<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 SEPTEMBER 30, 1999

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

71,784,925 shares of Common Stock, $.01 par value, were outstanding at October
31, 1999.

<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 - Unaudited

                    Consolidated Statement of Operations                                                I - 1

                    Consolidated Statement of Cash Flows                                                I - 2

                    Consolidated Balance Sheet                                                          I - 3

                    Consolidated Statement of Shareholders' Equity                                      I - 4

                    Notes to Consolidated Financial Statements                                     I - 5 to I - 14

Item 2.             Management's Discussion and Analysis of Results of Operations and
                    Financial Condition                                                           I - 15 to I - 24

Item 3.             Quantitative and Qualitative Disclosures About Market Risk                         I - 25


PART II.   OTHER INFORMATION

Item 1.             Legal Proceedings                                                                  II - 1

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

</TABLE>

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

<PAGE>

                          PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
        --------------------
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
W. R. GRACE & CO. AND SUBSIDIARIES                                    THREE MONTHS ENDED          NINE MONTHS ENDED
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)                        SEPTEMBER 30,               SEPTEMBER 30,
------------------------------------------------------------------------------------------------------------------------
Amounts  in millions, except per share amounts                        1999          1998          1999         1998
------------------------------------------------------------------------------------------------------------------------

<S>                                                                 <C>          <C>           <C>           <C>
Net sales.......................................................    $    372.2   $    380.3    $  1,090.7    $  1,091.0
Other income....................................................          10.9          7.1          27.7          23.1
                                                                   ------------  -----------   -----------  ------------

                                                                         383.1        387.4       1,118.4       1,114.1
                                                                   ------------  -----------   -----------  ------------


Cost of goods sold and operating expenses.......................         212.6        228.3         635.7         662.1
Selling, general and administrative expenses....................          81.0         80.8         237.8         240.1
Research and development expenses ..............................          10.6         10.9          31.8          31.9
Depreciation and amortization ..................................          23.8         22.7          67.8          66.5
Interest expense and related financing costs ...................           3.9          3.9          12.9          15.1
Provision for restructuring ....................................          --           --             4.3          --
                                                                   ------------  -----------   -----------  ------------

                                                                         331.9        346.6         990.3       1,015.7
                                                                   ------------  -----------   -----------  ------------

Income from continuing operations before income taxes ..........          51.2         40.8         128.1          98.4
Provision for income taxes .....................................          18.4         15.5          46.1          37.4
                                                                   ------------  -----------   -----------  ------------

     INCOME FROM CONTINUING OPERATIONS..........................          32.8         25.3          82.0          61.0
Income from discontinued operations, net of tax ................           9.2          1.0           5.7          --
                                                                   ------------  -----------   -----------  ------------
Income before extraordinary item ...............................          42.0         26.3          87.7          61.0
Extraordinary item - loss from extinguishment of debt, net of tax         --           --            --           (35.2)
                                                                   ------------  -----------   -----------  ------------

     NET INCOME.................................................    $     42.0   $     26.3    $     87.7    $     25.8
                                                                   ============  ===========   ===========  ============

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

BASIC EARNINGS PER SHARE:
     Continuing operations .....................................    $    0.46    $    0.34     $    1.16    $     0.81
     Net income ................................................    $    0.59    $    0.35     $    1.24    $     0.34

Average number of basic shares .................................        71.2         74.6          70.8          75.1

DILUTED EARNINGS PER SHARE:
     Continuing operations .....................................    $    0.44    $    0.32     $    1.11    $     0.76
     Net income ................................................    $    0.56    $    0.33     $    1.18    $     0.32

Average number of diluted shares ...............................        74.6         78.5          74.1          80.2

------------------------------------------------------------------------------------------------------------------------
</TABLE>

The Notes to Consolidated Financial Statements are integral to these statements.

                                      I-1

<PAGE>


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
W. R. GRACE & CO. AND SUBSIDIARIES                                                                NINE MONTHS ENDED
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)                                                    SEPTEMBER 30,
------------------------------------------------------------------------------------------------------------------------
Dollars in millions                                                                               1999         1998
------------------------------------------------------------------------------------------------------------------------

<S>                                                                                            <C>          <C>
OPERATING ACTIVITIES
Income from continuing operations before income taxes ...................................      $    128.1   $      98.4
Reconciliation to cash  provided by/(used for) operating activities:
     Depreciation and amortization ......................................................            67.8          66.5
     Gain on disposal of assets .........................................................            (3.8)         --
     Noncash charge for pension settlement ..............................................             1.9          --
     Changes in assets and liabilities, excluding effect of businesses
       acquired/divested and foreign currency exchange:
         Increase in notes and accounts receivable, net..................................           (12.5)        (43.2)
         Increase in inventories ........................................................            (4.6)         (8.7)
         Decrease in other current assets due to sales of accounts receivable ...........            38.5          --
         Proceeds from asbestos-related insurance settlements ...........................            53.7          65.2
         Expenditures for asbestos-related litigation ...................................           (94.0)       (207.3)
         Decrease in accounts payable ...................................................           (11.4)         (6.6)
         Decrease in accrued liabilities ................................................           (31.2)       (144.2)
         Other ..........................................................................           (22.8)        (27.5)
                                                                                               -----------  ------------

     NET PRE-TAX CASH PROVIDED BY/(USED FOR) OPERATING ACTIVITIES
       OF CONTINUING OPERATIONS..........................................................           109.7        (207.4)
Net pre-tax cash used for operating activities of discontinued operations................           (23.3)        (47.3)
                                                                                               -----------  ------------

     NET PRE-TAX CASH PROVIDED BY/(USED FOR) OPERATING ACTIVITIES .......................            86.4        (254.7)
Income taxes paid, net of refunds .......................................................           (65.2)        (34.3)
                                                                                               -----------  ------------

     NET CASH PROVIDED BY/(USED FOR) OPERATING ACTIVITIES ...............................            21.2        (289.0)
                                                                                               -----------  ------------


INVESTING ACTIVITIES
Capital expenditures ....................................................................           (54.4)        (65.1)
Businesses acquired in purchase transactions, net of cash acquired ......................             (.5)         --
Net investing activities of discontinued operations .....................................           (54.1)        (14.3)
Net proceeds from divestments ...........................................................           183.0           4.0
Proceeds from disposal of assets ........................................................            20.5          --
                                                                                               -----------  ------------
     NET CASH PROVIDED BY/(USED FOR) INVESTING ACTIVITIES ...............................            94.5         (75.4)
                                                                                               -----------  ------------


FINANCING ACTIVITIES
Repayments of borrowings having original maturities in excess of three months ...........            --          (698.4)
Repayments of borrowings having original maturities of three months or less .............           (32.2)       (163.2)
Exercise of stock options ...............................................................            25.3          44.1
Purchase of treasury stock ..............................................................           (58.7)        (35.5)
Net financing activity of discontinued operations .......................................           (27.5)      1,256.6
                                                                                               -----------  ------------
     NET CASH (USED FOR)/PROVIDED BY FINANCING ACTIVITIES ...............................           (93.1)        403.6
                                                                                               -----------  ------------


Effect of currency exchange rate changes on cash and cash equivalents ...................            (2.2)           .6
                                                                                               -----------  ------------

     INCREASE IN CASH AND CASH EQUIVALENTS ..............................................      $     20.4   $      39.8
                                                                                               ===========  ============

------------------------------------------------------------------------------------------------------------------------
</TABLE>

The Notes to Consolidated Financial Statements are integral to these statements.

                                      I-2
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
------------------------------------------------------------------------------------------------------------------------
                                                                                    SEPTEMBER 30,            December 31,
Dollars in millions, except par value and shares                                        1999                     1998
------------------------------------------------------------------------------------------------------------------------

<S>                                                                              <C>                 <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ...................................................     $           85.7    $           65.3
Notes and accounts receivable, net ..........................................                206.2               196.9
Inventories .................................................................                130.1               130.1
Asbestos-related insurance receivable .......................................                 57.7                66.7
Deferred income taxes .......................................................                 76.6                81.0
Other current assets ........................................................                 36.1                85.6
                                                                                  ------------------  ------------------
     TOTAL CURRENT ASSETS ...................................................                592.4               625.6

Properties and equipment, net of accumulated depreciation and
     amortization of $902.6 (1998 - $879.1) .................................                621.4               661.4
Goodwill, less accumulated amortization of $7.2 (1998 - $9.8) ...............                 18.8                37.8
Asbestos-related insurance receivable .......................................                332.9               376.3
Deferred income taxes .......................................................                378.4               406.9
Other assets ................................................................                467.5               469.8
                                                                                  ------------------  ------------------
     TOTAL ASSETS ...........................................................     $        2,411.4    $        2,577.8
                                                                                  ==================  ==================

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt .............................................................     $           76.8    $           80.6
Accounts payable ............................................................                113.5               123.7
Income taxes payable ........................................................                 81.5               135.3
Liability for asbestos-related litigation ...................................                149.9                95.5
Other current liabilities ...................................................                269.3               253.1
                                                                                  ------------------  ------------------
     TOTAL CURRENT LIABILITIES ..............................................                691.0               688.2

Long-term debt ..............................................................                  8.1                32.8
Deferred income taxes .......................................................                 20.0                24.5
Noncurrent liability for asbestos-related litigation ........................                955.9             1,104.4
Other liabilities ...........................................................                595.2               640.3
                                                                                  ------------------  ------------------
     TOTAL LIABILITIES ......................................................              2,270.2             2,490.2
                                                                                  ------------------  ------------------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY
Common stock issued, par value $.01; 300,000,000 shares authorized;
         outstanding: 1999 - 71,758,000; 1998 - 72,503,000 ..................                   .7                  .7
Paid in capital .............................................................                419.4               409.3
Retained earnings ...........................................................               (129.4)             (157.6)
Deferred compensation trust .................................................                  (.6)                (.8)
Treasury stock, at cost:  4,119,600 common shares (1998 - 5,149,100) ........                (54.0)              (83.1)
Accumulated other comprehensive loss ........................................                (94.9)              (80.9)
                                                                                  ------------------  ------------------
     TOTAL SHAREHOLDERS' EQUITY .............................................                141.2                87.6
                                                                                  ------------------  ------------------
     TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .............................     $        2,411.4    $        2,577.8
                                                                                  ==================  ==================

------------------------------------------------------------------------------------------------------------------------
</TABLE>

The Notes to Consolidated Financial Statements are integral to these statements.

