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

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

                                    FORM 10-Q

(Mark One)

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

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005

                                       OR

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

                         Commission File Number 1-13953

                                W. R. GRACE & CO.

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

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

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

                                 Yes [X] No [_]

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

                                 Yes [X] No [_]

66,915,396 shares of Common Stock, $0.01 par value, were outstanding at July 31,
2005.

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



                       W. R. GRACE & CO. AND SUBSIDIARIES

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

<TABLE>

                                                                                Page No.
                                                                              ------------

PART I.  FINANCIAL INFORMATION
------

Item 1.     Financial Statements                                                   I-1

               Report of Independent Registered Public Accounting Firm             I-2

               Consolidated Statements of Operations                               I-3

               Consolidated Statements of Cash Flows                               I-4

               Consolidated Balance Sheets                                         I-5

               Consolidated Statements of Shareholders' Equity (Deficit)           I-6

               Consolidated Statements of Comprehensive Income (Loss)              I-6

               Notes to Consolidated Financial Statements                      I-7 to I-26

Item 2.     Management's Discussion and Analysis of Financial Condition and
            Results of Operations                                             I-27 to I-41

Item 3.     Quantitative and Qualitative Disclosures About Market Risk            I-42

Item 4.     Controls and Procedures                                               I-42

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

Item 1.     Legal Proceedings                                                     II-1

Item 6.     Exhibits                                                              II-1
</TABLE>



                          PART I. FINANCIAL INFORMATION

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

With respect to the unaudited financial information of W. R. Grace & Co. for the
three-month and six-month periods ended June 30, 2005 and 2004, respectively,
included in the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2005, PricewaterhouseCoopers LLP reported that it has applied limited
procedures in accordance with the standards of the Public Company Accounting
Oversight Board (United States) for a review of such information. However, its
separate report dated August 8, 2005 appearing herein, states that it did not
audit and it does not express an opinion on that unaudited financial
information. Accordingly, the degree of reliance on its report on such
information should be restricted in light of the limited nature of the review
procedures applied. PricewaterhouseCoopers LLP is not subject to the liability
provisions of Section 11 of the Securities Act of 1933 for its report on the
unaudited financial information because that report is not a "report" or a
"part" of the registration statement prepared or certified by
PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.


                                       I-1



             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF W. R. GRACE & CO.:

We have reviewed the accompanying consolidated balance sheets of W. R. Grace &
Co. and its subsidiaries as of June 30, 2005, and the related consolidated
statements of operations, of shareholders' equity (deficit) and of comprehensive
income (loss) for each of the three-month and six-month periods ended June 30,
2005 and June 30, 2004 and the consolidated statements of cash flows for the
six-month periods ended June 30, 2005 and June 30, 2004. These interim financial
statements are the responsibility of the Company's management.

We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.

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

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

We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet as of December 31, 2004, and the related consolidated statements of
operations, of cash flows, of shareholders' equity (deficit) and of
comprehensive income (loss) for the year then ended, management's assessment of
the effectiveness of the Company's internal control over financial reporting as
of December 31, 2004 and the effectiveness of the Company's internal control
over financial reporting as of December 31, 2004; and in our report dated March
4, 2005, we expressed (i) an unqualified opinion on those consolidated financial
statements with an explanatory paragraph relating to the Company's ability to
continue as a going concern and, (ii) unqualified opinions on management's
assessment of the effectiveness of the Company's internal control over financial
reporting and on the effectiveness of the Company's internal control over
financial reporting. The consolidated financial statements and management's
assessment of the effectiveness of internal control over financial reporting
referred to above are not presented herein. In our opinion, the information set
forth in the accompanying consolidated balance sheet as of December 31, 2004, is
fairly stated in all material respects in relation to the consolidated balance
sheet from which it has been derived.

/s/ PricewaterhouseCoopers LLP
McLean, Virginia
August 8, 2005


                                       I-2



<TABLE>

==========================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES                                THREE MONTHS ENDED     SIX MONTHS ENDED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)                      JUNE 30,              JUNE 30,
==========================================================================================================
In millions, except per share amounts                                2005     2004       2005       2004
                                                                    --------------------------------------

Net sales .....................................................     $676.5   $572.4    $1,279.7   $1,090.9
                                                                    --------------------------------------

Cost of goods sold, exclusive of depreciation and
   amortization shown separately below ........................      439.7    357.2       832.4      688.4
Selling, general and administrative expenses, exclusive of
   net pension expense shown separately below .................      119.4    111.4       238.7      212.9
Depreciation and amortization .................................       28.6     26.3        57.4       53.5
Research and development expenses .............................       15.1     13.0        30.2       25.7
Net pension expense ...........................................       19.5     16.1        37.1       29.6
Interest expense and related financing costs ..................       13.3      3.9        27.9        7.8
Provision for environmental remediation .......................         --       --          --         --
Provision for asbestos-related litigation, net of insurance ...         --       --          --         --
Other (income) expense ........................................      (23.9)     4.6       (30.0)       1.4
                                                                    --------------------------------------
                                                                     611.7    532.5     1,193.7    1,019.3
                                                                    --------------------------------------

Income (loss) before Chapter 11 expenses, income taxes, and
   minority interest ..........................................       64.8     39.9        86.0       71.6
Chapter 11 expenses, net ......................................       (4.6)    (3.0)      (10.6)      (7.5)
Benefit from (provision for) income taxes .....................      (20.0)   (13.0)      (28.6)     (23.9)
Minority interest in consolidated entities ....................       (7.5)    (2.6)      (11.0)      (3.1)
                                                                    --------------------------------------
   NET INCOME (LOSS) ..........................................     $ 32.7   $ 21.3    $   35.8   $   37.1
==========================================================================================================

BASIC EARNINGS (LOSS) PER COMMON SHARE:
   Net income (loss) ..........................................     $ 0.49   $ 0.32    $   0.54   $   0.57
   Average number of basic shares .............................       66.9     65.6        66.8       65.6

DILUTED EARNINGS (LOSS) PER COMMON SHARE:
   Net income (loss) ..........................................     $ 0.49   $ 0.32    $   0.53   $   0.56
   Average number of diluted shares ...........................       67.2     65.8        67.3       65.8
==========================================================================================================
</TABLE>

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


                                       I-3



<TABLE>

================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES                                            SIX MONTHS ENDED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)                                  JUNE 30,
------------------------------------------------------------------------------------------------
In millions                                                                     2005     2004
                                                                              ------------------

OPERATING ACTIVITIES
Income (loss) before Chapter 11 expenses, income taxes, and minority
   interest ...............................................................   $  86.0   $  71.6
Reconciliation to net cash provided by (used for) operating activities:
   Depreciation and amortization ..........................................      57.4      53.5
   Interest accrued on pre-petition liabilities subject to compromise .....      25.4       5.4
   Net (gain) loss on sales of investments and disposals of assets ........      (0.5)      0.3
   Net pension expense ....................................................      37.1      29.6
   Payments to fund defined benefit pension arrangements ..................     (13.2)     (5.2)
   Provision for environmental remediation ................................        --        --
   Provision for asbestos-related litigation, net of insurance ............        --        --
   Net income from life insurance policies ................................      (1.9)     (2.2)
   Provision for uncollectible receivables ................................       0.9       1.1
   Payments under postretirement benefit plans ............................      (5.1)     (5.5)
   Expenditures for environmental remediation .............................      (3.0)     (2.9)
   Expenditures for retained obligations of divested businesses ...........      (0.5)     (0.7)
   Changes in assets and liabilities, excluding effect of businesses
      acquired/divested and foreign currency translation:
         Working capital items ............................................     (75.0)    (55.8)
         Other accruals and non-cash items ................................     (44.4)     16.5
                                                                              ------------------
   NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES BEFORE INCOME
      TAXES AND CHAPTER 11 EXPENSES .......................................      63.2     105.7
Cash paid to settle Chapter 11 contingencies ..............................    (119.7)       --
Chapter 11 expenses paid, net .............................................      (9.0)     (6.1)
Income taxes paid, net of refunds .........................................     (14.9)    (13.8)
                                                                              ------------------
   NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES ...................     (80.4)     85.8
                                                                              ------------------

INVESTING ACTIVITIES
Capital expenditures ......................................................     (31.3)    (22.5)
Businesses acquired, net of cash acquired .................................      (2.2)       --
Proceeds from termination of life insurance policies ......................      14.8        --
Net investment in life insurance policies .................................        --     (11.4)
Proceeds from life insurance policies .....................................       2.4      10.5
Proceeds from sales of investments and disposals of assets ................       1.9       1.3
                                                                              ------------------
   NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES ...................     (14.4)    (22.1)
                                                                              ------------------

FINANCING ACTIVITIES
Net payment of loans secured by cash value of life insurance ..............      (0.6)     (2.7)
Borrowings under credit facilities, net of repayments .....................      (1.2)      6.3
Fees under debtor-in-possession credit facility ...........................      (1.1)     (1.0)
Proceeds from exercise of stock options ...................................       3.0       0.2
                                                                              ------------------
   NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES ...................       0.1       2.8
                                                                              ------------------
Effect of currency exchange rate changes on cash and cash equivalents .....     (11.7)     (4.0)
                                                                              ------------------
   INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......................    (106.4)     62.5
Cash and cash equivalents, beginning of period ............................     510.4     309.2
                                                                              ------------------
Cash and cash equivalents, end of period ..................................   $ 404.0   $ 371.7
================================================================================================
</TABLE>

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


                                       I-4



<TABLE>

======================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES                                            JUNE 30,   DECEMBER 31,
CONSOLIDATED BALANCE SHEETS (UNAUDITED)                                         2005         2004
------------------------------------------------------------------------------------------------------
In millions, except par value and shares

ASSETS
CURRENT ASSETS
Cash and cash equivalents .................................................   $  404.0     $  510.4
Trade accounts receivable, less allowance of $6.9 (2004 - $5.8) ...........      435.4        390.9
Inventories ...............................................................      266.4        248.3
Deferred income taxes .....................................................       21.7         16.3
Other current assets ......................................................       54.8         62.6
                                                                              ------------------------
   TOTAL CURRENT ASSETS ...................................................    1,182.3      1,228.5

Properties and equipment, net of accumulated depreciation and
   amortization of $1,327.6 (2004 - $1,325.9) .............................      599.7        645.3
Goodwill ..................................................................      104.0        111.7
Cash value of life insurance policies, net of policy loans ................       81.3         96.0
Deferred income taxes .....................................................      675.0        667.4
Asbestos-related insurance ................................................      500.0        500.0
Other assets ..............................................................      281.0        290.0
                                                                              ------------------------
   TOTAL ASSETS ...........................................................   $3,423.3     $3,538.9
                                                                              ========================

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE
CURRENT LIABILITIES
Debt payable within one year ..............................................   $   11.0     $   12.4
Accounts payable ..........................................................      160.2        146.0
Income taxes payable ......................................................       13.7          7.7
Other current liabilities .................................................      186.5        221.5
                                                                              ------------------------
   TOTAL CURRENT LIABILITIES ..............................................      371.4        387.6

Debt payable after one year ...............................................        0.5          1.1
Deferred income taxes .....................................................       58.3         64.1
Unfunded defined benefit pension liability ................................      438.6        424.9
Other liabilities .........................................................       49.4         75.3
                                                                              ------------------------
   TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE ............................      918.2        953.0

