<PAGE>

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

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

                                    FORM 10-Q

(Mark One)

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

                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001

                                       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 [ ]

65,456,505 shares of Common Stock, $.01 par value, were outstanding at March 31,
2001.

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

<PAGE>

                       W. R. GRACE & CO. AND SUBSIDIARIES

                                Table of Contents
                                -----------------

<TABLE>
<CAPTION>
                                                                                         Page No.
                                                                                         --------
PART I.    FINANCIAL INFORMATION
<S>        <C>                                                                         <C>
Item 1.       Financial Statements

              Report of Independent Accountants                                            I - 1

              Consolidated Statement of Operations                                         I - 2

              Consolidated Statement of Cash Flows                                         I - 3

              Consolidated Balance Sheet                                                   I - 4

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

              Consolidated Statement of Comprehensive Income (Loss)                        I - 5

              Notes to Consolidated Financial Statements                              I - 6 to I - 14

Item 2.       Management's Discussion and Analysis of Results of Operations and
              Financial Condition                                                     I - 15 to I - 22

Item 3.       Quantitative and Qualitative Disclosures About Market Risk                   I - 23


PART II.   OTHER INFORMATION

Item 1.       Legal Proceedings                                                           II - 1

Item 3.       Defaults under Senior Securities                                            II - 1

Item 6.       Exhibits and Reports on Form 8-K                                            II - 1
</TABLE>

As used in this Report, the term "Grace" or "the Company" refers to W. R. Grace
& Co. (a Delaware corporation) and, in certain cases, one or more of its
subsidiaries and/or their respective predecessors.



<PAGE>

                          PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

                       REPORT OF INDEPENDENT ACCOUNTANTS

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

We have reviewed the accompanying consolidated balance sheet of W. R. Grace &
Co. and its subsidiaries as of March 31, 2001, and the related consolidated
statements of operations, of cash flows, of shareholders' equity (deficit) and
of comprehensive income (loss) for each of the three-month periods ended March
31, 2001 and 2000. These financial statements are the responsibility of the
Company's management.

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

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

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

We previously audited in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of December
31, 2000, 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 29, 2001, except for "Subsequent Event -
Voluntary Bankruptcy Filing" of Note 1 and the second paragraph under "Income
Taxes" of Note 15, as to which the date was April 2, 2001. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 2000 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
Baltimore, Maryland
May 15, 2001


                                      I-1
<PAGE>


<TABLE>
<CAPTION>
======================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES                                                            THREE MONTHS ENDED
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)                                                  MARCH 31,
======================================================================================================================
Amounts in millions, except per share amounts                                               2001              2000
                                                                                      --------------------------------
<S>                                                                                     <C>               <C>
Net sales..........................................................................     $    395.7        $    384.7
Other income...................................................................               18.8              10.2
                                                                                      --------------------------------

                                                                                             414.5             394.9
                                                                                      --------------------------------

Cost of goods sold, exclusive of depreciation and amortization shown
    separately below...........................................................              253.0             231.8
Selling, general and administrative expenses...................................               90.7              86.5
Research and development expenses .............................................               10.2              11.3
Depreciation and amortization .................................................               21.9              22.2
Interest expense and related financing costs ..................................                9.0               5.3
Reorganization expenses .......................................................                2.9              --
                                                                                      --------------------------------
                                                                                             387.7             357.1
                                                                                      --------------------------------

Income before income taxes and minority interest...............................               26.8              37.8
Provision for income taxes.....................................................              (11.9)            (13.6)
Minority interest in income of subsidiary......................................               (0.3)             --
                                                                                      --------------------------------

    NET INCOME ................................................................         $     14.6        $     24.2
======================================================================================================================
BASIC EARNINGS PER COMMON SHARE                                                         $     0.22        $      0.35

Average number of basic shares                                                                65.3               68.2

DILUTED EARNINGS PER COMMON SHARE                                                       $     0.22        $      0.35

Average number of diluted shares                                                              65.3               69.4
======================================================================================================================
</TABLE>


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


                                      I-2
<PAGE>

<TABLE>
<CAPTION>

======================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES                                                          THREE MONTHS ENDED
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)                                                 MARCH 31,
======================================================================================================================
Dollars in millions                                                                      2001               2000
                                                                                      --------------------------------


OPERATING ACTIVITIES
<S>                                                                                   <C>              <C>
Income before income taxes and minority interest...................................   $     26.8       $     37.8
Reconciliation to net cash (used for) operating activities:
     Depreciation and amortization ................................................         21.9             22.2
     (Gain) on disposal of assets..................................................         (2.8)            --
     Changes in assets and liabilities, excluding effect of businesses
         acquired/divested and foreign currency exchange:
           Increase in notes and accounts receivable, net............................      (13.3)            (2.9)
           Increase in inventories ..................................................      (17.9)            (1.0)
           Decrease (increase) in subordinated interest of accounts receivable sold .        1.3             (0.5)
           Decrease in accounts payable .............................................      (22.3)           (13.3)
           Decrease in accrued liabilities ..........................................      (29.7)           (13.5)
           Expenditures for asbestos-related litigation .............................     (103.1)           (38.3)
           Proceeds from asbestos-related insurance .................................       31.7             24.2
           Expenditures for environmental remediation ...............................       (8.4)           (12.4)
           Expenditures for postretirement benefits .................................       (5.6)            (5.1)
           Other ....................................................................      (15.1)            (5.8)
                                                                                      --------------------------------
     NET CASH (USED FOR) OPERATING ACTIVITIES OF CONTINUING OPERATIONS
              BEFORE INCOME TAXES..................................................       (136.5)            (8.6)
Net cash used for retained obligations of discontinued operations..................         (5.2)            (7.0)
                                                                                      --------------------------------
     NET CASH (USED FOR) OPERATING ACTIVITIES BEFORE INCOME TAXES..................       (141.7)           (15.6)
Income taxes paid, net of refunds .................................................         (6.9)           (11.4)
                                                                                      --------------------------------
     NET CASH (USED FOR) OPERATING ACTIVITIES .....................................       (148.6)           (27.0)
                                                                                      --------------------------------
INVESTING ACTIVITIES
Capital expenditures ..............................................................        (11.3)           (12.5)
Businesses acquired in purchase transactions, net of cash acquired ................        (56.5)           (25.0)
Net investment in life insurance policies .........................................         (2.3)           (11.7)
Proceeds from disposals of assets .................................................          3.7              0.4
                                                                                      --------------------------------
     NET CASH (USED FOR) INVESTING ACTIVITIES .....................................        (66.4)           (48.8)
                                                                                      --------------------------------

FINANCING ACTIVITIES
Borrowings under credit facilities, net of repayments .............................         97.1            158.7
Repayment of long-term debt .......................................................         --              (24.7)
Proceeds from loans secured by cash value of life insurance policies, net of
     loan repayments...............................................................         46.6             (0.4)
Exercise of stock options .........................................................         --                1.7
Purchase of treasury stock ........................................................         --              (25.4)
                                                                                      --------------------------------
     NET CASH PROVIDED BY FINANCING ACTIVITIES ....................................        143.7            109.9
                                                                                      --------------------------------

Effect of currency exchange rate changes on cash and cash equivalents .............         (4.8)            (4.0)
                                                                                      --------------------------------
     (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS .............................        (76.1)            30.1
Cash and cash equivalents, beginning of period ....................................        191.9            199.8
                                                                                      --------------------------------
Cash and cash equivalents, end of period ..........................................   $    115.8       $    229.9
======================================================================================================================
</TABLE>

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

                                      I-3
<PAGE>

<TABLE>
<CAPTION>

============================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES                                                        MARCH 31,       DECEMBER 31,
CONSOLIDATED BALANCE SHEET (UNAUDITED)                                                      2001              2000
============================================================================================================================

Amounts in millions, except par value and shares
<S>                                                                                    <C>               <C>

ASSETS
CURRENT ASSETS
Cash and cash equivalents ..........................................................   $        115.8    $        191.9
Notes and accounts receivable, net ................................................             207.1             197.2
Inventories .......................................................................             162.7             144.2
Deferred income taxes .............................................................              84.2              98.8
Asbestos-related insurance expected to be realized within one year ................              42.1              83.8
Other current assets...............................................................              60.2              58.0
                                                                                      --------------------------------------
     TOTAL CURRENT ASSETS .........................................................             672.1             773.9

Properties and equipment, net of accumulated depreciation and
     amortization of $942.7 (2000 - $935.4) .......................................             603.4             601.7
Goodwill, less accumulated amortization of $7.0 (2000 - $7.2) .....................              66.0              34.1
Cash value of life insurance policies, net of policy loans.........................              64.1             104.3
Deferred income taxes .............................................................             401.4             388.4
Asbestos-related insurance expected to be realized after one year..................             298.3             288.2
Other assets ......................................................................             403.8             394.3
                                                                                      --------------------------------------
     TOTAL ASSETS .................................................................    $      2,509.1    $      2,584.9
                                                                                      ======================================

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Short-term debt ...................................................................    $        518.6    $        421.9
Accounts payable ..................................................................              93.8             117.5
Income taxes payable ..............................................................             125.4             123.1
Asbestos-related liability expected to be satisfied within one year................             120.3             178.4
Other current liabilities .........................................................             213.9             252.0
                                                                                      --------------------------------------
     TOTAL CURRENT LIABILITIES ....................................................           1,072.0           1,092.9

Long-term debt .....................................................................             --                --
Deferred income taxes .............................................................              19.6              20.2
Asbestos-related liability expected to be satisfied after one year ................             882.5             927.5
Other liabilities .................................................................             609.3             615.6
                                                                                      --------------------------------------
     TOTAL LIABILITIES ............................................................           2,583.4           2,656.2
                                                                                      --------------------------------------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS'  EQUITY (DEFICIT)
Common stock issued, par value $.01; 300,000,000 shares authorized;                               0.8               0.8
     outstanding: 2001 - 65,457,000 shares (2000 - 65,418,000) ....................
Paid in capital ...................................................................             432.6             432.2
Accumulated deficit................................................................            (201.8)           (216.4)
Treasury stock, at cost:  11,443,900 common shares (2001 and 2000)  ...............            (136.4)           (136.4)
Accumulated other comprehensive loss ..............................................            (169.5)           (151.5)
                                                                                      --------------------------------------
     TOTAL SHAREHOLDERS'  EQUITY (DEFICIT) ........................................             (74.3)            (71.3)
                                                                                      --------------------------------------
     TOTAL LIABILITIES AND SHAREHOLDERS'  EQUITY (DEFICIT) ........................    $      2,509.1    $      2,584.9
============================================================================================================================
</TABLE>

