<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, 2002

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

65,479,625 shares of Common Stock, $0.01 par value, were outstanding at April
30, 2002.

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

<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 - 17

Item 2.             Management's Discussion and Analysis of Results of Operations and
                    Financial Condition                                                           I - 18 to I - 26

Item 3.             Quantitative and Qualitative Disclosures About Market Risk                         I - 27


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

Item 1.             Legal Proceedings                                                                  II - 1

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

</TABLE>

<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS

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

We have reviewed the accompanying consolidated balance sheet of W. R. Grace &
Co. and its subsidiaries as of March 31, 2002, and the related consolidated
statements of operations, of cash flows and of comprehensive income (loss) for
each of the three-month periods ended March 31, 2002 and March 31, 2001, and the
consolidated statement of shareholder's equity (deficit) for the three-month
period ended March 31, 2002. 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 auditing standards generally accepted in the United States of America, 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, 2001, and the related consolidated statements of operations, of cash flows,
of shareholders' equity (deficit) and of comprehensive (loss) income 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, 2002. In our opinion, the information set
forth in the accompanying consolidated balance sheet as of December 31, 2001, 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
April 23, 2002



                                      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                                  2002              2001
                                                                        ------------------------------------
<S>                                                                     <C>                <C>
Net sales........................................................        $    413.5        $    395.7
Other income.....................................................               6.3              18.9
                                                                        ------------------------------------
                                                                              419.8             414.6
                                                                        ------------------------------------


Cost of goods sold, exclusive of depreciation and amortization
  shown separately below.........................................             261.6             252.4
Selling, general and administrative expenses.....................              91.8              90.8
Research and development expenses ...............................              11.9              10.5
Depreciation and amortization ...................................              22.8              22.5
Interest expense and related financing costs ....................               4.8               9.0
                                                                        ------------------------------------
                                                                              392.9             385.2
                                                                        ------------------------------------

Income from continuing operations before Chapter 11 reorganization
  expenses and income taxes......................................              26.9              29.4
Chapter 11 reorganization expenses, net .........................              (4.4)             (2.9)
Provision for income taxes.......................................             (10.1)            (11.9)
                                                                        ------------------------------------

    NET INCOME ..................................................        $     12.4        $     14.6
============================================================================================================


BASIC EARNINGS PER COMMON SHARE                                          $     0.19        $     0.22

Average number of basic shares ..................................              65.4              65.3

DILUTED EARNINGS PER COMMON SHARE................................        $     0.19        $     0.22

Average number of diluted shares.................................              65.4              65.3
============================================================================================================
</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                                                                                 2002               2001
                                                                                             ---------------------------------------
<S>                                                                                          <C>                <C>
OPERATING ACTIVITIES
Income before Chapter 11 reorganization expenses and income taxes........................    $       26.9       $         29.4
Reconciliation to cash provided by (used for) operating activities:
     Depreciation and amortization ......................................................            22.8                 22.5
     Interest accrued on pre-petition debt subject to compromise.........................             3.4                 --
     Gain on sales of investments........................................................            --                   (7.9)
     Loss (gain) on disposals of assets..................................................             0.2                 (2.8)
     Provision for environmental remediation.............................................             3.8                 --
     Net income from life insurance policies.............................................            (2.9)                (4.1)
     Changes in assets and liabilities, excluding effect of businesses acquired and
       foreign currency transaction:
         Increase in notes and accounts receivable, net..................................            (9.0)               (13.3)
         Decrease in subordinated interest of accounts receivable sold ..................            --                    1.3
         Increase in inventories ........................................................            (6.5)               (17.9)
         Decrease in accounts payable ...................................................           (14.3)               (21.4)
         Decrease in accrued liabilities ................................................           (10.2)               (29.1)
         Decrease (increase) in net pension assets ......................................             2.8                 (3.2)
         Expenditures for asbestos-related litigation ...................................            (1.5)              (103.1)
         Proceeds from asbestos-related insurance .......................................             1.0                 31.7
         Expenditures for environmental remediation .....................................            (3.8)                (8.4)
         Expenditures for postretirement benefits .......................................            (4.6)                (5.6)
         Expenditures for retained obligations of discounted operations .................            (1.0)                (5.2)
     Other ..............................................................................            12.5                (12.2)
                                                                                             ---------------------------------------
     NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES BEFORE INCOME TAXES AND CHAPTER
       11 REORGANIZATION EXPENSES........................................................            19.6               (149.3)
Chapter 11 reorganization expenses paid, net ............................................            (2.9)                (2.9)
Income taxes paid, net of refunds .......................................................            (4.6)                (6.9)
                                                                                             ---------------------------------------
     NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES ...............................            12.1               (159.1)
                                                                                             ---------------------------------------

INVESTING ACTIVITIES
Capital expenditures ....................................................................           (13.2)               (11.3)
Businesses acquired in purchase transactions, net of cash acquired ......................           (25.0)               (56.5)
Investments in life insurance policies...................................................           (12.6)               (12.9)
Proceeds from life insurance policies ...................................................             6.2                 10.6
Proceeds from sales of investments.......................................................            --                    7.9
Proceeds from disposals of assets .......................................................             0.6                  3.7
                                                                                             ---------------------------------------
     NET CASH USED FOR INVESTING ACTIVITIES .............................................           (44.0)               (58.5)
                                                                                             ---------------------------------------

FINANCING ACTIVITIES
Proceeds from loans secured by cash value of life insurance, net of repayments...........            (2.1)                46.6
Borrowings under non-debtor and pre-petition credit facilities, net of repayments........            (0.4)                99.7
Borrowings under debtor-in-possession facility...........................................            20.0                 --
Repayments of borrowings under debtor-in-possession facility.............................           (20.0)                --
                                                                                             ---------------------------------------
     NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES ...............................            (2.5)               146.3
                                                                                             ---------------------------------------
Effect of currency exchange rate changes on cash and cash equivalents ...................            (0.6)                (4.8)
                                                                                             ---------------------------------------
     DECREASE IN CASH AND CASH EQUIVALENTS ..............................................           (35.0)               (76.1)
Cash and cash equivalents, beginning of period ..........................................           181.3                191.9
                                                                                             ---------------------------------------
Cash and cash equivalents, end of period ................................................    $      146.3       $        115.8
====================================================================================================================================
</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)                                                     2002              2001
============================================================================================================================
Amounts in millions, except par value and shares
<S>                                                                                   <C>                <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents .........................................................    $       146.3     $        181.3
Notes and accounts receivable, net ................................................            309.0              302.1
Inventories .......................................................................            180.2              174.8
Deferred income taxes .............................................................             29.5               22.5
Asbestos-related insurance expected to be realized within one year ................              8.7                9.7
Other current assets...............................................................             53.0               57.7
                                                                                      --------------------------------------
     TOTAL CURRENT ASSETS .........................................................            726.7              748.1

Properties and equipment, net of accumulated depreciation and
     amortization of $1,002.7 (2001 - $995.3)......................................            596.5              589.0
Goodwill ..........................................................................             57.4               55.8
Cash value of life insurance policies, net of policy loans.........................             87.0               75.6
Deferred income taxes .............................................................            493.7              502.9
Asbestos-related insurance expected to be realized after one year..................            283.7              283.7
Other assets ......................................................................            457.2              461.9
                                                                                      --------------------------------------
     TOTAL ASSETS .................................................................    $     2,702.2     $      2,717.0
                                                                                      ======================================

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE
CURRENT LIABILITIES
Debt payable within one year ......................................................    $         6.8     $          7.8
Accounts payable ..................................................................             84.3               99.0
Income taxes payable ..............................................................             15.5               14.4
Other current liabilities .........................................................            119.9              127.9
                                                                                      --------------------------------------
     TOTAL CURRENT LIABILITIES ....................................................            226.5              249.1

Debt payable after one year........................................................             --                 --
Deferred income taxes .............................................................             21.2               20.8
Other liabilities .................................................................            276.0              275.2
                                                                                      --------------------------------------
     TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE...................................            523.7              545.1

LIABILITIES SUBJECT TO COMPROMISE - NOTE 2.........................................          2,315.3            2,313.6
                                                                                      --------------------------------------
     TOTAL LIABILITIES.............................................................          2,839.0            2,858.7
                                                                                      --------------------------------------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY (DEFICIT)
Common stock issued, par value $.01; 300,000,000 shares authorized;
     outstanding: 2002 - 65,479,000 shares (2001 - 65,399,600)                                   0.8                0.8
Paid in capital ...................................................................            433.1              433.0
Retained earnings (accumulated deficit)............................................           (125.4)            (137.8)
Treasury stock, at cost: 2002 - 11,500,800 shares (2001 - 11,500,800)..............           (137.0)            (137.0)
Accumulated other comprehensive loss ..............................................           (308.3)            (300.7)
                                                                                      --------------------------------------
     TOTAL SHAREHOLDERS' EQUITY (DEFICIT) .........................................           (136.8)            (141.7)
                                                                                      --------------------------------------
     TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) .........................    $     2,702.2     $      2,717.0
============================================================================================================================
</TABLE>


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



                                      I-4
<PAGE>



<TABLE>
<CAPTION>
================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)  (UNAUDITED)
================================================================================================================================
                                                                                           Accumulated            TOTAL
                                          Common Stock                                        Other            SHAREHOLDERS'
                                              and          Accumulated        Treasury    Comprehensive           EQUITY
Dollars in millions                     Paid in Capital      Deficit            Stock         Loss               (DEFICIT)
--------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>              <C>                <C>          <C>                <C>
BALANCE, DECEMBER 31, 2001...........   $        433.8   $     (137.8)      $   (137.0)  $     (300.7)      $       (141.7)
Net income ..........................             --             12.4             --             --                   12.4
Stock plan activity .................              0.1           --               --             --                    0.1
Other comprehensive loss.............             --             --               --             (7.6)                (7.6)
                                        ----------------------------------------------------------------------------------------
   BALANCE, MARCH 31, 2002...........   $        433.9   $     (125.4)      $   (137.0)  $     (308.3)      $       (136.8)
================================================================================================================================
</TABLE>


<TABLE>
=================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)                                    THREE MONTHS ENDED
                                                                                                         MARCH 31,
==================================================================================================================================
Dollars in millions                                                                                2002              2001
                                                                                             ------------------ -----------------
<S>                                                                                          <C>                <C>
NET INCOME.............................................................................      $       12.4           $  14.6
                                                                                             ------------------ -----------------

OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustments...............................................              (7.6)            (17.8)
Net unrealized loss on investment......................................................               --               (0.2)
                                                                                             ------------------ -----------------
   Total other comprehensive (loss)....................................................              (7.6)            (18.0)
                                                                                             ------------------ -----------------
COMPREHENSIVE INCOME (LOSS)............................................................      $        4.8           $  (3.4)
=================================================================================================================================
</TABLE>





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



                                      I-5
<PAGE>



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

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

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

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

VOLUNTARY BANKRUPTCY FILING: In response to a sharply increasing number of
asbestos-related bodily injury claims, on April 2, 2001 (the "Filing Date"), W.
R. Grace & Co. and 61 of its United States subsidiaries and affiliates,
including Grace-Conn. (collectively, the "Debtors"), filed voluntary petitions
for reorganization (the "Filing") under Chapter 11 of the United States
Bankruptcy Code ("Chapter 11" or the "Bankruptcy Code") in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). The
cases were consolidated and are being jointly administered under case number
01-01139 (the "Chapter 11 Cases"). Grace's non-U.S. subsidiaries and certain of
its U.S. subsidiaries were not included in the Filing.