LIABILITIES SUBJECT TO COMPROMISE - NOTE 2 ................................    3,110.4      3,207.7
                                                                              ------------------------
   TOTAL LIABILITIES ......................................................    4,028.6      4,160.7
                                                                              ------------------------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY (DEFICIT)
Common stock issued, par value $0.01; 300,000,000 shares authorized;
   outstanding: 2005 - 66,915,396 (2004 - 66,395,721) .....................        0.8          0.8
Paid-in capital ...........................................................      423.4        426.5
Accumulated deficit .......................................................     (537.4)      (573.2)
Treasury stock, at cost: shares: 2005 - 10,064,364; (2004 - 10,584,039) ...     (119.7)      (125.9)
Accumulated other comprehensive income (loss) .............................     (372.4)      (350.0)
                                                                              ------------------------
   TOTAL SHAREHOLDERS' EQUITY (DEFICIT) ...................................     (605.3)      (621.8)
                                                                              ------------------------
   TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) ...................   $3,423.3     $3,538.9
======================================================================================================
</TABLE>

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


                                       I-5



<TABLE>

=================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
=================================================================================================================
                                                                                    Accumulated        TOTAL
                                          Common Stock                                 Other       SHAREHOLDERS'
                                              and         Accumulated   Treasury   Comprehensive       EQUITY
In millions                             Paid-in Capital     Deficit       Stock    Income (Loss)     (DEFICIT)
-----------------------------------------------------------------------------------------------------------------

BALANCE, MARCH 31, 2005 .............       $424.3          $(570.1)    $(119.9)      $(363.0)        $(628.7)
Net income ..........................           --             32.7          --            --            32.7
Stock plan activity .................         (0.1)              --         0.2            --             0.1
Other comprehensive income (loss) ...           --               --          --          (9.4)           (9.4)
                                           ----------------------------------------------------------------------
BALANCE, JUNE 30, 2005 ..............       $424.2          $(537.4)    $(119.7)      $(372.4)        $(605.3)
                                           ----------------------------------------------------------------------

BALANCE, DECEMBER 31, 2004 ..........       $427.3          $(573.2)    $(125.9)      $(350.0)        $(621.8)
Net income ..........................           --             35.8          --            --            35.8
Stock plan activity .................         (3.1)              --         6.2            --             3.1
Other comprehensive income (loss) ...           --               --          --         (22.4)          (22.4)
                                           ----------------------------------------------------------------------
BALANCE, JUNE 30, 2005 ..............       $424.2          $(537.4)    $(119.7)      $(372.4)        $(605.3)
=================================================================================================================
</TABLE>

<TABLE>

=======================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)           THREE MONTHS ENDED   SIX MONTHS ENDED
(UNAUDITED)                                                           JUNE 30,            JUNE 30,
=======================================================================================================
In millions                                                        2005    2004        2005     2004
                                                                 --------------------------------------

NET INCOME (LOSS) ............................................    $32.7   $ 21.3      $ 35.8   $ 37.1

OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustments .....................     (9.4)    (2.5)      (22.4)    (7.5)
Minimum pension liability adjustments, net of income taxes ...       --    (35.3)         --    (35.3)
                                                                 --------------------------------------
Total other comprehensive income (loss) ......................     (9.4)   (37.8)      (22.4)   (42.8)
                                                                 --------------------------------------
COMPREHENSIVE INCOME (LOSS) ..................................    $23.3   $(16.5)     $ 13.4   $ (5.7)
=======================================================================================================
</TABLE>

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


                                       I-6



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

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

W. R. Grace & Co., through its subsidiaries, is engaged in specialty chemicals
and specialty materials businesses on a worldwide basis through two business
segments: "Davison Chemicals," which includes two product groups - refining
technologies and specialty materials; and "Performance Chemicals," which
includes three product groups - specialty construction chemicals, building
materials, and sealants and coatings.

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

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

VOLUNTARY BANKRUPTCY FILING - During 2000 and the first quarter of 2001, Grace
experienced several adverse developments in its asbestos-related litigation,
including: a significant increase in personal injury claims, higher than
expected costs to resolve personal injury and certain property damage claims,
and class action lawsuits alleging damages from Zonolite Attic Insulation, or
ZAI, a former Grace attic insulation product.

After a thorough review of these developments, the Board of Directors concluded
that a federal court-supervised bankruptcy process provided the best forum
available to achieve fairness in resolving these claims and on April 2, 2001
(the "Filing Date"), Grace and 61 of its United States subsidiaries and
affiliates, including Grace-Conn. (collectively, the "Debtors"), filed voluntary
petitions for reorganization (the "Filing") under Chapter 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court"). The cases were consolidated and are being
jointly administered under case number 01-01139 (the "Chapter 11 Cases").
Grace's non-U.S. subsidiaries and certain of its U.S. subsidiaries were not
included in the Filing.

Under Chapter 11, the Debtors have continued to operate their businesses as
debtors-in-possession under court protection from creditors and claimants, while
using the Chapter 11 process to develop and implement a plan for addressing the
asbestos-related claims. Since the Filing, all motions necessary to conduct
normal business activities have been approved by the Bankruptcy Court. (See Note
2 for Chapter 11 Related Information.)

BASIS OF PRESENTATION - The interim Consolidated Financial Statements presented
herein are unaudited and should be read in conjunction with the Consolidated
Financial Statements presented in the Company's 2004 Annual Report on Form 10-K.
Such interim Consolidated Financial Statements reflect all adjustments that, in
the opinion of management, are necessary for a fair presentation of the results
of the interim periods presented; all such adjustments are of a normal recurring
nature. Potential accounting adjustments discovered during normal reporting and
accounting processes are evaluated on the basis of materiality, both
individually and in the aggregate, and are recorded in the accounting period
discovered, unless a restatement of a prior period is necessary. All significant
intercompany accounts and transactions have been eliminated.

The results of operations for the six-month interim period ended June 30, 2005
are not necessarily indicative of the results of operations for the year ending
December 31, 2005.

RECLASSIFICATIONS - Certain amounts in prior years' Consolidated Financial
Statements have been reclassified to conform to the 2005 presentation.

USE OF ESTIMATES - The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires that management make
estimates and assumptions affecting the assets and liabilities reported at the
date of the Consolidated Financial Statements, and the revenues and expenses
reported for the periods presented. Actual amounts could differ from those
estimates. Changes in estimates are recorded in the period identified. Grace's
accounting measurements that are most affected by management's estimates of
future events are:

o    Contingent liabilities such as asbestos-related matters (see Notes 2 and
     3), environmental remediation (see Note 12), income taxes (see Note 12),
     and litigation (see Note 12).

o    Pension and postretirement liabilities that depend on assumptions regarding
     discount rates and total returns on invested funds. (See Note 13.)


                                       I-7



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

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

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

EFFECT OF NEW ACCOUNTING STANDARDS - In March 2005, the Financial Accounting
Standards Board ("FASB") issued FIN 47, "Accounting for Conditional Asset
Retirement Obligations - an interpretation of FASB Statement No. 143," to
provide clarification that the term conditional asset retirement obligation,
refers to a legal obligation to perform an asset retirement activity in which
the timing and/or method of settlement are conditional on a future event that
may or may not be within the control of the entity. This Interpretation
clarifies that an entity is required to recognize a liability for the fair value
of a conditional asset retirement obligation when incurred, if the liability's
fair value can be reasonably estimated. This Interpretation is effective no
later than fiscal years ending after December 31, 2005. This Interpretation will
not have a material impact on Grace's Consolidated Financial Statements.

In December 2004, the FASB revised Statement of Financial Accounting Standards
("SFAS") No. 123, "Share-Based Payment," to require companies to measure and
recognize in operations the cost of employee services received in exchange for
an award of equity instruments based on the grant-date fair value. The
provisions of this standard are effective for Grace in 2006. As Grace has not
granted equity options or rights while in Chapter 11, this standard should not
have a material impact on the Consolidated Financial Statements.

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an Amendment
of ARB No. 43, Chapter 4," to provide clarification that abnormal amounts of
idle facility expense, freight, handling costs, and wasted material be
recognized as current-period charges. In addition, this standard requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. The provisions of this
standard are effective for Grace in 2006. Grace is currently evaluating the
impact the standard will have on the Consolidated Financial Statements.

STOCK INCENTIVE PLANS - SFAS No. 123 permits the Company to follow the
measurement provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and not recognize compensation
expense for its stock-based incentive plans.

To determine compensation cost under SFAS No. 123, the fair value of each option
is estimated on the date of grant using the Black-Scholes option pricing model.
No compensation cost was recognized for the Company's stock-based incentive
compensation plans in pro forma net income for the three-month and six-month
periods ended June 30, 2005 due to the fact that all prior grants had vested and
were fully expensed in prior periods. There were no option grants in the first
six months of 2005 or the year ended 2004.

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

PLAN OF REORGANIZATION - On November 13, 2004 Grace filed a plan of
reorganization, as well as several associated documents, including a disclosure
statement, with the Bankruptcy Court. On January 13, 2005, Grace filed an
amended plan of reorganization (the "Plan") and related documents to address
certain objections of creditors and other interested parties. The Plan is
supported by committees representing general unsecured creditors and equity
holders, but is not supported by committees representing asbestos personal
injury claimants and asbestos property damage claimants.

Under the terms of the Plan, a trust would be established under Section 524(g)
of the Bankruptcy Code to which all pending and future asbestos-related claims
would be channeled for resolution. Grace has requested that the Bankruptcy Court
conduct an estimation hearing to determine the amount that would need to be paid
into the trust on the effective date of the Plan to satisfy the estimated
liability for each class of asbestos claimants and trust administration costs
and expenses over time. The Plan provides that Grace's asbestos-related
liabilities would be satisfied using cash and securities from Grace and third
parties.

The Plan will become effective only after a vote of eligible creditors and with
the approval of the Bankruptcy Court and the U.S. District Court for the
District of Delaware. Votes on the Plan may not be solicited until the
Bankruptcy Court approves the disclosure statement. The Debtors have received an
extension of their exclusive right to propose a plan of reorganization through
August 29, 2005.


                                       I-8



Under the terms of the Plan, claims will be satisfied under the Chapter 11 cases
as follows:

Asbestos-Related Claims and Costs
---------------------------------

A trust would be established under Section 524(g) of the Bankruptcy Code to
which all pending and future asbestos-related claims would be channeled for
resolution. The trust would utilize specified trust distribution procedures to
satisfy the following allowed asbestos-related claims and costs:

1.   Personal injury claims that meet specified exposure and medical criteria
     (Personal Injury-Symptomatic Eligible or "PI-SE" Claims) - In order to
     qualify for this class, claimants would have to prove that their health is
     impaired from meaningful exposure to asbestos-containing products formerly
     manufactured by Grace.

2.   Personal injury claims that do not meet the exposure and medical criteria
     necessary to qualify as PI-SE Claims (Personal Injury-Asymptomatic and
     Other or "PI-AO" Claims) - This class would contain all asbestos-related
     personal injury claims against Grace that do not meet the specific
     requirements to be PI-SE Claims, but do meet certain other specified
     exposure and medical criteria.

3.   Property damage claims, including claims related to ZAI ("PD Claims") - In
     order to qualify for this class, claimants would have to prove Grace
     liability for loss of property value or remediation costs related to
     asbestos-containing products formerly manufactured by Grace.

4.   Trust administration costs and legal expenses

The pending asbestos-related legal proceedings are described in
"Asbestos-Related Litigation" (see Note 3). The claims arising from such
proceedings would be subject to this classification process as part of the Plan.

Grace has requested that the Bankruptcy Court conduct estimation hearings to
determine the amounts that would need to be paid into the trust on the effective
date of the Plan to satisfy the estimated liability for each class of asbestos
claimants and trust administration costs and expenses over time. The amounts to
fund PI-SE Claims, PD Claims and the expense of trust administration would be
capped at the amount determined through the estimation hearing. Amounts required
to fund PI-AO Claims would not be capped, so if the amount funded in respect
thereof later proved to be inadequate, Grace would be responsible for
contributing additional funds into the asbestos trust to satisfy PI-AO Claims.
The Bankruptcy Court has verbally indicated that it will enter case management
orders for estimating liability for personal injury claims and property damage
claims, excluding ZAI claims. Grace does not expect the estimation process to be
completed before mid-2006.