                                      I-3

<PAGE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
-----------------------------------------------------------------------------------------------------------------------------
                                    Common                                                    Accumulated
                                    Stock and                     Deferred                       Other            TOTAL
                                    Paid in       Retained      Compensation    Treasury     Comprehensive     SHAREHOLDERS'
Dollars in millions                 Capital       Earnings          Trust         Stock      Income/(Loss)        EQUITY
-----------------------------------------------------------------------------------------------------------------------------

<S>                               <C>           <C>           <C>             <C>         <C>               <C>
BALANCE, JULY 1, 1999 ........    $  407.3      $  (171.4)    $      (.6)     $  (50.3)   $    (96.0)       $     89.0
Net income ...................        --             42.0           --            --            --                42.0
Purchase of common stock .....        --             --             --            (3.7)         --                (3.7)
Issuance of shares under
stock plans ..................        12.8           --             --            --            --                12.8
Change in unrealized
appreciation on marketable
security .....................        --             --             --            --            (3.0)             (3.0)
Foreign currency translation
adjustment....................        --             --             --            --             4.1               4.1
                                  ------------  -----------   --------------  ----------  --------------    -----------------
BALANCE, SEPTEMBER 30, 1999 ..    $  420.1      $  (129.4)    $      (.6)     $  (54.0)   $    (94.9)       $    141.2
                                  ============  ===========   ==============  ==========  ===============   =================

BALANCE, DECEMBER 31, 1998 ...    $  410.0      $  (157.6)    $      (.8)     $  (83.1)   $    (80.9)       $     87.6
Net income ...................        --             87.7           --            --            --                87.7
Purchase of common stock .....        --             --             --           (59.3)         --               (59.3)
Retirement of treasury stock .       (28.9)         (59.5)          --            88.4          --                --
Issuance of shares under stock
plans ........................        39.0           --               .2          --            --                39.2
Change in unrealized
appreciation on marketable
security .....................        --             --             --            --             0.9               0.9
Foreign currency translation
adjustment ...................        --             --             --            --           (14.9)            (14.9)
                                  ------------  -----------   --------------  ----------  --------------    -----------------
BALANCE, SEPTEMBER 30, 1999...    $  420.1      $  (129.4)    $      (.6)     $  (54.0)   $    (94.9)       $    141.2
                                  ============  ===========   ==============  ==========  ===============   =================

-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

The Notes to Consolidated Financial Statements are integral to these statements.

                                      I-4

<PAGE>

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

1.  CHANGE IN ORGANIZATION AND BASIS OF PRESENTATION

W. R. Grace & Co., through its subsidiaries, is primarily engaged in specialty
chemicals businesses on a worldwide basis. These businesses consist of refining
catalysts, chemical catalysts and silica products (Grace Davison), specialty
construction chemicals and building materials (Grace Construction Products) and
container protection products (Darex Container Products). Collectively, Grace
Construction Products and Darex Container Products form the Grace Performance
Chemicals business unit.

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. On a consolidated basis, Grace-Conn.'s
statement of operations, statement of cash flows and balance sheet are
substantially the same as those of W. R. Grace and Co.'s as reflected in the
interim consolidated financial statements included herein.

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. Grace has classified certain
businesses as discontinued operations.

PACKAGING BUSINESS TRANSACTION

On March 31, 1998, a predecessor of the Company (Old Grace) completed a
transaction in which Grace's former flexible packaging business (Packaging
Business) was combined with Sealed Air Corporation (Sealed Air). Old Grace
effected this transaction by transferring its specialty chemicals businesses
along with certain other businesses and assets to the Company, distributing the
shares of the Company's common stock to Old Grace's shareholders on a
one-for-one basis (Spin-off) and merging a subsidiary of Old Grace with Sealed
Air (Merger). Immediately following the Spin-off and Merger, the Company changed
its name to "W. R. Grace & Co." and Old Grace changed its name to "Sealed Air
Corporation" (New Sealed Air).

For further information, see Old Grace's Joint Proxy Statement/Prospectus dated
February 13, 1998, the Company's Information Statement dated February 13, 1998,
Notes 1 and 3 to the Consolidated Financial Statements in Grace's Annual Report
on Form 10-K for 1998 (1998 Form 10-K), and Note 3 below.

BASIS OF PRESENTATION

The interim consolidated financial statements in this Report are unaudited and
should be read in conjunction with the consolidated financial statements in the
Company's 1998 Form 10-K. Such interim consolidated financial statements reflect
all adjustments that, in the opinion of management, are necessary for a fair
presentation of the results of the interim periods presented; all such
adjustments are of a normal recurring nature. All significant intercompany
accounts and transactions have been eliminated. Certain amounts in the
consolidated financial statements for prior periods have been reclassified to
conform to the current period's basis of presentation.

The results of operations for the three and nine month interim periods ended
September 30, 1999 are not necessarily indicative of the results of operations
for the year ending December 31, 1999.

Balance sheet information relating to a discontinued business is not restated
for periods prior to the date of classification of a business as a discontinued
operation. Accordingly, "Net pre-tax cash used for operating activities of
discontinued operations" excludes the effects of changes in working capital of

                                      I-5

<PAGE>

discontinued operations prior to their classification as such. The net investing
and financing activities of discontinued operations represent cash flows of
discontinued operations subsequent to the respective dates of such
classifications.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires that management make estimates and assumptions
affecting the assets and liabilities (including contingent assets and
liabilities) reported at the date of the consolidated financial statements and
the revenues and expenses reported for the periods presented. Actual amounts
could differ from those estimates.


2. ASBESTOS RELATED LITIGATION

Grace is a defendant in property damage and personal injury lawsuits relating to
previously sold asbestos-containing products and expects that it will be named
as a defendant in additional asbestos-related lawsuits in the future. Grace was
a defendant in 48,295 asbestos-related lawsuits on September 30, 1999 (11
involving claims for property damage and the remainder involving 102,894 claims
for personal injury), as compared to 45,086 lawsuits on December 31, 1998 (14
involving claims for property damage and the remainder involving 97,017 claims
for personal injury).

PROPERTY DAMAGE LITIGATION

The plaintiffs in property damage lawsuits generally seek to have the defendants
absorb the cost of removing, containing, or repairing the asbestos-containing
materials in the affected buildings. Each property damage case is unique in that
the age, type, size and use of the building, and the difficulty of asbestos
abatement, if necessary, vary from structure to structure. Thus, the amounts
involved in prior dispositions of property damage cases are not necessarily
indicative of the amounts that may be required to dispose of cases in the
future. Information regarding product identification, the amount of product in
the building, the age, type, size and use of the building, the jurisdictional
history of prior cases and the court in which the case is pending provide
meaningful guidance as to the range of potential costs. Some of this information
is not yet available in the property damage cases currently pending against
Grace. Accordingly, it is not possible to estimate with precision the costs of
defending against and disposing of these cases. In accordance with Statement of
Financial Accounting Standards (SFAS) No. 5, "Accounting for Contingencies",
Grace has recorded an accrual for all existing property damage cases for which
sufficient information is available to form a reasonable estimate of such
exposure.

Through September 30, 1999, 140 asbestos property damage cases 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; and 203 property damage cases were
settled for a total of $603.8 million. Property damage case activity for the
nine months ended September 30, 1999 was as follows:


--------------------------------------------------------------------------------
Cases outstanding, December 31, 1998.................................      14
New cases filed......................................................      --
Settlements..........................................................     (3)
Dismissals...........................................................      --
                                                                          ---
     Cases outstanding, September 30, 1999...........................      11
                                                                           ==
--------------------------------------------------------------------------------

                                      I-6

<PAGE>

PERSONAL INJURY LITIGATION

Personal 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 is influenced by numerous
variables, including the solvency of other former asbestos producers,
cross-claims by co-defendants, the rate at which new claims are filed, the
jurisdiction in which the filings are made, and the defense and disposition
costs associated with these claims. Grace's personal injury liability reflects
management's estimate of the number and ultimate cost of present and future
personal injury claims expected to be asserted through 2039 (the date by which
all personal injury claims related to Grace are expected to be known, given
demographic assumptions of possible exposure to asbestos products manufactured
by Grace).

Through September 30, 1999, approximately 13,800 asbestos personal injury
lawsuits involving 31,500 claims were dismissed without payment of any damages
or settlement amounts (primarily on the basis that Grace products were not
involved), and approximately 47,300 lawsuits involving 122,700 claims were
disposed of (through settlement and judgments) for a total of $398.3 million.
Personal injury claim activity for the nine months ended September 30, 1999 was
as follows:


--------------------------------------------------------------------------------
Claims outstanding, December 31, 1998..............................    97,017
New claims.........................................................    20,629
Settlements........................................................   (13,945)
Dismissals.........................................................      (803)
Judgments..........................................................        (4)
                                                                      -------
     Claims outstanding, September 30, 1999........................   102,894
                                                                      =======
--------------------------------------------------------------------------------

ASBESTOS-RELATED LIABILITY

Grace estimates its property damage and personal injury liabilities based on its
experience with, and recent trends in, asbestos litigation. These estimates
include property damage and personal injury indemnity as well as defense costs.
Grace regularly evaluates its financial exposure to asbestos-related lawsuits
and the adequacy of related recorded liabilities. The amounts recorded at each
balance sheet date reflect Grace's best estimate of probable and estimable
liabilities in all material respects. However, changes to estimates of probable
liabilities may occur as actual experience is gained over time.