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


                                      I-4
<PAGE>

<TABLE>
<CAPTION>

=================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS'  EQUITY (DEFICIT) (UNAUDITED)
=================================================================================================================================
                                                                                                                  TOTAL
                                                                                          Accumulated Other     SHAREHOLDERS'
                                        Common Stock and     Accumulated     Treasury      Comprehensive          EQUITY
Dollars in millions                     Paid in Capital      Deficit          Stock            Loss             (DEFICIT)
--------------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>              <C>                <C>          <C>                <C>
BALANCE, DECEMBER 31, 2000...........   $     433.0      $    (216.4)       $   (136.4)  $        (151.5)   $        (71.3)
Net income ..........................          --               14.6              --                --                14.6
Shares issued under stock plans .....           0.4             --                --                --                 0.4
Other comprehensive loss.............          --               --                --               (18.0)            (18.0)
                                        ----------------------------------------------------------------------------------------
BALANCE, MARCH 31, 2001..............   $     433.4      $    (201.8)       $   (136.4)  $        (169.5)   $        (74.3)
================================================================================================================================
</TABLE>

<TABLE>
<CAPTION>

================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES                                                                      THREE MONTHS ENDED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)  (UNAUDITED)                                          MARCH 31,
================================================================================================================================
Dollars in millions                                                                                    2001            2000
                                                                                                   ------------------------------
<S>                                                                                                   <C>             <C>
NET INCOME.....................................................................................       $  14.6         $  24.2
                                                                                                   ------------------------------
OTHER COMPREHENSIVE LOSS:
Foreign currency translation adjustments.......................................................         (17.8)          (12.6)
Net unrealized (loss) on investment............................................................          (0.2)           (5.6)
                                                                                                   ------------------------------
Total other comprehensive loss.................................................................         (18.0)          (18.2)
                                                                                                   ------------------------------
COMPREHENSIVE (LOSS) INCOME ...................................................................       $  (3.4)       $    6.0
================================================================================================================================
</TABLE>



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



                                      I-5
<PAGE>

W. R. GRACE & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
1.   BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND FINANCIAL
     REPORTING POLICIES
--------------------------------------------------------------------------------

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

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

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

SUBSEQUENT EVENT - VOLUNTARY BANKRUPTCY FILING - On April 2, 2001, 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 numbers 01-1139
through 01-1200. Grace's non-U.S. subsidiaries and certain of its U.S.
subsidiaries were not a part of the Filing.

The Filing was made in response to a sharply increasing number of
asbestos-related bodily injury claims. These claims are discussed in more detail
in Note 2 to the Consolidated Financial Statements. Under Chapter 11, the
Debtors expect to continue to operate their businesses as debtors-in-possession
under court protection from their creditors and claimants, while using the
Chapter 11 process to develop and implement a plan for addressing the
asbestos-related claims against them.

Background of Filing - On January 29, 2001, Grace announced that recent
developments in asbestos-related litigation had led to a fourth quarter 2000
charge of $208.0 million (net of expected insurance recovery). The charge was
made to account for probable and estimable costs related to several adverse
developments in Grace's asbestos litigation during 2000, including: a
significant increase in bodily injury claims; higher than expected costs to
resolve bodily injury and certain property damage claims; and new class-action
lawsuits alleging damages from a former attic insulation product not previously
subject to property damage litigation. These adverse developments continued
during the first quarter of 2001.

Grace also announced on January 29, 2001 that it was reviewing the strategic and
operating issues associated with continuing to defend asbestos litigation
through the court system versus voluntarily seeking a resolution of such
litigation through reorganization under Chapter 11. As a result of that review,
the Board of Directors of Grace concluded on April 2, 2001 that a federal
court-supervised Chapter 11 filing provides the best forum available to achieve
predictability and fairness in the claims settlement process. By filing under
Chapter 11, Grace expects to be able to both obtain a comprehensive resolution
of the claims against it and preserve the inherent value of its businesses.

Consequence of Filing - As a consequence of the Filing, all pending litigation
against the Debtors is stayed and no party may take any action to realize its
pre-petition claims except pursuant to order of the Bankruptcy Court. It is the
Debtors' intention to address all of their pending and future asbestos-related
claims and all other pre-petition claims in a plan of reorganization. However,
it is currently impossible to predict with any degree of certainty how the plan
will treat asbestos and other pre-petition claims and the impact the Filing and
any reorganization plan may have on the shares of common stock of Grace. The
formulation and implementation of a plan of reorganization could take a
significant period of time.

The accompanying Consolidated Financial Statements have been 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, such realization of certain of Debtors'
assets and liquidation of certain of Debtors' liabilities are subject to
significant uncertainty. Further, a plan of reorganization could materially
change the amounts and classifications reported in the consolidated financial
statements, which do not give effect to any

                                      I-6
<PAGE>

adjustments to the carrying value or classification of assets or liabilities
that might be necessary as a consequence of a plan of reorganization.

All of the Debtors' pre-petition debt is now in default due to the Filing.
Accordingly, the accompanying Consolidated Balance Sheet as of March 31, 2001
reflects the classification of the Debtors' pre-petition debt as current.

The Debtors have negotiated a debtor-in-possession post-petition loan and
security agreement with Bank of America, N.A. (the "DIP facility") in the
aggregate amount of $250 million. The DIP facility has a term of 2 years and
bears interest at either Bank of America's prime rate or a formula based on the
LIBOR rate plus 2.00 to 2.25 percentage points. The Bankruptcy Court issued a
final order approving the DIP facility on May 3, 2001. The Debtors have borrowed
a total of $75.0 million against the DIP facility subsequent to March 31, 2001.

The Debtors have received approval from the Bankruptcy Court to pay or otherwise
honor certain of its pre-petition obligations, including claims of trade
creditors to a specified amount and employee wages and benefits in the ordinary
course of business.

Accounting Impact - Beginning in the second quarter of 2001, Grace will be
required to follow Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting
by Entities in Reorganization under the Bankruptcy Code." Pursuant to SOP 90-7,
Grace's pre-petition liabilities that are subject to compromise will be reported
separately on the balance sheet at an estimate of the amount that will
ultimately be allowed by the Bankruptcy Court. Obligations of Grace subsidiaries
not covered by the Filing will remain classified on the consolidated balance
sheet based upon maturity dates or the expected dates of payment. SOP 90-7 also
requires separate reporting of certain expenses, realized gains and losses, and
provisions for losses related to the Filing as reorganization items.

Pro-Forma Condensed Balance Sheet Information (Unaudited) - The condensed
consolidated balance sheet of Grace as if the Debtors had filed petitions for
reorganization under Chapter 11 at March 31, 2001 is as follows:

==========================================================================
PRO-FORMA CONDENSED CONSOLIDATED BALANCE SHEET            MARCH 31,
(Dollars in millions)                                       2001
--------------------------------------------------------------------------
Current Assets:
   Cash and cash equivalents................                $ 122.5
   Notes and accounts receivable, net.......                  207.1
   Inventories..............................                  162.7
   Deferred income taxes....................                   84.2
   Asbestos-related insurance expected to be
     realized within one year...............                   17.0
   Other current assets.....................                   60.2
                                                        ------------------
       Total current assets.................                  653.7
   Properties and equipment, net............                  603.4
   Asbestos-related insurance receivable....                  323.4
   Deferred income taxes....................                  401.4
   Other noncurrent assets..................                  533.9
                                                        ------------------
       TOTAL ASSETS.........................               $2,515.8
                                                        ==================
Liabilities Not Subject to Compromise:
Current liabilities
   Short-tem debt...........................                 $  9.7
   Accounts payable.........................                   57.6
   Other current liabilities................                   70.1
                                                        ------------------
     Total current liabilities not subject
       to compromise........................                  137.4
   Noncurrent liabilities not subject to
       compromise...........................                   54.9
                                                        ------------------
         TOTAL LIABILITIES NOT SUBJECT TO
            COMPROMISE......................                  192.3
                                                        ------------------
Liabilities Subject to  Compromise:
   Debt.....................................                  508.9
   Asbestos-related liability ..............                1,002.8
   Other liabilities........................                  886.1
                                                        ------------------
         TOTAL LIABILITIES SUBJECT TO
            COMPROMISE......................                2,397.8
                                                        ------------------
      TOTAL LIABILITIES.....................                2,590.1
SHAREHOLDERS' EQUITY (DEFICIT)..............                  (74.3)
                                                        ------------------
      TOTAL LIABILITIES AND SHAREHOLDERS'
            EQUITY (DEFICIT)................               $2,515.8
==========================================================================

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 2000 Form 10-K. Such interim consolidated financial
statements reflect all adjustments that, in the opinion of management, are
necessary for a fair presentation of the results of the interim periods
presented; all such adjustments are of a normal recurring nature. All
significant intercompany accounts and transactions have been eliminated. Certain
amounts in the consolidated financial statements for prior periods have been
reclassified to conform to the current period's basis of presentation.

The results of operations for the three-month interim period ended March 31,
2001 are not necessarily indicative of the results of operations for the year
ending December 31, 2001.


                                      I-7
<PAGE>

RECLASSIFICATIONS

Certain amounts in prior years' consolidated financial statements have been
reclassified to conform to the 2001 presentation.

EFFECT OF NEW ACCOUNTING STANDARDS

On January 1, 2001, Grace adopted Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities"
(as amended). SFAS No. 133 requires, among other things, that all derivative
instruments be recognized at fair value as assets or liabilities in the
consolidated balance sheet with changes in fair value recognized currently in
earnings unless specific hedge accounting criteria are met. At March 31, 2001,
the Company did not hold or issue any derivative financial instruments. The
adoption of SFAS No. 133, as amended, on January 1, 2001 did not have a material
impact on the consolidated financial statements.