Asbestos personal injury claimants would have the option either to litigate
their claims against the trust in federal court in Delaware or, if they meet
specified eligibility criteria, accept a settlement amount based on the severity
of their condition. Asbestos property damage claimants would be required to
litigate their claims against the trust in federal court in Delaware. The Plan
provides that, as a condition precedent to confirmation, the maximum estimated
aggregate funding amount for all asbestos-related liabilities (PI-SE, PI-AO and
PD including ZAI) and trust administration costs and expenses as determined by
the Bankruptcy Court cannot exceed $1,613 million, which Grace believes would
fund over $2 billion in claims, costs and expenses over time.

The PI-SE Claims, the PD Claims and the related trust administration costs and
expenses would be funded with (1) a payment of $512.5 million in cash (plus
interest at 5.5% compounded annually from December 21, 2002) and nine million
shares of common stock of Sealed Air Corporation ("Sealed Air") to be made
directly by Cryovac, Inc. ("Cryovac") to the asbestos trust pursuant to the
terms of a settlement agreement resolving asbestos-related, successor liability
and fraudulent transfer claims against Sealed Air and Cryovac and (2) Grace
common stock. The amount of Grace common stock required to satisfy these claims
will depend on the liability measures approved by the Bankruptcy Court and the
value of the Sealed Air settlement, which changes daily with the accrual of
interest and the trading value of Sealed Air common stock. The Sealed Air
settlement agreement has been approved by the Bankruptcy Court, but remains
subject to the fulfillment of specified conditions.

The PI-AO Claims would be funded with warrants exercisable for that number of
shares of Grace common stock which, when added to the shares issued directly to
the trust on the effective date of the Plan, would represent 50.1% of Grace's
voting securities. If the common stock issuable upon exercise of the warrants is
insufficient to pay all PI-AO Claims (the liability for which is uncapped under
the Plan), then Grace would pay any additional liabilities in cash.

Other Claims
------------

The Plan provides that all allowed claims other than those covered under the
asbestos trust would be paid 100% in cash (if such claims qualify as
administrative or priority claims) or 85% in cash and 15% in Grace


                                       I-9



common stock (if such claims qualify as general unsecured claims). Grace
estimates that claims with a recorded value of approximately $1,164 million,
including interest accrued through June 30, 2005, would be satisfied in this
manner at the effective date of the Plan. Grace would finance these payments
with cash on hand, cash from Fresenius Medical Care Holdings, Inc. ("Fresenius")
paid in settlement of asbestos and other Grace-related claims, new Grace debt,
and Grace common stock. Grace would satisfy other non-asbestos related
liabilities and claims (primarily certain environmental, tax, pension and
retirement medical obligations) as they become due and payable over time.
Proceeds from available product liability insurance applicable to
asbestos-related claims would supplement operating cash flow to service new debt
and liabilities not paid on the effective date of the Plan.

Effect on Grace Common Stock
----------------------------

The Plan provides that Grace common stock will remain outstanding at the
effective date of the Plan, but that the interests of existing shareholders
would be subject to dilution by additional shares of common stock issued under
the Plan. In addition, in order to preserve significant tax benefits from net
operating loss carryforwards ("NOLs"), which are subject to elimination or
limitation in the event of a change in control (as defined by the Internal
Revenue Code) of Grace, the Plan places restrictions on the purchase of Grace
common stock. The restrictions would prohibit (without the consent of Grace),
for a period of three years, a person or entity from acquiring more than 4.75%
of the outstanding Grace common stock or, for those persons already holding more
than 4.75%, prohibit them from increasing their holdings. The Bankruptcy Court
has also approved the trading restrictions described above until the effective
date of the Plan.

Grace intends to address all pending and future asbestos-related claims and all
other pre-petition claims as outlined in the Plan. However, Grace may not be
successful in obtaining approval of the Plan by the Bankruptcy Court and other
interested parties. Instead, a materially different plan of reorganization may
ultimately be approved and, under the ultimate plan of reorganization, the
interests of the Company's shareholders could be substantially diluted or
cancelled. The value of Grace common stock following a plan of reorganization,
and the extent of any recovery by non-asbestos-related creditors, will depend
principally on the allowed value of Grace's asbestos-related claims as
determined by the Bankruptcy Court.

OFFICIAL PARTIES TO GRACE'S CHAPTER 11 PROCEEDINGS - Three creditors'
committees, two representing asbestos claimants and the third representing other
unsecured creditors, and a committee representing shareholders have been
appointed in the Chapter 11 Cases. These committees, and a legal representative
of future asbestos claimants, have the right to be heard on all matters that
come before the Bankruptcy Court and are likely to play important roles in the
Chapter 11 Cases. The Debtors are required to bear certain costs and expenses of
the committees and of the future asbestos claimants' representative, including
those of their counsel and financial advisors.

CLAIMS FILINGS - The Bankruptcy Court established a bar date of March 31, 2003
for claims of general unsecured creditors, asbestos-related property damage
claims and medical monitoring claims related to asbestos. The bar date did not
apply to asbestos-related personal injury claims or claims related to ZAI, which
will be dealt with separately.

Approximately 14,900 proofs of claim were filed by the bar date. Of these
claims, approximately 9,400 were non-asbestos related, approximately 4,300 were
for asbestos-related property damage, and approximately 1,000 were for medical
monitoring. The medical monitoring claims were made by individuals who allege
exposure to asbestos through Grace's products or operations. These claims, if
sustained, would require Grace to fund ongoing health monitoring costs for
qualified claimants. In addition, approximately 750 proofs of claim were filed
after the bar date.

Approximately 7,000 of the non-asbestos related claims involve claims by
employees or former employees for future retirement benefits such as pension and
retiree medical coverage. Grace views most of these claims as contingent and has
proposed a plan of reorganization that would retain such benefits. The other
non-asbestos related claims include claims for payment of goods and services,
taxes, product warranties, principal and interest under pre-petition credit
facilities, amounts due under leases and other contracts, leases and other
executory contracts rejected in the Bankruptcy Court, environmental remediation,
indemnification or contribution to actual or potential co-defendants in
asbestos-related and other litigation, pending non-asbestos-related litigation,
and non-asbestos-related personal injury.

The Debtors have analyzed the claims as filed and have found that many are
duplicates, represent the same claim filed against more than one of the Debtors,
lack any supporting documentation, or provide insufficient supporting
documentation. As of June 30, 2005, the Debtors had filed with the Bankruptcy
Court objections to 1,490 claims. Most of these objections were non-substantive
(duplicates, no supporting documentation,


                                      I-10



late filed claims, etc.). Of such claims, 1,198 have been expunged, 215 have
been resolved, 34 have been withdrawn, and the remainder will be addressed
through the claims objection process and the dispute resolution procedures
approved by the Bankruptcy Court. The Debtors expect to file objections to a
substantial number of additional claims.

Grace believes that its recorded liabilities for claims subject to the bar date
represent a reasonable estimate of the ultimate allowable amount for claims that
are not in dispute or have been submitted with sufficient information to both
evaluate the merit and estimate the value of the claim. The asbestos-related
claims are considered as part of Grace's overall asbestos liability and are
being accounted for in accordance with the conditions precedent under the Plan,
as described in "Accounting Impact" below. As claims are resolved, or where
better information becomes available and is evaluated, Grace will make
adjustments to the liabilities recorded on its financial statements as
appropriate. Any such adjustments could be material to its consolidated
financial position and results of operations.

LITIGATION PROCEEDINGS IN BANKRUPTCY COURT - In September 2000, Grace was named
in a purported class action lawsuit filed in California Superior Court for the
County of San Francisco, alleging that the 1996 reorganization involving a
predecessor of Grace and Fresenius and the 1998 reorganization involving a
predecessor of Grace and Sealed Air were fraudulent transfers. The Bankruptcy
Court authorized the Official Committee of Asbestos Personal Injury Claimants
and the Official Committee of Asbestos Property Damage Claimants to proceed with
claims against Fresenius and Sealed Air and Cryovac on behalf of the Debtors'
bankruptcy estate.

On November 29, 2002, Sealed Air (and Cryovac) and Fresenius each announced that
they had reached agreements in principle with such Committees to settle
asbestos, successor liability and fraudulent transfer claims related to such
transactions (the "litigation settlement agreements"). Under the terms of the
Fresenius settlement, subject to the fulfillment of certain conditions,
Fresenius would contribute $115.0 million to the Debtors' estate as directed by
the Bankruptcy Court upon confirmation of the Debtors' plan of reorganization.
In July 2003, the Fresenius settlement was approved by the Bankruptcy Court.
Under the terms of the Sealed Air settlement, subject to the fulfillment of
certain conditions, Cryovac would make a payment of $512.5 million (plus
interest at 5.5% compounded annually, commencing on December 21, 2002) and nine
million shares of Sealed Air common stock (collectively valued at $1,034.8
million as of June 30, 2005), as directed by the Bankruptcy Court upon
confirmation of the Debtors' plan of reorganization. In June 2005, the Sealed
Air settlement was approved by the Bankruptcy Court.

DEBT CAPITAL - All of the Debtors' pre-petition debt is in default due to the
Filing. The accompanying Consolidated Balance Sheets reflect the classification
of the Debtors' pre-petition debt within "liabilities subject to compromise."

The Debtors have entered into a debtor-in-possession post-petition loan and
security agreement with Bank of America, N.A. (the "DIP facility") in the
aggregate amount of $250 million. The term of the DIP facility expires on April
1, 2006.

ACCOUNTING IMPACT - The accompanying Consolidated Financial Statements have been
prepared in accordance with Statement of Position 90-7 ("SOP 90-7"), "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code," promulgated
by the American Institute of Certified Public Accountants. SOP 90-7 requires
that financial statements of debtors-in-possession be prepared on a going
concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the Filing, the realization of certain of the Debtors'
assets and the liquidation of certain of the Debtors' liabilities are subject to
significant uncertainty. While operating as debtors-in-possession, the Debtors
may sell or otherwise dispose of assets and liquidate or settle liabilities for
amounts other than those reflected in the Consolidated Financial Statements.
Further, the ultimate plan of reorganization could materially change the amounts
and classifications reported in the Consolidated Financial Statements.

Pursuant to SOP 90-7, Grace's pre-petition liabilities that are subject to
compromise are required to be reported separately on the balance sheet at an
estimate of the amount that will ultimately be allowed by the Bankruptcy Court.
As of June 30, 2005, such pre-petition liabilities include fixed obligations
(such as debt and contractual commitments), as well as estimates of costs
related to contingent liabilities (such as asbestos-related litigation,
environmental remediation, and other claims). Obligations of Grace subsidiaries
not covered by the Filing continue to be classified on the Consolidated Balance
Sheets based upon maturity dates or the expected dates of payment. SOP 90-7 also
requires separate reporting of certain expenses, realized gains and losses, and
provisions for losses related to the Filing as reorganization items.


                                      I-11



Grace has not recorded the benefit of any assets that may be available to fund
asbestos-related and other liabilities under the litigation settlements with
Sealed Air and Fresenius, as such agreements are subject to conditions which,
although expected to be met, have not been satisfied and confirmed by the
Bankruptcy Court. The value available under these litigation settlement
agreements as measured at June 30, 2005, was $1,149.8 million comprised of
$115.0 million in cash from Fresenius and $1,034.8 million in cash and stock
from Cryovac. Payments under the Sealed Air settlement will be paid directly to
the asbestos trust by Cryovac, and will be accounted for as a satisfaction of a
portion of Grace's recorded asbestos-related liability and a credit to
shareholder's equity.