<TABLE>
<CAPTION>
                                                                                       SEPTEMBER 30,  December 31,
Dollars in millions                                                                        1999           1998
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>          <C>
Current liability for asbestos-related litigation (estimated payments within one year)..  $  149.9     $    95.5
Noncurrent liability for asbestos-related litigation (estimated payments beyond one year)    955.9       1,104.4
                                                                                          --------     ---------

     Total asbestos-related liability (including $3.3 - 1999 and $5.8 - 1998
     payable under negotiated settlements)..............................................  $1,105.8      $1,199.9
                                                                                          ========      ========
</TABLE>


ASBESTOS-RELATED INSURANCE RECEIVABLE

Grace previously purchased insurance policies with respect to its
asbestos-related lawsuits and claims. Activity in Grace's notes receivable from
insurance carriers and asbestos-related insurance receivable during the nine
months ended September 30, 1999 was as follows:

                                      I-7

<PAGE>

<TABLE>
<CAPTION>
Dollars in millions
<S>                                                                                                    <C>
NOTES RECEIVABLE
Notes receivable from insurance carriers on December 31, 1998, net of discount of $2.3 ..............  $   18.0
Proceeds received under asbestos-related insurance settlements.......................................     (12.2)
Current period amortization of discount..............................................................       1.3
                                                                                                       --------
     Notes receivable from insurance carriers on September 30, 1999, net of discount of $1.0.........  $    7.1
                                                                                                       --------
INSURANCE RECEIVABLE
Asbestos-related insurance receivable on December 31, 1998...........................................   $ 425.0
Proceeds received under asbestos-related insurance settlements.......................................     (41.5)
                                                                                                       --------
     Asbestos-related insurance receivable on September 30, 1999.....................................   $ 383.5
                                                                                                        -------
     Total amounts due from insurance carriers.......................................................   $ 390.6
                                                                                                        =======
</TABLE>


Grace has settled with and been paid by its primary insurance carriers with
respect to both property damage and personal injury cases and claims. Grace has
also settled with its excess insurance carriers that wrote policies available
for property damage cases; those settlements involve amounts paid and to be paid
to Grace. In addition, Grace has settled with many excess insurance carriers
that wrote policies available for personal injury claims. Grace is currently in
litigation with certain remaining excess insurance carriers whose policies
generally represent layers of coverage Grace has not yet reached. Such policies
are believed by Grace to be available for asbestos-related personal injury
lawsuits. Insurance coverage for asbestos-related liabilities has not been
commercially available since 1985.

Grace's ultimate exposure with respect to its asbestos-related cases and claims
partly depends on the extent to which its insurance will cover damages for which
it may be held liable, amounts paid in settlements, and litigation costs. In
Grace's opinion, it is probable that recoveries from its insurance carriers
(including amounts reflected in the receivable discussed above), along with
other funds, will be available to satisfy the property damage and personal
injury cases and claims pending at September 30, 1999, as well as personal
injury claims expected to be filed through 2039. Consequently, Grace believes
that the resolution of its asbestos-related litigation will not have a material
adverse effect on its consolidated financial position or results of operations.

For additional information, see Note 2 to the Consolidated Financial Statements
in the 1998 Form 10-K.


3. DISCONTINUED OPERATIONS

PACKAGING BUSINESS TRANSACTION

As discussed in Note 1, the Spin-off and the Merger were completed on March 31,
1998. Prior to the spin-off and the Merger, Old Grace and a Packaging Business
subsidiary borrowed $1,258.8 million (inclusive of $2.2 million of bank fees)
and made a cash transfer of $1,256.6 million to Grace, which used the
transferred funds to repay substantially all of Grace's debt (see Note 5 to the
interim consolidated financial statements in this Report). The borrowed funds
are shown as a net financing activity of discontinued operations in the
accompanying Consolidated Statement of Cash Flows. In the Merger and a related
recapitalization, for each Old Grace common share outstanding at the close of
trading on March 31, 1998, each shareholder received .536 shares of New Sealed
Air common stock and .475 shares of New Sealed Air convertible preferred stock.
Upon the completion of the Spin-off and the Merger, the shareholders of Old
Grace owned (a) 100% of the specialty chemicals businesses (through their
ownership of 100% of the Company's outstanding shares) and (b) approximately 63%
of New Sealed Air, on a fully diluted basis.

                                      I-8

<PAGE>

The Packaging Business transaction resulted in an adjustment to shareholders'
equity of $196.4 million, representing Grace's investment in the Packaging
Business less the $1,258.8 million of borrowings discussed above.

During 1998, Grace made certain amendments to one of its domestic pension plans
which included offering a lump sum settlement option to former Grace employees
not currently receiving benefits. During the second quarter of 1999, a
significant number of the lump sum offers were settled. In accordance with SFAS
No. 88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Plans and for Termination Benefits," the Company recognized a pre-tax
loss of $11.0 million during the nine months ended September 30, 1999, in
connection with these settlements. A pre-tax non-cash charge of $9.1 million
($5.7 million after-tax) is included in "Income from discontinued operations,
net of tax" in the accompanying Consolidated Statement of Operations as it
relates to settlements with former Packaging Business employees. A pre-tax
noncash charge of $1.9 million is included in selling, general and
administrative expenses in the accompanying Consolidated Statement of Operations
for settlements relating to former Grace employees not associated with the
former Packaging Business.

The Packaging Business transaction also required the Company to split certain
pension plans and recognize a net curtailment loss for other plans. In
accordance with SFAS No. 88, the Company recognized a net pre-tax loss of $8.4
million ($5.5 million after-tax) for the three months ended March 31, 1998, in
connection with these plans. This net pre-tax loss is included in "Income from
discontinued operations, net of tax" in the accompanying Consolidated Statement
of Operations.

HEALTH CARE

Cross Country Staffing
In July 1999, the Company completed the sale of substantially all of its
interest in Cross Country Staffing (CCS), a provider of temporary nursing and
other healthcare services for total cash proceeds of $183.0 million, subject to
certain post-closing adjustments. The Company's investment in CCS had been
accounted for under the equity method. The sale resulted in a net pre-tax gain
of $74.8 million ($32.1 million after-tax) including the cost of the Company's
purchase of the interests held by third parties in CCS and the amount payable
under CCS's phantom equity plan prior to closing under the sale transaction. The
gain and the operations of CCS prior to the sale are included in "Income from
discontinued operations, net of tax" in the accompanying Consolidated Statement
of Operations. Certain liabilities, primarily related to tax liabilities of CCS,
are being retained by the Company and are included in other current liabilities
in the accompanying Consolidated Balance Sheet.

RETAINED OBLIGATIONS

Under certain divestiture agreements, the Company has retained contingent
obligations that could develop into situations where accruals for estimated
costs of defense or loss would be recorded in a period subsequent to divestiture
under generally accepted accounting principles. The Company assesses its
retained risks quarterly and accrues amounts estimated to be payable related to
these obligations.

During the three months ended September 30, 1999, the Company revised its
estimate of the outcome of certain of these retained contingent obligations
based on current circumstances and, as a result, recorded an additional charge
of $25.7 million ($16.7 million after-tax). This charge is included in "Income
from discontinued operations, net of tax" in the accompanying Consolidated
Statement of Operations.

                                      I-9

<PAGE>


FINANCIAL INFORMATION FOR DISCONTINUED OPERATIONS

Results of discontinued operations for the three months and the nine months
ended September 30, 1999 and 1998 were as follows:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                                 THREE MONTHS ENDED            NINE MONTHS ENDED
                                                                   SEPTEMBER 30,                 SEPTEMBER 30,
Dollars in millions                                              1999          1998           1999           1998
------------------------------------------------------------- -----------    ----------    -----------    -----------
<S>                                                           <C>            <C>          <C>             <C>
PACKAGING BUSINESS TRANSACTION
Net sales...............................................      $     --       $     --      $     --       $   431.2
                                                              -----------    ----------    -----------    -----------
(Loss)/income from discontinued operations before taxes             --             --            (9.1)          6.2
Income tax provision ...................................            --             --             3.4           8.8
                                                              -----------    ----------    -----------    -----------
     Loss from discontinued operations .................      $     --       $     --      $     (5.7)    $    (2.6)
                                                              -----------    ----------    -----------    -----------

HEALTH CARE
Net sales...............................................      $     --       $     --      $     --       $    --
                                                              -----------    ----------    -----------    -----------
(Loss)/income from discontinued operations before taxes            (13.3)           2.1          (8.6)          5.8
Income tax provision/(benefit) .........................             7.1           (1.1)          4.6          (3.2)
                                                              -----------    ----------    -----------    -----------
     (Loss)/income from discontinued operations ........      $     (6.2)    $      1.0    $     (4.0)    $     2.6
                                                              -----------    ----------    -----------    -----------

Total operating results of discontinued operations......      $     (6.2)    $      1.0    $     (9.7)    $    --
Net pre-tax gain on disposal of operations..............            74.8           --            74.8          --
Income tax provision on gain on disposal of operations..           (42.7)          --           (42.7)         --
Other charges, net of tax...............................           (16.7)          --           (16.7)         --
                                                              -----------    ----------    -----------    -----------
     Income from discontinued operations, net of tax....      $      9.2     $      1.0    $      5.7     $    --
                                                              ===========    ==========    ===========    ===========

Basic income per share from discontinued operations ....      $      0.13    $      0.01   $      0.08    $    --
Diluted income per share from discontinued operations ..      $      0.12    $      0.01   $      0.07    $    --

---------------------------------------------------------------------------------------------------------------------
</TABLE>

The operating results of Grace's other discontinued operations are reflected in
movements of assets and liabilities previously established to account for
estimated financial activities related to such divested businesses.