During 2000 and the first quarter of 2001, Grace experienced several adverse
developments in its asbestos-related litigation, including: a significant
increase in bodily injury claims, higher than expected costs to resolve bodily
injury and certain property damage claims, and class action lawsuits alleging
damages from a former attic insulation product. (These claims are discussed in
more detail in Note 3 to the Consolidated Financial Statements.) After a
thorough review of these developments, the Board of Directors of Grace concluded
on April 2, 2001 that a federal court-supervised Chapter 11 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. Under Chapter 11, the Debtors expect to
continue to operate their businesses as debtors-in-possession under court
protection from their creditors and claimants, while using the Chapter 11
process to develop and implement a plan for addressing the asbestos-related
claims against them.

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

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

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

As provided by the Bankruptcy Code, the Debtors had the exclusive right to
propose a plan of reorganization for a 120-day period following the Filing Date.
The Debtors have received an extension of their exclusive period during which to
file a plan of reorganization through August 1, 2002, and an extension of the
Debtors' exclusive rights to solicit acceptances of a reorganization plan
through October 1, 2002.

Three creditors' committees, two representing asbestos claimants and the third
representing other unsecured



                                      I-6

<PAGE>

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

In November 2001, the Debtors' Chapter 11 Cases, as well as the Chapter 11 Cases
of four unrelated companies with asbestos-related claims, were assigned to Judge
Alfred M. Wolin, a senior federal judge who sits in Newark, New Jersey. An
additional asbestos-related Chapter 11 case was assigned to Judge Wolin in March
2002. Judge Wolin will preside over the asbestos bodily injury matters affecting
all six companies and, at his choosing, certain other asbestos-related lawsuits
particular to Grace. Judge Judith Fitzgerald, a U.S. Bankruptcy judge from the
Western District of Pennsylvania, sitting in Wilmington, Delaware, will preside
over the Debtors' other bankruptcy matters.

At a hearing on April 22, 2002, the Bankruptcy Court entered an order
establishing a bar date of March 31, 2003 for claims of general unsecured
creditors, asbestos property damage claims and medical monitoring claims related
to asbestos. The bar date does not apply to asbestos-related bodily injury
claims or claims related to Zonolite(R) attic insulation, which will be
addressed separately. In addition, a trial to determine whether the 1998
transaction involving Grace's former packaging business and Sealed Air
Corporation constituted a fraudulent conveyance was set for September 30, 2002.

Impact on Debt Capital - All of the Debtors' pre-petition debt is now in default
due to the Filing. The accompanying Consolidated Balance Sheet as of March 31,
2002 reflects the classification of the Debtors' pre-petition debt within
"Liabilities subject to compromise."

The Debtors have entered into a debtor-in-possession post-petition loan and
security agreement with Bank of America, N.A. (the "DIP facility") in the
aggregate amount of $250 million. The DIP facility has a term expiring in April
2003 and bears interest under a formula based on the London Inter-Bank Offered
Rate ("LIBOR") rate plus 2.00 to 2.25 percentage points depending on the level
of loans outstanding.

Accounting Impact - The accompanying Consolidated Financial Statements have been
prepared in accordance with Statement of Position 90-7 ("SOP 90-7") "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code," promulgated
by the American Institute of Certified Public Accountants. SOP 90-7 requires
that financial statements of debtors-in-possession be prepared on a going
concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the Filing, the realization of certain of Debtors'
assets and liquidation of certain of Debtors' liabilities are subject to
significant uncertainty. While operating as debtors-in-possession, the Debtors
may sell or otherwise dispose of assets and liquidate or settle liabilities for
amounts other than those reflected in the Consolidated Financial Statements.
Further, a plan of reorganization could materially change the amounts and
classifications reported in the Consolidated Financial Statements, which do not
currently give effect to any adjustments to the carrying value or classification
of assets or liabilities that might be necessary as a consequence of a plan of
reorganization.

Pursuant to SOP 90-7, Grace's pre-petition liabilities that are subject to
compromise are required to be reported separately on the balance sheet at an
estimate of the amount that will ultimately be allowed by the Bankruptcy Court.
As of March 31, 2002, such pre-petition liabilities include fixed obligations
(such as debt and contractual commitments) as well as estimates of costs related
to contingent liabilities (such as asbestos-related litigation and other
claims.) The recorded amounts of such liabilities generally reflect accounting
measurements as of the Filing Date adjusted, as warranted, for changes in facts
and circumstances and/or rulings under Grace's Chapter 11 proceedings subsequent
to the Filing. (See Note 2 to the Consolidated Financial Statements for detail
of the "Liabilities subject to compromise" as of March 31, 2002, and as of the
Filing Date.) Obligations of Grace subsidiaries not covered by the Filing
continue to be classified on the Consolidated Balance Sheet based upon maturity
dates or the expected dates of payment. SOP 90-7 also requires separate
reporting of certain expenses, realized gains and losses, and provisions for
losses related to the Filing as reorganization items.

BASIS OF PRESENTATION: The interim consolidated financial statements presented
herein are unaudited and should be read in conjunction with the consolidated
financial statements presented in the Company's 2001 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



                                      I-7
<PAGE>

adjustments are of a normal recurring nature. All significant intercompany
accounts and transactions have been eliminated.

The results of operations for the three month interim period ended March 31,
2002 are not necessarily indicative of the results of operations for the year
ending December 31, 2002.

RECLASSIFICATIONS: Certain amounts in prior years' consolidated financial
statements have been reclassified to conform to the 2002 presentation.

ADOPTION OF NEW ACCOUNTING STANDARDS: Grace adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No.
142"), on January 1, 2002. In accordance with SFAS No. 142, Grace ceased the
amortization of goodwill on January 1, 2002. The pro forma impact of applying
the new non-amortization provisions of SFAS No. 142 in the first quarter of 2001
was $0.1 million, which had no impact on either basic or diluted earnings per
share. SFAS No. 142 requires that goodwill and indefinite life intangible assets
be tested for impairment on an annual basis. For purposes of measuring
impairment under the provisions of SFAS No. 142, Grace has identified its
reporting units as catalyst products, silica products, speciality construction
chemicals, specialty building materials and specialty sealants and coatings. In
connection with the adoption of SFAS No. 142, Grace is currently evaluating its
goodwill and other intangible assets that have indefinite useful lives, and
anticipates that this evaluation will not result in an impairment charge. This
assessment will be completed by June 30, 2002.

In October 2001 issued SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets". SFAS No. 144 supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets to Be Disposed Of," and expands the scope of
discontinued operations. Grace adopted SFAS No. 144 on January 1, 2002. The
adoption did not have a material effect on its financial statements.

USE OF ESTIMATES: The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires that management make
estimates and assumptions affecting the assets and liabilities (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. Grace's accounting
measurements that are most affected by management's estimates of future events
are:

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

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

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

o    Realization values of various assets such as receivables, inventories,
     goodwill, insurance and tax attributes.

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

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

As a result of the Filing, Grace's Consolidated Balance Sheet as of March 31,
2002 separately identifies the liabilities that are "subject to compromise" as a
result of the Chapter 11 proceedings. In Grace's case, "Liabilities subject to
compromise" represent pre-petition liabilities as determined under U.S.
generally accepted accounting principles. Changes to the recorded amount of such
liabilities will be based on developments in the Chapter 11 Cases and
management's assessment of the claim amounts that will ultimately be allowed by
the Bankruptcy Court. Changes to pre-petition liabilities subsequent to the
Filing Date reflect: 1) cash payments under approved court orders; 2) the
accrual of interest on pre-petition debt at the pre-petition contractual rate;
3) accruals for employee-related programs; and 4) changes in estimates related
to pre-petition contingent liabilities and assets.

Components of Liabilities subject to compromise are as follows:

================================================================
                                     MARCH 31,     Filing Date
(Dollars in millions)                  2002
================================================================
Debt, pre-petition plus
  accrued interest.........     $      527.7      $      511.5
Accounts payable...........             32.2              43.0
Income taxes payable.......            218.3             210.1
Asbestos-related liability.            994.9           1,002.8
Other postretirement
  benefits.................            165.1             185.4
Environmental
  remediation.............             152.9             164.8
Retained obligations of
  divested businesses......             81.8              75.5
Pension related............             76.0              70.8
Other accrued liabilities..             66.4             102.1
                                --------------------------------
                                $    2,315.3      $    2,366.0
================================================================

                                      I-8
<PAGE>

Set forth below is a reconciliation of the changes in pre-filing date liability
balances for the period from the Filing Date through March 31, 2002.

================================================================
                                                  Cumulative
(Dollars in millions)                            Since Filing
================================================================
Balance, Filing Date......................     $    2,366.0
Cash disbursements and/or reclassifications
  under Bankruptcy Court orders:
   Freight and distribution order.........             (5.7)
   Trade accounts payable order...........             (8.4)
Other court orders including employee wages
  and benefits, sales and use tax and
  customer programs.......................            (87.4)
Expense/(income) items:
   Interest on pre-petition debt..........             24.3
   Adjustments to employment-related
     accruals.............................             12.2
   Environmental accruals.................              9.6
   Interest on income tax contingencies...              9.7
Balance sheet reclassifications...........             (3.3)
                                               -----------------
Balance, end of period....................     $    2,317.0
================================================================
Pre-Filing Date liabilities allowable under
  court orders............................     $        1.7
Pre-Filing Date liabilities subject to
  compromise..............................     $    2,315.3
================================================================

Pre-Filing Date obligations allowable under current court orders and expected to
be paid prior to an adopted plan of reorganization are classified as
"Liabilities not subject to compromise." Additional liabilities subject to
compromise may arise due to the rejection of executory contracts or unexpired
leases, or as a result of the allowance of contingent or disputed claims.