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

Components of liabilities subject to compromise are as follows:
================================================================================
                                                         JUNE 30,   December 31,
(In millions) (Unaudited)                                  2005         2004
--------------------------------------------------------------------------------
Debt, pre-petition plus
   accrued interest ..................................   $  664.8     $  645.8
Asbestos-related liability ...........................    1,700.0      1,700.0
Income taxes .........................................      143.2        210.4
Environmental remediation ............................      320.6        345.0
Postretirement benefits other
   than pension ......................................      111.1        118.9
Unfunded special pension
   arrangements ......................................       74.2         77.4
Retained obligations of
   divested businesses ...............................       15.6         25.1
Accounts payable .....................................       31.3         31.3
Other accrued liabilities ............................       49.6         53.8
                                                         ----------------------
TOTAL LIABILITIES SUBJECT TO
   COMPROMISE ........................................   $3,110.4     $3,207.7
================================================================================

Note that the unfunded special pension arrangements reflected above exclude
non-U.S. plans and qualified U.S. plans that became underfunded subsequent to
the Filing. Contributions to qualified U.S. plans are subject to Bankruptcy
Court approval.

CHANGE IN LIABILITIES SUBJECT TO COMPROMISE

Set forth below is a reconciliation of the changes in pre-filing date liability
balances for the period from the Filing Date through June 30, 2005.

================================================================================
                                                                   Cumulative
(In millions) (Unaudited)                                         Since Filing
--------------------------------------------------------------------------------
Balance, Filing Date ..........................................     $2,366.0
Cash disbursements and/or reclassifications under
   Bankruptcy Court orders:
      Freight and distribution order ..........................         (5.7)
      Trade accounts payable order ............................         (9.1)
      Settlements of Chapter 11 contingencies .................       (119.7)
      Other court orders including employee wages and
         benefits, sales and use tax, and customer programs ...       (278.8)
Expense/(income) items:
   Interest on pre-petition liabilities .......................        178.4
   Employee-related accruals ..................................         22.4
   Change in estimate of asbestos-related contingencies .......        744.8
   Change in estimate of environmental contingencies ..........        240.6
   Change in estimate of income tax contingencies .............         (2.8)
Balance sheet reclassifications ...............................        (25.7)
                                                                    --------
Balance, end of period ........................................     $3,110.4
================================================================================

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

CHAPTER 11 EXPENSES
================================================================================
                                                   THREE MONTHS    SIX MONTHS
                                                      ENDED           ENDED
(In millions) (Unaudited)                            JUNE 30,        JUNE 30,
================================================================================
                                                   2005    2004    2005    2004
                                                  ------------------------------
Legal and financial advisory fees .............   $ 6.2   $ 3.3   $14.0   $ 8.1
Interest income ...............................    (1.6)   (0.3)   (3.4)   (0.6)
                                                  ------------------------------
Chapter 11 expenses, net ......................   $ 4.6   $ 3.0   $10.6   $ 7.5
================================================================================

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

                                      I-12



CONDENSED FINANCIAL INFORMATION OF THE DEBTORS

================================================================================
W. R. GRACE & CO. - CHAPTER 11
   FILING ENTITIES
   DEBTOR-IN-POSSESSION
   STATEMENTS OF OPERATIONS                                     SIX MONTHS ENDED
(In millions) (Unaudited)                                           JUNE 30,
--------------------------------------------------------------------------------
                                                                 2005     2004
                                                               -----------------
Net sales, including intercompany ...........................   $638.3   $565.2
                                                               -----------------
Cost of goods sold, including intercompany, exclusive of
   depreciation and amortization shown separately below .....    439.3    400.0
Selling, general and administrative expenses, exclusive of
   net pension expense shown separately below ...............    136.5    129.8
Research and development expenses ...........................     19.2     17.4
Depreciation and amortization ...............................     30.5     28.4
Net pension expense .........................................     26.7     23.1
Interest expense and related financing costs ................     27.5      7.5
Other (income) expense ......................................    (48.6)    (9.7)
                                                               -----------------
                                                                 631.1    596.5
                                                               -----------------
Income (loss) before Chapter 11 expenses, income taxes,
   and equity in net income of non-filing entities ..........      7.2    (31.3)
Chapter 11 expenses, net ....................................    (10.4)    (7.5)
Benefit from (provision for) income taxes ...................     (8.7)    (2.9)
                                                               -----------------
Income (loss) before equity in net income of non-filing
   entities .................................................    (11.9)   (41.7)
Equity in net income of non-filing entities .................     47.7     78.8
                                                               -----------------
NET INCOME (LOSS) ...........................................   $ 35.8   $ 37.1
================================================================================

================================================================================
W. R. GRACE & CO. - CHAPTER 11 FILING
   ENTITIES DEBTOR-IN-POSSESSION
   CONDENSED STATEMENTS OF CASH FLOWS                        SIX MONTHS ENDED
(In millions) (Unaudited)                                        JUNE 30,
--------------------------------------------------------------------------------
                                                              2005     2004
                                                          ----------------------
OPERATING ACTIVITIES
Income (loss) before Chapter 11 expenses, income taxes,
   and equity in net income of non-filing entities ......   $   7.2   $(31.3)
Reconciliation to net cash provided by (used for)
   operating activities:
   Non-cash items, net ..................................      54.0     31.3
   Contributions to defined benefit pension plans .......      (8.3)    (2.2)
   Cash paid to settle Chapter 11 contingencies .........    (119.7)      --
   Changes in other assets and liabilities, excluding
      the effect of businesses acquired/divested ........     (81.6)   (13.4)
                                                          ----------------------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES ....    (148.4)   (15.6)

NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES ....      45.3    101.0

NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES ....      (1.7)    (3.7)
                                                          ----------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....    (104.8)    81.7
Cash and cash equivalents, beginning of period ..........     340.0    120.5
                                                          ----------------------
Cash and cash equivalents, end of period ................   $ 235.2   $202.2
================================================================================

================================================================================
W. R. GRACE & CO. -
   CHAPTER 11 FILING ENTITIES
   DEBTOR-IN-POSSESSION
   BALANCE SHEETS                                    JUNE 30,   December 31,
(In millions) (Unaudited)                              2005         2004
--------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents ........................   $  235.2   $  340.0
Trade accounts receivable, net ...................      125.3      111.6
Receivables from non-filing entities, net ........       61.8       37.8
Inventories ......................................       83.8       76.9
Other current assets .............................       33.3       38.1
                                                     -----------------------
TOTAL CURRENT ASSETS .............................      539.4      604.4

Properties and equipment, net ....................      345.6      359.9
Cash value of life insurance policies, net of
   policy loans ..................................       81.3       96.0
Deferred income taxes ............................      673.2      666.2
Asbestos-related insurance .......................      500.0      500.0
Loans receivable from non-filing entities, net ...      330.4      358.6
Investment in non-filing entities ................      470.6      468.4
Other assets .....................................      107.1      101.7
                                                     -----------------------
TOTAL ASSETS .....................................   $3,047.6   $3,155.2
================================================================================


                                      I-13


================================================================================
                                                         JUNE 30,   December 31,
(In millions) (Unaudited)                                  2005         2004
--------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE
Current liabilities ..................................   $  165.2     $  187.5
Other liabilities ....................................      377.3        381.8
                                                        -----------------------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE ..........      542.5        569.3

LIABILITIES SUBJECT TO COMPROMISE ....................    3,110.4      3,207.7
                                                        -----------------------
TOTAL LIABILITIES ....................................    3,652.9      3,777.0

SHAREHOLDERS' EQUITY (DEFICIT) .......................     (605.3)      (621.8)
                                                        -----------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
   (DEFICIT) .........................................   $3,047.6     $3,155.2
================================================================================

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

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

Grace is a defendant in property damage and personal injury lawsuits relating to
previously sold asbestos-containing products. As of the Filing Date, Grace was a
defendant in 65,656 asbestos-related lawsuits, 17 involving claims for property
damage (one of which has since been dismissed), and the remainder involving
129,191 claims for personal injury. Due to the Filing, holders of
asbestos-related claims are stayed from continuing to prosecute pending
litigation and from commencing new lawsuits against the Debtors. Separate
creditors' committees representing the interests of property damage and personal
injury claimants, and a legal representative of future personal injury
claimants, have been appointed in the Chapter 11 Cases. Grace's obligations with
respect to present and future claims will be determined through the Chapter 11
process.

PROPERTY DAMAGE LITIGATION - The plaintiffs in asbestos property damage lawsuits
generally seek to have the defendants pay for the cost of removing, containing
or repairing the asbestos-containing materials in the affected buildings. Each
property damage case is unique in that the age, type, size and use of the
building, and the difficulty of asbestos abatement, if necessary, vary from
structure to structure. Information regarding product identification, the amount
of product in the building, the age, type, size and use of the building, the
legal status of the claimant, the jurisdictional history of prior cases and the
court in which the case is pending has provided meaningful guidance as to the
range of potential costs.

Out of 380 asbestos property damage cases (which involved thousands of
buildings) filed prior to the Filing Date, 140 were dismissed without payment of
any damages or settlement amounts; judgments were entered in favor of Grace in
nine cases (excluding cases settled following appeals of judgments in favor of
Grace); judgments were entered in favor of the plaintiffs in eight cases (one of
which is on appeal) for a total of $86.1 million; 207 property damage cases were
settled for a total of $696.8 million; and 16 cases remain outstanding
(including the one on appeal). Of the 16 remaining cases, eight relate to ZAI
and eight relate to a number of former asbestos-containing products (two of
which also are alleged to involve ZAI).

Approximately 4,300 additional property damage claims were filed prior to the
March 31, 2003 claims bar date established by the Bankruptcy Court. (The bar
date did not apply to ZAI claims.) Such claims were reviewed in detail by Grace,
categorized into claims with sufficient information to be evaluated or claims
that require additional information and, where sufficient information existed,
the estimated cost of resolution was considered as part of Grace's recorded
asbestos-related liability. (Approximately 140 claims did not contain sufficient
information to permit an evaluation.) Grace intends to object to substantially
all property damage claims on a number of different bases, including: no
authorization to file a claim; the claim was previously settled; no or
insufficient documentation; failure to identify a Grace product; the expiration
of the applicable statute of limitations and/or statute of repose, and/or
laches; and a defense that the product in place is not hazardous.

Eight of the ZAI cases were filed as purported class action lawsuits in 2000 and
2001. In addition, two purported class action lawsuits were filed in October
2004 with respect to persons and homes in Canada. These cases seek damages and
equitable relief, including the removal, replacement and/or disposal of all such
insulation. The plaintiffs assert that this product is in millions of homes and
that the cost of removal could be


                                      I-14



several thousand dollars per home. As a result of the Filing, the eight U.S.
cases have been transferred to the Bankruptcy Court. Based on Grace's
investigation of the claims described in these lawsuits, and testing and
analysis of this product by Grace and others, Grace believes that the product
was and continues to be safe for its intended purpose and poses little or no
threat to human health. The plaintiffs in the ZAI lawsuits (and the U.S.
government in the Montana criminal proceeding described in Note 12) dispute
Grace's position on the safety of ZAI. In July 2002, the Bankruptcy Court
approved special counsel to represent, at the Debtors' expense, the ZAI
claimants in a proceeding to determine certain threshold scientific issues
regarding ZAI. On October 18, 2004, the Bankruptcy Court held a hearing on
motions filed by the parties to address a number of important legal and factual
issues regarding the ZAI claims, and has taken the motions under advisement. The
Bankruptcy Court has indicated that it may require further proceedings with
respect to the matters addressed in the motions and no decision has been
rendered by the Court. Given the early stage of litigation, Grace's recorded
asbestos-related liability at June 30, 2005 assumes the risk of loss from ZAI
litigation is not probable.