Grace adopted Emerging Issues Task Force (EITF) 00-10, "Accounting for Shipping
and Handling Fees and Costs," in the fourth quarter of 2000. The adoption of
this standard did not effect pre-tax or net income; however, freight costs and
sales commissions (previously shown as a reduction of net sales) are now
included in costs of goods sold and selling, general and administrative
expenses, respectively. Sales for the first quarter of 2000, as previously
reported, were $364.9 million and sales, as currently reported, are $384.7
million. The difference of $19.8 million is comprised of freight costs of $18.9
million and sales commissions of $0.9 million.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires that management make estimates and assumptions
affecting the assets and liabilities (including contingent 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.

--------------------------------------------------------------------------------
2. ASBESTOS-RELATED LITIGATION
--------------------------------------------------------------------------------

Grace is a defendant in property damage and bodily injury lawsuits relating to
previously sold asbestos-containing products and expects that it will receive
additional asbestos-related claims in the future. Grace was a defendant in
65,656 asbestos-related lawsuits on March 31, 2001 (8 involving claims for
property damage, 9 involving attic fill insulation, and the remainder involving
129,191 claims for bodily injury), as compared to 61,395 lawsuits on December
31, 2000 (7 involving claims for property damage, 8 involving attic fill
insulation, and the remainder involving 124,907 claims for bodily injury). As a
result of the Filing, all such litigation has been stayed.

PROPERTY DAMAGE LITIGATION

The plaintiffs in 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. Thus, the amounts
involved in prior dispositions of property damage cases are not necessarily
indicative of the amounts that may be required to dispose of cases in the
future. Information regarding product identification, the amount of product in
the building, the age, type, size and use of the building, the jurisdictional
history of prior cases and the court in which the case is pending provide
meaningful guidance as to the range of potential costs. Grace has recorded an
accrual for all outstanding property damage cases for which sufficient
information is available to form a reasonable estimate of such exposure.

Through March 31, 2001, out of 371 asbestos property damage cases filed, 140
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 seven cases for a total of $60.3 million; 207 property damage
cases were settled for a total of $696.8 million and 8 cases remain outstanding.
One new case was filed and there were no cases settled or dismissed during the
first quarter of 2001.

ATTIC INSULATION LITIGATION

Through March 31, 2001, Grace was a defendant in nine class action lawsuits
brought on behalf of owners of homes containing Zonolite attic fill insulation.
These lawsuits seek damages and equitable relief, including the removal,
replacement and/or disposal of all such insulation. This former attic insulation
product has never previously been the subject of property damage litigation.
Grace believes that this product was safe for its intended purpose.


                                      I-8
<PAGE>

BODILY INJURY LITIGATION

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 asbestos producers,
cross-claims by co-defendants, the rate at which new claims are filed, the
jurisdiction in which the filings are made, and the defense and disposition
costs associated with these claims. Grace's bodily injury liability reflects
management's estimate, prior to the Filing, 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 products
manufactured by Grace.

Through March 31, 2001, approximately 16,354 asbestos bodily injury lawsuits
involving 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 163,698 claims were
disposed of (through settlement and judgments) for a total of $645.6 million.

==============================================================
BODILY INJURY CLAIM ACTIVITY
==============================================================
Claims outstanding, December 31, 2000 ........       124,907
New claims filed .............................        16,411
Settlements ..................................       (11,841)
Dismissals ...................................          (286)
Judgments ....................................            --
                                                   -----------
     Claims outstanding, March 31, 2001              129,191
==============================================================

ASBESTOS-RELATED LIABILITY

Grace estimates its property damage and bodily injury liabilities based on its
experience with, and recent trends in, asbestos litigation. Its recorded
liabilities cover indemnity and defense costs for pending property damage cases
and for pending and projected future bodily injury claims. The amounts recorded
at each balance sheet date reflect Grace's estimate as of the balance sheet
date, based on measures governed by generally accepted accounting principles, of
probable and estimable liabilities for asbestos-related litigation in all
material respects.

==============================================================
ESTIMATED LIABILITY FOR
ASBESTOS-RELATED LITIGATION        MARCH 31,    December 31,
(Dollars in millions)                2001           2000
==============================================================
Asbestos-related liability
  expected to be satisfied
  within one year...............   $    120.3  $     178.4
Asbestos-related liability
  expected to be satisfied
  after one year................        882.5        927.5
                                  ----------------------------
Total asbestos-related liability   $  1,002.8  $   1,105.9
==============================================================

The current portion of Grace's asbestos-related liability is based on
management's estimate as of the respective balance sheet date of indemnity
payments and defense costs expected to be paid within one year. Due to the
Filing and the uncertainties of asbestos-related litigation actual amounts could
differ materially from the recorded liabilities.

ASBESTOS INSURANCE

Grace previously purchased insurance policies with respect to its
asbestos-related lawsuits and claims. Activity in Grace's notes receivable from
insurance carriers and asbestos-related insurance receivable during the three
months ended March 31, 2001 was as follows:

=============================================================
ESTIMATED INSURANCE RECOVERY ON
ASBESTOS-RELATED LIABILITIES
(Dollars in millions)
=============================================================

NOTES RECEIVABLE
Notes receivable from insurance carriers,
  beginning of year, net of discount of $0.2      $      2.7
Proceeds received under asbestos-related
  insurance settlements .....................           (2.2)
Current year amortization of discount .......            0.1
-------------------------------------------------------------
   Notes receivable from insurance carriers, end
     of quarter, net of discount of $0.1.....            0.6
-------------------------------------------------------------

INSURANCE RECEIVABLE
Asbestos-related insurance receivable,
  beginning of  year ........................          369.3
Proceeds received under asbestos-related
  insurance settlements .....................          (29.5)
-------------------------------------------------------------
   Asbestos-related insurance receivable, end
     of quarter .............................          339.8
-------------------------------------------------------------
    Total amounts due from insurance carriers          340.4
    Expected to be realized within one year .          (42.1)
-------------------------------------------------------------
    Expected to be realized after one year ..      $   298.3
=============================================================



                                      I-9
<PAGE>

Grace has settled with and been paid by 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. In addition, Grace has settled with many 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. Insurance
coverage for asbestos-related liabilities has not been commercially available
since 1985.

The asbestos-related insurance asset represents amounts expected to be received
from carriers under settlement agreements for defense and disposition costs to
be paid by Grace. Estimated insurance reimbursements relate to property damage
and bodily injury cases and claims pending at March 31, 2001 and bodily injury
claims expected to be filed in the future.

--------------------------------------------------------------------------------
3. ACQUISITIONS AND JOINT VENTURES
--------------------------------------------------------------------------------

In March 2001, Grace acquired The Separations Group, a manufacturer of
chromatography columns and separations media, and the precipitated silicas
business of AKZO-PQ Silicas. These acquisitions were accounted for under the
purchase accounting method of accounting. Pro forma results of operations have
not been presented because the effects of these acquisitions were not material
on either an individual or aggregate basis.

On March 1, 2001, Grace and Chevron Products Co. (Chevron) formed Advanced
Refining Technologies (ART) to develop and market globally hydroprocessing
catalysts. ART conducts business through two distribution companies and one
operating company. Grace has a majority ownership interest in and controls both
distribution companies; therefore, for financial reporting purposes the assets,
liabilities and results of operations of these entities are included in Grace's
consolidated financial statements. The minority interest in Grace's consolidated
statement of operations represents the proportionate loss related to Chevron's
45% interest in the distribution companies. Grace does not exercise governance
control over the operating company and therefore, the assets, liabilities and
results of operations of this company are not consolidated in Grace's financial
statements. Accordingly, the equity income or loss related to the operating
company is reported in "Other Income" in Grace's consolidated statement of
operations. ART has an agreement with both Grace and Chevron whereby Grace and
Chevron provide administrative and research and development services to ART and
ART reimburses Grace and Chevron for these services.

--------------------------------------------------------------------------------
4. OTHER INCOME
--------------------------------------------------------------------------------

Components of other income are as follows:

===============================================================
OTHER INCOME                             THREE MONTHS ENDED
(Dollars in millions)                        MARCH 31,
===============================================================
                                         2001         2000
                                      -------------------------
Investment income................       $  4.3      $   4.8
Gain on sale of cost basis
  investment ....................          7.7         --
Net gains on dispositions of
  assets.........................          2.8         --
Tolling revenue..................          0.9          1.6
Interest income..................          1.8          2.3
Other miscellaneous income ......          1.3          1.5
---------------------------------------------------------------
     Total other income .........     $   18.8      $  10.2
===============================================================

--------------------------------------------------------------------------------
5. OTHER BALANCE SHEET ACCOUNTS
--------------------------------------------------------------------------------

==============================================================
                                     MARCH 31,   December 31,
(Dollars in millions)                   2001         2000
==============================================================

NOTES AND ACCOUNTS RECEIVABLE, NET
Trade receivables, less allowance
  of $4.0 (2000 - $3.9)..........     $  174.6      $172.2
Other receivables, less allowance
  of $2.1 (2000 - $0.5)..........         32.5        25.0
                                     -------------------------
                                      $  207.1      $197.2
==============================================================
INVENTORIES
Raw materials ...................        $38.5       $32.7
In process ......................         27.8        22.4
Finished products ...............        105.9        96.4
General merchandise .............         19.8        22.0
Less:  Adjustment of certain
  inventories to a
  last-in/first-out (LIFO) basis         (29.3)      (29.3)
                                     -------------------------
                                        $162.7      $144.2
==============================================================
OTHER ASSETS
Plan assets in excess of defined
  benefit pension obligation.....       $202.4      $200.1
Unamortized costs of overfunded
  pension plans .................        105.5       104.7
Deferred charges ................         50.9        44.3
Long-term receivables, less
  allowances of $0.6 (2000 - $0.8)         2.4         2.4
Long-term investments ...........          3.0         3.6
Patents, licenses and other
  intangible assets .............         39.6        39.2
                                     -------------------------
                                        $403.8      $394.3
==============================================================
OTHER CURRENT LIABILITIES
Retained obligations of divested
  businesses ....................        $64.4       $67.2
Accrued compensation ............         25.4        32.6
Costs of business restructurings           1.1         2.7
Environmental remediation .......         26.1        36.2
Deferred compensation ...........          1.4        10.5
Accrued interest ................          6.3         6.3
Other accrued liabilities .......         89.2        96.5
                                     -------------------------
                                        $213.9      $252.0