The Debtors recorded Chapter 11 reorganization expenses for three months ended
March 31, 2002 consisting of:

================================================================
                                                  THREE MONTHS
                                                 ENDED MARCH 31,
(Dollars in millions)                                 2002
================================================================
Legal and financial advisory fees..........    $       4.5
Interest income............................           (0.1)
                                               -----------------
Chapter 11 reorganization expenses, net....    $       4.4
================================================================


Pursuant to SOP 90-7, interest income earned on the Debtors' cash balances must
be offset against reorganization expenses. Condensed financial information of
the Debtors is presented below:

===============================================================
W. R. GRACE & CO. - CHAPTER 11 FILING             JANUARY 1,
ENTITIES                                           2002 TO
DEBTOR-IN-POSSESSION STATEMENT OF OPERATIONS       MARCH 31,
(Dollars in millions)                                2002
===============================================================
Net sales, including intercompany............   $    236.0
Other income.................................         14.0
                                                ---------------
                                                     250.0
                                                ---------------
Cost of goods, including intercompany,
   exclusive of depreciation and amortization
   shown separately below....................        150.5
Selling, general and administrative expenses.         63.9
Research and development expenses............         10.1
Depreciation and amortization ...............         15.1
Interest expense and related financing costs.          4.6
                                                ---------------
                                                     244.2
                                                ---------------
Income before Chapter 11 reorganization
   expenses, income taxes, and equity in net
   income of non-filing entities.............          5.8
Chapter 11 reorganization expenses, net .....         (4.4)
Provision for income taxes ..................         (4.1)
Equity in net income of non-filing entities .         15.1
                                                ---------------
   NET INCOME ...............................   $     12.4
===============================================================

===============================================================
W. R. GRACE & CO. - CHAPTER 11 FILING ENTITIES  JANUARY 1, 2002
DEBTOR-IN-POSSESSION CONDENSED STATEMENT OF            TO
CASH FLOWS                                         MARCH 31,
(Dollars in millions)                                2002
===============================================================
OPERATING ACTIVITIES
Net income...................................  $      12.4
Reconciliation to net cash provided by (used
   for) operating activities:
  Non-cash items, net........................         18.9
  Increase in accounts receivable due to
    termination of securitization program....          --
  Decrease in subordinated interest of
    accounts receivable sold.................          --
  Changes in other assets and liabilities,
    excluding the effect of businesses
    acquired.................................        (33.3)
                                               ----------------
  NET CASH USED FOR OPERATING ACTIVITIES....          (2.0)

  NET CASH USED FOR INVESTING ACTIVITIES.....        (15.6)

  NET CASH USED FOR FINANCING ACTIVITIES.....         (6.4)
                                               ----------------
  NET DECREASE IN CASH AND CASH EQUIVALENTS..        (24.0)

Cash and cash equivalents, beginning of period        38.0
                                               ----------------
Cash and cash equivalents, end of period.....  $      14.0
===============================================================



                                      I-9
<PAGE>



===============================================================
W. R. GRACE & CO. - CHAPTER 11 FILING
ENTITIES
DEBTOR-IN-POSSESSION BALANCE SHEET                 MARCH 31,
(Dollars in millions)                                2002
===============================================================
ASSETS
CURRENT ASSETS
Cash and cash equivalents ..................   $       14.0
Notes and accounts receivable, net .........          126.6
Receivables from non-filing entities, net ..           34.6
Inventories ................................           85.7
Other current assets........................           81.1
                                               ----------------
   TOTAL CURRENT ASSETS ....................          342.0

Properties and equipment, net...............          380.3
Cash value of life insurance policies,
   net of policy loans......................           87.0
Deferred income taxes ......................          493.4
Asbestos-related insurance expected to be
   realized after one year..................          283.7
Loans receivable from non-filing entities,
   net .....................................          385.0
Investment in non-filing entities ..........          170.4
Other assets ...............................          335.4
                                               ----------------
   TOTAL ASSETS ............................   $    2,477.2
===============================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
   (DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE
Current liabilities ........................   $       72.3
Debt payable within one year ...............            1.5
Other liabilities ..........................          224.9
                                               ----------------
   TOTAL LIABILITIES NOT SUBJECT TO
   COMPROMISE...............................          298.7

LIABILITIES SUBJECT TO COMPROMISE ..........        2,315.3
                                               ----------------
   TOTAL LIABILITIES........................        2,614.0

   SHAREHOLDERS' EQUITY (DEFICIT) ..........         (136.8)
                                               ----------------
   TOTAL LIABILITIES AND SHAREHOLDERS'
     EQUITY (DEFICIT) ......................   $    2,477.2
===============================================================

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

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

Grace is a defendant in property damage and bodily injury lawsuits relating to
previously sold asbestos-containing products. On April 2, 2001, Grace filed
voluntary petitions for reorganization under Chapter 11 to use the
court-supervised reorganization process to achieve predictability and fairness
in the claims settlement process. See Note 1 for further discussion.

As of the Filing Date, Grace was a defendant in 65,656 asbestos-related
lawsuits, 16 involving claims for property damage (one of which has since been
dismissed), and the remainder involving 129,191 claims for bodily injury. Due to
the Filing, holders of asbestos-related claims are stayed from continuing to
prosecute pending litigation and from commencing new lawsuits against the
Debtors. Additional asbestos-related claims are expected to be filed as part of
the Chapter 11 claims process. Separate creditors' committees representing the
interests of property damage and bodily injury claimants have been appointed in
the Chapter 11 Cases. Grace's obligations with respect to present and future
claims will be determined through proceedings in the Bankruptcy Court and
through negotiations with each of the official committees appointed in the
Chapter 11 Cases and a legal representative of future asbestos claimants, which
is expected to provide the basis for a plan of reorganization.

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. Information regarding
product identification, the amount of product in the building, the age, type,
size and use of the building, the jurisdictional history of prior cases and the
court in which the case is pending has provided meaningful guidance as to the
range of potential costs. Grace has recorded an accrual for all outstanding
property damage cases for which sufficient information is available to form a
reasonable estimate of such exposure.

Through March 31, 2002, out of 379 asbestos property damage cases filed, 141
were dismissed without payment of any damages or settlement amounts; judgments
were entered in favor of Grace in nine cases (excluding cases settled following
appeals of judgments in favor of Grace); judgments were entered in favor of the
plaintiffs in seven cases for a total of $60.3 million; 207 property damage
cases were settled for a total of $696.8 million; and 15 cases remain
outstanding. Grace may receive additional asbestos property damage claims as
part of its Chapter 11 proceeding.



                                      I-10
<PAGE>

Of the 15 remaining cases, seven relate to a former attic insulation product and
eight relate to a number of former asbestos-containing products (two of which
also involve such attic insulation product). The attic insulation cases were
filed as class action lawsuits in 2000 and 2001 on behalf of owners of homes
containing Zonolite attic insulation. These cases seek damages and equitable
relief, including the removal, replacement and/or disposal of all such
insulation. The plaintiffs assert that this product is in millions of homes
throughout the U.S. and that the cost of removal could be several thousand
dollars per home. These cases are expected to be heard by the Bankruptcy Court
within the next year. While Grace has not completed its investigation of the
claims described in these cases, Grace believes that this product was and
continues to be safe for its intended purpose and poses little or no threat to
human health. At this time, Grace is not able to assess the extent of any
possible liability related to this matter.

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 claims are filed, and the defense and disposition
costs associated with these claims. Grace's bodily injury liability reflects
management's estimate, as of the Filing Date, of the number and ultimate cost of
present and future bodily injury claims expected to be asserted against Grace
given demographic assumptions of possible exposure to asbestos containing
products previously manufactured by Grace.

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


ASBESTOS-RELATED LIABILITY

Since litigation is stayed by the Chapter 11 Cases, ongoing costs are generally
limited to claims administration costs and to defense costs incurred in
connection with litigation permitted by the Bankruptcy Court. Any other
adjustments to the recorded liability will be based on developments in the
Chapter 11 Cases. For periods prior to and as of the Filing Date, Grace's
estimated property damage and bodily injury liabilities were based on its
experience with, and recent trends in, asbestos litigation. Its recorded
liabilities covered indemnity and defense costs for pending property damage
cases and for pending and projected future bodily injury claims. No change has
been made to the pre-filing asbestos-related liability except to record the
payment of normal post-filing administrative costs primarily related to claims
processing. However, due to the Filing and the uncertainties of asbestos-related
litigation, actual amounts could differ materially from the recorded liability.
The total asbestos-related liability balances as of March 31, 2002 and December
31, 2001 were $994.9 million and $996.3 million, respectively. As of March 31,
2002, the asbestos-related liability was included in "Liabilities subject to
compromise."

ASBESTOS INSURANCE

Grace previously purchased insurance policies that cover a portion of its
asbestos-related lawsuits and claims. Insurance coverage for asbestos-related
liabilities has not been commercially available since 1985. Grace has settled
with and has been paid by all of its primary insurance carriers with respect to
both property damage and bodily injury cases and claims. Grace has also settled
with its excess insurance carriers that wrote policies available for property
damage cases; those settlements involve amounts paid and to be paid to Grace.
Grace believes that certain of these settlements may cover attic insulation
claims as well as other property damage claims. In addition, Grace believes that
additional coverage for attic insulation claims may exist under excess insurance
policies not subject to settlement agreements. Grace has settled with excess
insurance carriers that wrote policies available for bodily injury claims in
layers of insurance that Grace believes may be reached based on its current
estimates.

The asbestos-related insurance asset represents amounts expected to be received
from carriers under settlement agreements for defense and disposition costs to
be paid by Grace. Estimated insurance reimbursements are based on the recorded
amount of the liability and are considered to be collectible.



                                      I-11

<PAGE>

===============================================================
ESTIMATED INSURANCE RECOVERY ON ASBESTOS-RELATED LIABILITIES
(Dollars in millions)
===============================================================
INSURANCE RECEIVABLE
Asbestos-related insurance receivable,
  beginning of year........................      $     293.4
Proceeds received under asbestos-related
  insurance settlements ...................            (1.0)
---------------------------------------------------------------
   Asbestos-related insurance receivable, end
     of quarter............................           292.4
---------------------------------------------------------------
Total amounts due from insurance carriers .           292.4
Expected to be realized within one year ...            (8.7)
---------------------------------------------------------------
Expected to be realized after one year ....      $    283.7
===============================================================

--------------------------------------------------------------------------------
4.   ACQUISITIONS
--------------------------------------------------------------------------------
In January 2002, Grace, through its Swedish subsidiary, acquired the catalyst
manufacturing assets of Borealis A/S. In March 2002, Grace acquired the business
and assets of Addiment, Incorporated, a leading supplier of specialty chemicals
to the concrete paver and masonry industries in the U.S. and Canada.