4. OTHER BALANCE SHEET ITEMS
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
                                                                                       SEPTEMBER 30,     December 31,
Dollars in millions                                                                         1999             1998
------------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>                  <C>
INVENTORIES
Raw materials .......................................................................      $     43.7       $     43.2
In process ..........................................................................            11.3             11.3
Finished products ...................................................................            80.5             77.9
General merchandise .................................................................            19.7             23.3
Less:  Adjustment of certain inventories to a last-in/first-out (LIFO) basis ........           (25.1)           (25.6)
                                                                                           ------------     ------------
                                                                                           $    130.1       $    130.1
                                                                                           ============     ============
</TABLE>

                                      I-10

<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
                                                                                           SEPTEMBER 30,    December 31,
Dollars in millions                                                                           1999             1998
------------------------------------------------------------------------------------------------------------------------
<S>                                                                                        <C>              <C>
OTHER ASSETS
Prepaid pension costs ...............................................................      $    263.2       $    256.1
Deferred charges ....................................................................            46.5             49.8
Long-term receivables, less allowances of $18.4 (1998 - $17.1).......................            22.2             23.5
Marketable securities ...............................................................            27.9             26.4
Cash surrender value of company owned life insurance ................................            79.8             78.7
Patents, licenses and other intangible assets .......................................            27.9             35.3
                                                                                           ------------     ------------
                                                                                           $    467.5       $    469.8
                                                                                           ============     ============
</TABLE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
<S>                                                                                        <C>              <C>
OTHER CURRENT LIABILITIES
Estimated costs to satisfy retained obligations of divested businesses ..............      $     98.0       $     76.4
Accrued compensation ................................................................            32.8             30.6
Estimated costs of announced business restructuring plans ...........................            21.2             33.3
Estimated costs of environmental site remediation ...................................            39.3             37.5
Accrued interest ....................................................................             4.4              5.4
Other accrued liabilities ...........................................................            73.6             69.9
                                                                                           ------------     ------------
                                                                                           $    269.3       $    253.1
                                                                                           ============     ============
</TABLE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
<S>                                                                                        <C>              <C>
OTHER LIABILITIES
Postretirement benefits other than pensions .........................................      $    204.6       $    211.3
Estimated costs of environmental site remediation ...................................           182.5            203.0
Pension benefits ....................................................................           138.4            141.8
Deferred compensation ...............................................................            34.0             42.9
Long-term self insurance reserve ....................................................            18.0             21.4
Other accrued liabilities ...........................................................            17.7             19.9
                                                                                           ------------     ------------
                                                                                           $    595.2       $    640.3
                                                                                           ============     ============

------------------------------------------------------------------------------------------------------------------------
</TABLE>

5. DEBT /  EXTRAORDINARY ITEM

As discussed in Notes 1 and 3 above, Grace received a cash transfer of $1,256.6
million in connection with the Spin-off and Merger. Grace used the transferred
funds to repay substantially all of its debt. On March 31, 1998, Grace used
$600.0 million of the cash transfer to repay bank borrowings. On April 1, 1998,
Grace repaid $611.3 million principal amount of 8.0% Notes Due 2004, 7.4% Notes
Due 2000, and 7.75% Notes Due 2002 (collectively, Notes), pursuant to a tender
offer that expired on March 27, 1998. On April 1, 1998, Grace also repaid $3.5
million principal amount of the Medium-Term Notes, Series A (MTNs) and $6.0
million of sundry indebtedness.

As a result of this extinguishment of debt, Grace incurred a pre-tax charge of
$56.3 million ($35.2 million after-tax, or a basic loss per share of $0.47;
diluted loss per share of $0.44) for premiums paid in excess of the Notes'
principal amounts and other costs incurred in connection with the purchase of
the Notes and MTNs (including the costs of settling related interest rate swap
agreements). These costs are presented as an extraordinary item in the
accompanying Consolidated Statement of Operations. On September 30, 1999, and
December 31, 1998, the Company's short-term and long-term debt was as follows:

                                      I-11

<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
                                                                                       SEPTEMBER 30,     December 31,
Dollars in millions                                                                         1999             1998
------------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>              <C>
SHORT-TERM DEBT
Bank borrowings  ....................................................................   $     47.3       $     75.0
Current maturities of long-term debt ................................................         24.7             --
Other short-term borrowings ........................................................           4.8              5.6
                                                                                        ------------     ------------
                                                                                        $     76.8       $     80.6
                                                                                        ============     ============

LONG-TERM DEBT
8.0% Notes Due 2004  ................................................................   $      5.7       $      5.7
7.4% Notes Due 2000 .................................................................         --               24.7
7.75% Notes Due 2002 ................................................................          2.0              2.0
Sundry indebtedness ................................................................            .4               .4
                                                                                        ------------     ------------
                                                                                        $      8.1       $     32.8
                                                                                        ============     ============

------------------------------------------------------------------------------------------------------------------------
</TABLE>

In May 1999, Grace entered into a $250.0 million credit facility under a 364-day
credit agreement expiring May 2000. In addition, Grace maintains a $250.0
million long-term facility expiring in May 2003. At September 30, 1999, the
Company had $47.3 million of bank borrowings outstanding under these facilities.
The aggregate amount of net unused and unreserved borrowings under short-term
facilities at September 30, 1999 was $452.7 million.


6. SHAREHOLDERS' EQUITY

The Company is authorized to issue 300,000,000 shares of common stock. Of the
common stock unissued on September 30, 1999, approximately 12,848,000 shares
were reserved for issuance pursuant to stock options and other stock incentives.
In the first nine months of 1999, the Company granted a total of 2,299,290
options with an average exercise price of $13.19. In 1998, the Company granted a
total of 3,316,826 options with an average exercise price of $19.12.

In April 1998, the Company's Board of Directors approved a program to repurchase
up to 20% of the Company's outstanding shares in the open market (approximately
15,165,000 shares). Through September 30, 1999, the Company had acquired
9,596,400 shares of common stock for $142.4 million under the program (an
average price per share of $14.84). In January, 1999, Grace retired 5,476,800
shares of treasury stock with a cost basis of $88.4 million, which is reflected
in the accompanying Consolidated Statement of Shareholders' Equity.

For additional information, see Notes 12 and 14 to the Consolidated Financial
Statements in the 1998 Form 10-K.

                                      I-12

<PAGE>

7. EARNINGS PER SHARE

The following table shows a reconciliation of the numerators and denominators
used in calculating basic and diluted earnings per share from continuing
operations for the three months and the nine months ended September 30, 1999 and
1998:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
                                                                        THREE MONTHS ENDED         NINE MONTHS ENDED
                                                                           SEPTEMBER 30,             SEPTEMBER 30,
Amounts in millions, except  per share amounts                           1999         1998        1999          1998
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>          <C>         <C>           <C>
NUMERATOR:
     Income from continuing operations...........................      $   32.8     $   25.3    $   82.0      $     61.0
                                                                      ===========  ===========  ==========   ============
DENOMINATOR:
     Weighted average common shares - basic calculation .........          71.2         74.6        70.8            75.1

       Effect of dilutive securities:
       Employee compensation-related shares .....................           3.4          3.9         3.3             5.1
                                                                      -----------  -----------  ----------   ------------

        Weighted average common shares - diluted calculation ....          74.6         78.5        74.1            80.2
                                                                      ===========  ===========  ==========   ============

BASIC EARNINGS PER SHARE - CONTINUING OPERATIONS ................      $   0.46     $   0.34    $   1.16      $    0.81
                                                                      ===========  ===========  ==========   ============

DILUTED EARNINGS PER SHARE - CONTINUING OPERATIONS ..............      $   0.44     $   0.32    $   1.11      $    0.76
                                                                      ===========  ===========  ==========   ============
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

In the first nine months of 1999 and in 1998, the Company granted a total of
45,000 and 246,933 shares, respectively, of the Company's common stock to
certain executives, subject to various restrictions. For more information, see
the Form of Restricted Share Award Agreements filed with the Company's Form 10-Q
for the quarter ended March 31, 1998.


8. COMPREHENSIVE INCOME

The table below presents the after-tax components of Grace's Comprehensive
Income for the three months and the nine months ended September 30, 1999 and
1998:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
                                                                        THREE MONTHS ENDED         NINE MONTHS ENDED
                                                                           SEPTEMBER 30,             SEPTEMBER 30,
Dollars  in millions                                                     1999         1998        1999          1998
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>          <C>          <C>          <C>
Net income ......................................................     $    42.0    $    26.3    $   87.7     $      25.8
                                                                      -----------  -----------  ----------   ------------

Unrealized appreciation/(depreciation) on marketable security,
net of tax:
     Change in unrealized appreciation/(depreciation) during period        (1.3)        (0.6)        6.2            14.7
     Reclassification for gains realized in net income ..........          (1.7)        (1.5)       (5.3)           (1.5)
                                                                      -----------  -----------  ----------   ------------
Net change in unrealized appreciation/(depreciation) ............          (3.0)        (2.1)        0.9            13.2
Foreign currency translation adjustments ........................           4.1         10.3       (14.9)          (11.6)
Minimum pension liability adjustment ............................          --           --          --              (9.9)
                                                                      -----------  -----------  ----------   ------------
Other comprehensive income/(loss), net of tax ...................           1.1          8.2       (14.0)           (8.3)
                                                                      -----------  -----------  ----------   ------------

COMPREHENSIVE INCOME  ...........................................     $    43.1    $    34.5    $   73.7     $      17.5
                                                                      ===========  ===========  ==========   ============

-------------------------------------------------------------------------------------------------------------------------
</TABLE>
                                      I-13