                                      I-10
<PAGE>


==============================================================
                                     MARCH 31,   December 31,
(Dollars in millions)                   2001         2000
==============================================================
OTHER LIABILITIES
Other postretirement benefits ...       $185.4       $189.1
Environmental remediation .......        138.7        138.7
Defined benefit obligation in
  excess of pension plan assets .        167.7        167.8
Unamortized costs of underfunded
  pension plans .................        (35.5)       (36.0)
Deferred compensation ...........          6.8          9.5
Long-term self insurance reserve           4.9          5.6
Retained obligations of divested
  businesses ....................         10.9         10.9
Taxes payable, including interest        103.0        103.0
Other accrued liabilities .......         27.4         27.0
                                     -------------------------
                                        $609.3       $615.6
==============================================================

--------------------------------------------------------------------------------
6. LIFE INSURANCE
--------------------------------------------------------------------------------

Grace is the beneficiary of life insurance policies on current and former
employees with benefits in force of approximately $2,286 million and a net cash
surrender value of $64.1 million at March 31, 2001. The policies were acquired
to fund various employee benefit programs and other long-term liabilities and
are structured to provide cash flow (primarily tax-free) over an extended number
of years. The following table summarizes activity in these policies for the
three months ended March 31, 2001 and 2000 and components of the net cash value
at March 31, 2001 and December 31, 2000:

============================================================
ACTIVITY SUMMARY -
LIFE INSURANCE                    MARCH 31,     March 31,
(Dollars in millions)                2001         2000
============================================================

Earnings on policy assets ......   $     11.9  $      8.9
Interest on policy loans .......         (7.8)       (7.4)
Policy loan repayments .........          2.1         0.4
Premiums .......................       --          --
Proceeds from policy loans .....        (48.7)     --
Net investing activity .........          2.3        11.7
                                   -------------------------
   Change in net cash value ....   $    (40.2) $     13.6
============================================================
Tax-free proceeds received .....   $      8.9  $      0.5
============================================================
COMPONENTS OF NET CASH VALUE - .    MARCH 31,   December 31,
 LIFE INSURANCE ................     2001          2000
============================================================
Gross cash value ...............   $    453.7  $    452.4
Principal - policy loans .......       (390.3)     (325.8)
Accrued interest - policy loans           0.7       (22.3)
                                   -------------------------
Net cash value .................   $     64.1  $    104.3
============================================================
Insurance benefits in force ....   $  2,286.0  $  2,286.0
============================================================

Policy loans bore interest at an average annualized rate of 9.2% through March
31, 2001 (calculated on a trailing four quarters basis), compared to an average
of 9.3% for the year ended December 31, 2000. Policy assets are invested
primarily in general accounts of the insurance carriers and earned returns at an
average annualized rate of 8.8% through March 31, 2001 (calculated on a trailing
four quarters basis), compared to an average of 8.3% for the year ended December
31, 2000.

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

--------------------------------------------------------------------------------
7. DEBT
--------------------------------------------------------------------------------

On March 31, 2001, and December 31, 2000, the Company's short-term debt was as
follows:

============================================================
COMPONENTS OF DEBT               MARCH 31,    December 31,
(Dollars in millions)               2001          2000
============================================================

SHORT-TERM DEBT
Bank borrowings...............  $   500.0     $  400.0
8.0% Notes Due 2004...........        5.7          5.7
7.75% Notes Due 2002..........        2.0          2.0
Other short-term borrowings...       10.9         14.2
                                ----------------------------
                                $   518.6     $  421.9
============================================================

In May 2000, Grace extended its $250.0 million credit facility under a 364-day
credit agreement to May 2001. In addition, Grace maintains a $250.0 million
long-term facility expiring in May 2003. As a result of the Filing, Grace is in
default of these credit facilities, as well as the Notes, and accordingly, the
balance has been reported as short-term debt.

The Debtors have negotiated a DIP facility in the aggregate amount of $250
million. The DIP facility has a term of 2 years and bears interest at either
Bank of America's prime rate or a formula based on the LIBOR rate plus 2.00 to
2.25 percentage points. The Bankruptcy Court issued a final order approving the
DIP facility on May 3, 2001. The Debtors have borrowed a total of $75.0 million
against the DIP facility subsequent to March 31, 2001.

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

The Company is authorized to issue 300,000,000 shares of common stock. Of the
common stock unissued on March 31, 2001, approximately 15,000,000 shares were
reserved for issuance pursuant to stock option and other stock incentive plans.
In the first three months of 2001, the Company granted a total of 1,320,446
options with an average exercise price of $2.54. For the year ended December 31,
2000, the Company granted a total of 2,555,000 options with an average exercise
price of $13.32.

In May 2000, the Company's Board of Directors approved a program to repurchase
up to 12,000,000 of the Company's outstanding shares in the open market.


                                      I-11
<PAGE>

The Company made no purchases during the first three months of 2001.

For additional information, see Notes 16 and 18 to the Consolidated Financial
Statements in the 2000 Form 10-K.

--------------------------------------------------------------------------------
9. EARNINGS PER SHARE
--------------------------------------------------------------------------------

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

=============================================================
EARNINGS PER SHARE
(Amounts in millions, except per         THREE MONTHS ENDED
share amounts)                               MARCH 31,
=============================================================
                                          2001       2000
                                        ---------------------
NUMERATORS
  Net income  ...................        $   14.6   $   24.2
                                        =====================
DENOMINATORS
  Weighted average common shares -
  basic calculation .............            65.3       68.2

  Effect of dilutive securities:
  Employee compensation-related shares       --          1.2
                                        ---------------------
  Weighted average common shares -
  diluted calculation............            65.3       69.4
                                        =====================


BASIC EARNINGS PER SHARE ........       $    0.22  $    0.35
                                        =====================
DILUTED EARNINGS PER SHARE ......       $    0.22  $    0.35
=============================================================

--------------------------------------------------------------------------------
10. COMPREHENSIVE INCOME (LOSS)
--------------------------------------------------------------------------------

The tables below present the pre-tax, tax and after-tax components of the
Company's other comprehensive loss for the three months ended March 31, 2001 and
2000:

=============================================================
THREE MONTHS ENDED                                  After-
MARCH 31, 2001               Pre-tax      Tax         Tax
(Dollars in millions)        Amount     Benefit     Amount
=============================================================

Unrealized losses on
  security................     $(0.2)      $0.1      $ (0.1)
Reclassification
  adjustment for gains
  realized in net income..      (0.2)       0.1        (0.1)
                            ---------------------------------
Net unrealized loss.......      (0.4)       0.2        (0.2)
Foreign currency
  translation adjustments.     (17.8)      --         (17.8)
                            ---------------------------------
Other comprehensive loss..    $(18.2)      $0.2     $ (18.0)
=============================================================


=============================================================
Three Months Ended                                  After-
March 31, 2000               Pre-tax      Tax         Tax
(Dollars in millions)        Amount     Benefit     Amount
=============================================================
Unrealized losses on
  security................    $ (5.9)    $  2.1      $ (3.8)
Reclassification
  adjustment for gains
  realized in net income..      (2.8)       1.0        (1.8)
                            ---------------------------------
Net unrealized loss.......      (8.7)       3.1        (5.6)
Foreign currency
  translation adjustments.     (12.6)      --         (12.6)
                            ---------------------------------
Other comprehensive loss..   $ (21.3)    $  3.1     $ (18.2)
=============================================================

The table below presents the components of Grace's accumulated other
comprehensive (loss) income at March 31, 2001 and December 31, 2000:

=============================================================
COMPONENTS OF ACCUMULATED
OTHER COMPREHENSIVE
INCOME (LOSS)                       MARCH 31,    December 31,
(Dollars in millions)                2001          2000
=============================================================

Foreign currency translation
  adjustments .................    $(158.0)     $(140.2)
Net unrealized gains on
  investments .................        0.1          0.3
Minimum pension liability
  adjustments .................      (11.6)       (11.6)
                                 ----------------------------
Total accumulated other
  comprehensive loss...........    $(169.5)     $(151.5)
=============================================================

--------------------------------------------------------------------------------
11. COMMITMENTS AND CONTINGENT LIABILITIES
--------------------------------------------------------------------------------

ENVIRONMENTAL

In February 2000, a putative class action lawsuit was filed in U.S. District
Court in Missoula, Montana against Grace on behalf of all owners of real
property situated within 12 miles from Libby, Montana that are improved private
properties. The action alleges that the class members have suffered harm in the
form of environmental contamination and loss of property rights resulting from
Grace's former vermiculite mining and processing operations. The complaint seeks
remediation, property damages and punitive damages. While Grace has not
completed its investigation of the claims, and therefore is not able to assess
the extent of any possible liability related to this lawsuit, it has no reason
to believe that its former activities caused damage to the environment or
property.

In October 2000, a putative class action lawsuit was filed in the 4th District
Court of Minneapolis, Minnesota, against Grace on behalf of all owners of real
property situated near a former vermiculite processing plant in Northeast,
Minneapolis. The

                                      I-12
<PAGE>

action alleges that the class members have suffered harm in the form of
environmental contamination and loss of property rights resulting from the
former vermiculite processing operations. The complaint seeks remediation,
property damages, and punitive damages. These activities are not expected to
result in material liability to Grace.

INCOME TAXES

The Internal Revenue Service (IRS), on a comprehensive national level, is
challenging the deductibility of interest on policy loans related to corporate
owned life insurance (COLI) policies for years prior to January 1, 1999. In July
2000 Grace paid $21.2 million of tax and interest related to this issue for tax
years 1990-1992. Subsequent to 1992, Grace deducted approximately $163.2 million
in interest attributable to COLI policy loans. Grace filed a claim for refund of
the amount paid to date and will contest any future IRS assessments on the
grounds that these insurance policies and related loans had, and continue to
have a valid business purpose, that the COLI policies have economic substance
and that interest deductions claimed were in compliance with tax laws in effect
at the time. During first quarter 2001, a U. S. District Court ruling, American
Electric Power, Inc. vs. United States, denied interest deductions of a taxpayer
in a similar situation. Until this ruling, Grace's accounting reflected its
estimate of resolution in connection with ongoing tax examinations. However, as
a result of the ruling, Grace recorded an additional accrual of $75.0 million
(net of tax benefits) in the fourth quarter of 2000 for tax exposure and related
interest through 2000. The effective tax rate for the fiscal year 2001 includes
the current period interest on this tax contingency.