PERSONAL INJURY LITIGATION - Asbestos personal injury claimants allege adverse
health effects from exposure to asbestos-containing products formerly
manufactured by Grace. Claims are generally similar to each other, differing
primarily in the type of asbestos-related illness allegedly suffered by the
plaintiff. Claimants allege adverse health effects from exposure to
asbestos-containing products formerly manufactured by Grace. Grace's cost to
resolve such claims has been influenced by numerous variables, including the
solvency of other former producers of asbestos containing products, cross-claims
by co-defendants, the rate at which new claims are filed, the jurisdiction in
which the claims are filed, and the defense and disposition costs associated
with these claims.

Cumulatively through the Filing Date, 16,354 asbestos personal injury lawsuits
involving approximately 35,720 claims were dismissed without payment of any
damages or settlement amounts (primarily on the basis that Grace products were
not involved) and approximately 55,489 lawsuits involving approximately 163,698
claims were disposed of (through settlements and judgments) for a total of
$645.6 million. As of the Filing Date, 129,191 claims for personal injury were
pending against Grace. Grace believes that a substantial number of additional
personal injury claims would have been received between the Filing Date and June
30, 2005 had such claims not been stayed by the Bankruptcy Court.

ASBESTOS-RELATED LIABILITY - The total recorded asbestos-related liability
balance as of June 30, 2005 and December 31, 2004 was $1,700.0 million and is
included in "liabilities subject to compromise." Grace adjusted its
asbestos-related liability in the fourth quarter of 2004 based on its proposed
plan of reorganization as discussed in Note 2. The amount recorded at December
31, 2004 includes the $1,613 million maximum amount reflected as a condition
precedent to the Plan and $87 million related to pre-Chapter 11 contractual
settlements and judgments included in general unsecured claims.

Under the Plan, Grace is requesting that the Bankruptcy Court determine the
aggregate dollar amount, on a net present value basis (the "Funding Amount"),
that must be funded on the effective date of the Plan into an asbestos trust
(established under Section 524(g) of the Bankruptcy Code) to pay all allowed
pending and future asbestos-related personal injury and property damage claims
(including ZAI) and related trust administration costs and expenses on the later
of the effective date of the Plan or when allowed. It is a condition to
confirmation of the Plan that the Bankruptcy Court shall conclude that the
Funding Amount is not greater than $1,613 million. This amount, which should be
sufficient to fund over $2 billion in pending and future claims, is based in
part on Grace's evaluation of (1) existing but unresolved personal injury and
property damage claims, (2) actuarially-based estimates of future personal
injury claims, (3) the risk of loss from ZAI litigation, (4) proposed claim
payments reflected in the Plan, and (5) the cost of the trust administration and
litigation. This amount may not be consistent with what the Bankruptcy Court may
conclude would be a sufficient Funding Amount.

The Bankruptcy Court has verbally indicated that it will enter case management
orders setting forth a process for estimating the value of Grace's property
damage claims (excluding ZAI) and pending and future personal injury claims,
which will be primarily a function of the number of allowed property damage and
personal injury claims, and the amount payable per claim. Using this process,
which will involve the use of detailed claim forms, questionnaires and expert
testimony, Grace will seek to demonstrate that most claims should not be allowed
because they fail to establish any material property damage, health impairment
or significant occupational exposure to asbestos from Grace's operations or
products. Grace also will seek Bankruptcy Court approval of Grace's proposed
payouts for allowed personal injury claims, which will vary depending upon the
type of claim and/or the claimant's medical condition. If the Bankruptcy Court
agrees with Grace's position on the number of, and the amounts to be paid in
respect of, allowed personal injury and property damage


                                      I-15



claims, then Grace believes that the Funding Amount could be less than $1,613
million. However, this outcome is highly uncertain and will depend on a number
of Bankruptcy Court rulings favorable to Grace's position.

Conversely, the asbestos claimants committees and the future claimants
representative continue to assert that Grace's asbestos-related liabilities are
substantially higher than $1,613 million, and in fact are in excess of Grace's
business value. If the Court accepts the position of the asbestos claimants
committees, then any plan of reorganization likely would result in the loss of
all or substantially all equity value by current shareholders. Therefore, due to
the significant uncertainties of this process and asbestos litigation generally,
Grace is not able to estimate a probable Funding Amount that would be accepted
by the Bankruptcy Court.

However, as Grace is willing to proceed with confirmation of the Plan with a
Funding Amount of up to $1,613 million (assuming that other conditions precedent
to confirmation of the Plan are satisfied, including the availability of the
payment from Cryovac directly to the asbestos trust under the settlement
agreement described in Note 2), during the fourth quarter of 2004, Grace accrued
and took a charge of $714.8 million to increase its recorded asbestos-related
liability to reflect the maximum amount allowed as a condition precedent under
the Plan. This amount, plus $87.0 million for pre-Chapter 11 contractual
settlements and judgments, brings the total recorded asbestos-related liability
as of December 31, 2004 and June 30, 2005 to $1,700 million. Any differences
between the Plan as filed and as approved for confirmation could fundamentally
change the accounting measurement of Grace's asbestos-related liability and that
change could be material.

INSURANCE RIGHTS - Grace previously purchased insurance policies that provide
coverage for the 1962 - 1985 period with respect to asbestos-related lawsuits
and claims. Since 1985, insurance coverage for asbestos-related liabilities has
not been commercially available to Grace.

Grace's primary insurance coverage is in the amount of $1 million per occurrence
with annual aggregate product-liability limits ranging from $1 to $2 million.
With one exception, coverage disputes regarding primary insurance policies have
been settled, and the settlement amounts paid in full.

Grace's excess coverage is for loss above certain levels. The levels vary from
policy to policy, creating "layers" of excess coverage, some of which are
triggered before others. As of June 30, 2005, after subtracting previous
reimbursements by insurers and allowing for discounts pursuant to certain
settlement agreements, there remains approximately $978 million of excess
coverage from more than 30 presently solvent insurers.

Grace has entered into settlement agreements with various excess insurance
carriers. These settlements involve amounts paid and to be paid to Grace. The
unpaid maximum aggregate amount available under these settlement agreements is
approximately $495 million. With respect to asbestos-related personal injury
claims, the settlement agreements generally require that the claims be spread
over the claimant's exposure period and that each insurer pay a pro rata portion
of each claim based on the amount of coverage provided during each year of the
total exposure period.

Presently, Grace has no agreements in place with insurers with respect to
approximately $483 million of excess coverage, which is at layers of coverage
that have not yet been triggered, but certain layers would be triggered if the
Plan were approved at the recorded asbestos-related liability of $1,700 million.
Grace believes that the ZAI claims also are covered under the settlement
agreements and unsettled policies discussed above to the extent they relate to
installations of ZAI occurring after July 1, 1973.

Grace has approximately $355 million of excess coverage with insolvent or
non-paying insurance carriers. (Non-paying carriers are those that, although
technically not insolvent, are not currently meeting their obligations to pay
claims.) Grace has filed and continues to file claims in the insolvency
proceedings of insolvent carriers. Grace is currently receiving distributions
from some of these insolvent carriers and expects to receive distributions in
the future. Settlement amounts are recorded as income when received.

Pursuant to settlements with primary-level and excess-level insurance carriers
with respect to asbestos-related claims, Grace received payments totaling $11.5
million during the first six months of 2005 and $7.3 million during the prior
year period.

Grace estimates that, assuming an ultimate payout of asbestos-related claims
equal to the recorded liability of $1,700 million, it should be entitled to
approximately $500 million, on a net present value basis, of insurance recovery.


                                      I-16



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

During the first six months of 2005, Grace completed two business combinations
for a total cash cost of $2.2 million as follows:

o    In February 2005, Grace acquired certain assets of Midland Dexter
     Venezuela, S.A. (Midevensa). Midevensa supplied coatings and sealants for
     rigid packaging in the local and export markets of Latin America.

o    In March 2005, Grace acquired certain assets relating to the concrete
     admixtures business of Perstorp Peramin AB ("Perstorp") located in Sweden.
     Perstorp supplied specialty chemicals and materials to the construction
     industry in Sweden and other Northern European countries.

During the first six months of 2004, Grace did not complete any business
combinations.

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

Components of other (income) expense are as follows:

================================================================================
                                                 THREE MONTHS      SIX MONTHS
OTHER (INCOME) EXPENSE                               ENDED            ENDED
(In millions) (Unaudited)                          JUNE 30,         JUNE 30,
================================================================================
                                                 2005     2004    2005     2004
                                                --------------------------------
Income from insurance settlements ...........   $(20.3)  $  --   $(20.3)  $  --
Investment income ...........................     (0.6)   (0.7)    (1.9)   (2.2)
Interest income .............................     (0.9)   (1.4)    (1.6)   (2.3)
Net (gain) loss on sales of investments and
   disposals of assets ......................      0.4     0.1     (0.5)    0.3
Tolling revenue .............................     (0.4)   (0.2)    (0.6)   (0.5)
Currency translation - intercompany loan ....     16.5    (0.5)    31.4     1.1
Value of currency contracts .................    (16.7)    9.3    (31.2)    9.3
Other currency transaction effects ..........      0.3    (0.4)     0.5    (0.6)
Other miscellaneous income ..................     (2.2)   (1.6)    (5.8)   (3.7)
                                                --------------------------------
Total other (income) expense ................   $(23.9)  $ 4.6   $(30.0)  $ 1.4
================================================================================

Other (income) expense for the three-month and six-month periods ended June 30,
2005 includes approximately $20 million from the settlement of two disputes with
insurance carrier groups with respect to coverage for past environmental
remediation and asbestos-related costs.

In March 2004, Grace began accounting for currency fluctuations on a (euro)293
million intercompany loan between Grace's subsidiaries in the United States and
Germany as a component of operating results instead of as a component of other
comprehensive income. The change was prompted by new tax laws in Germany and
Grace's cash flow planning for its Chapter 11 reorganization, which indicated
that it is no longer reasonable to consider this loan as part of the permanent
capital structure in Germany. In May 2004, Grace entered into a series of
foreign currency forward contracts to mitigate future currency fluctuations on
the remaining loan balance. These contracts were extended in June 2005 and have
varying rates on notional amounts that coincide with loan repayments due
periodically through December 2008. In 2005, (euro)30.9 million of loan
principal was repaid. For the six months ended June 30, 2005, a $31.2 million
contract gain was recognized, offset by a $31.4 million foreign currency loss.
These forward contracts are viewed as risk management instruments by Grace and
are not used for trading or speculative purposes.

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

================================================================================
                                                         JUNE 30,   December 31,
(In millions) (Unaudited)                                  2005         2004
--------------------------------------------------------------------------------
INVENTORIES
Raw materials ........................................    $ 64.1       $ 62.4
In process ...........................................      36.1         36.1
Finished products ....................................     183.7        166.7
General merchandise ..................................      30.7         32.2
Less: Adjustment of certain inventories to a
   last-in/first-out (LIFO) basis ....................     (48.2)       (49.1)
                                                         -----------------------
                                                          $266.4       $248.3
================================================================================

OTHER ASSETS
Deferred pension costs ...............................    $112.3       $119.5
Deferred charges .....................................      57.5         49.9
Long-term receivables, less allowances of $0.7
   (2004 - $0.8) .....................................       8.1          8.3
Patents, licenses and other intangible assets, net ...      87.1         96.3
Pension-unamortized prior service cost ...............      15.3         15.3
Investments in unconsolidated affiliates and other ...       0.7          0.7
                                                         -----------------------
                                                          $281.0       $290.0
================================================================================

================================================================================
OTHER CURRENT LIABILITIES
Accrued compensation .................................    $ 53.9       $ 92.9
Deferred tax liability ...............................       1.1          1.2
Customer volume rebates ..............................      21.8         31.7
Accrued commissions ..................................       7.6         11.0
Accrued reorganization fees ..........................      12.9         11.4
Other accrued liabilities ............................      89.2         73.3
                                                         -----------------------
                                                          $186.5       $221.5
================================================================================

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

Grace is the beneficiary of life insurance policies on certain current and
former employees with a net cash surrender value of $81.3 million and $96.0
million at June 30, 2005 and December 31, 2004, respectively. The policies were
acquired to fund various employee benefit programs and other long-term
liabilities and are


                                      I-17



structured to provide cash flow (primarily tax-free) over an extended number of
years.