<PAGE>

9. BUSINESS SEGMENT INFORMATION

The table below presents information related to Grace's business segments for
the three months and the nine months ended September 30, 1999 and 1998.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
                                                                        THREE MONTHS ENDED         NINE MONTHS ENDED
                                                                           SEPTEMBER 30,             SEPTEMBER 30,
Dollars  in millions                                                     1999         1998         1999         1998
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>          <C>          <C>          <C>
NET SALES
GRACE DAVISON ...................................................     $    178.4   $    184.7   $    529.6   $      541.1
                                                                      -----------  -----------  -----------  ------------
GRACE PERFORMANCE CHEMICALS:
     Grace Construction Products ................................          135.1        135.2        383.7          366.2
     Darex Container Products ...................................           58.7         60.4        177.4          183.7
                                                                      -----------  -----------  -----------  ------------
                                                                           193.8        195.6        561.1          549.9
                                                                      -----------  -----------  -----------  ------------
TOTAL ...........................................................     $    372.2   $    380.3   $  1,090.7   $    1,091.0
                                                                      ===========  ===========  ===========  ============

PRETAX OPERATING INCOME
GRACE DAVISON....................................................     $     33.2   $     29.2   $     86.3   $       81.9
                                                                      -----------  -----------  -----------  ------------
GRACE PERFORMANCE CHEMICALS:
     Grace Construction Products ................................           22.8         19.9         57.1           43.7
     Darex Container Products ...................................            8.4          5.8         22.9           20.1
                                                                      -----------  -----------  -----------  ------------
                                                                            31.2         25.7         80.0           63.8
                                                                      -----------  -----------  -----------  ------------
TOTAL ...........................................................     $     64.4   $     54.9   $    166.3   $      145.7
                                                                      ===========  ===========  ===========  ============
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

The table below presents information related to the geographic areas in which
Grace operated for the three months and the nine months ended September 30, 1999
and 1998:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
                                                                        THREE MONTHS ENDED         NINE MONTHS ENDED
                                                                           SEPTEMBER 30,             SEPTEMBER 30,
Dollars  in millions                                                     1999         1998         1999         1998
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>          <C>          <C>          <C>
NET SALES
     North America ..............................................     $    196.2   $    205.9   $    570.6   $     582.1
     Europe .....................................................          106.5        103.7        315.8         297.4
     Latin America ..............................................           19.0         22.9         58.4          64.5
     Asia Pacific ...............................................           50.5         47.8        145.9         147.0
                                                                      -----------  -----------  -----------  ------------
TOTAL ...........................................................     $    372.2   $    380.3   $  1,090.7   $   1,091.0
                                                                      ===========  ===========  ===========  ============
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

The pretax operating income of Grace's business segments for the three months
and the nine months ended September 30, 1999 and 1998 is reconciled below to
amounts presented in the accompanying Consolidated Statement of Operations.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
                                                                        THREE MONTHS ENDED         NINE MONTHS ENDED
                                                                           SEPTEMBER 30,             SEPTEMBER 30,
Dollars  in millions                                                     1999         1998        1999          1998
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>          <C>          <C>          <C>
Pretax operating income - business segments .....................     $    64.4    $    54.9    $  166.3     $     145.7
Interest expense and related financing costs ....................          (3.9)        (3.9)      (12.9)          (15.1)
Investment income ...............................................           1.1          1.2         2.9             3.5
Corporate and general expense ...................................         (16.4)        (9.1)      (41.4)          (29.9)
Other income (expense), net......................................           6.0         (2.3)       13.2            (5.8)
                                                                      -----------  -----------  ----------   ------------
Income from continuing operations before income taxes ...........     $    51.2    $    40.8    $  128.1     $      98.4
                                                                      ===========  ===========  ==========   ============
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                      I-14

<PAGE>

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

The following discussion includes projections and/or other "forward-looking"
information. Grace is subject to risks and other uncertainties that could cause
its actual results to differ materially from any such projections or that could
cause other forward-looking information to prove incorrect. For a discussion of
such risks and uncertaintees, see "Introduction and Overview - Projections and
Other Forward-Looking Information" in Item 1 of Grace's 1998 Annual Report on
Form 10-K ("1998 Form 10-K").


RESULTS OF CONTINUING OPERATIONS

OVERVIEW

Grace is primarily engaged in specialty chemicals businesses on a worldwide
basis. These businesses consist of refining catalysts, chemical catalysts and
silica products (Grace Davison), specialty construction chemicals and building
materials (Grace Construction Products), and container protection products
(Darex Container Products). Collectively, Grace Construction Products and Darex
Container Products form the Grace Performance Chemicals unit. Set forth below is
a chart that lists key operating components and percentage change for the three
months and the nine months ended September 30, 1999 compared to the same periods
of the prior year, which should be referred to when reading management's
discussion of the results of continuing operations.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
                                                 THREE MONTHS ENDED                      NINE MONTHS ENDED
                                                    SEPTEMBER 30,                          SEPTEMBER 30,
                                                                     %                                          %
Dollars in millions                         1999        1998(a)    Change           1999          1998(a)     Change
----------------------------------------------------------------------------------------------------------------------
<S>                                         <C>         <C>       <C>              <C>           <C>         <C>
NET SALES
GRACE DAVISON............................ $  178.4    $  184.7      (3.4 %)   $     529.6    $    541.1       (2.1 %)
                                          ----------  ----------              ------------   ----------
GRACE PERFORMANCE CHEMICALS:
     Grace Construction Products  .......    135.1       135.2      (0.1 %)         383.7         366.2        4.8 %
     Darex Container Products ...........     58.7        60.4      (2.8 %)         177.4         183.7       (3.4 %)
                                          ----------  ----------              ------------   ----------
                                             193.8       195.6      (0.9 %)         561.1         549.9        2.0 %
                                          ----------  ----------              ------------   ----------
TOTAL ................................... $  372.2    $  380.3      (2.1 %)   $   1,090.7    $  1,091.0        0.0%
                                          ==========  ==========              ============   ==========

PRE-TAX OPERATING INCOME
GRACE DAVISON ........................... $   33.2    $   29.2      13.7 %    $      86.3    $     81.9        5.4 %
                                          ----------  ----------              ------------   ----------
GRACE PERFORMANCE CHEMICALS:
     Grace Construction Products ........     22.8        19.9      14.6 %           57.1          43.7       30.7 %
     Darex Container Products ...........      8.4         5.8      44.8 %           22.9          20.1       13.9 %
                                          ----------  ----------              ------------   ----------
                                              31.2        25.7      21.4 %           80.0          63.8       25.4 %
                                          ----------  ----------              ------------   ----------
TOTAL ...................................     64.4        54.9      17.3 %          166.3         145.7       14.1 %
Interest expense net of investment
income ..................................     (2.8)       (2.7)     (3.7 %)         (10.0)        (11.6)      13.8 %
Corporate and general expense ...........    (16.4)       (9.1)    (80.2 %)         (41.4)        (29.9)     (38.5 %)
Other income (expense), net .............      6.0        (2.3)      NM              13.2          (5.8)       NM
                                          ----------  ----------              ------------   ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES .....................     51.2        40.8      25.5 %          128.1          98.4       30.2 %
Provision for income taxes ..............    (18.4)      (15.5)    (18.7 %)         (46.1)        (37.4)     (23.3 %)
                                          ----------  ----------              ------------   ----------
INCOME FROM CONTINUING
OPERATIONS .............................. $   32.8    $   25.3      29.6 %    $      82.0    $     61.0       34.4 %
                                          ==========  ==========              ============   ==========
----------------------------------------------------------------------------------------------------------------------
</TABLE>

NM - Not Meaningful
(a) Results have been restated for the reclassification of Cross Country
Staffing as a discontinued operation.

                                      I-15

<PAGE>

NET SALES

Net sales of Grace's business segments decreased 2.1% to $372.2 million in the
third quarter of 1999 and were essentially flat for the first nine months of
1999. Factoring out fluctuations in currencies compared to the same periods of
the prior year, sales and revenues would have decreased an overall 1.1% for the
third quarter and increased .8% for the first nine months of 1999.

On an as-reported basis, including currency fluctuations: Grace Davison's sales
were down 3.4% for the quarter and down 2.1% year-to-date largely attributed to
weakened demand for fluid cracking catalysts (FCC) in North America and reduced
volume in Asia Pacific. Grace Construction Products' sales had little change for
the quarter with construction chemicals gains being offset by building materials
declines; and were up 4.8% year-to-date primarily due to customer receptiveness
to its new and value-added products. Darex Container Products' sales decreased
2.8% for the quarter and 3.4% year-to-date impacted primarily by unfavorable
currency exchange, principally in Latin America and Europe.

The table below depicts Grace's net sales by major product group, the change
from the comparable prior period and the percentage contribution of each product
group to Grace's total net sales. Refer to separate sections that follow for
business segment discussions of sales and revenues.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                                         THREE MONTHS ENDED                          NINE MONTHS ENDED
                                            SEPTEMBER 30,                              SEPTEMBER 30,
                                                                  %                                            %
                                                                Sales -                            %        Sales -
Dollars in millions            1999          1998    % Change   1999         1999          1998  Change      1999
--------------------------------------------------------------------------------------------------------------------
<S>                          <C>         <C>         <C>        <C>      <C>          <C>        <C>         <C>
Refining catalysts .....     $   98.5    $  107.1    (8.0 %)    26.5%    $    292.3   $  313.1   (6.6 %)     26.8%
Chemical catalysts .........     28.0        26.5     5.7 %      7.5 %         81.8       76.1    7.5 %       7.5%
Silica products ............     51.9        51.1     1.6 %     13.9 %        155.5      151.9    2.4 %      14.3%
Construction chemicals  ....     80.7        78.1     3.3%      21.7 %        225.1      211.7    6.3 %      20.6%
Building materials .........     54.4        57.1    (4.7 %)    14.6 %        158.6      154.5    2.7 %      14.5%
Container protection .......     58.7        60.4    (2.8 %)    15.8 %        177.4      183.7   (3.4 %)     16.3%
                             ---------   ----------           ---------  ----------   -----------          ---------

     TOTAL GRACE SALES...... $  372.2    $  380.3    (2.1 %)   100.0%    $  1,090.7   $  1,091.0  0.0 %     100.0%
                             ==========  ==========           =========  ===========  ===========          =========
--------------------------------------------------------------------------------------------------------------------
</TABLE>

PRE-TAX OPERATING INCOME

Pre-tax operating income improved in each business segment for the third quarter
and year-to-date compared to the respective period of the prior year. Grace
Davison's pre-tax operating income improved 13.7% versus the prior year quarter
and 5.4% year-to-date, despite unfavorable sales, as a result of continuing to
realize raw material cost reductions and manufacturing efficiencies. Grace
Construction Products' pre-tax operating income was up 14.6% for the quarter and
30.7% year-to-date driven by margin improvements from value-added product
penetration/substitution and manufacturing cost reduction. Darex Container
Products' improvement in operating income (44.8% versus the prior year quarter
and 13.9% year-to-date) reflects the benefits realized from its restructuring
and other productivity initiatives. (Refer to separate sections that follow for
business segment discussions of pre-tax operating income.)