The IRS also has assessed additional federal income tax withholding and Federal
Insurance Contributions Act taxes plus interest and related penalties for
calendar years 1993 through 1995 related to a subsidiary of Grace that formerly
held a majority interest in Cross Country Staffing (CCS). The assessments,
aggregating $21.8 million, were made in connection with a meal and incidental
expense per diem plan for travelling healthcare personnel which was in effect
through 1999. In July 1999, Grace sold substantially all of its interest in CCS.
In the first quarter 2001 Grace sold its remaining interest in CCS. Grace has,
however retained the potential tax liability. The matter is currently pending in
the U.S Court of Claims.

Grace has received notification from a foreign taxing authority assessing tax
deficiencies plus interest relating to the purchase and sale of foreign bonds in
1989 and 1990. This assessment, totaling $10.5 million, is related to the
Bekaert Group which Grace sold in 1991 but retained liability for tax
deficiencies attributable to tax periods prior to the sale. The matter is
currently before the foreign authorities but no decision has been rendered.

FRAUDULENT CONVEYANCE

Grace and one of its subsidiaries have been named in a putative class action
suit alleging that the 1996 reorganization involving a predecessor of Grace and
Fresenius A.G. and the 1998 reorganization involving a predecessor of Grace and
Sealed Air Corporation were fraudulent transfers. The suit is alleged to have
been brought on behalf of all individuals who presently have lawsuits on file
that are pursuing personal injury or wrongful death claims against any of the
defendants. The other defendants in the suit have all asserted claims against
Grace for indemnification. Grace believes that the suit is without merit.

RETAINED OBLIGATIONS

Under certain divestiture agreements, the Company has retained contingent
obligations that could develop into situations where accruals for estimated
costs of defense or loss would be recorded in a period subsequent to divestiture
under generally accepted accounting principles. The Company assesses its
retained risks quarterly and accrues amounts estimated to be payable related to
these obligations when probable and estimable. As of March 31, 2001 and December
31, 2000 Grace had recorded $75.3 million and $78.1 million, respectively, to
satisfy such obligations.

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 generally accepted accounting principles. As a result of the
Filing, litigation related to the items discussed above will be addressed as
part of Grace's Chapter 11 proceedings.

                                      I-13
<PAGE>

--------------------------------------------------------------------------------
12. BUSINESS SEGMENT INFORMATION
--------------------------------------------------------------------------------

The table below presents information related to Grace's business segments for
the three months ended March 31, 2001 and 2000.

=============================================================
BUSINESS SEGMENT DATA                   THREE MONTHS ENDED
(Dollars in millions)                        MARCH 31,
=============================================================
                                        2001         2000
                                     ------------------------
NET SALES

Davison Chemicals..................     $ 198.4    $  192.0
Performance Chemicals..............       197.3       192.7
                                     ------------------------

TOTAL..............................     $ 395.7    $  384.7
                                     ========================

PRE-TAX OPERATING INCOME

Davison Chemicals..................     $  24.6    $   32.9
Performance Chemicals..............        17.8        19.1
                                     ------------------------
TOTAL..............................      $ 42.4    $   52.0
=============================================================

The table below presents information related to the geographic areas in which
Grace operated for the three months ended March 31, 2001 and 2000.

=============================================================
GEOGRAPHIC AREA DATA                    THREE MONTHS ENDED
(Dollars in millions)                        MARCH 31,
=============================================================
                                        2001         2000
                                     ------------------------
NET SALES
  United States....................      $199.0    $  197.2
  Canada and Puerto Rico...........         8.5         9.5
  Germany..........................        71.4        64.2
  Europe, other than Germany.......        36.2        41.2
  Asia Pacific.....................        54.1        47.3
  Latin America....................        26.5        25.3
                                     ------------------------
TOTAL..............................      $395.7    $  384.7
=============================================================

The pre-tax operating income for Grace's business segments for the three months
ended March 31, 2001 and 2000 is reconciled below to income before income taxes
and minority interest presented in the accompanying Consolidated Statement of
Operations.

=============================================================
RECONCILIATION OF BUSINESS
SEGMENT DATA TO FINANCIAL
STATEMENTS                             THREE MONTHS ENDED
(Dollars in millions)                       MARCH 31,
=============================================================
                                        2001        2000
                                   -------------------------
Pre-tax operating income -
  business segments..............      $42.4       $52.0
Interest expense and related
  financing costs................       (9.0)       (5.3)
Interest income..................        1.8         2.3
Corporate operating costs........      (13.7)      (12.2)
Reorganization expenses..........       (2.9)        --
Other net........................        8.2         1.0
                                   -------------------------
Income before income taxes and
  minority interest..............      $26.8       $37.8
=============================================================





                                      I-14
<PAGE>


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


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

Grace is engaged in specialty chemicals and specialty materials businesses on a
global basis. Its principal business segments are Davison Chemicals, which
produces catalysts and silica products, and Performance Chemicals, which
produces construction chemicals, building materials and container products.

--------------------------------------------------------------------------------
SUBSEQUENT EVENT - VOLUNTARY BANKRUPTCY FILING
--------------------------------------------------------------------------------

On April 2, 2001, 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
numbers 01-1139 through 01-1200. Grace's non-U.S. operating subsidiaries were
not a part of the Filing.

The Filing was made in response to a sharply increasing number of
asbestos-related bodily injury claims. These claims are discussed in more detail
in Note 2 to the Consolidated Financial Statements. Under Chapter 11, the
Debtors expect to continue to operate their businesses as debtors-in-possession
under court protection from their creditors and claimants, while using the
Chapter 11 process to develop and implement a plan for addressing the
asbestos-related claims against them.

Background of Filing - On January 29, 2001, Grace announced that recent
developments in asbestos-related litigation had led to a fourth quarter charge
of $208.0 million (net of expected insurance recovery). The charge was made to
account for probable and estimable costs related to several adverse developments
in Grace's asbestos litigation during 2000, including: a significant increase in
bodily injury claims; higher than expected costs to resolve bodily injury and
certain property damage claims; and new class-action lawsuits alleging damages
from a former attic insulation product not previously subject to property damage
litigation. These adverse developments continued during the first quarter 2001.

Grace also announced on January 29, 2001 that it was reviewing the strategic and
operating issues associated with continuing to defend asbestos litigation
through the court system versus voluntarily seeking a resolution of such
litigation through reorganization under Chapter 11. As a result of that review,
the Board of Directors of Grace concluded on April 2, 2001 that a federal
court-supervised Chapter 11 filing provides the best forum available to achieve
predictability and fairness in the claims settlement process. By filing under
Chapter 11, Grace expects to be able to both obtain a comprehensive resolution
of the claims against it and preserve the inherent value of its businesses.

Consequence of Filing - As a consequence of the Filing, all pending litigation
against the Debtors is stayed and no party may take any action to realize its
pre-petition claims except pursuant to order of the Bankruptcy Court. It is the
Debtors' intention to address all of their pending and future asbestos-related
claims and all other pre-petition claims in a plan of reorganization. However,
it is currently impossible to predict with any degree of certainty how the plan
will treat asbestos and other pre-petition claims and the impact the Filing and
any reorganization plan may have on the shares of common stock of Grace. The
formulation and implementation of the plan of reorganization could take a
significant period of time.

The accompanying Consolidated Financial Statements have been 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, such realization of certain Debtors' assets
and liquidation of certain Debtors' liabilities are subject to significant
uncertainty. Further, a plan of reorganization could materially change the
amounts and classifications reported in the consolidated financial statements,
which do not 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.


                                      I-15
<PAGE>

All of the Debtor's pre-petition debt is now in default due to the Filing.
Accordingly, the accompanying Consolidated Balance Sheets as of March 31, 2001
and December 31, 2000 reflect the classification of the Debtors' pre-petition
debt as current.

The Debtors have negotiated a DIP facility in the aggregate amount of $250
million. The DIP facility has a term of 2 years and bears interest at either
Bank of America's prime rate or a formula based on the LIBOR rate plus 2.00% to
2.25%. The Bankruptcy Court issued a final approval of the DIP facility on May
3, 2001. The Debtors have borrowed a total of $75.0 million against the DIP
facility subsequent to March 31, 2001.

The Debtors have received approval from the Bankruptcy Court to pay or otherwise
honor certain of its pre-petition obligations, including claims of trade
creditors to a specified amount and employee wages and benefits in the ordinary
course of business.

Accounting Impact - Beginning in the second quarter of 2001, Grace will be
required to follow Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting
by Entities in Reorganization under the Bankruptcy Code." Pursuant to SOP 90-7,
Grace's pre-petition liabilities that are subject to compromise will be reported
separately on the balance sheet at an estimate of the amount that will
ultimately be allowed by the Bankruptcy Court. Obligations of Grace subsidiaries
not covered by the Filing will remain classified on the consolidated balance
sheet based upon maturity dates or the expected dates of payment. SOP 90-7 also
requires separate reporting of certain expenses, realized gains and losses, and
provisions for losses related to the Filing as reorganization items.