The following tables summarize activity in these policies for the six months
ended June 30, 2005 and 2004, and the components of net cash value at June 30,
2005 and December 31, 2004:

================================================================================
LIFE INSURANCE - ACTIVITY SUMMARY                               SIX MONTHS ENDED
(In millions) (Unaudited)                                            JUNE 30,
--------------------------------------------------------------------------------
                                                                 2005     2004
                                                               -----------------
Earnings on policy assets ...................................   $  4.1   $ 17.2
Interest on policy loans ....................................     (2.2)   (15.0)
Premiums ....................................................       --       --
Policy loan repayments ......................................      0.6      2.7
Proceeds from termination of life insurance policies ........    (14.8)      --
Net investing activity ......................................     (2.4)     0.9
                                                               -----------------
Change in net cash value ....................................   $(14.7)  $  5.8
================================================================================
Tax-free proceeds received ..................................   $  2.4   $ 10.5
================================================================================

================================================================================
COMPONENTS OF NET CASH VALUE                             JUNE 30,   December 31,
(In millions) (Unaudited)                                  2005         2004
--------------------------------------------------------------------------------
Gross cash value .....................................    $105.3      $  484.2
Principal - policy loans .............................     (22.7)       (368.2)
Accrued interest - policy loans ......................      (1.3)        (20.0)
                                                         -----------------------
Net cash value .......................................    $ 81.3      $   96.0
================================================================================
Insurance benefits in force ..........................    $193.7      $2,191.3
================================================================================

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

In January 2005, Grace surrendered and terminated most of these life insurance
policies and received $14.8 million of net cash value from the termination. As a
result of the termination, gross cash value of the policies was reduced by
approximately $381 million and policy loans of approximately $365 million were
satisfied. Grace's insurance benefits in force was reduced by approximately $2
billion. See Note 12 for a discussion of a settlement agreement with the
Internal Revenue Service ("IRS") with respect to tax contingencies related to
these life insurance policies and the tax consequences of terminating such
policies.

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

================================================================================
COMPONENTS OF DEBT                                       JUNE 30,   December 31,
(In millions) (Unaudited)                                  2005         2004
--------------------------------------------------------------------------------
DEBT PAYABLE WITHIN ONE YEAR
Other short-term borrowings ..........................    $ 11.0       $ 12.4
                                                         -----------------------
                                                          $ 11.0       $ 12.4
                                                         =======================
DEBT PAYABLE AFTER ONE YEAR
DIP facility .........................................    $   --       $   --
Other long-term borrowings ...........................       0.5          1.1
                                                         -----------------------
                                                          $  0.5       $  1.1
                                                         =======================
DEBT SUBJECT TO COMPROMISE
Bank borrowings ......................................    $500.0       $500.0
Other borrowings .....................................      14.5         15.0
Accrued interest .....................................     150.3        130.8
                                                         -----------------------
                                                          $664.8       $645.8
                                                         =======================
Annualized weighted average
   interest rates on total debt ......................       6.0%         6.0%
================================================================================

In April 2001, the Debtors entered into the DIP facility for a two-year term in
the aggregate amount of $250 million. The DIP facility is secured by a priority
lien on substantially all assets of the Debtors, and bears interest based on
LIBOR. The Debtors have extended the term of the DIP facility through April 1,
2006. Grace had no outstanding borrowings under the DIP facility as of June 30,
2005; however, $29.0 million of standby letters of credit were issued and
outstanding under the facility. The letters of credit, which reduce available
funds under the facility, were issued primarily for trade-related matters such
as performance bonds, and certain insurance and environmental matters.

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

The Company is authorized to issue 300,000,000 shares of common stock. Of the
common stock unissued on June 30, 2005, approximately 7,100,446 shares were
reserved for issuance pursuant to stock option and other stock incentive plans.
In the first six months of 2005 and the year ended December 31, 2004, Grace did
not grant any stock options.

For additional information, see Notes 15 and 17 to the Consolidated Financial
Statements in Grace's 2004 Form 10-K.


                                      I-18



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

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

================================================================================
EARNINGS PER SHARE                                  THREE MONTHS     SIX MONTHS
(In millions, except per share amounts)                 ENDED          ENDED
(Unaudited)                                           JUNE 30,        JUNE 30,
================================================================================
                                                    2005    2004    2005    2004
                                                   -----------------------------
NUMERATORS
   Net income ..................................   $32.7   $21.3   $35.8   $37.1
                                                   =============================
DENOMINATORS
   Weighted average common shares -
      basic calculation ........................    66.9    65.6    66.8    65.6
   Dilutive effect of employee stock
      options...................................     0.3     0.2     0.5     0.2
                                                   -----------------------------
  Weighted average common shares -
     diluted calculation........................    67.2    65.8    67.3    65.8
                                                   =============================
BASIC EARNINGS PER SHARE........................   $0.49   $0.32   $0.54   $0.57
                                                   =============================
DILUTED EARNINGS PER SHARE......................   $0.49   $0.32   $0.53   $0.56
================================================================================

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

The table below presents the pre-tax, tax and after tax amounts of Grace's other
comprehensive income (loss) for the three months and six months ended June 30,
2005 and 2004:

================================================================================
                                                                         AFTER-
THREE MONTHS ENDED JUNE 30, 2005                     PRE-TAX     TAX       TAX
(In millions) (Unaudited)                             AMOUNT   BENEFIT   AMOUNT
--------------------------------------------------------------------------------
Foreign currency translation
   adjustments ...................................    $(9.4)     $--     $(9.4)
                                                     ---------------------------
Other comprehensive income
   (loss) ........................................    $(9.4)     $--     $(9.4)
================================================================================

                                                                         AFTER-
SIX MONTHS ENDED JUNE 30, 2005                       PRE-TAX     TAX       TAX
(In millions) (Unaudited)                             AMOUNT   BENEFIT   AMOUNT
--------------------------------------------------------------------------------
Foreign currency translation
   adjustments ...................................   $(22.4)     $--     $(22.4)
                                                    ----------------------------
Other comprehensive income
   (loss) ........................................   $(22.4)     $--     $(22.4)
================================================================================

================================================================================
                                                                         AFTER-
THREE MONTHS ENDED JUNE 30, 2004                     PRE-TAX     TAX       TAX
(In millions) (Unaudited)                             AMOUNT   BENEFIT   AMOUNT
--------------------------------------------------------------------------------
Minimum pension liability ........................   $(54.3)    $19.0    $(35.3)
Foreign currency translation
   adjustments ...................................     (2.5)       --      (2.5)
                                                    ----------------------------
Other comprehensive income
   (loss) ........................................   $(56.8)    $19.0    $(37.8)
================================================================================

                                                                         AFTER-
SIX MONTHS ENDED JUNE 30, 2004                       PRE-TAX     TAX       TAX
(In millions) (Unaudited)                             AMOUNT   BENEFIT   AMOUNT
--------------------------------------------------------------------------------
Minimum pension liability ........................   $(54.3)    $19.0    $(35.3)
Foreign currency translation
   adjustments ...................................     (7.5)       --      (7.5)
                                                    ----------------------------
Other comprehensive income
   (loss) ........................................   $(61.8)    $19.0    $(42.8)
================================================================================

The table below presents the components of Grace's accumulated other
comprehensive income (loss) at June 30, 2005 and December 31, 2004:

================================================================================
COMPONENTS OF ACCUMULATED OTHER
   COMPREHENSIVE INCOME (LOSS)                           JUNE 30,   December 31,
(In millions) (Unaudited)                                  2005         2004
--------------------------------------------------------------------------------
Foreign currency translation .........................   $ (24.9)     $  (2.5)
Minimum pension liability ............................    (347.5)      (347.5)
                                                        ------------------------
Accumulated other
   comprehensive income
   (loss) ............................................   $(372.4)     $(350.0)
================================================================================

Grace is a global enterprise which operates in over 40 countries with local
currency generally deemed to be the functional currency for accounting purposes.
The foreign currency translation amount represents the adjustment necessary to
translate the balance sheets valued in local currencies to the U.S. dollar as of
the end of each period presented. The change in foreign currency translation at
June 30, 2005 compared with December 31, 2004 is due to the strengthening of the
U.S. dollar against most other reporting currencies.

The decline in equity market returns in 2000-2002, coupled with a decline in
interest rates from 2000-2004, as well as updated assumptions for expected
life-spans and the longevity of Grace's active work force, created a shortfall
between the accounting measurement of Grace's obligations under certain of its
qualified pension plans for U.S. employees and the market value of dedicated
pension assets. This condition required Grace to record a minimum pension
liability for these plans equal to the funding shortfall and to offset related
deferred costs against shareholders' equity (deficit) at December 31, 2004.

                                      I-19



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

ASBESTOS-RELATED LITIGATION - See Note 3

ENVIRONMENTAL REMEDIATION - Grace is subject to loss contingencies resulting
from extensive and evolving federal, state, local and foreign environmental laws
and regulations relating to the generation, storage, handling, discharge and
disposition of hazardous wastes and other materials. Grace accrues for
anticipated costs associated with investigative and remediation efforts where an
assessment has indicated that a probable liability has been incurred and the
cost can be reasonably estimated. These accruals do not take into account any
discounting for the time value of money.

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

At June 30, 2005, Grace's estimated liability for environmental investigative
and remediation costs totaled $320.6 million, as compared with $345.0 million at
December 31, 2004. The amount is based on funding and/or remediation agreements
in place and Grace's best estimate of its cost for sites not subject to a formal
remediation plan. Grace's estimated environmental liabilities are included in
"liabilities subject to compromise."

Net cash expenditures charged against previously established reserves for the
six months ended June 30, 2005 and 2004 were $24.4 million and $2.9 million,
respectively. The decrease in the liability in 2005 was primarily due to a
settlement payment of $21.4 million related to a formerly owned site, which was
approved by the Bankruptcy Court.

Vermiculite Related Matters

From the 1920's until 1992, Grace (beginning in 1963) and previous owners
conducted vermiculite mining and related activities near Libby, Montana. The
mined vermiculite ore contained varying amounts of asbestos as an impurity,
almost all of which was removed during processing. Expanded vermiculite was used
in products such as fireproofing, insulation and potting soil.

EPA Lawsuit - In November 1999, Region 8 of the Environmental Protection Agency
("EPA") began an investigation into alleged excessive levels of asbestos-related
disease in the Libby population related to these former mining activities. This
investigation led the EPA to undertake additional investigative activity and to
carry out response actions in and around Libby. On March 30, 2001, the EPA filed
a lawsuit in U.S. District Court for the District of Montana, Missoula Division
(United States v. W. R. Grace & Company et al.) under the Comprehensive
Environmental Response, Compensation and Liability Act for the recovery of costs
allegedly incurred by the United States in response to the release or threatened
release of asbestos in the Libby, Montana area relating to such former mining
activities. These costs include cleaning and/or demolition of contaminated
buildings, excavation and removal of contaminated soil, health screening of
Libby residents and former mine workers, and investigation and monitoring costs.
In this action, the EPA also sought a declaration of Grace's liability that
would be binding in future actions to recover further response costs.

In December 2002, the District Court granted the United States' motion for
partial summary judgment on a number of issues that limited Grace's ability to
challenge the EPA's response actions. In January 2003, a trial was held on the
remainder of the issues, which primarily involved the reasonableness and
adequacy of documentation of the EPA's cost recovery claims through December 31,
2001. On August 28, 2003, the District Court issued a ruling in favor of the
United States that requires Grace to reimburse the government for $54.5 million
(plus interest) in costs expended through December 2001, and for all appropriate
future costs to complete the clean-up. Grace appealed the court's ruling to the
Ninth Circuit Court of Appeals, which heard oral argument on February 7, 2005.
No decision has been issued on the appeal.