INCOME FROM CONTINUING OPERATIONS

Income from continuing operations was $32.8 million for the third quarter, or
$0.44 per diluted share, up from $25.3 million, or $0.32 per diluted share in
1998. Year-to-date income from continuing operations improved 34.4% over the
prior year resulting in diluted earnings per share of $1.11 compared to $0.76
for the nine months ended September 30, 1998.

Interest expense, net of investment income for the third quarter increased 3.7%
compared to prior year. Such costs for the first nine months of 1999 were $10.0
million, down from $11.6 million for the first nine months of 1998. Average
borrowings (including receivables sold and excluding borrowings against

                                      I-16

<PAGE>

the cash surrender value of certain life insurance policies) were $38.2 million
higher in the third quarter of 1999 compared to 1998, but $320.2 million lower
on a year-to-date basis. Proceeds from the Packaging Business transaction were
used to reduce debt levels in April 1998. Weighted average borrowing costs were
6.2% year-to-date 1999 versus 7.1% for 1998.

The third quarter increase in corporate and general expense of $7.3 million
relative to prior year was primarily due to legal defense costs incurred on
behalf of five former officers in connection with a lawsuit brought by the
Securities and Exchange Commission while these officers were employed by Grace
(the Company is obligated to defend these former officers in this case); and
expenses associated with the relocation of corporate headquarters from Boca
Raton, Florida to Columbia, Maryland. The year-to-date increase in corporate and
general expense of $11.5 million was primarily due to the legal defense costs
incurred to defend the former officers, expenses associated with the relocation
of corporate headquarters and a second quarter 1999 non-cash charge related to a
partial settlement of pension obligations to recognize a proportionate share of
actuarial pension losses.

The increase in other income (expense), net for the third quarter of 1999
compared to the prior year is primarily due to the sale of marketable
securities, net insurance proceeds emanating from a shareholder lawsuit against
former officers and the elimination of losses related to Circe Biomedical which
was sold in January 1999. These same items (sale of marketable securities, net
insurance proceeds from shareholder lawsuit, and the elimination of losses
related to Circe Biomedical) and the sale of the corporate aircraft in the first
quarter of 1999 contribute to the increase in other income (expense), net on a
year-to-date basis. These items are partially offset by a first quarter 1999
restructuring charge of $2.8 million relative to severance costs in connection
with the relocation of Grace's headquarters from Boca Raton, Florida to
Columbia, Maryland, and the consolidation of certain administrative functions in
Columbia.

Grace's effective tax rate on income from continuing operations was reduced from
37% to 36% as a result of the reclassification of the Cross Country Staffing
business, sold in the third quarter of 1999, to discontinued operations. For the
same reason, the effective tax rate on income from continuing operations changed
to 38% from 39% for 1998.

NET INCOME

Net income for the third quarter was $42.0 million, up 59.7% from the same
period in 1998, and net income year-to-date was $87.7 million, up nearly 240%
from the $25.8 million for the same period in 1998. Net income for 1999 was
bolstered by gains from discontinued operations of $9.2 million and $5.7 million
for the third quarter and year-to-date, respectively. In addition, the results
on a year-to-date basis for 1998 included an extraordinary loss from early
extinguishment of debt of $35.2 million (see Notes 3 and 5 to the interim
consolidated financial statements in this Report).


GRACE DAVISON

Net Sales

Grace Davison is a leading global supplier of catalysts and silica products.
Refining catalysts, representing approximately 26.8% of Grace's year-to-date
total sales, include fluid cracking catalysts (FCC) used by petroleum refiners
to convert distilled crude oil into transportation fuels and other
petroleum-based products, hydroprocessing catalysts, which upgrade heavy oils
and remove certain impurities, and chemical additives for treatment of feedstock
impurities. Chemical catalysts (7.5% of Grace's year-to-date total sales)
include polyolefin catalysts, which are essential components in the manufacture
of polyethylene resins used in products such as plastic film, high performance
plastic pipe, and plastic household containers. Silica products (14.3% of
Grace's year-to-date total sales) are used in a wide variety of industrial and
consumer applications as agents for specific product performance.

                                      I-17

<PAGE>


Grace Davison's net sales decreased 3.4% compared to the third quarter of 1998
and 2.1% year-to-date. Contributing to the sales decline in the third quarter
was the overall adverse impact of foreign currency weakness (primarily in
Europe) compared to the value of the U.S. dollar. Excluding the impact of
foreign exchange, sales would have decreased 2.3% for the third quarter. Foreign
exchange had only a minor impact on year-to-date sales.

Refining catalysts sales decreased 8.0% in the third quarter and 6.6%
year-to-date, primarily as a result of volume declines in North America and Asia
Pacific, partially offset by volume gains in Europe. The FCC third quarter
volume decline in North America was primarily due to reduced refinery usage and
some share fluctuation (within historically normal ranges). Also contributing to
the year-to-date volume decline was excess refinery turnaround activity in the
first half of the year. The volume decline in Asia Pacific was primarily due to
reduced market participation. Volume gains in Europe were primarily due to
increased shipments to existing and new customers of hydroprocessing catalysts
made possible as a result of new manufacturing capacity coming on line in the
third quarter of 1998.

Chemical catalysts sales increased 5.7% in the third quarter and 7.5%
year-to-date on strong sales of polyolefin catalysts in all geographic regions,
except Asia Pacific. Volume growth was largely driven by a strong worldwide
demand for polyolefin catalysts, particularly in North America.

Sales of silica products increased 1.6% for the third quarter and 2.4%
year-to-date. Third quarter results were driven by favorable volume comparisons
in all regions except North America. On a year-to-date basis, all regions show
favorable volume comparisons to prior year. Unfavorable price/mix partially
offset worldwide volume gains year-to-date.

Pre-Tax Operating Income

Grace Davison's pre-tax operating income increased 13.7% over the third quarter
1998 with a year-to-date increase of 5.4%. Gross margins improved in the third
quarter, despite unfavorable sales comparison, as a result of raw material cost
reductions and manufacturing efficiencies derived from Grace's productivity
effectiveness program. This program is designed to lower manufacturing and other
operating expenses. The most significant benefits of the program were realized
in refining catalysts and to a lesser extent in silica products. These
improvements were partially offset by restructuring costs of $0.9 million
recognized in the first quarter of 1999.


PERFORMANCE CHEMICALS

GRACE CONSTRUCTION PRODUCTS

Net Sales

Grace Construction Products is a leading supplier of specialty chemicals and
building materials to the nonresidential (commercial and government)
construction industry and to a lesser extent, the residential construction
industry. Specialty construction chemicals, which contributed approximately
20.6% of Grace's year-to-date total sales, add strength, control corrosion, and
enhance the handling and application of concrete. Specialty building materials
prevent water damage to structures and protect structural steel against collapse
due to fire; and represented 14.5% of Grace's year-to-date total sales.

Grace Construction Products' net sales had little change compared to the third
quarter of 1998. On a year-to-date basis, sales have increased 4.8%. Currency
translation had only a minor impact on third quarter and year-to-date sales.

                                      I-18

<PAGE>

Specialty construction chemicals sales increased 3.3% for the third quarter and
6.3% year-to-date. The third quarter increase in sales was driven by volume
increases in all regions except North America. On a year-to-date basis, volumes
increased in all regions as compared to the same period of 1998. This volume
increase is primarily due to penetration of value-added products in North
America and the consolidation of a joint venture in Japan (GCK), as Grace
increased its ownership in GCK from 45% to 81% in January 1999.

Specialty building materials sales decreased 4.7% for the third quarter
primarily due to volume decreases in Asia Pacific (continued depressed project
activity) and in Europe (delays of oil industry projects). On a year-to-date
basis, sales have increased 2.7% primarily due to increases in North America
volumes.

Pre-Tax Operating Income

Grace Construction Products' pre-tax operating income for the third quarter and
first nine months of 1999 was 14.6% and 30.7% better than the same periods in
1998, driven by margin improvements from value-added product
penetration/substitution and manufacturing cost reduction. Total operating
expenses increased due to the consolidation of GCK, offset by savings generated
from Grace's productivity effectiveness program.

DAREX CONTAINER PRODUCTS

Net Sales

Darex Container Products is a leading global producer of container protection
products, including can sealants, closure sealants, coatings for metal
packaging, and other related products. Can sealants hermetically seal beverage,
food, and other cans; closure sealants seal glass and plastic bottles and jars
used in beverage and food applications; and coatings protect metal packaging
from corrosion and its contents from the influences of the metal. Container
protection products represented 16.3% of Grace's year-to-date total sales.