Pro-Forma Condensed Balance Sheet Information of Debtors (Unaudited) - The
condensed consolidated balance sheet as if the Debtors had filed petitions for
reorganization under Chapter 11 at March 31, 2001 is as follows:

=============================================================
PRO-FORMA CONDENSED CONSOLIDATED BALANCE SHEET
OF DEBTORS                                         MARCH 31,
(Dollars in millions)                                2001
=============================================================
Current Assets:
   Cash and cash equivalents................       $   8.6
   Notes and accounts receivable, net.......          43.8
   Inventories..............................          86.4
   Deferred income taxes....................          80.9
   Asbestos-related insurance expected to be
     realized within one year...............          17.0
   Other current assets.....................          21.9
                                               --------------
       Total current assets.................         258.6
   Properties and equipment, net............         400.4
   Asbestos-related insurance receivable....         323.4
   Receivables from nonfiling entities,
     net of loans...........................         438.7
   Investment in nonfiling entities.........         115.2
   Deferred income taxes....................         401.0
   Other noncurrent assets..................         386.2
                                               --------------
       TOTAL ASSETS.........................      $2,323.5
                                               ==============
Liabilities Not Subject to Compromise:
Current liabilities
   Short-tem debt...........................        $   --
   Accounts payable.........................            --
   Other current liabilities................            --
                                               --------------
     Total current liabilities not subject
       to compromise........................            --
   Noncurrent liabilities not subject to
       compromise...........................            --
                                               --------------
         TOTAL LIABILITIES NOT SUBJECT TO
            COMPROMISE......................            --
                                               --------------
Liabilities Subject to  Compromise:
   Debt.....................................         508.9
   Asbestos-related liability ..............       1,002.8
   Other liabilities........................         886.1
                                               --------------
         TOTAL LIABILITIES SUBJECT TO
           COMPROMISE.......................       2,397.8
                                               --------------
      TOTAL LIABILITIES.....................       2,397.8
SHAREHOLDERS' EQUITY (DEFICIT)..............         (74.3)
                                               --------------
      TOTAL LIABILITIES AND SHAREHOLDERS'
         EQUITY (DEFICIT)...................      $2,323.5
=============================================================


--------------------------------------------------------------------------------
CONTINUING OPERATIONS
--------------------------------------------------------------------------------

Grace is engaged in specialty chemicals and specialty materials businesses on a
global basis. The principal business segments are Davison Chemicals, which
produces catalysts and silica products, and Performance Chemicals, which
produces construction chemicals, building materials and container products. Set
forth below is a chart that lists key operating statistics and percentage
changes for the three months ended March 31, 2001 and 2000, which should be
referenced when reading management's discussion and analysis of the results of
continuing operations. The chart below, 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 that are
not directly related to the generation of customer revenue or the support of
core operations.


<PAGE>


<TABLE>
<CAPTION>
====================================================================================================================================
ANALYSIS OF CONTINUING OPERATIONS                                                           THREE MONTHS ENDED        % Change Fav
(Dollars in millions)                                                                            MARCH 31,               (Unfav)
====================================================================================================================================
                                                                                            2001            2000
                                                                                       ------------------------------
<S>                                                                                        <C>            <C>             <C>
NET SALES
    DAVISON CHEMICALS
    Refining catalysts..........................................................           $109.7         $110.0          (0.3%)
    Chemical catalysts..........................................................             33.0           29.0          13.8%
    Silica products.............................................................             55.7           53.0           5.1%
                                                                                       ---------------------------------------------
  TOTAL DAVISON CHEMICALS.......................................................            198.4          192.0           3.3%
                                                                                       ---------------------------------------------
    PERFORMANCE CHEMICALS
    Construction chemicals......................................................             78.0           79.6          (2.0%)
    Building materials..........................................................             57.8           56.2           2.8%
    Container products..........................................................             61.5           56.9           8.1%
                                                                                       ---------------------------------------------
  TOTAL PERFORMANCE CHEMICALS...................................................            197.3          192.7           2.4%
                                                                                       ---------------------------------------------
TOTAL GRACE SALES - CORE OPERATIONS.............................................           $395.7         $384.7           2.9%
====================================================================================================================================
PRE-TAX OPERATING INCOME:
    Davison Chemicals...........................................................           $ 24.6         $ 32.9         (25.2%)
    Performance Chemicals.......................................................             17.8           19.1          (6.8%)
    Corporate operating costs...................................................            (13.7)         (12.2)        (12.3%)
                                                                                       ---------------------------------------------
PRE-TAX INCOME FROM CORE OPERATIONS.............................................             28.7           39.8         (27.9%)
                                                                                       ---------------------------------------------
PRE-TAX INCOME FROM NONCORE ACTIVITIES..........................................              8.2            1.0           NM
Reorganization expenses.........................................................             (2.9)            --           NM
Interest expense................................................................             (9.0)          (5.3)        (69.8%)
Interest income.................................................................              1.8            2.3         (21.7%)
                                                                                       ---------------------------------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST................................             26.8           37.8         (29.1%)
Provision for income taxes......................................................            (11.9)         (13.6)        (12.5%)
Minority interest in income of subsidiary.......................................             (0.3)            --           NM
------------------------------------------------------------------------------------------------------------------------------------
NET INCOME .....................................................................            $14.6         $ 24.2         (39.7%)
====================================================================================================================================

KEY FINANCIAL MEASURES:
   Pre-tax income from core operations as a percentage of sales.................              7.2%          10.3%         (3.1)pts.
   Pre-tax income from core operations before depreciation and amortization.....            $50.6          $62.0         (18.4%)
       As a percentage of sales.................................................             12.8%          16.1%         (3.3) pts.
====================================================================================================================================
NET SALES BY REGION:
North America...................................................................           $207.5         $206.7           0.4%
Europe..........................................................................            107.6          105.4           2.1%
Asia Pacific....................................................................             54.1           47.3          14.4%
Latin America...................................................................             26.5           25.3           4.7%
                                                                                       ---------------------------------------------
TOTAL NET SALES.................................................................           $395.7         $384.7           2.9%
====================================================================================================================================
</TABLE>

   NM = Not meaningful.



                                      I-16
<PAGE>

NET SALES

The following table identifies the quarter-over-quarter increase or decrease in
sales attributable to changes in product volume, product price and/or mix, and
the impact of foreign currency translation.

================================================================
                       THREE MONTHS ENDED MARCH 31, 2001 AS A
NET SALES            PERCENTAGE INCREASE (DECREASE) FROM THREE
VARIANCE ANALYSIS           MONTHS ENDED MARCH 31, 2000
================================================================
                      VOLUME   PRICE/MIX   TRANSLATION   TOTAL
                     -------------------------------------------

Davison Chemicals..     3.2%      3.6%        (3.5%)     3.3%
Performance
  Chemicals .......     5.3%      0.7%        (3.6%)     2.4%
Net sales..........     4.3%      2.2%        (3.6%)     2.9%
----------------------------------------------------------------
By Region:
  North America....    (2.8%)     3.4%        (0.2%)     0.4%
  Europe...........    11.3%     (0.5%)       (8.7%)     2.1%
  Asia Pacific.....    19.0%      2.9%        (7.5%)    14.4%
  Latin America....     6.4%      1.8%        (3.5%)     4.7%
================================================================

Grace's net sales increased 2.9% to $395.7 million in the first quarter of 2001
compared to the same period in 2000. The sales growth was attributable to
acquisitions and favorable price/mix partially offset by foreign currency
translation. Acquisitions completed in 2000 contributed $13.7 million or 3.6% to
sales in the first quarter 2001. The impact from foreign currency translation
was experienced principally in Europe where sales, reported in US dollars, were
adversely affected by 8.7%.

In the first quarter of 2001, all product groups experienced volume growth. The
most significant volume increase was experienced in container products where
North American volumes were strong and were supplemented by the acquisition of
the Hampshire Polymers business. Sales of chemical catalysts also experienced
solid volume growth, driven primarily by strong polyolefin sales in Europe and
Asia Pacific.

PRE-TAX INCOME FROM CORE OPERATIONS

Pre-tax operating income decreased in each business segment for the first
quarter of 2001 compared to the respective period of 2000. Pre-tax income from
core operations was $28.7 million for the first quarter of 2001, compared to
$39.8 million for the first quarter 2000, a 27.9% decrease quarter-over-quarter.

Operating income of Davison Chemicals for the first quarter of 2001 was $24.6
million, down 25.2% versus 2000, and its operating margin of 12.4% was 4.7
percentage points unfavorable to the prior year. Operating income of Performance
Chemicals for the first quarter of 2001 was $17.8 million, down 6.8% from 2000
with an operating margin of 9.0%, down 0.9 percentage points from 2000. These
decreases are mainly due to higher energy and raw material costs. The rise in
natural gas prices (used by Davison Chemicals as part of its manufacturing
process) and transportation fuel prices (impacting distribution costs for
Performance Chemicals) has had a significant adverse affect on profit margins.
In addition, these energy sources are a significant factor in the cost of many
raw materials used by both business segments. Selling price increases have not
kept pace with the rise in these energy related costs.

The following table identifies the percentage change in the cost per dollar of
sales for each business segment and Grace's core operations in total. The index
is calculated using 1998 as the base year and carving out selling price changes,
currency movement and cost inflation in every year since the base year. The
resulting change in cost per dollar of sales is Grace's productivity measure.
Changes in product volume and mix remain in the productivity equation.

==================================================
                                THREE MONTHS ENDED
PRODUCTIVITY INDEX                   MARCH 31,
==================================================
                                 2001       2000
                                ------------------
COST PER $ OF SALES ON A
  CONSTANT $ BASIS WITH
  1998 AS BASE YEAR:

Davison Chemicals .........     $0.831     $0.806
Performance Chemicals......      0.877      0.885
Corporate operating costs..      0.033      0.030
--------------------------------------------------
Total core operations......     $0.885     $0.875
--------------------------------------------------
PERCENTAGE IMPROVEMENT
 FROM PRIOR YEAR                  (1.0)%      5.6%
==================================================

As reflected in the table above, on a constant dollar basis with 1998, Grace had
a 1.0% increase in unit costs during the first quarter of 2001, while there was
a 5.6% reduction achieved in the first quarter 2000. The first quarter 2001
increase was primarily attributable to the increases in energy and raw material
costs.

Corporate operating costs include expenses incurred by corporate headquarters
functions in support of core operations. Corporate operating costs in the first
quarter of 2001 were $13.7 million, compared to $12.2 million in first quarter
2000, a 12.3% increase, primarily related to higher insurance costs.

PRE-TAX INCOME FROM NONCORE ACTIVITIES

Income from noncore activities totaled $8.2 million for the first quarter of
2001 compared to $1.0 million for the same period of 2000. The first quarter of
2001 includes $7.7 million from the sale of Grace's remaining interest in Cross
Country Staffing. The first quarter 2000 income from noncore activities included


                                      I-17
<PAGE>

$5.0 million accrual for environmental contingencies related to the Company's
former operations in Libby, Montana. The remainder of the change in income from
noncore activities is primarily attributable to an increase in net investment
income from life insurance policies.