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

--------------------------------------------------------------------------------
5.   OTHER INCOME
--------------------------------------------------------------------------------
Components of other income are as follows:

===============================================================
  OTHER INCOME                             THREE MONTHS ENDED
 (Dollars in millions)                          MARCH 31,
===============================================================
                                             2002       2001
                                         ----------------------
Investment income....................     $  2.9       $ 4.1
Gain on sale of investments..........        --          7.9
Net (losses) gains on dispositions of
 assets..............................       (0.2)        2.8
Tolling revenue......................        0.5         0.6
Interest income......................        0.8         1.8
Equity in net losses of affiliates...       (1.0)       (0.4)
Other miscellaneous income ..........        3.3         2.1
---------------------------------------------------------------
Total other income...................     $  6.3       $18.9
===============================================================

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

================================================================
                                         MARCH 31,   December 31,
(Dollars in millions)                      2002         2001
----------------------------------------------------------------
NOTES AND ACCOUNTS RECEIVABLE, NET
Trade receivables, less allowances of
  $4.6 (2001 - $5.7)...............      $   286.1   $   276.4
Other receivables, less allowances of
  $1.7 (2001 - $1.9)...............           22.9        25.7
                                         ----------- -----------
                                         $   309.0   $   302.1
================================================================
INVENTORIES
Raw materials ......................     $    42.1   $    39.2
In process .........................          33.4        27.6
Finished products ..................         105.3       108.1
General merchandise ................          25.5        25.8
Less:  Adjustment of certain
  inventories to a last-in/first-out
  (LIFO) basis .....................         (26.1)      (25.9)
                                         ----------- -----------
                                         $   180.2   $   174.8
================================================================
OTHER ASSETS
Deferred pension costs.............      $   323.2   $   326.1
Deferred charges ..................           42.6        44.9
Long-term receivables, less
  allowances of $0.6 (2001 - $0.6).            2.8         2.8
Investments in unconsolidated
  affiliates.......................            2.5         3.0
Patents, licenses and other
  intangible assets, net ..........           86.1        85.1
                                         ----------- -----------
                                         $   457.2   $   461.9
================================================================
OTHER CURRENT LIABILITIES
Accrued compensation ..............      $    33.2   $    39.4
Accrued interest ..................            4.8         4.8
Deferred tax liability ............            0.9         0.8
Customer volume rebates ...........           10.5        19.2
Accrued commissions ...............            4.7         6.1
Accrued reorganization fees .......            7.7         6.4
Other accrued liabilities .........           58.1        51.2
                                         ----------- -----------
                                         $   119.9   $   127.9
================================================================
OTHER LIABILITIES
Pension related ...................       $  266.8   $   266.5
Other accrued liabilities .........            9.2         8.7
                                         ----------- -----------
                                         $   276.0   $   275.2
================================================================

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

Grace is the beneficiary of life insurance policies on certain current and
former employees with benefits in force of approximately $2,288.5 million and a
net cash surrender value of $87.0 million at March 31, 2002. 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 each of the three months ended March 31, 2002 and 2001, and
components of the net cash value of such policies at March 31, 2002 and December
31, 2001:



                                      I-12
<PAGE>

============================================================
LIFE INSURANCE -
ACTIVITY SUMMARY                       THREE MONTHS ENDED
(Dollars in millions)                       MARCH 31,
============================================================
                                    2002           2001
                               -------------- --------------

Earnings on policy assets.     $      11.6    $       11.9
Interest on policy loans..            (8.7)           (7.8)
Premiums..................            --              --
Proceeds from policy loans            --             (48.7)
Policy loan repayments....             2.1             2.1
Net investing activity....             6.4             2.3
                               -----------------------------
  Change in net cash value     $      11.4    $      (40.2)
============================================================
Tax-free proceeds received     $       6.2    $       10.6
============================================================
COMPONENTS OF                    MARCH 31,    December 31,
 NET CASH VALUE                    2002           2001
============================================================
Gross cash value...........    $     482.9    $      477.5
Principal - policy loans...         (375.5)         (377.6)
Accrued interest - policy
  loans....................          (20.4)          (24.3)
                               -----------------------------
   Net cash value..........    $      87.0    $       75.6
============================================================
Insurance benefits in force    $   2,288.5    $    2,291.0
============================================================

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

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

On March 31, 2002, and December 31, 2001, Grace's debt was as follows:

==============================================================
COMPONENTS OF DEBT                  MARCH 31,      December 31,
(Dollars in millions)                 2002            2001
==============================================================

DEBT PAYABLE WITHIN ONE YEAR
Bank borrowings............     $      --     $      --
Other short-term borrowings             6.8           7.8
                                ------------------------------
                                $       6.8   $       7.8
                                ==============================

DEBT PAYABLE AFTER ONE YEAR
DIP facility ..............     $      --            --
Other long-term borrowings      $      --            --
                                ------------------------------
                                $      --     $      --
                                ==============================

DEBT SUBJECT TO COMPROMISE
Bank borrowings ...........     $     500.0   $     500.0
Other borrowings ..........             1.1           1.3
Accrued interest ..........            26.6          23.2
                                ------------------------------
                                $     527.7   $     524.5
                                ------------------------------
Full-year weighed average
  interest rates on total
  debt ....................             2.7%         5.8%
==============================================================

In April 2001, the Debtors entered into a debtor-in-possession post-petition
loan and security agreement with Bank of America, N.A. (the "DIP facility") in
the aggregate amount of $250 million. The DIP facility has a term of two years,
is secured by a priority lien on substantially all assets of the Debtors, and
bears interest based on the London Inter-Bank Offered Rate (LIBOR) plus 2.00 to
2.25 percentage points. As of March 31, 2002 Grace had no outstanding borrowings
under the DIP facility. However, $11.7 million of standby letters of credit were
issued under the facility as of March 31, 2002. The letters of credit, which
reduce available funds under the facility, were issued mainly for trade-related
matters such as performance bonds, as well as certain insurance and
environmental matters.

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

The Company is authorized to issue 300,000,000 shares of common stock. Of the
common stock unissued on March 31, 2002, approximately 12,634,096 shares were
reserved for issuance pursuant to stock option and other stock incentive plans.
In the first three months of 2002, the Company did not grant any stock options.
For the year ended December 31, 2001, the Company granted a total of 1,339,846
options with an average exercise price of $2.53.

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. The
Company made no purchases during the first three months of 2002.

For additional information, see Notes 16 and 18 to the Consolidated Financial
Statements in the 2001 Form 10-K.

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

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

==============================================================
EARNINGS PER SHARE
(Amounts in millions, except per         THREE MONTHS ENDED
share amounts)                                MARCH 31,
==============================================================
                                       2002          2001
                                   ---------------------------
NUMERATORS
  Net income ....................  $   12.4      $    14.6
                                   ===========================
DENOMINATORS
  Weighted average common shares
  - basic calculation ...........      65.4           65.3

  Effect of dilutive securities:
  Employee compensation-related
    shares.......................       --             --
                                   ---------------------------

  Weighted average common shares
  diluted calculation............      65.4           65.3
                                   ===========================

BASIC EARNINGS PER SHARE           $    0.19     $     0.22
                                   ===========================
DILUTED EARNINGS PER SHARE         $    0.19     $     0.22
==============================================================



                                      I-13
<PAGE>

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

The tables below present the pre-tax, tax and after-tax components of Grace's
other comprehensive loss for the three months ended March 31, 2002 and 2001:

=============================================================
THREE MONTHS ENDED                                   After-
MARCH 31, 2002               Pre-tax       Tax        Tax
(Dollars in millions)        Amount      Benefit     Amount
=============================================================
Foreign currency
  translation adjustments.   $  (7.6)      --         $(7.6)
                            ---------------------------------
Other comprehensive loss..   $  (7.6)   $  --         $(7.6)
=============================================================

=============================================================
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)
=============================================================

The table below presents the components of Grace's accumulated other
comprehensive loss at March 31, 2002 and December 31, 2001:

=============================================================
COMPONENTS OF ACCUMULATED
OTHER COMPREHENSIVE LOSS          MARCH 31,    December 31,
(Dollars in millions)               2002           2001
=============================================================

Foreign currency translation
  adjustments .............        $(172.3)     $(164.7)
Minimum pension liability
  adjustments .............         (136.0)      (136.0)
                                 ----------------------------
Total accumulated other
  comprehensive loss.......        $(308.3)     $(300.7)
=============================================================

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

ASBESTOS-RELATED LITIGATION - SEE NOTE 3

ENVIRONMENTAL REMEDIATION

General Matters and Discussion

Grace is subject to loss contingencies resulting from extensive and evolving
federal, state, local and foreign environmental laws and regulations relating to
the generation, storage, handling, discharge and disposition of hazardous wastes
and other materials. Grace accrues for anticipated costs associated with
investigatory and remediation efforts where an assessment has indicated that a
probable liability has been incurred and the amount of loss can be reasonably
estimated. These accruals do not take into account any discounting for the time
value of money. At March 31, 2002, Grace's liability for environmental
investigatory and remediation costs related to continuing and discontinued
operations totaled $152.9 million, as compared to $153.1 million at December 31,
2001. Grace made cash payments in the first three months of 2002 and 2001 of
$3.8 million and $8.4 million, respectively, to remediate environmentally
impaired sites. These amounts have been charged against previously established
reserves. In the first quarter of 2002, Grace recorded a pre-tax charge of $3.8
million, primarily for remediation and defense costs at previously operated
vermiculite mining and processing sites. The environmental risks related to
Grace's former vermiculite mining and processing activities could result in
material future charges to Grace's earnings, the amounts of which are not
currently determinable. (See discussion under "Vermiculite Related Matters"
below.)