As a result of the District Court ruling and Grace's evaluation of estimated
costs for remediation in and around Libby and at vermiculite processing sites
currently or formerly operated by Grace, Grace's total estimated liability for
vermiculite-related remediation at June 30, 2005 and December 31, 2004 was
$204.1 million and $204.2 million, respectively. Grace's estimate of expected
costs is based on public comments regarding the EPA's spending plans,
discussions of spending forecasts with EPA representatives, analysis of other
information made available from the EPA, and evaluation of probable remediation
costs at vermiculite processing sites. However, the EPA's cost estimates


                                      I-20



have increased regularly and substantially over the course of this clean-up.
Consequently, as the EPA's spending on these matters increases, Grace's
liability for remediation will increase.

Montana Criminal Proceeding - On February 7, 2005, the United States Department
of Justice announced the unsealing of a 10-count grand jury indictment against
Grace and seven current or former senior level employees (United States of
America v. W. R. Grace & Co. et al) relating to Grace's former vermiculite
mining and processing activities in Libby, Montana. The indictment accuses the
defendants of (1) conspiracy to violate environmental laws and obstruct federal
agency proceedings; (2) violations of the federal Clean Air Act; (3) wire fraud
in connection with the sale of allegedly contaminated properties; and (4)
obstruction of justice. The U.S. District Court for the District of Montana has
entered a scheduling order setting a trial date of September 11, 2006.

Grace purchased the Libby mine in 1963 and operated it until 1990; vermiculite
processing activities continued until 1992. The grand jury charges that the
conspiracy took place from 1976 to 2002 and also charges that the alleged
endangerment to the areas surrounding Libby continues to the present day.
According to the U.S. Department of Justice, Grace could be subject to fines in
an amount equal to twice the after-tax profit earned from its Libby operations
or twice the alleged loss suffered by Libby victims, plus additional amounts for
restitution to victims. The indictment alleges that such after tax profits were
$140 million. Grace has categorically denied any criminal wrongdoing and intends
to vigorously defend itself at trial.

The U.S. Bankruptcy Court previously granted Grace's request to advance legal
and defense costs to the employees, subject to a reimbursement obligation if it
is later determined that the employees did not meet the standards for
indemnification set forth under the appropriate state corporate law. For the
six-month period ended June 30, 2005, total expense for Grace and the employees
was $8.7 million.

Grace is unable to assess whether the indictment, or any conviction resulting
therefrom, will have a material adverse effect on the results of operations or
financial condition of Grace or affect Grace's bankruptcy proceedings. However,
Grace expects legal fees for its current and former employees defense could be
several million dollars per quarter through the trial date. Such costs will be
accounted for as incurred.

New Jersey Lawsuit - On June 1, 2005, the New Jersey Department of Environmental
Protection ("DEP") filed a lawsuit against Grace and two employees seeking civil
penalties for alleged misrepresentations and false statements made in a
Preliminary Assessment/Site Investigation Report and Negative Declarations
submitted by Grace to the DEP in 1995 pursuant to the New Jersey Industrial Site
Recovery Act. Grace submitted the Report, which was prepared by an independent
environmental consultant, in connection with the closing of Grace's former plant
in Hamilton Township, New Jersey. Grace is also aware that the State of New
Jersey and U.S. Department of Justice each are conducting criminal
investigations related to Grace's former operations of such plant.

Grace purchased the Hamilton plant in 1963 and ceased operations there in 1994.
During this period, Grace produced spray-on fire protection products and
vermiculite-based products at the plant. The EPA is currently remediating the
former plant site at an estimated cost of approximately $4 million.

Grace is unable at this time to assess the effect of the vermiculite-related
lawsuits or pending investigations on Grace's results of operations, cash flows,
or liquidity, or on its bankruptcy proceeding.

Non-Vermiculite Related Matters

At June 30, 2005 and December 31, 2004, Grace's estimated liability for
remediation of sites not related to its former vermiculite mining and processing
activities was $116.5 million and $140.8 million, respectively. This liability
relates to Grace's current and former operations, including its share of
liability for off-site disposal at facilities where it has been identified as a
potentially responsible party. Grace's estimated liability is based upon an
evaluation of claims for which sufficient information was available. As Grace
receives new information and continues its claims evaluation process, its
estimated liability may change materially. The decrease in the liability in 2005
was primarily due to a settlement payment of $21.4 million related to a formerly
owned site, which was approved by the Bankruptcy Court.

TAX MATTERS - On May 19, 2005, Grace received a revised examination report (the
"Examination Report") from the Internal Revenue Service (the "IRS") for the
1993-1996 tax periods asserting, in the aggregate, approximately $77.3 million
of proposed tax adjustments, plus accrued interest. The most significant issue
addressed in the Examination Report concerns corporate-owned life insurance
("COLI") policies, as discussed below. Grace is in agreement with the IRS with
respect to all proposed tax adjustments in the Examination Report with the
exception of approximately


                                      I-21



$7.0 million of proposed adjustments relating to research and development
credits. On April 14, 2005, Grace made a $90 million payment to the IRS with
respect to federal taxes and accrued interest for the 1993-1996 tax periods,
consistent with the revised Examination Report.

With respect to COLI, in 1988 and 1990, Grace acquired COLI policies and funded
policy premiums in part using loans secured against policy cash surrender value.
Grace claimed a total of approximately $258 million in deductions attributable
to interest accrued on such loans through the 1998 tax year, after which such
deductions were no longer permitted by law. The IRS disallowance of such
interest deductions, beginning during the 1990-1992 federal tax audit, resulted
in years of discussion until recently, when the issue was resolved in a
settlement approved by the Bankruptcy Court, as described below.

On January 20, 2005, Grace terminated the COLI policies and Grace, Fresenius,
Sealed Air and the IRS entered into a COLI Closing Agreement. Under the COLI
Closing Agreement, the government allowed 20% of the aggregate amount of the
COLI interest deductions and Grace owed federal income tax and interest with
respect to the remaining 80% of the COLI interest deductions disallowed. The
federal tax liability resulting from the COLI settlement is approximately $52.5
million, $10.4 million of which was paid in 2000 in connection with the
1990-1992 tax audit, and $30.8 million of which was paid in the April 14, 2005
payment in connection with the 1993-1996 federal tax audit discussed above. The
remaining approximately $11.3 million of additional tax liability will be
satisfied in connection with the 1997 and 1998 federal tax audits, which are
still under examination by the IRS. The COLI Closing Agreement also provides
that, with respect to the termination of the COLI policies, Grace will include
20% of the gain realized in taxable income, with the government exempting 80% of
such gain from tax. As a result of the termination, Grace received $14.8 million
in cash proceeds and will record income for tax purposes of approximately $60
million in 2005. It is anticipated that Grace will apply its net operating loss
carryforwards to offset the taxable income generated from terminating the COLI
policies, although alternative minimum taxes may apply.

As a consequence of having finally determined federal tax adjustments for the
1990-1996 tax periods, Grace became liable for additional state taxes plus
interest accrued thereon. Grace's estimate for state taxes and interest to be
paid for these years is approximately $27 million, of which approximately $18.5
million is expected to be paid in the near future.

Grace's federal tax returns covering 1997 through 2001 are currently under
examination by the IRS and subsequent years are open for future examination.
Grace believes that the impact of probable tax return adjustments is adequately
recognized as liabilities in its consolidated financial statements at June 30,
2005.

The IRS has assessed additional federal income tax withholding and Federal
Insurance Contributions Act taxes plus interest and related penalties for
calendar years 1993 through 1998 against a Grace subsidiary that formerly
operated a temporary staffing business for nurses and other health care
personnel. The assessments, aggregating $61.9 million, were made in connection
with a meal and incidental expense per diem plan for traveling health care
personnel, which was in effect through 1999, the year in which Grace sold the
business. (The statute of limitations has expired with respect to 1999.) The IRS
contends that certain per diem reimbursements should have been treated as wages
subject to employment taxes and federal income tax withholding. Grace contends
that its per diem and expense allowance plans were in accordance with statutory
and regulatory requirements, as well as other published guidance from the IRS.
Grace has a right to indemnification from its former partner in the business for
approximately 36% of any tax liability (including interest thereon) for the
period from July 1996 through December 1998. The matter is currently pending in
the United States Court of Claims. Grace has tentatively agreed with the
Department of Justice and IRS on a settlement amount and certain other terms
that would resolve the matter. The preliminary settlement is subject to the
execution of written closing agreements with the IRS and a written settlement
agreement with the Department of Justice, and to Bankruptcy Court approval.

On October 22, 2004, President Bush signed the American Jobs Creation Act of
2004 (the "Jobs Act") into law. The Jobs Act provides for, among other things,
an 85% dividends received deduction with respect to certain dividends received
from a U.S. corporation's foreign subsidiaries. The dividends must be used to
fund certain permitted domestic activities, as specified in the Jobs Act. These
domestic activities include the building or improvement of infrastructure,
research and development, and the financial stabilization of the corporation. As
Grace currently understands the repatriation provision, companies in a net
operating loss carryforward position would not be eligible to utilize foreign
tax credits to offset U.S. taxes on foreign dividends eligible for benefits
under the Jobs Act. Such dividends would be subject to cash taxes equal to
approximately 5.25% of the dividend distributions. Therefore, Grace does not
expect to elect


                                      I-22



the application of the Jobs Act to foreign dividend distributions. Instead, if
Grace is unable to utilize foreign tax credits to offset the U.S. tax on these
dividends, it will likely opt to utilize NOLs to offset the full 35% U.S. income
tax. Grace will continue to monitor IRS pronouncements with respect to the Jobs
Act and will reconsider its current position if the law is either clarified or
amended to permit use of its foreign tax credits to offset the U.S. tax on
qualifying dividend income. In order to preserve its rights under the Jobs Act,
Grace is complying with its terms in repatriating approximately $40 million of
dividends thus far during 2005. If the government provides guidance that would
permit Grace to utilize foreign tax credits to offset U.S. taxes on dividend
distributions, Grace will likely elect the application of the Jobs Act. In the
meantime, Grace is assuming that U.S. federal net operating loss carryforwards
will be utilized to offset U.S. taxes on 2005 dividend distributions. The
dividend-received deduction is available to taxpayers for only a limited period
of time, expiring after year-end 2005.

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

GUARANTEES AND INDEMNIFICATION OBLIGATIONS - Grace is a party to many contracts
containing guarantees and indemnification obligations. These contracts primarily
consist of:

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

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

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

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

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

FINANCIAL ASSURANCES - Financial assurances have been established for a variety
of purposes, including insurance and environmental matters, asbestos settlements
and appeals, trade-related commitments and other matters. At June 30, 2005,
Grace had gross financial assurances issued and outstanding of $253.2 million,
comprised of $135.2 million of surety bonds issued by various insurance
companies, and $118.0 million of standby letters of credit and other financial
assurances issued by various banks.

ACCOUNTING FOR CONTINGENCIES - Although the outcome of each of the matters
discussed above cannot be predicted with certainty, Grace has assessed its risk
and has made accounting estimates as required under U.S. generally accepted
accounting principles. As a result of the Filing, claims related to certain of
the items discussed above will be addressed as part of Grace's Chapter 11
proceedings. Accruals recorded for such contingencies have been included in
"liabilities subject to compromise" on the accompanying Consolidated Balance
Sheets. The amounts of these liabilities as ultimately determined through the
Chapter 11 proceedings could be materially different from amounts recorded at
June 30, 2005.