INTEREST AND INCOME TAXES

Net interest expense for the first quarter of 2001 was $7.2 million, an increase
of $4.2 million, or 71.4%, over the first quarter of 2000. This increase is
attributable to higher average debt levels primarily to fund business
acquisitions and working capital requirements.

The Company's effective tax rate was 44.6% for the first quarter of 2001 and
36.0% for the first quarter of 2000. The increase in the fiscal year 2001
effective tax rate is attributable to the current period interest on tax
contingencies.

DAVISON CHEMICALS

Recent Acquisitions and Joint Ventures

In March 2001, Grace acquired The Separations Group, a manufacturer of
chromatography columns and separations media. Also in March 2001, a German
subsidiary acquired the precipitated silicas business of AKZO-PQ Silicas.

On March 1, 2001, Grace and Chevron Products Co. (Chevron) formed Advanced
Refining Technologies (ART) to develop and market globally hydroprocessing
catalysts. ART conducts business through two distribution companies and one
operating company. Grace has a majority ownership interest in and controls both
distribution companies; therefore, for financial reporting purposes the assets,
liabilities and results of operations of these entities are included in Grace's
consolidated financial statements. The minority interest in Grace's consolidated
statement of operations represents the proportionate loss related to Chevron's
45% interest in the distribution companies. Grace does not exercise governance
control over the operating company and therefore, the assets, liabilities and
results of operations of this company are not consolidated in Grace's financial
statements. Accordingly, the equity income or loss related to the operating
company is reported in "Other Income" in Grace's consolidated statement of
operations. ART has an agreement with both Grace and Chevron whereby Grace and
Chevron provide administrative and research and development services to ART and
ART reimburses Grace and Chevron for these services.

Sales

Davison Chemicals is a leading global supplier of catalysts and silica products.
Refining catalysts, which represented 27.7% of Grace's 2001 first quarter sales
(28.6% - first quarter 2000), include fluid cracking catalysts used by petroleum
refiners to convert distilled crude oil into transportation fuels and other
petroleum-based products, hydroprocessing catalysts which upgrade heavy oils and
remove certain impurities, and chemical additives for treatment of feedstock
impurities. Chemical catalysts, which represented 8.3% of Grace's 2001 first
quarter sales (7.6% - first quarter 2000), include polyolefin catalysts which
are essential components in the manufacturing of polyethylene resins used in
products such as plastic film, high performance plastic pipe and plastic
household containers. Silica products, which represented 14.1% of Grace's 2001
first quarter sales (13.8% - first quarter 2000), are used in a wide variety of
industrial and consumer applications such as coatings, food processing,
plastics, adsorbents and personal care products.

In the first quarter of 2001, refining catalysts sales were $109.7 million, down
slightly compared to the same period in 2000, as declines in North America more
than offset growth in the other regions. Chemical catalysts sales increased
13.8% to $33.0 million in the first quarter of 2001 reflecting favorable product
mix and strong volumes in European and Asian polyolefin catalysts. Silica
products sales of $55.7 million for the first quarter of 2001 were up 5.1%
compared to the 2000 first quarter largely due to volume gains realized from the
Ludox(R) colloidal silicas acquisition, which were partially offset by negative
foreign currency translation. Excluding the impact of currency translations,
sales were up 10.1%. This translation effect was primarily due to the fact that
a significant portion of the silicas business is based in Europe.

Operating Earnings

Pre-tax operating income of $24.6 million was 25.2% lower than first quarter
2000. Operating margins declined 4.7 percentage points to 12.4%, as higher
energy costs, primarily reflected in natural gas and raw materials, more than
offset the favorable results of productivity initiatives.


                                      I-18
<PAGE>

PERFORMANCE CHEMICALS

Sales

Performance Chemicals' major product groups include specialty construction
chemicals and specialty building materials used primarily by the nonresidential
construction industry; and container sealants and coatings for food and beverage
packaging, and other related products. Construction chemicals, which represented
19.7% of Grace's 2001 first quarter sales (20.7% - first quarter 2000) add
strength, control corrosion, and enhance the handling and application of
concrete. Building materials, which represented 14.6% of Grace's 2001 and 2000
first quarter sales, prevent water damage to structures and protect structural
steel against collapse due to fire. Container products, which represented 15.5%
of Grace's 2001 first quarter sales (14.8% - first quarter 2000), seal beverage
and food cans, and glass and plastic bottles, and protect metal packaging from
corrosion and the contents from the influences of metal.

In the first quarter of 2001, sales of construction chemicals were $78.0
million, down 2.0% versus the year-ago quarter due to volume decreases in North
America and the continued softness of the Asia Pacific market. Sales of building
materials increased 2.8% to $57.8 million compared to first quarter 2000,
primarily reflecting increases in North American volume. Volume increases in
Europe were largely offset by the negative impact of currency translation and
depressed construction activity in the United Kingdom. Sales of container
products increased 8.1% to $61.5 million in the first quarter of 2001. The
increase relates to the positive impact of the Hampshire Polymers business
acquired in July 2000 as well as higher sales of specialty coatings products.
Excluding the effects of foreign exchange, sales were up 14.5% compared to first
quarter 2000.

Operating Earnings

Pre-tax operating income declined 6.8% to $17.8 million in the first quarter of
2001. This decrease was caused by higher energy and raw material costs as a
discussed above.

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

The charts below are intended to enhance the readers' understanding of the
Company's overall financial position by separately showing assets, liabilities
and cash flows related to core operations from those related to noncore
activities. The Company's management structure and activities are tailored to
the separate focus and accountability of core operations and noncore activities.


=============================================================
CORE OPERATIONS
(Dollars in millions)
---------------------------------
CAPITAL INVESTED IN CORE           MARCH 31,   December 31,
OPERATIONS                            2001         2000
=============================================================

BOOK VALUE OF INVESTED CAPITAL
Receivables ......................    $198.9     $187.4
Inventory ........................     162.7      144.2
Properties and equipment, net ....     597.2      596.2
Intangible assets and other.......     496.1      437.8
                                   --------------------------
ASSETS SUPPORTING CORE OPERATIONS.   1,454.9    1,365.6
Accounts payable and accruals.....    (272.9)    (329.9)
                                   --------------------------
CAPITAL INVESTED IN CORE
     OPERATIONS...................  $1,182.0   $1,035.7
After-tax return on average
     invested capital (trailing
     four quarters)...............      11.0%      12.0%
                                   ==========================

=============================================================
NET CASH FLOW FROM CORE               THREE MONTHS ENDED
OPERATIONS NET                             MARCH 31,
                                   --------------------------
                                      2001       2000
=============================================================
CASH FLOWS:
Pre-tax operating income .........     $28.7    $  39.8
Depreciation and amortization ....      21.9       22.2
                                   --------------------------

PRE-TAX EARNINGS BEFORE
DEPRECIATION AND AMORTIZATION ....      50.6       62.0
Capital expenditures .............     (11.3)     (12.5)
Businesses acquired ..............     (56.5)     (25.0)
Working capital and other changes      (96.6)     (57.9)
                                   --------------------------
NET CASH FLOW FROM CORE
OPERATIONS .......................   $(113.8)   $ (33.4)
=============================================================

The Company has a net asset position supporting its core operations of $1,182.0
million at March 31, 2001 compared to $1,035.7 million at December 31, 2000
after adding back the cumulative translation account reflected in Shareholders'
(Deficit) Equity of $158.0 million at March 31, 2001 and $140.2 million at
December 31, 2000. Weighted average invested capital over the past four quarters
was $1,023.4 million. The change in the net asset position is primarily due to
an increase in net assets from business acquisitions and a reduction in accounts
payable and core liabilities due to payments made in the first quarter of 2001
including the payment of accruals that had built up over the course of the prior
fiscal year for items such as bonuses, customer rebates and taxes. After-tax
return on capital invested in core operations (calculated based on a trailing
four quarters) decreased 1.0 percentage points.

The Company 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. Grace's current core operations,
together with other available assets, were being managed to generate

                                      I-19
<PAGE>

sufficient cash flow to fund these obligations over time. However, as a result
of the Filing, the noncore liabilities listed in the table below are subject to
resolution under Chapter 11.

=============================================================
NONCORE ACTIVITIES
(Dollars in millions)
-----------------------------------   MARCH 31,  December 31,
NET NONCORE LIABILITY                   2001        2000
=============================================================
BOOK VALUE OF ASSETS AVAILABLE
TO FUND NONCORE OBLIGATIONS:
Cash and other financial assets ..    $208.6     $327.2
Properties and investments .......       9.0        8.2
Asbestos-related insurance
receivable .......................     340.4      372.0
Tax assets, net...................     290.4      295.7
-------------------------------------------------------------
ASSETS AVAILABLE TO FUND NONCORE
   OBLIGATIONS....................     848.4    1,003.1
-------------------------------------------------------------
Noncore liabilities:
Asbestos-related litigation.......  (1,002.8)  (1,105.9)
Environmental remediation.........    (164.8)    (174.9)
Postretirement benefits...........    (185.4)    (189.1)
Retained obligations and other....     (75.3)     (78.1)
-------------------------------------------------------------
TOTAL NONCORE LIABILITIES.........  (1,428.3)  (1,548.0)
-------------------------------------------------------------
NET NONCORE LIABILITY.............   $(579.9)   $(544.9)
=============================================================
NET CASH FLOW FROM NONCORE            THREE MONTHS ENDED
     ACTIVITIES                            MARCH 31,
                                   --------------------------
                                      2001       2000
=============================================================
Pre-tax income from noncore
     activities...................      $8.2    $   1.0
Other changes.....................     (16.5)       6.9
Cash spending for:
  Asbestos-related litigation,
     net of insurance recovery....     (71.4)     (14.1)
  Environmental remediation.......     (10.1)     (13.9)
  Postretirement benefits.........      (5.6)      (5.1)
  Retained obligations and other..      (3.5)      (5.5)
-------------------------------------------------------------
NET CASH FLOW FOR NONCORE
     ACTIVITIES ..................    $(98.9)   $ (30.7)
=============================================================

The table above displays the book value of Grace's noncore liabilities and the
assets available to fund those liabilities at March 31, 2001 and December 31,
2000. The Filing could materially change the amounts reported in the table
above, which does not give any adjustments to the carrying value of assets or
liabilities that might be necessary as a consequence of a plan of
reorganization. Each noncore liability has different characteristics, risks and
expected liquidation profile. Taken together, these liabilities represent
$1,428.3 million of Grace's total liabilities as reflected on its balance sheet
at March 31, 2001. Assets available to fund noncore liabilities consist of cash
and cash equivalents, net cash value of life insurance where Grace is the
beneficiary, property and investments not used in core operations, insurance
coverage for asbestos-related litigation and net tax assets related to noncore
liabilities. These assets, which in the aggregate total $848.4 million at March
31, 2001, are not required to support base core operating activities and, thus,
are available to fund noncore liabilities.