Grace's environmental liabilities are reassessed whenever circumstances become
better defined or remediation efforts and their costs can be better estimated.
These liabilities are evaluated based on currently available information,
including the progress of remedial investigation at each site, the current
status of discussions with regulatory authorities regarding the method and
extent of remediation at each site, existing technology, prior experience in
contaminated site remediation and the apportionment of costs among potentially
responsible parties. Grace expects that the funding of environmental remediation
activities will be affected by the Chapter 11 proceedings, but cannot predict at
this time if such proceedings will have a favorable or adverse effect; any such
effect could be material. Grace's environmental liabilities are included in
"Liabilities subject to compromise" as of March 31, 2002.

Vermiculite Related Matters

In November 1999, the U.S. Environmental Protection Agency ("EPA") began an
investigation into alleged excessive levels of asbestos-related disease related
to Grace's former vermiculite mining activities in the Libby, Montana area. On
March 30, 2001, the EPA filed a lawsuit in U.S. District Court for the District
of Montana, Missoula Division (United States v. W. R. Grace & Company et al.)
under the Comprehensive Environmental Response, Compensation and Liability Act
for the recovery of costs allegedly incurred by the United States in response to
the release or threatened release of asbestos in the Libby, Montana area
relating to such former mining activities. These costs include cleaning and/or
demolition of contaminated buildings, the evacuation and removal of contaminated
soil, health screening of Libby residents and former mine

                                      I-14
<PAGE>

workers, and investigation and monitoring costs. In this action, the United
States is also seeking a declaration of Grace's liability that would be binding
in future actions to recover further response costs. The EPA has reported that
it has spent approximately $25.4 million in response costs in and around Libby
through June 2001. As Libby is expected to be added to EPA's National Priorities
List of Superfund sites, Grace expects that the EPA may incur significant
additional response costs, but is unable to estimate the amount at this time.
Grace intends to review the EPA's actions and cost claims to determine whether
they are justified and reasonable. This lawsuit is not subject to the automatic
stay provided under the U.S. Bankruptcy Code and is expected to be tried during
the first quarter of 2003. However, recovery of any response costs would be
subject to the Chapter 11 proceedings.

In February 2000, a purported class action lawsuit was filed in the U.S.
District Court in Missoula, Montana against Grace on behalf of all owners of
improved, private real property situated within 12 miles of Libby, Montana. The
action alleges that the class members have suffered harm in the form of
environmental contamination and loss of property rights resulting from Grace's
former vermiculite mining and processing operations. The complaint seeks
remediation, property damages and punitive damages. In October 2000, a purported
class action lawsuit was filed in the U.S. District Court for Minnesota against
Grace on behalf of all owners of real property situated near a former
vermiculite processing plant in northeast Minneapolis. The 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. Grace has not completed its investigation of these claims, and,
therefore, is not able to assess the extent of any possible liability related to
these lawsuits. These cases have been stayed as a result of the Filing.

Insurance Matters

Grace is a party to three environmental insurance coverage actions involving one
primary and one excess insurance carrier regarding the applicability of the
carriers' policies to Grace's environmental remediation costs. The outcome of
such litigation as well as the amounts of any recoveries that Grace may receive
is presently uncertain. Accordingly, Grace has not recorded a receivable with
respect to such insurance coverage.


TAX MATTERS

The Internal Revenue Service (IRS) is challenging deductions of interest on
loans secured by corporate owned life insurance (COLI) policies for years prior
to January 1, 1999. In 2000, Grace paid $21.2 million of tax and interest
related to this issue for tax years 1990 through 1992. Subsequent to 1992, Grace
deducted approximately $163.2 million in interest attributable to COLI policy
loans. 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. Grace has accrued for
potential tax and interest liability related to the likely challenge of this tax
position and continues to accrue interest as part of the quarterly tax provision

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 against a Grace subsidiary that formerly
operated a temporary staffing business for nurses and other healthcare
personnel. 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. The IRS contends that certain per
diem reimbursements should have been treated as wages subject to employment
taxes and federal income tax withholding. Grace contends that its per diem and
expense allowance plans were in accordance with statutory and regulatory
requirements, as well as other published guidance from the IRS. Grace expects
that the IRS will make additional assessments for the 1996 through 1999 periods.
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 as to which Grace 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.

As a result of Grace's Chapter 11 filing, certain tax matters related to open
tax years, including COLI interest deductions, could become the direct
obligations of predecessor companies that now own Grace's former healthcare and
packaging businesses.



                                      I-15
<PAGE>

One or both of these companies could be directly liable to tax authorities for
Grace's tax deficiencies. Pursuant to agreements relating to each transaction,
Grace may be required to indemnify both parties for taxes relating to periods
prior to the closing of such transactions. Any indemnification obligation that
arises as a result of these matters would be a pre-petition liability subject to
the Chapter 11 proceedings.

FRAUDULENT TRANSFERS

The Company and one of its subsidiaries have been named in purported class
action suits 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 suits are
alleged to have been brought on behalf of all individuals who then had lawsuits
on file asserting personal injury or wrongful death claims against any of the
defendants. The other defendants in the suits have all asserted claims against
Grace for indemnification. Grace believes that the suits are without merit.
These lawsuits have been stayed as a result of Grace's Chapter 11 filing.
However, fraudulent transfer claims related to the Sealed Air transaction are
expected to be heard by the Bankruptcy Court commencing on September 30, 2002.

PURCHASE COMMITMENTS

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

FINANCIAL ASSURANCES

At March 31, 2002, Grace had gross financial assurances issued and outstanding
of $247.3 million, comprised of $135.2 million of gross surety bonds issued by
various insurance companies and $112.1 million of standby letters of credit
issued by various banks. Of the standby letters of credit, $29.4 million act as
collateral for surety bonds, thereby reducing Grace's overall obligations under
its financial assurances to a net $217.9 million. These financial assurances
were established for a variety of purposes, including insurance and
environmental matters, asbestos settlements and appeals, trade-related
commitments and other matters. Of the net amount of $217.9 million of financial
assurances, approximately $9.4 million were issued by non-Debtor entities and
$222.5 million were issued by the Debtors. Of the amounts issued by the Debtors,
approximately $196.8 million were issued before the Filing Date, with the
remaining $11.7 million being issued under the DIP facility subsequent to the
Filing.

ACCOUNTING FOR CONTINGENCIES

Although the outcome of each of the matters discussed above cannot be predicted
with certainty, Grace has assessed its risk and has made accounting estimates as
required under U.S. generally accepted accounting principles. As a result of the
Filing, claims related to the items discussed above will be addressed as part of
Grace's Chapter 11 proceedings. Accruals recorded for such contingencies have
been included in "Liabilities subject to compromise" on the accompanying
Consolidated Balance Sheet as of March 31, 2002. The amounts of these
liabilities as ultimately determined through the Chapter 11 proceedings could be
materially different from amounts recorded by Grace at March 31, 2002.

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

The table below presents information related to Grace's business segments for
each of the three months ended March 31, 2002 and 2001. Only those corporate
expenses directly related to the segment are allocated for reporting purposes.
All remaining corporate items are reported separately and labeled as such.
Pre-tax operating income for Davison Chemicals includes Grace's equity income in
Advanced Refining Technologies LLC ("ART"), a hydroprocessing joint venture
between Grace and Chevron Products Company, a unit of ChevronTexaco, Inc. For
further information concerning ART, refer to Note 6 to the Consolidated
Financial Statements in the 2001 Form 10-K.

=============================================================
BUSINESS SEGMENT DATA                    THREE MONTHS ENDED
(Dollars in millions)                        MARCH 31,
=============================================================
                                      2002          2001
                                  ---------------------------
NET SALES
Davison Chemicals............     $   215.4      $   198.4
Performance Chemicals........         198.1          197.3
                                  ---------------------------
TOTAL........................     $   413.5      $   395.7
PRE-TAX OPERATING INCOME
Davison Chemicals............     $    26.9      $    24.3
Performance Chemicals........          19.6           17.8
                                  ---------------------------
TOTAL........................      $   46.5      $    42.1
=============================================================



                                      I-16
<PAGE>

The table below presents information related to the geographic areas in which
Grace operated for each of the three months ended March 31, 2002 and 2001.

=============================================================
GEOGRAPHIC AREA DATA                    THREE MONTHS ENDED
(Dollars in millions)                        MARCH 31,
=============================================================
                                      2002          2001
                                  ---------------------------
NET SALES
  United States..............     $   192.1      $   199.0
  Canada and Puerto Rico.....          12.1            8.5
  Europe.....................         123.8          107.6
  Asia Pacific...............          60.0           54.1
  Latin America..............          25.5           26.5
                                  ---------------------------
TOTAL........................      $  413.5       $  395.7
=============================================================

The pre-tax operating income for Grace's business segments for each of the three
months ended March 31, 2002 and 2001 is reconciled below to income before
Chapter 11 reorganization expenses and income taxes presented in the
accompanying Consolidated Statement of Operations.

==============================================================
RECONCILIATION OF BUSINESS
SEGMENT DATA TO FINANCIAL
STATEMENTS                                THREE MONTHS ENDED
(Dollars in millions)                          MARCH 31,
==============================================================
                                       2002          2001
                                   ---------------------------
Pre-tax operating income -
  business segments...........     $    46.5      $   42.1
Interest expense and related
  financing costs.............          (4.8)         (9.0)
Interest income...............           0.8           1.8
Corporate operating costs.....         (12.7)        (13.1)
Other, net....................          (2.9)          7.6
                                   ---------------------------
Income before Chapter 11
  reorganization expenses and
  income taxes................     $    26.9      $   29.4
==============================================================



                                      I-17
<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 business segments are Davison Chemicals, which produces
catalysts and silica products, and Performance Chemicals, which produces
construction chemicals, building materials and sealants and coatings.

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

In response to a sharply increasing number of asbestos-related bodily injury
claims, on April 2, 2001 (the "Filing Date"), the Company and 61 of its United
States subsidiaries and affiliates, including W. R. Grace & Co.-Conn.
(collectively, the "Debtors"), filed voluntary petitions for reorganization (the
"Filing") under Chapter 11 of the United States Bankruptcy Code ("Chapter 11" or
the "Bankruptcy Code") in the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court"). The cases were consolidated and are being
jointly administered under case number 01-01139 (the "Chapter 11 Cases").
Grace's non-U.S. subsidiaries and certain of its U.S. subsidiaries were not
included in the Filing.

During 2000 and the first quarter of 2001, Grace experienced several adverse
developments in its asbestos-related litigation, including: a significant
increase in bodily injury claims, higher than expected costs to resolve bodily
injury and certain property damage claims, and class action lawsuits alleging
damages from a former attic insulation product. (These claims are discussed in
more detail in Note 3 to the Consolidated Financial Statements.) After a
thorough review of these developments, the Board of Directors of Grace concluded
on April 2, 2001 that a federal court-supervised Chapter 11 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. Under Chapter 11, the Debtors expect to
continue to operate their businesses as debtors-in-possession under court
protection from their creditors and claimants, while using the Chapter 11
process to develop and implement a plan for addressing the asbestos-related
claims against them.