Darex Container Products' net sales were 2.8% and 3.4% lower than the comparable
third quarter and year-to-date periods in 1998, respectively. Contributing to
the sales decline was the May 1998 divestment of a can forming lubricants
business, which had sales of $1.6 million in the first nine months of 1998. Also
contributing to the sales decline was the overall adverse impact of currency
weakness in Europe and Latin America compared to the value of the U.S. dollar.
The negative impact of foreign currency translation was $2.2 million for the
third quarter and $6.7 million for the first nine months of 1999. Excluding the
impact of these items, sales would have been flat for the quarter and
year-to-date.

Can sealant sales were essentially flat for the quarter and down 3.4% for the
first nine months due to customer consolidations and the impact of currency
movements, offset by increased volume in Asia Pacific and a favorable price/mix
variance in Europe and Latin America. Worldwide, closure sealants sales
decreased 4.7% for the quarter and were essentially flat year-to-date, as
increased sales in North America and Asia Pacific were offset by lower sales in
Latin America and unfavorable currency exchange. Coatings sales were down 6.0%
for the quarter and 5.1% for the first nine months as favorable price/mix
variances were offset by volume decreases, particularly in Latin America, as
well as unfavorable currency exchange.

Pre-Tax Operating Income

Darex Container Products' pre-tax operating income increased 44.8% for the third
quarter and 13.9% for the first nine months of 1999. Contributing to the
increase was the September 1999 sale of the St. Neots, England technical center
which became redundant as a result of Darex restructuring efforts, resulting in
a gain of $1.3 million for the third quarter. Excluding the sale of the St.
Neots facility, the gains resulting from the sale of the can forming lubricants
business ($1.5 million in 1998) and the currency translation

                                      I-19

<PAGE>

effect, pretax operating income would have increased by 29.3% for the quarter
and 22.6% for the nine months, primarily due to favorable product mix and
productivity improvements. Continued productivity initiatives, principally
restructuring and consolidation of infrastructure, resulted in reduced
operating, selling and research and development expenses and slight improvements
in gross margin.

DISCONTINUED OPERATIONS

PACKAGING BUSINESS

As discussed in Notes 1 and 3 to the interim consolidated financial statements
in this Report, the Spin-off and Merger were completed on March 31, 1998.
Results from discontinued operations for the nine months ended September 30,
1999 included $9.1 million ($5.7 million after-tax) for a related pension plan
settlement loss, and for the nine months ended September 30, 1998 included $32.6
million ($28.3 million after-tax) of costs related to the Packaging Business
transaction and $8.4 million ($5.5 million after-tax) for a related pension plan
curtailment loss.

HEALTH CARE

As discussed in Note 3 to the interim consolidated financial statements in this
Report, in July 1999, the Company completed the sale of substantially all of its
interest in Cross Country Staffing (CCS), a provider of temporary nursing and
other healthcare services. The net pre-tax gain of $74.8 million ($32.1 million
after-tax) and the operations of CCS prior to the sale are included in "Income
from discontinued operations, net of tax" in the Consolidated Statement of
Operations. For the third quarter of 1999 and 1998 the results of CCS'
operations were a loss of $13.3 million ($6.2 million after-tax) and income of
$2.1 million ($1.0 million after-tax), respectively. For the nine months ended
September 30, 1999 and 1998, the results of CCS' operations were a loss of $8.6
million ($4.0 million after-tax) and income of $5.8 million ($2.6 million
after-tax), respectively. Certain liabilities, primarily related to tax
liabilities of CCS, are being retained by the Company and are included in other
current liabilities in the Consolidated Balance Sheet.

RETAINED OBLIGATIONS

Under certain divestiture agreements, the Company has retained contingent
obligations that could develop into situations where accruals for estimated
costs of defense or loss would be recorded in a period subsequent to divestiture
under generally accepted accounting principles. The Company assesses its
retained risks quarterly and accrues amounts estimated to be payable related to
these obligations.

During the three months ended September 30, 1999, the Company revised its
estimate of the outcome of certain of these retained contingent obligations
based on current circumstances and, as a result, recorded an additional charge
of $25.7 million ($16.7 million after-tax).


FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES

Grace's continuing operating activities provided net pre-tax cash of $109.7
million in the first nine months of 1999, compared to using $207.4 million in
the first nine months of 1998. After giving effect to the net pre-tax cash used
by operating activities of discontinued operations and payments of income taxes,
the net cash provided by operating activities was $21.2 million in the first
nine months of 1999 compared to net cash used of $289.0 million for the same
period in 1998. The increase from the first nine months of 1998 was primarily
due to expenditures of $94.0 million in the first nine months of 1999 for the
defense and disposition of asbestos-related litigation, partially offset by
$53.7 million received from settlements with certain insurance carriers in
connection with such litigation, as compared to the net expenditure of

                                      I-20

<PAGE>

$142.1 million for asbestos-related litigation in the first nine months of 1998.
In addition, environmental remediation payments totaled $18.7 million for the
first nine months of 1999 compared to $25.3 million in the first nine months of
1998. Also disbursements under Grace's long-term incentive compensation program
decreased approximately $99.8 million during the first nine months of 1999
compared to 1998. Tax payments totaled $65.2 million compared to $34.3 million
reflecting payments of previously established tax liabilities for open tax years
under IRS examination.

Cash provided by investing activities in the first nine months of 1999 was $94.5
million, compared to cash used of $75.4 million in the first nine months of
1998. This increase is principally due to the net cash proceeds from the sale of
Cross Country Staffing (see Note 3 to the interim consolidated financial
statements in this Report), the proceeds from the sale of the corporate aircraft
($20.4 million) and reduced capital expenditures. Capital expenditures of $54.4
million in 1999 primarily relate to continued deployment of new information
technology and added manufacturing equipment, principally at Grace Davison.
Grace anticipates that total 1999 capital expenditures will be approximately
$90.0 million, most of which will be directed towards its business segments and
for building improvement costs related to the 1999 move of the corporate
headquarters to Columbia, Maryland.

Net cash used for financing activities in the first nine months of 1999 was
$93.1 million. Proceeds from exercise of stock options of $25.3 million as well
as a portion of the cash provided by operating and investing activities were
used to purchase $58.7 million of the Company's shares as part of the 1998 share
repurchase program. Net cash provided by financing activities in the first nine
months of 1998 was $403.6 million, primarily reflecting the cash transfer of
$1,256.6 million received in connection with the Packaging Business transaction
and proceeds from the exercise of employee stock options, partially offset by
net repayments of borrowings.

In connection with the Packaging Business transaction, Grace received $1,256.6
million in cash, which was used to repay substantially all of its debt. On March
31, 1998, Grace used $600.0 million of the cash transfer to repay bank
borrowings. On April 1, 1998, Grace repaid $611.3 million principal amount of
Notes pursuant to a tender offer that expired on March 27, 1998. On April 1,
1998, Grace also repaid $3.5 million principal amount of MTNs and $6.0 million
of sundry indebtedness. As a result of this extinguishment of debt, Grace
incurred an after-tax charge of $35.2 million for premiums paid in excess of the
Notes' principal amounts and other costs related to the purchase of the Notes
and MTNs (including the costs of settling related interest rate swap
agreements). These costs are presented as an extraordinary item in the
Consolidated Statement of Operations in this Report.

On September 30, 1999, Grace had committed borrowing facilities totaling $500.0
million, consisting of $250.0 million expiring in May 2000 and $250.0 million
under a long-term facility expiring May 2003. These facilities support the
issuance of commercial paper and bank borrowings, of which $47.3 million was
outstanding on September 30, 1999. The aggregate amount of net unused and
unreserved borrowings under short-term facilities at September 30, 1999 was
$452.7 million.

In addition, Grace has an agreement to sell, on an ongoing basis, an
approximately $100 million pool of eligible trade accounts receivable to a
multi-seller receivables company (the "conduit") through a wholly-owned
bankruptcy-remote special purpose subsidiary. Cash proceeds, net of remittances
to the conduit for collections, received during the first nine months of 1999
were $38.5 million and through September 30, 1999 aggregated $74.6 million since
program inception.

Grace is the beneficiary of company owned life insurance policies with a face
value of approximately $2,300.0 million and net cash surrender value of $79.8
million. These policies are maintained to fund various employee and director
benefit plans and other long-term obligations. Policy loans outstanding of
$343.7 million as of September 30, 1999 are recorded as a reduction in the
policies' cash surrender value, which is included in other assets in the
accompanying Consolidated Balance Sheet. As a result of recent legislation,
interest costs related to the corporate owned life insurance policy loans is
not deductible for tax purposes.


                                      I-21

<PAGE>


Grace has targeted a ratio of debt to EBITDA (earnings before interest, taxes,
depreciation and amortization and special charges - as defined in Grace's
borrowing facilities) of less than 1.0. However, Grace will consider exceeding
this target as business needs dictate. The debt to EBITDA ratio for the nine
months ended September 30, 1999 was estimated at .30 to 1.

In April 1998, the Company's Board of Directors approved a program to repurchase
up to 20% of the Company's outstanding shares in the open market (approximately
15,165,000 shares). Through September 30, 1999, the Company had acquired
9,596,400 shares of common stock for $142.4 million under the program (an
average price per share of $14.84).

Grace believes that cash flows generated from future operations and committed
borrowing facilities will be sufficient to meet its cash requirements for the
foreseeable future.

ASBESTOS-RELATED MATTERS

In the first nine months of 1999, Grace paid $40.3 million for the defense and
disposition of asbestos-related property damage and personal injury litigation,
net of amounts received under settlements with insurance carriers. Although the
total amount to be paid in 1999 with respect to asbestos-related claims (after
giving effect to payments to be received from insurance carriers) cannot be
precisely estimated, Grace currently expects that it will expend approximately
$50.0 - $70.0 million (pretax) in 1999 to defend against and dispose of such
claims. Such amounts are estimates of the probable cost of defending against and
disposing of asbestos-related claims and probable recoveries from insurance
carriers - the ultimate outcomes of such matters cannot be predicted with
certainty and estimates may change as actual experience evolves over time.

See Note 2 to the interim consolidated financial statements in this Report for
further information concerning asbestos-related lawsuits and claims.