ASBESTOS-RELATED MATTERS

Grace is a defendant in lawsuits relating to previously sold asbestos-containing
products. In the first quarter of 2001, Grace paid $71.4 million for the defense
and disposition of asbestos-related property damage and bodily injury
litigation, net of amounts received under settlements with insurance carriers,
compared to net expenditures in the first quarter of 2000 of $14.1 million. At
March 31, 2001 Grace's balance sheet reflects a gross liability of $1,002.8
million and a liability net of insurance recovery of $662.4 million, which
represents management's estimate as of the balance sheet date (in conformity
with generally accepted accounting principles) of the undiscounted net cash
outflows in satisfaction of Grace's current and expected asbestos-related
claims.

The Consolidated Balance Sheet at March 31, 2001 includes total amounts due from
insurance carriers of $340.4 million pursuant to settlement agreements with
insurance carriers. The recovery of amounts due from insurance carriers is
consistent with the timing of payment of an asbestos claim.

See Note 2 to the Consolidated Financial Statements for further information
concerning asbestos related lawsuits and claims. Although all such litigation
has been stayed, Grace expects to continue to fund claims processing costs and
certain defense costs as part of its Chapter 11 proceedings.

ENVIRONMENTAL MATTERS

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 made cash payments to remediate environmentally
impaired sites during the first quarter of 2001 and 2000 of $10.1 million and
$13.9 million, respectively. These amounts have been charged against previously
established reserves. At March 31, 2001, Grace's liability for environmental
investigatory and remediation costs related to continuing and discontinued
operations totaled $164.8 million, as compared to $174.9 million at December 31,
2000. Grace expects to continue to fund required remediation activities while in
Chapter 11.

Grace is in litigation with two excess insurance carriers regarding the
applicability of the carriers' policies to environmental remediation costs. The
outcome of such litigation, as well as the amounts of any recoveries that Grace
may receive, is presently

                                      I-20
<PAGE>

uncertain. Accordingly, Grace has not recorded a receivable with respect to such
insurance coverage.

See Note 11 to the Consolidated Financial Statements for further information
concerning environmental matters.

POSTRETIREMENT BENEFITS

Grace provides certain postretirement health care and life insurance benefits
for retired employees, a large majority of which pertains to retirees of
previously divested businesses. These plans are unfunded, and Grace pays the
costs of benefits under these plans as they are incurred.

Spending under this program during the first quarter of 2001 was $5.6 million.
This amount is consistent with expected spending of approximately $22.1 million
for the year ended December 31, 2001. Grace's recorded liability of $185.4
million at March 31, 2001 is stated at net present value discounted at 7.5%.

RETAINED OBLIGATIONS OF DIVESTED BUSINESSES

The principal retained obligations of divested businesses relate to contractual
indemnification and to contingent liabilities not passed on to the new owner. At
March 31, 2001, Grace had recorded $75.3 million to satisfy such obligations.
Grace expects that these claims will be resolved as part of its plan of
reorganization under Chapter 11.

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

LIQUIDITY POSITION

At March 31, 2001, Grace had committed borrowing facilities totaling $500.0
million, consisting of $250.0 million expiring in May 2001 and $250.0 million
under a long-term facility expiring in May 2003. Total debt outstanding at March
31, 2001 was $518.6 million, which includes $500.0 million outstanding on the
borrowing facility. As a result of the Filing, Grace is in default under such
debt and accordingly, total borrowings have been reported as short-term debt.
However, the automatic stay provided under the Bankruptcy Code prevents the
Company's lenders from taking any action to collect such principal amounts as
well as related accrued interest. In addition, the Company's accounts receivable
securitization program has been terminated. Under the terms of this program, the
company purchasing the eligible accounts receivable may collect such receivables
in order to satisfy outstanding balances under the program.

To meet its liquidity needs over the next two years, Grace has entered into a
DIP facility in the aggregate amount of $250.0 million. In addition, Grace has
cash and cash equivalents of $115.8 million and cash value of life insurance
(net) of $64.1 million at March 31, 2001. Management believes that the DIP
facility and the existing liquid assets will be sufficient to meet the operating
needs of Grace over the next year.

CASH FLOW

Cash flows from core operations during the first quarter of 2001 were an outflow
of $113.8 million compared to an outflow in first quarter 2000 of $33.4 million.
This reduction in cash flows from core operations was primarily attributable to
working capital pressures stemming from creditors concerns over a possible
Chapter 11 filing.

The net cash flow of noncore activities was $(98.9) million in the first
quarter of 2001 compared to $(30.7) million in the first quarter of 2000.
Asbestos-related spending and environmental spending was significantly higher in
the first quarter of 2001 than the first quarter of 2000. Postretirement benefit
payments were consistent with the prior year as these payments are based on
comparable year-over-year benefit programs. In the first quarter of 2001,
proceeds from loans secured by cash value of life insurance policies, net of
loan repayments, were $46.6 million as compared to net repayments of $0.4
million in 2000. This increased inflow of cash was offset by much higher
asbestos-related payments in the first quarter of 2001 as compared to 2000.

Cash flows used for investing activities during the first quarter of 2001 were
$66.4 million, compared to $48.8 million during first quarter 2000. Net cash
outflow during the first quarter of 2001 was impacted by capital expenditures,
and $56.5 million used for business acquisitions. Total capital expenditures
during the first quarter of 2001 and 2000 were $11.3 million and $12.5 million,
respectively, substantially all of which was directed toward its business
segments.

Net cash provided by financing activities during the first quarter of 2001 was
$143.7 million, principally representing $97.1 million in net borrowings against
the Company's credit facilities and $46.6 million of proceeds from loans secured
by the cash value of life insurance policies, net of repayments. The net
borrowing against the credit facilities and life insurance policies was used
primarily to fund the

                                      I-21
<PAGE>

business acquisitions, asbestos payments, and working capital requirements. Cash
provided by financing activities during the first quarter of 2000 was $109.9
million, principally representing $158.7 million in net borrowings against the
Company's credit facilities, offset by payments for long term debt and the
purchase of treasury stock.

Grace is the beneficiary of life insurance policies on current and former
employees with benefits in force of approximately $2,286 million and net cash
surrender value of $64.1 million at March 31, 2001, comprised of $453.7 million
in policy gross cash value offset by $389.6 million of principal and accrued
interest on policy loans. The policies were acquired to fund various employee
benefit programs and other long-term liabilities and are structured to provide
cash flows (primarily tax-free) over the next 40-plus years.

The Company intends to utilize policy cash flows, which are actuarially
projected to range from $15 million to $45 million annually over the policy
terms, to fund (partially or fully) noncore liabilities and to earmark gross
policy cash value as a source of funding for noncore obligations. The Company
also intends to explore structuring options for the policies and policy loans to
enhance returns on assets, to reduce policy expenses and to better match policy
cash flows with payments of noncore liabilities.

Grace employees currently receive salaries, incentive bonuses, other benefits,
and stock options. Each stock option granted under the Company's stock incentive
plan has an exercise price equal to the fair market value of the Company's
common stock on the date of grant. In the first three months of 2001, the
Company granted a total of 1,320,446 options with an average exercise price of
$2.54. Poor stock price performance and the Filing have diminished the value of
the option program to current and prospective employees, which caused the
Company to change its long-term incentive compensation program into more of a
cash-based program. The Company has also sought to address employee retention
issues by providing retention bonuses to certain key employees and increasing
the company contribution to its savings and investment plan.

--------------------------------------------------------------------------------
FORWARD-LOOKING STATEMENTS
--------------------------------------------------------------------------------

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




                                      I-22
<PAGE>

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

Grace had no outstanding derivative financial instruments on March 31, 2001. For
further information concerning Grace's quantitative and qualitative disclosures
about market risk, refer to Note 11 in the Consolidated Financial Statements in
the 2000 Form 10-K.

















                                      I-23
<PAGE>

                           PART II. OTHER INFORMATION

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

Notes 1 and 2 to the interim consolidated financial statements in Part I of this
Report is incorporated herein by reference.


ITEM 3. DEFAULTS UNDER SENIOR SECURITIES
--------------------------------------------------------------------------------

On April 2, 2001, Grace and 61 of its United States subsidiaries and affiliates
filed voluntary petitions for reorganization under Chapter 11 of the United
States Bankruptcy Code. As a result of these filings, Grace and its subsidiary,
W. R. Grace & Co.-Conn., are in default under (1) the Credit Agreement dated as
of May 14, 1998 among W. R. Grace & Co., W. R. Grace & Co.-Conn., the banks
party thereto, The Chase Manhattan Bank, as Administrative Agent, and Chase
Securities, Inc., as arranger; and (2) the 364-Day Credit Agreement dated as of
May 5, 1999 among W. R. Grace & Co., W. R. Grace & Co.-Conn., the banks party
thereto, Bank of America N.A., as syndication agent, The Chase Manhattan Bank,
as Administrative Agent, Chase Securities, Inc., as Book Manager, and First
Union National Bank, as documentation agent, as amended. An aggregate of $500
million has been borrowed by W. R. Grace & Co.-Conn. under these credit
agreements.

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

     (b)  Reports on Form 8-K. The Company filed no reports on Form 8-K during
          the first quarter and to date during the second quarter of 2001.




                                      II-1
<PAGE>

                                    SIGNATURE
                                    ---------


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



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



Date:                                     By
     ---------------------------            ---------------------------------
                                                  Robert M. Tarola
                                               Chief Financial Officer
                                           (Principal Accounting Officer)




                                      II-2
<PAGE>



                                  EXHIBIT INDEX
                                  -------------

EXHIBIT NO.       DESCRIPTION OF EXHIBIT
-----------       ----------------------

     15           Accountants' Awareness Letter














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