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

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

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

As provided by the Bankruptcy Code, the Debtors had the exclusive right to
propose a plan of reorganization for a 120-day period following the Filing Date.
The Debtors have received an extension of their exclusive period during which to
file a plan of reorganization through August 1, 2002, and an extension of the
Debtors' exclusive rights to solicit acceptances of a reorganization plan
through October 1, 2002.

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



                                      I-18
<PAGE>

In November 2001, the Debtors' Chapter 11 Cases, as well as the Chapter 11 Cases
of four unrelated companies with asbestos-related claims, were assigned to Judge
Alfred M. Wolin, a senior federal judge who sits in Newark, New Jersey. An
additional asbestos-related Chapter 11 case was assigned to Judge Wolin in March
2002. Judge Wolin will preside over the asbestos bodily injury matters affecting
all six companies and, at his choosing, certain other asbestos-related lawsuits
particular to Grace. Judge Judith Fitzgerald, a U.S. Bankruptcy judge from the
Western District of Pennsylvania, sitting in Wilmington, Delaware, will preside
over the Debtors' other bankruptcy matters.

At a hearing on April 22, 2002 the Bankruptcy Court entered an order
establishing a bar date of March 31, 2003 for claims of general unsecured
creditors, asbestos property damage claims and medical monitoring claims related
to asbestos. The bar date does not apply to asbestos-related bodily injury
claims or claims related to Zonolite(R) attic insulation, which will be
addressed separately. In addition, a trial to determine whether the 1998
transaction involving Grace's former packaging business and Sealed Air
Corporation constituted a fraudulent conveyance was set for September 30, 2002.

Impact on Debt Capital - All of the Debtors' pre-petition debt is now in default
due to the Filing. The accompanying Consolidated Balance Sheet as of March 31,
2002 reflects the classification of the Debtors' pre-petition debt within
"Liabilities subject to compromise."

The Debtors have entered into a debtor-in-possession post-petition loan and
security agreement with Bank of America, N.A. (the "DIP facility") in the
aggregate amount of $250 million. The DIP facility has a term expiring in April
2003 and bears interest under a formula based on the London Inter-Bank Offered
Rate ("LIBOR") rate plus 2.00 to 2.25 percentage points depending on the level
of loans outstanding.

Accounting Impact - The accompanying Consolidated Financial Statements have been
prepared in accordance with Statement of Position 90-7 ("SOP 90-7") "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code," promulgated
by the American Institute of Certified Public Accountants. SOP 90-7 requires
that financial statements of debtors-in-possession be prepared on a going
concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the Filing, the realization of certain of Debtors'
assets and liquidation of certain of Debtors' liabilities are subject to
significant uncertainty. While operating as debtors-in-possession, the Debtors
may sell or otherwise dispose of assets and liquidate or settle liabilities for
amounts other than those reflected in the Consolidated Financial Statements.
Further, a plan of reorganization could materially change the amounts and
classifications reported in the consolidated financial statements, which do not
currently give effect to any adjustments to the carrying value or classification
of assets or liabilities that might be necessary as a consequence of a plan of
reorganization.

Pursuant to SOP 90-7, Grace's pre-petition liabilities that are subject to
compromise are required to be reported separately on the balance sheet at an
estimate of the amount that will ultimately be allowed by the Bankruptcy Court.
As of March 31, 2002, such pre-petition liabilities include fixed obligations
(such as debt and contractual commitments) as well as estimates of costs related
to contingent liabilities (such as asbestos-related litigation and other
claims.) The recorded amounts of such liabilities generally reflect accounting
measurements as of the Filing Date adjusted, as warranted, for changes in facts
and circumstances and/or rulings under Grace's Chapter 11 proceedings subsequent
to the Filing. (See Note 2 to the Consolidated Financial Statements for detail
of the "Liabilities subject to compromise" as of March 31, 2002 and as of the
Filing Date.) Obligations of Grace subsidiaries not covered by the Filing
continue to be classified on the Consolidated Balance Sheet based upon maturity
dates or the expected dates of payment. SOP 90-7 also requires separate
reporting of certain expenses, realized gains and losses, and provisions for
losses related to the Filing as reorganization items. During the period ended
March 31, 2002, the Debtors recorded Chapter 11 reorganization expenses of $4.4
million. See Note 1 to the consolidated Financial Statements for further
information concerning the Chapter 11 filing.

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

The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires that management make estimates and
assumptions affecting the assets and liabilities (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. Grace's accounting measurements that are



                                      I-19
<PAGE>

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

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

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

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

o    Realization values of various assets such as receivables, inventories,
     goodwill, insurance and tax attributes.

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

CONTINUING OPERATIONS

Set forth below is a chart that lists key operating statistics and percentage
changes for the three months ended March 31, 2002 and 2001, 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 not
directly related to the generation of revenue or the support of core operations.

<TABLE>
<CAPTION>
=================================================================================================================================
 ANALYSIS OF CONTINUING OPERATIONS                                                               THREE MONTHS ENDED
 (Dollars in millions)                                                                               MARCH 31,
=================================================================================================================================
                                                                                                                   % Change
                                                                                         2002            2001      Fav (Unfav)
                                                                                    ---------------------------------------------
<S>                                                                                 <C>            <C>             <C>
NET SALES:
    DAVISON CHEMICALS
    Catalyst products.........................................................      $    153.7     $    142.7             7.7%
    Silica products...........................................................            61.7           55.7            10.8%
                                                                                    ---------------------------------------------
TOTAL DAVISON CHEMICALS.......................................................           215.4          198.4             8.6%
                                                                                    ---------------------------------------------
    PERFORMANCE CHEMICALS
    Construction chemicals....................................................            81.9           78.0             5.0%
    Building materials........................................................            57.4           57.8            (0.7%)
    Sealants and coatings.....................................................            58.8           61.5            (4.4%)
                                                                                    ---------------------------------------------
TOTAL PERFORMANCE CHEMICALS...................................................           198.1          197.3             0.4%
                                                                                    ---------------------------------------------
TOTAL GRACE SALES - CORE OPERATIONS...........................................      $    413.5     $    395.7             4.5%
=================================================================================================================================
PRE-TAX OPERATING INCOME:
    Davison Chemicals.........................................................      $     26.9     $     24.3            10.7%
    Performance Chemicals.....................................................            19.6           17.8            10.1%
    Corporate Operating Costs.................................................           (12.7)         (13.1)            3.1%
                                                                                    ---------------------------------------------
PRE-TAX INCOME FROM CORE OPERATIONS...........................................            33.8           29.0            16.6%
                                                                                    ---------------------------------------------

PRE-TAX (LOSS) INCOME FROM NON-CORE ACTIVITIES................................            (2.9)           7.6            NM
                                                                                    ---------------------------------------------
    Interest expense..........................................................            (4.8)          (9.0)           46.7%
    Interest income...........................................................             0.8            1.8           (55.6%)
                                                                                    ---------------------------------------------
INCOME BEFORE CHAPTER 11 REORGANIZATION EXPENSES AND INCOME TAXES                         26.9           29.4            (8.5%)
Chapter 11 reorganization expenses, net.......................................            (4.4)          (2.9)          (51.7%)
Provision for income taxes ...................................................           (10.1)         (11.9)           15.1%
                                                                                    ---------------------------------------------

INCOME FROM CONTINUING OPERATIONS ............................................      $     12.4     $     14.6           (15.1%)
=================================================================================================================================
NET SALES BY REGION:
North America.................................................................      $    204.2     $    207.5
Europe........................................................................           123.8          107.6
Asia Pacific..................................................................            60.0           54.1
Latin America.................................................................            25.5           26.5
                                                                                    ---------------------------------------------
TOTAL.........................................................................      $    413.5     $    395.7
=================================================================================================================================
</TABLE>

   NM = Not meaningful.



                                      I-20
<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.

==============================================================
NET SALES              THREE MONTHS ENDED MARCH 31, 2002 AS A
                     PERCENTAGE INCREASE (DECREASE) FROM THREE
VARIANCE ANALYSIS          MONTHS ENDED MARCH 31, 2001
==============================================================
                    VOLUME   PRICE/MIX   TRANSLATION   TOTAL
                   -------------------------------------------
Davison
  Chemicals......   10.6%       1.1%        (3.1%)     8.6%
Performance
  Chemicals......    4.4%      (1.0%)       (3.0%)     0.4%
Net sales........    7.5%       0.1%        (3.1%)     4.5%
--------------------------------------------------------------
By Region:
  North America      3.3%      (4.7%)       (0.2%)    (1.6%)
  Europe.........   14.6%       7.3%        (6.8%)    15.1%
  Asia Pacific...   14.1%       1.5%        (4.7%)    10.9%
  Latin America..   (0.5%)      3.8%        (7.1%)    (3.8%)
==============================================================

Grace's net sales increased 4.5% to $413.5 million in the first quarter of 2002
compared to the same period in 2001. The first quarter was favorably impacted by
continued strong demand for refining catalysts, augmented by revenue and
earnings from acquisitions in catalyst and silica products and construction
chemicals. Acquisitions completed in 2001 contributed $15.8 million or 4.0% of
the sales growth in the first quarter 2002. The impact from foreign currency
translation was experienced principally in Europe and Latin America, where
sales, reported in U.S. dollars, were adversely affected by 6.8% and 7.1%,
respectively.

In the first quarter of 2002, all product groups experienced volume growth. Asia
Pacific catalyst volumes were strong due to increased sales of hydroprocessing
catalysts. Silica products sales reflect the addition of two acquisitions since
the first quarter of 2001. Construction chemicals volume growth in Europe was
primarily attributable to the acquisition of Pieri S.A. completed in the third
quarter of 2001.

PRE-TAX INCOME FROM CORE OPERATIONS

Pre-tax income from core operations was $33.8 million for the first quarter of
2002, compared to $29.0 million for the first quarter 2001, a 16.6% increase
quarter-over-quarter.

Operating income of Davison Chemicals for the first quarter of 2002 was $26.9
million, up 10.7% versus 2001, and its operating margin of 12.5% was 0.3
percentage points higher than the first quarter of the prior year. Operating
income and margins were favorably impacted by lower energy costs and improved
productivity in the first quarter of 2002 compared with the first quarter of
2001. Operating income of Performance Chemicals for the first quarter of 2002
was $19.6 million, up 10.1% versus 2001, with an operating margin of 9.9%, up
0.9 percentage points from 2001. Operating income and margins were favorably
impacted by lower operating expenses and material costs, attributable to Grace's
productivity efforts in the first quarter of 2002.