YEAR 2000 COMPUTER SYSTEMS COMPLIANCE

OVERVIEW

Grace has reviewed its Year 2000 compliance efforts by business segment. Each
business segment and the Grace corporate headquarters (Grace Corporate) has
appointed a project leader to coordinate a comprehensive review of all systems
used by Grace to determine to what extent Grace may be affected by the failure
of its systems to be Year 2000 compliant. In addition, the project leader for
Grace Corporate also functions as Grace's overall Project Director, reporting
directly to the Chief Executive Officer and reporting regularly to the Audit
Committee of the Board of Directors of Grace.

Grace has reviewed both its information technology ("IT") and non-information
technology ("non-IT") systems for Year 2000 compliance. IT systems include
hardware, infrastructure, local and wide area networks, software, application
systems, electronic data exchange and interfaces. Non-IT systems cover process
control and manufacturing support equipment, laboratory systems, instruments and
scales, telecommunications, and facility and utility support systems. Non-IT
systems include systems containing date dependent software as well as embedded
date dependent chip technology.

                                      I-22

<PAGE>

GRACE'S CURRENT STATE OF YEAR 2000 READINESS

INVENTORY

Grace has completed an inventory of its IT and non-IT systems that could
potentially be affected by the Year 2000 issue for each of its business segments
and Grace Corporate. All systems were prioritized as being either critical or
non-critical. A critical system is one where failure to be Year 2000 compliant
may have a material adverse effect on health and safety, the environment or on
Grace's financial condition or results of operations. A non-critical system is
one where failure to be Year 2000 compliant could produce brief business
interruptions or system failures that may be remedied promptly and that are not
likely to have any such material adverse effect.

COMPLIANCE

As of October 31, 1999, all of the critical items were Year 2000 compliant, with
the exception of seven items of laboratory equipment used for research and
development. This laboratory equipment is expected to be replaced with compliant
equipment on order for delivery by November 30, 1999. Also, all but eight
non-critical items are known to be compliant. These non-compliant items are
expected to be replaced with compliant items by November 30, 1999.

For non-IT systems, Grace's most significant internal Year 2000 exposure is with
the process control systems that control the major Grace Davison plants. The
hardware and system operating and application software associated with these
systems have been assessed by the primary vendors providing these systems, and
all have been confirmed as being Year 2000 compliant by these vendors and, where
appropriate, by internal testing.

Grace Construction Products' facilities primarily utilize a batch process
approach for manufacturing and have limited automated process controls that may
be directly impacted by Year 2000 issues. Darex Container Products has more than
20 manufacturing facilities worldwide and certain facilities have automated
process controls. All critical process control systems for both Grace
Construction Products and Darex Container Products have been reviewed using
compliance information provided by their vendors and, where appropriate,
internal testing, and all have been confirmed as Year 2000 compliant.

Grace has contacted its key customers and vendors (including telecommunications
and utility providers, banks and governmental agencies) in an effort to
ascertain their compliance status. Through October 31, 1999, 93% of key vendors
and 81% of key customers had returned or made available to Grace information on
their compliance status. Grace has analyzed these responses and continues to
follow up with those key vendors and customers who have not responded or whose
responses are not adequate. Based on the responses received to date, Grace does
not believe that the non-compliance of key customers will have a material
adverse effect on Grace's financial condition or results of operations. However,
Grace believes that widespread non-compliance by certain vendors such as utility
providers could have a material adverse effect and is developing contingency
plans.

REMEDIATION AND TESTING

Grace has completed the remediation of all non-compliant critical and
non-critical items, with the exception of the seven laboratory items and eight
non-critical items described above, all of which are expected to be replaced
with compliant items by November 30, 1999. Grace has used primarily internal
resources to validate its remediation procedures as they relate to critical IT
and non-IT systems.

A major component of Grace's IT remediation activity is in place as a result of
the conversion of its financial and certain operational support systems to
programs using software of SAP America, Inc. (SAP), which has represented that
its systems used by Grace are Year 2000 compliant. Unrelated to its

                                      I-23

<PAGE>

Year 2000 efforts, Grace commenced this project in 1995. Substantially all Grace
Construction Products and Darex Container Products locations worldwide have
completed the implementation of the SAP software.

Grace Davison has implemented SAP in conjunction with Grace Construction
Products and Darex Container Products in Asia Pacific and Latin America,
respectively. In North America and Europe, Grace Davison will not convert to SAP
until after December 31, 1999. In North America, Grace Davison has installed new
software releases to upgrade existing systems and has contracted with outside
programming services to resolve its Year 2000 issues. All such systems in North
America are now fully remediated, tested and confirmed as being Year 2000
compliant. In Europe, Grace Davison uses a largely internally developed software
program that is now supported and maintained by a third party, to provide its
business and financial systems support. This third party vendor has provided
Grace Davison with a version of system software that has been tested and
confirmed as being Year 2000 compliant.

COSTS

Grace estimates as of October 31, 1999, the total cost of its Year 2000 efforts
is not expected to exceed $3.8 million, of which approximately $3.1 million has
been spent to date. The largest portion of the remaining expenditures is for
replacement costs for non-compliant laboratory equipment.

The total cost excludes the cost of the SAP implementation since, despite being
a critical component of the Grace Year 2000 remediation effort, this was a
project that was already planned and was not accelerated due to Year 2000
issues. This amount also excludes internal costs, principally the payroll costs,
of IT personnel not solely devoted to the Year 2000 remediation effort. No
material IT or non-IT projects were delayed due to the Grace Year 2000
remediation effort.

CONTINGENCY PLANS

Grace has developed contingency plans to the extent it believes they will be
effective to safeguard against the most likely critical Year 2000 failures. For
IT systems, these plans include (1) the preliminary submission prior to year-end
of financial data necessary for Grace to meet its year-end reporting
obligations, (2) using alternative means to enter data into key Grace
information systems in the event of telecommunication failure in certain
countries, and (3) using diesel generators in the case of power failure at key
data processing facilities. For non-IT systems plans include building up
inventories and, where possible, using alternative manufacturing locations for
product development. One key Grace plant already has its own power generation
capability.

RISK

In the absence of remedial action, Year 2000 non-compliance could have a
material adverse effect on the financial condition or results of operations of
Grace. However, Grace believes that the efforts taken to ensure Year 2000
compliance outlined above, together with contingency planning, will be effective
to minimize interruptions or loss of business, or environmental, health and
safety risks. One possible exception to this conclusion is in the case of
widespread or extended infrastructure failures by utility providers (power,
water, gas, etc.) at key Grace manufacturing locations. Widespread or extended
infrastructure failure at these sites could affect the ability of Grace to
manufacture products and meet the demands of its customers.

The foregoing Year 2000 discussion is based on management's current evaluation
using available information. Factors that might cause material changes include,
but are not limited to, the readiness of third parties and Grace's ability to
respond to unforeseen Year 2000 complications.

                                      I-24

<PAGE>

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Grace had no outstanding interest rate swap agreements on September 30, 1999.
For further information concerning Grace's quantitative and qualitative
disclosures about market risk, refer to Note 10 in the Consolidated Financial
Statements in the 1998 Form 10-K.

                                      I-25

<PAGE>

                           PART II - OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

(a)       Note 2 to the interim  consolidated  financial  statements in Part I
          of this Report is incorporated herein by reference.

(b)       Reference is made to the section entitled "U.S. Justice
          Department Lawsuit" in Item 3 of the Company's 1998 Form 10-K
          and to Part II, Item 1(c), to the Company's 1999 second
          quarter 10-Q for information concerning a lawsuit alleging
          that Baker & Taylor Books, a book wholesaler sold by Grace in
          1992, overcharged public schools, libraries, and federal
          agencies over a ten year period (now identified as 1985 to
          1995). On August 9, 1999, a motion by seventeen states to
          intervene in the lawsuit was granted.

(c)       Reference is made to the section entitled "Fumed Silica Plant
          Litigation" in Item 3 of the Company's 1998 10-K for information
          concerning a lawsuit initiated by Grace and certain subsidiaries in
          the Belgian courts seeking to recover losses resulting from the
          closing of a subsidiary's fumed silica plant in Puurs, Belgium. On
          July 20, 1999, a Belgian appeals court upheld a lower court's
          dismissal of the claims brought by such subsidiaries, and upheld a
          counterclaim by the Flemish government for the repayment by a
          subsidiary of certain investment grants of 239 billion Belgian francs
          (approximately $6,300,000 at September 30, 1999 exchanges rates) plus
          interest.

(d)       Reference is made to the section entitled "Shareholder Litigation" in
          Item 3 of the Company's 1998 10-K for information concerning a lawsuit
          brought by shareholders against a predecessor of the Company and its
          board of directors, alleging that the individual defendants breached
          their fiduciary duties to such predecessor by providing certain
          compensation arrangements to and approving certain severance
          arrangements for former executives of such predecessor. On September
          9, 1999, the plaintiffs and defendants executed a stipulation of
          settlement (the "Stipulation"), subject to the approval of the New
          York State Supreme Court. Under the Stipulation, Grace's insurers
          agreed to pay the Company $3,750,000 (less $1,250,000 to be paid to
          attorneys for the plaintiffs), and the Company agreed to adopt, and
          distribute to all employees, contractors and directors, a new sexual
          harassment policy. On October 7, 1999, the court approved the
          Stipulation.

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.

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

27.1      Financial Data Schedule.

(b)       Reports on Form 8-K. The Company filed no reports on Form 8-K during
          the third quarter and to date during the fourth quarter of 1999.

                                      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:  November 11, 1999                           By  /s/ Robert M. Tarola
                                                      -------------------------
                                                           Robert M. Tarola
                               Senior Vice President and Chief Financial Officer

                                      II-2

<PAGE>

                                  EXHIBIT INDEX


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

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

27.1           Financial Data Schedule.

                                      II-1