Corporate operating costs include expenses incurred by corporate headquarters
functions in support of core operations. Corporate operating costs in the first
quarter of 2002 were $12.7 million, compared with $13.1 million in first quarter
2001, a 3.1% decrease resulting from lower costs for support functions, offset,
in part, by increased pension expense.

PRE-TAX INCOME (LOSS) FROM NONCORE ACTIVITIES

Expense from noncore activities totaled $2.9 million for the three months ended
March 31, 2002, compared with income of $7.6 million for the prior year period.
The expense from noncore activities for 2002 included additional pension and
postretirement expenses related to retirees of former businesses, as well as an
accrual for legal and environmental costs primarily related to Grace's former
vermiculite mining operations in Libby, Montana, offset by income from Grace's
life insurance policies. Income from 2001 included $7.7 million from the sale of
Grace's remaining interest in Cross Country Staffing and income from Grace's
life insurance policies, offset by pension and other postretirement expenses.

CHAPTER 11 REORGANIZATION EXPENSE

Net reorganization expenses for the three months ended March 31, 2002 and 2001
of $4.4 million and $2.9 million, respectively, consist primarily of legal and
consulting fees incurred by Grace and three creditors' committees related to the
Chapter 11 Filing.

INTEREST AND INCOME TAXES

Net interest expense for the first quarter of 2002 was $4.0 million, a decrease
of 44.4% from net interest expense of $7.2 million in 2001. This decrease is
attributable primarily to a declining interest rate environment. Grace is
continuing to accrue interest expense on its pre-petition debt at the
pre-petition contractual rate, which amounted to $3.4 million in the first
quarter of 2002.

The Company's provision for income taxes at the federal corporate rate of 35%
was $7.9 million for the three months ended March 31, 2002. The primary
difference between this amount and the overall provision for income taxes of
$10.1 million is
                                      I-21
<PAGE>

attributable to current period interest on tax contingencies and the
non-deductibility of certain Chapter 11 reorganization expenses.

DAVISON CHEMICALS

Recent Acquisitions

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

Sales

The Davison Chemicals segment is a leading global supplier of catalysts and
silica products. Catalyst products represented approximately 37% of Grace's 2002
first quarter sales (36% - 2001). This segment includes: fluid cracking
catalysts and additives used in petroleum refineries to convert distilled crude
oil into transportation fuels and other petroleum-based products;
hydroprocessing catalysts which upgrade heavy oils and remove certain
impurities, polyolefin catalysts, which are essential components in the
manufacture of polyethylene used in products such as high-performance plastic
pipe and other plastic parts; and chemical catalysts, which are used in a
variety of chemical processes. Silica products, which represented 15% of Grace's
2002 first quarter sales (14% - 2001), are used in a wide range of industrial,
consumer and biotechnology applications such as coatings, food processing,
plastics, adsorbents, personal care products and separations.

In the first quarter of 2002, catalyst products sales were $153.7 million, an
increase of 7.7% compared with the same period in 2001, reflecting a higher
demand for Grace's refining catalysts to meet increased gasoline usage.
Worldwide demand for gasoline increased 2-3% compared with the first quarter of
the prior year. Silica products sales for the first quarter of 2002 were $61.7
million, up 10.8% compared with the first quarter of 2001. This increase was
primarily from two acquisitions completed in the past year which expanded the
silicas product line into precipitated silicas, chromatography columns and
separations media. Excluding the negative impact of foreign exchange, sales for
the Davison Chemicals segment were up 11.7% over the prior year period.

Operating Earnings

Pre-tax operating income of $26.9 million reflected a 10.7% increase compared
with 2001. Operating income and margins were favorably impacted by lower energy
costs and improved productivity in the first quarter of 2002 compared with the
first quarter of 2001.

PERFORMANCE CHEMICALS

Recent Acquisitions

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

Sales

The major product groups of the Performance Chemicals segment are specialty
construction chemicals and specialty building materials, which are 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 20% of Grace's 2002 and 2001 first
quarter sales, add strength, control corrosion, and enhance the handling and
application of concrete, and reduce the manufacturing cost and improve the
quality of cement. Building materials, which represented 14% of Grace's 2002
first quarter sales (15% - 2001), prevent water damage to structures and protect
structural steel against collapse due to fire. Sealants and coatings, which
represented 14% of Grace's 2002 first quarter sales (15% - 2001), 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 2002, sales of construction chemicals were $81.9
million, an increase of 5.0% over the first quarter of 2001. Sales increases
were strongest in Europe, with the Pieri S.A. acquisition, completed in July
2001, favorably impacting volume. Sales of building materials in the first
quarter of 2002 decreased 0.7% to $57.4 million, with good results in
residential roofing underlayments being offset by softness in commercial fire
protection. Sales of sealants and coatings decreased 4.4% to $58.8 million for
the quarter, reflecting a continued decline in demand for metal food packages in
favor of plastic and paper substitutes. Excluding the negative impact of foreign
exchange, sales for the Performance Chemicals segment were up 3.4% over the
prior year period.

Operating Earnings

Pre-tax operating income increased 10.1% from $17.8 million in 2001 to $19.6
million in 2002. Operating income and margins were favorably impacted by lower



                                      I-22
<PAGE>

operating expenses and material costs, primarily attributable to Grace's
productivity efforts.

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

The charts below are intended to enhance understanding of Grace's overall
financial position by separately displaying 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

The Company had a net asset position supporting its core operations of $1,337.0
million at March 31, 2002, compared with $1,299.6 million at December 31, 2001
(including the cumulative translation account reflected in Shareholders' Equity
(Deficit) of ($172.4) million for 2002 and ($164.8) million for 2001). After-tax
return on capital invested in core operations for the first quarter of 2002
remained even with all of 2001. Net cash flows from core operations increased
primarily due to the easing of working capital pressures experienced in the
first quarter of 2001 (just before Grace's Chapter 11 filing) and from a 16.6%
increase in pre-tax income from core operations.

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

CORE OPERATIONS                       MARCH 31,    December 31,
(Dollars in millions)                   2002           2001
---------------------------------------------------------------

BOOK VALUE OF INVESTED CAPITAL
Receivables......................    $   302.2   $   296.3
Inventory........................        180.2       174.8
Properties and equipment, net....        590.4       582.9
Intangible assets and other......        622.2       616.8
                                     --------------------------
ASSETS SUPPORTING CORE OPERATIONS      1,695.0     1,670.8
Accounts payable and accruals....       (358.0)     (371.2)
                                     --------------------------
CAPITAL INVESTED IN CORE OPERATIONS  $ 1,337.0   $ 1,299.6
After-tax return on average
 invested capital................          9.6%        9.6%
===============================================================
                                         THREE MONTHS ENDED
                                               MARCH 31,
CASH FLOWS FROM CORE OPERATIONS          2002         2001
---------------------------------------------------------------
Pre-tax operating income.........    $    33.8   $    29.0
Depreciation and amortization....         22.8        22.5
                                     --------------------------
PRE-TAX EARNINGS BEFORE
 DEPRECIATION AND AMORTIZATION ..         56.6        51.5
Working capital and other changes        (27.6)     (101.7)
                                     --------------------------
CASH FLOW BEFORE INVESTING.......         29.0       (50.2)
Capital expenditures.............        (13.2)      (11.3)
Businesses acquired..............        (25.0)      (56.5)
---------------------------------------------------------------
NET CASH FLOW FROM CORE OPERATIONS   $    (9.2)  $  (118.0)
===============================================================

NONCORE ACTIVITIES

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. The table below summarizes the net
noncore liability at March 31, 2002 and December 31, 2001 and the net cash flow
from noncore activities for the three months ended March 31, 2002 and 2001:

===============================================================
NONCORE ACTIVITIES
(Dollars in millions)
-----------------------------------    MARCH 31,   December 31,
NET NONCORE LIABILITY                    2002         2001
===============================================================
Asbestos-related litigation.....   $  (994.9)    $  (996.3)
Asbestos-related insurance
receivable .....................       292.4         293.4
                                   ----------------------------
Asbestos-related liability, net.      (702.5)       (702.9)
Environmental remediation.......      (152.9)       (153.1)
Postretirement benefits.........      (165.1)       (169.1)
Retained obligations and other..       (81.8)        (80.6)
                                   ----------------------------
NET NONCORE LIABILITIES.........   $(1,102.3)    $(1,105.7)
===============================================================
                                        THREE MONTHS ENDED
                                              MARCH 31,
NET CASH FLOW FROM NONCORE         ----------------------------
ACTIVITIES                             2002           2001
===============================================================
Pre-tax income from noncore
activities......................   $  (2.9)      $     7.6
Other changes...................       3.6            (2.2)
Cash spending for:
Asbestos-related litigation, net
of insurance recovery...........      (0.5)          (71.4)
Environmental remediation.......      (3.8)           (8.4)
Postretirement benefits.........      (4.6)           (5.6)
Retained obligations and other..      (1.0)           (5.2)
---------------------------------------------------------------
NET CASH FLOW FOR NONCORE
ACTIVITIES .....................   $  (9.2)      $   (85.2)
===============================================================

As described under "Voluntary Bankruptcy Filing," the resolution of most of
these noncore recorded and contingent liabilities will be determined through the
Chapter 11 proceedings. Grace cannot predict with any certainty how, and for
what amounts, any of such estimates will be resolved. The amounts of these
liabilities as ultimately determined through the Chapter 11 proceedings could be
materially different from amounts recorded by Grace at March 31, 2002.

ASBESTOS-RELATED MATTERS

Grace is a defendant in lawsuits relating to previously sold asbestos-containing
products. In the first three months of 2002, Grace paid $0.5 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 three months of 2001 of $71.4 million.
At March 31, 2002, Grace's



                                      I-23
<PAGE>

balance sheet reflects a gross liability of $994.9 million ($702.5 million, net
of insurance). This liability represents management's estimate of the
undiscounted net cash outflows in satisfaction of Grace's current and expected
asbestos-related claims, based on facts and circumstances existing prior to the
Filing. Changes to the recorded amount of such liability will be based on
Chapter 11 developments and management's assessment of the claim amounts that
will ultimately be allowed by the Bankruptcy Court.

The Consolidated Balance Sheet at March 31, 2002 includes total amounts due from
insurance carriers of $292.4 million pursuant to settlement agreements with
insurance carriers. The recovery of amounts due from insurance carriers is
dependent upon the timing, character and exposure periods of asbestos-related
claims. Grace's Chapter 11 bankruptcy proceedings could also affect recovery
timing and amounts.

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

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. At March 31, 2002, Grace's liability for environmental
investigatory and remediation costs related to both continuing and discontinued
operations totaled $152.9 million, as compared to $153.1 million at December 31,
2001.

In addition, Grace is facing environmental lawsuits related to previously
operated vermiculite mining and processing sites that could result in a material
future charge to Grace's earnings, the amount of which is not currently
determinable. The EPA reported that it had expended approximately $25.4 million
in response costs in and around Libby, Montana (the site of a former Grace
vermiculite mine) through June 2001. Grace expects that the EPA may incur
significant additional response costs, as Libby is expected to be added to the
EPA's National Priorities List of Superfund sites. The EPA is also evaluating
environmental risks at several vermiculite processing sites throughout the U.S.
which processed vermiculite from Libby, Montana, and has made claims against
Grace to fund clean-up activities. Grace intends to review the EPA's actions and
cost claims to determine whether they are justified and reasonable. These
actions are not subject to the automatic stay provided under Section 362 of the
U.S. Bankruptcy Code, but any allowed claim would be subject to the Chapter 11
proceedings.

PENSION BENEFITS

The decline in value of the U.S. and global equity markets, coupled with a
decline in interest rates, primarily in the second half of 2001, created a
shortfall between the accounting measurement of Grace's U.S. salaried qualified
pension obligations and the market value of dedicated pension assets. This
condition required a balance sheet adjustment in shareholders' equity (deficit)
at December 31, 2001 of $124.4 million, and increased Grace's pension expense
charged to core operations by approximately $3.5 million in the first three
months of 2002 compared with the first quarter of 2001.

POSTRETIREMENT BENEFITS

Grace provides certain postretirement health care and life insurance benefits
for retired employees, a large majority of which pertain to retirees of
previously divested businesses. These plans are unfunded, and Grace pays the
costs of benefits under these plans as they are incurred. Spending under this
program during the first quarter of 2002 was $4.6 million. Grace's recorded
liability of $165.1 million at March 31, 2002 is stated at net present value
discounted at 7.25%. The continued payment of these benefits has been approved
by the Bankruptcy Court.

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, 2002, Grace had recorded $81.8 million to satisfy such obligations.
Prior to Grace's Chapter 11 filing, $43.5 million of this total was expected to
be paid over periods ranging from 2 to 10 years. The remainder represents
estimates of probable cost to satisfy specific contingencies that were expected
to be resolved over the next few years. However, most of these matters are now
subject to the automatic stay of the Bankruptcy Court and will be resolved as
part of Grace's Chapter 11 proceedings.



                                      I-24
<PAGE>

TAX MATTERS

The Internal Revenue Service ("IRS") is challenging the deductions related to
interest on loans secured by under corporate owned life insurance ("COLI")
policies for years prior to January 1, 1999. In 2000 Grace paid $21.2 million of
tax and interest related to this issue for tax years 1990 through 1992.
Subsequent to 1992, Grace deducted approximately $163.2 million in interest
attributable to COLI policy loans. 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. Grace has accrued for potential tax and interest liability related to the
likely challenge of this tax position, and continues to accrue interest as part
of the quarterly tax provision.

During the first quarter of 2001, a U.S. District Court ruling, American
Electric Power, Inc. vs. United States, denied interest deductions of a taxpayer
in a similar situation. American Electric Power, Inc. is currently appealing
this ruling. However, in light of the ruling, Grace recorded an additional
accrual in 2000 for tax exposure and related interest, and continues to accrue
interest on estimated amounts that may be due. There are two additional COLI
cases decided against the taxpayer currently on appeal. The taxpayer in
Winn-Dixie Stores, Inc. v. Commissioner of Internal Revenue has petitioned for a
rehearing in the United States Court of Appeals. CM Holdings, Inc. v. Internal
Revenue Service is currently on appeal to the United States Court of Appeals.
Finally, Dow Chemical Company has filed an action to recover income taxes and
interest paid in connection with its COLI policies, and that case is currently
pending in the United States District Court. Grace is monitoring these cases and
will continue to reassess its legal posture as the cases evolve.

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 against a Grace subsidiary that formerly
operated a temporary staffing business for nurses and other healthcare
personnel. The assessments, aggregating $21.8 million, were made in connection
with a meal and incidental expense per diem plan for traveling healthcare
personnel that was in effect through 1999. The IRS contends that certain per
diem reimbursements should have been treated as wages subject to employment
taxes and federal income tax withholding. Grace contends that its per diem and
expense allowance plans were in accordance with statutory and regulatory
requirements, as well as other published guidance from the IRS. Grace expects
that the IRS will make additional assessments for the 1996 through 1999 periods.
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 as to which Grace retained liability
for tax deficiencies attributable to tax periods prior to the sale. The matter
is currently before the foreign tax authorities, but no decision has been
rendered.

As a result of Grace's Chapter 11 filing, certain tax matters related to open
tax years, including COLI interest deductions, could become the direct
obligations of predecessor companies that now own Grace's former healthcare and
packaging businesses. One or both of these companies could be directly liable to
tax authorities for Grace's tax deficiencies. Pursuant to agreements relating to
each transaction, Grace may be required to indemnify both parties for taxes
relating to periods prior to the closing of such transactions. Any
indemnification obligation that arises as a result of these matters would be a
pre-petition liability subject to the Chapter 11 proceedings.

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

CASH FLOW

Grace's net cash flow provided by core operations before investing was $29.0
million in the first quarter of 2002 compared with cash used for core operations
of $50.2 million in the comparable period of 2001. Acquisition investments
aggregated $25.0 million in the first quarter of 2002, compared with $56.5
million in the comparable period of 2001. Total Grace capital expenditures for
the first quarter of 2002 and 2001 were $13.2 million and $11.3 million,
respectively, substantially all of which was directed toward its business
segments and were of a routine nature. Grace's cash flow from core operations in
2002 is expected to be relatively stable and consistent with recent years. Grace
expects to continue to invest excess cash flow and/or other available capital
resources in its core business base. These investments are likely to be in the
form of added plant capacity, product line extensions and geographic market
expansions. Such investments may be subject to



                                      I-25
<PAGE>

Bankruptcy Court approval and Chapter 11 creditor committee review.

The pre-tax cash outflow of noncore activities was $9.2 million in the first
three months of 2002 compared to an outflow of $85.2 million in the comparable
period in 2001. The decreased cash outflow was primarily attributable to lower
asbestos-related payments in 2002 as compared to 2001, resulting from the stay
on payments for asbestos-related claims after the Filing Date. Expenditures for
environmental remediation were lower in the first three months of 2002 due
partly to Grace's Chapter 11 proceedings and partly to the completion of
remediation work on certain sites. Postretirement benefit payments, which are
allowed to be paid under Grace's Chapter 11 proceedings, were lower in the first
three months of 2002 than the prior year, due to plan adjustments. The payments
for retained obligations of divested businesses and other contingencies were
lower in the first three months of 2002 due to the stay of litigation and to the
one-time nature of these matters.

Cash flows used for investing activities in the first three months of 2002 were
$44.0 million, compared to cash used of $58.5 million in the first three months
of 2001. Net cash outflows in the first three months of 2002 were primarily for
businesses acquired and capital expenditures as discussed above. Net cash
outflows of 2001 consisted of $56.5 million in businesses acquired, capital
expenditures and net investment in life insurance policies of $2.9 million,
offset by proceeds from the sale of investments and disposals of assets.
Proceeds from disposals of assets in the first three months of 2002 were also
lower than the comparable period in 2001, with $0.6 million in 2002 and $3.7
million in 2001.

Net cash used for financing activities in the first three months of 2002 was
$2.5 million as compared to net cash provided by financing activities of $146.3
million in the first three months of 2001. In 2002, this principally represents
net repayments for loans secured by cash value of life insurance policies. In
the first three months of 2001, this represents $46.6 million in proceeds from
loans secured by the cash value of life insurance policies and borrowings under
credit facilities of $99.7 million.

DEBT AND OTHER CONTRACTUAL OBLIGATIONS

Total debt outstanding at March 31, 2002 was $534.5 million. As a result of the
Filing, Grace is now in default on $501.1 million of such debt, which has been
included in "Liabilities subject to compromise" as of March 31, 2002. The
automatic stay provided under the Bankruptcy Code prevents Grace's lenders from
taking any action to collect the principal amounts as well as related accrued
interest. However, Grace will continue to accrue and report interest on such
debt during the Chapter 11 proceedings (unless further developments lead
management to conclude that it is probable that such interest will be
compromised).

At March 31, 2002, Grace had gross financial assurances outstanding of $247.3
million, comprised of $135.2 million of gross surety bonds issued by various
insurance companies and $112.1 million of standby letters of credit issued by
various banks. Of the standby letters of credit, $29.4 million act as collateral
for surety bonds, thereby reducing Grace's overall obligations under its
financial assurances to a net amount of $217.9 million. These financial
assurances were established for a variety of purposes, including insurance and
environmental matters, asbestos settlements and appeals, trade-related
commitments and other matters. Of the net amount of $217.9 million of financial
assurances, approximately $9.4 million were issued by non-Debtor entities and
$208.5 million were issued by the Debtors. Of the amounts issued by the Debtors,
approximately $196.8 million were issued before the Filing Date, with the
remaining $11.7 million being issued under the DIP facility.

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

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



                                      I-26
<PAGE>

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

Grace had no outstanding derivative financial instruments on March 31, 2002. For
further information concerning Grace's quantitative and qualitative disclosures
about market risk, refer to Notes 13 and 15 in the Consolidated Financial
Statements in the 2001 Form 10-K.




                                      I-27
<PAGE>




                           PART II. OTHER INFORMATION



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



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

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

               15   Accountants' Awareness Letter



         (b)   Reports on Form 8-K. The Company filed no reports on Form 8-K
               -------------------
               during the first quarter of 2002.









                                      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:  May 15, 2002                 By    /s/ Robert M. Tarola
                                         ---------------------
                                            Robert M. Tarola
                                        Senior Vice President and
                                         Chief Financial Officer
                                      (Principal Accounting Officer)



                                      II-2
<PAGE>

                                  EXHIBIT INDEX




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


   15             Accountants' Awareness Letter



                                      II-3