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

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


                                      I-23



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

At the December 31, 2004 measurement date for Grace's defined benefit pension
plans (the "Plans"), the accumulated benefit obligation ("ABO") was
approximately $1,367 million as measured under U.S. generally accepted
accounting principles. At June 30, 2005, Grace's recorded pension liability for
underfunded plans was $512.8 million ($438.6 million included in liabilities not
subject to compromise and $74.2 million related to supplemental pension
benefits, included in "liabilities subject to compromise"). The recorded
liability reflects (1) the shortfall between dedicated assets and the ABO of
underfunded plans ($315.3 million); and (2) the ABO of pay-as-you-go plans
($197.5 million).

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

Retirees and beneficiaries covered by the postretirement medical plan are
required to contribute a minimum of 40% of the calculated premium for that
coverage. During 2002, per capita costs under the retiree medical plans exceeded
caps on the amount Grace was required to contribute under a 1993 amendment to
the plan. As a result, for 2003 and future years, retirees will bear 100% of any
increase in premium costs. For this reason, assumed health care cost trend rates
are not used in the determination of Grace's OPEB expense.

In December 2003, President Bush signed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the "Act") into law. The Act
introduces a prescription drug benefit under Medicare ("Medicare Part D") as
well as a federal subsidy to companies that provide a benefit that is at least
actuarially equivalent (as defined in the Act) to Medicare Part D. On January
21, 2005, the Center for Medicare and Medicaid Services released the final
regulations implementing the Act. Grace has determined that the prescription
drug benefit under its postretirement health care plan is actuarially equivalent
to the Medicare Part D benefit. Therefore, the accumulated postretirement
benefit obligation (APBO) was remeasured as of January 21, 2005 to reflect the
amount associated with the federal subsidy. The APBO was reduced by
approximately $22.0 million and the net periodic benefit cost for 2005 will be
reduced by approximately $2.8 million ($1.4 million for the six-month period
ended June 30, 2005) due to the effect of the federal subsidy.

The components of net periodic benefit cost for the three months and six months
ended June 30, 2005 and 2004 are as follows:

================================================================================
                                           THREE MONTHS ENDED JUNE 30,
                                 -----------------------------------------------
                                          2005                     2004
COMPONENTS OF NET PERIODIC       -----------------------------------------------
   BENEFIT COST                            NON-                    Non-
(In millions) (Unaudited)          U.S.    U.S.    OPEB    U.S.    U.S.    OPEB
--------------------------------------------------------------------------------
Service cost .................   $  4.0   $ 1.9   $ 0.2   $ 4.1   $ 1.5   $ 0.1
Interest cost ................     14.6     4.3     1.2    15.8     4.1     1.8
Expected return on plan
   assets ....................    (12.8)   (3.9)     --   (12.5)   (3.8)     --
Amortization of prior service
   cost ......................      1.3     0.2    (3.2)    1.3     0.2    (3.1)
Amortization of unrecognized
   actuarial loss ............      6.3     1.9     0.4     4.2     1.2     0.7
Net curtailment and settlement
   loss ......................      0.1     1.6      --      --      --      --
                                 -----------------------------------------------
NET PERIODIC BENEFIT COST
   (INCOME) ..................   $ 13.5   $ 6.0   $(1.4)  $12.9   $ 3.2   $(0.5)
================================================================================


                                      I-24



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

                                           SIX MONTHS ENDED JUNE 30,
                                ------------------------------------------------
                                         2005                     2004
COMPONENTS OF NET PERIODIC      ------------------------------------------------
   BENEFIT COST                           NON-                     Non-
(In millions) (Unaudited)        U.S.     U.S.    OPEB    U.S.     U.S.    OPEB
--------------------------------------------------------------------------------
Service cost ................   $  8.2   $ 3.8   $ 0.4   $  7.0   $ 3.0   $ 0.3
Interest cost ...............     29.0     8.7     2.4     29.7     8.3     3.5
Expected return on plan
   assets ...................    (25.6)   (7.9)     --    (25.1)   (7.6)     --
Amortization of prior
   service cost .............      2.6     0.4    (6.4)     2.7     0.4    (6.3)
Amortization of
   unrecognized actuarial
   loss .....................     11.4     3.8     0.8      8.8     2.4     1.4
Net curtailment and
   settlement loss ..........      1.1     1.6      --       --      --      --
                                ------------------------------------------------
NET PERIODIC BENEFIT COST
   (INCOME) .................   $ 26.7   $10.4   $(2.8)  $ 23.1   $ 6.5   $(1.1)
================================================================================

PLAN CONTRIBUTIONS AND FUNDING - Subject to the approval of the Bankruptcy
Court, it is Grace's intention to satisfy its obligations under the Plans and to
comply with all of the requirements of the Employee Retirement Income Security
Act of 1974. On June 22, 2005, Grace obtained Bankruptcy Court approval to fund
minimum required payments of approximately $46 million for the period July 2005
through June 2006. In that regard, in July 2005, Grace contributed approximately
$15 million to the trusts that hold assets of the Plans as permitted by the
Bankruptcy Court. However, there can be no assurance that the Bankruptcy Court
will continue to approve arrangements to satisfy the funding needs of the Plans.
Contributions to non-U.S. plans are not subject to Bankruptcy Court approval and
Grace intends to fund such plans based on actuarial and trustee recommendations.

Grace plans to pay benefits as they become due under virtually all pay-as-you-go
plans and to maintain compliance with federal funding laws for its U.S.
qualified plans.

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

Grace is a global producer of specialty chemicals and specialty materials. It
generates revenues from two business segments: Davison Chemicals, which consists
of the refining technologies and specialty materials product groups; and
Performance Chemicals, which consists of the specialty construction chemicals,
building materials, and sealants and coatings product groups. Intersegment
sales, eliminated in consolidation, are not material. The table below presents
information related to Grace's business segments for the three-month and
six-month periods ended June 30, 2005 and 2004. Only those corporate expenses
directly related to the segment are allocated for reporting purposes. All
remaining corporate items are reported separately and labeled as such.

===================================================================
                                THREE MONTHS         SIX MONTHS
BUSINESS SEGMENT DATA              ENDED               ENDED
(In millions) (Unaudited)         JUNE 30,            JUNE 30,
===================================================================
                               2005     2004      2005       2004
                              -------------------------------------
NET SALES

Davison Chemicals .........   $358.9   $297.8   $  693.6   $  568.7
Performance Chemicals .....    317.6    274.6      586.1      522.2
                              -------------------------------------
TOTAL .....................   $676.5   $572.4   $1,279.7   $1,090.9
                              =====================================
PRE-TAX OPERATING INCOME

Davison Chemicals .........   $ 43.1   $ 37.5   $   80.8   $   69.5
Performance Chemicals .....     45.7     38.9       73.0       66.5
                              -------------------------------------
TOTAL .....................   $ 88.8   $ 76.4   $  153.8   $  136.0
===================================================================

The table below presents information related to the geographic areas in which
Grace operated for each of the three-month and six-month periods ended June 30,
2005 and 2004, respectively.

==========================================================================
                                       THREE MONTHS         SIX MONTHS
GEOGRAPHIC AREA DATA                      ENDED               ENDED
(In millions) (Unaudited)                JUNE 30,            JUNE 30,
==========================================================================
                                      2005     2004      2005       2004
                                     -------------------------------------
NET SALES
   United States .................   $249.0   $223.9   $  475.9   $  426.1
   Canada and Puerto Rico ........     31.9     26.8       65.2       49.7
   Europe, other than Germany ...     214.7    176.8      407.4      342.0
   Germany .......................     30.0     29.1       58.5       57.3
   Asia Pacific ..................    117.6     86.7      205.7      159.5
   Latin America .................     33.3     29.1       67.0       56.3
                                     -------------------------------------
TOTAL ............................   $676.5   $572.4   $1,279.7   $1,090.9
==========================================================================

The pre-tax operating income for Grace's business segments for each of the
three-month and six-month periods ended June 30, 2005 and 2004, respectively, is
reconciled below to income (loss) before Chapter 11 expenses, income taxes, and
minority interest presented in the accompanying Consolidated Statements of
Operations.


                                      I-25



=============================================================================
RECONCILIATION OF BUSINESS SEGMENT DATA      THREE MONTHS       SIX MONTHS
   TO FINANCIAL STATEMENTS                      ENDED              ENDED
(In millions) (Unaudited)                      JUNE 30,          JUNE 30,
=============================================================================
                                            2005     2004     2005      2004
                                           ----------------------------------
Pre-tax operating income - business
   segments ............................   $ 88.8   $ 76.4   $153.8   $136.0
Minority interest ......................      7.5      2.6     11.0      3.1
Net gain (loss) on sales of
   investments and disposals of
   assets ..............................     (0.4)    (0.1)     0.5     (0.3)
Provision for environmental
   remediation .........................       --       --       --       --
Interest expense and related
   financing costs .....................    (13.3)    (3.9)   (27.9)    (7.8)
Corporate costs ........................    (32.2)   (27.1)   (57.5)   (48.2)
Other, net .............................     14.4     (8.0)     6.1    (11.2)
                                           ----------------------------------
Income (loss) before Chapter 11
   expenses, income taxes, and
   minority interest ...................   $ 64.8   $ 39.9   $ 86.0   $ 71.6
=============================================================================

Minority interest for the three-month and six-month periods ended June 30, 2005
increased over the prior year periods primarily due to increased profit from
Advanced Refining Technologies LLC ("ART"), a joint venture between Grace and
Chevron Products Company.

Corporate costs include expenses of corporate headquarters functions incurred in
support of core operations, such as corporate financial and legal services,
human resources management, communications and regulatory affairs. This item
also includes certain pension and postretirement benefits, including the
amortization of deferred costs that are considered a core operating expense but
not allocated to business segments. Corporate costs for the three-month and
six-month periods ended June 30, 2005 increased over the prior year periods
primarily due to higher pension expense that reflects updated assumptions for
expected life-spans, the longevity of Grace's active work force, and
amortization of deferred costs related to capital market returns in recent
years.

Other items for the three-month and six-month periods ended June 30, 2005
increased over the prior year periods primarily due to the receipt of
approximately $20 million of income and cash proceeds from the settlement of two
disputes with insurance carrier groups with respect to coverage for past
environmental remediation and asbestos-related costs, offset by an accrual for
legal fees related to the Montana criminal proceeding (see Note 12 for more
information).


                                      I-26



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

--------------------------------------------------------------------------------
FINANCIAL SUMMARY FOR SECOND QUARTER 2005
--------------------------------------------------------------------------------

The following is a summary analysis of key financial measures of Grace's
performance for the three months and six months ended June 30, 2005 compared
with the prior year periods.

o    Grace's net income for each period has been primarily affected by: (1) the
     performance of Grace's businesses, which employ a growth and productivity
     strategy to maximize business performance, and (2) the impact of legal
     contingencies and other noncore liabilities.

o    The 53.5% increase in net income for the three months ended June 30, 2005
     from the prior year period was a result of a 14.8% increase in pre-tax
     income from core operations and income from two insurance settlements,
     offset by higher interest expense to conform to rates in Grace's proposed
     Chapter 11 plan of reorganization and higher legal costs related to Chapter
     11 and other litigation proceedings. Net income for the six months ended
     June 30, 2005 decreased 3.5% from the prior year period as a 9.7% increase
     in 2005 pre-tax income from core operations was more than offset by higher
     interest expense and legal costs.

o    Sales increased 18.2% and 17.3% for the three and six months ended June 30,
     2005 from the respective prior year periods as a result of (1) higher sales
     volumes in all key geographic regions, (2) selling price increases to
     partially offset inflation in operating costs, (3) improved product mix,
     (4) acquisitions, and (5) favorable currency translation from a weaker U.S.
     dollar.

o    Pre-tax income from core operations increased 14.8% and 9.7% for the three
     and six months ended June 30, 2005 from the respective prior year periods
     due primarily to added profit from higher sales and from productivity
     improvements, which together more than offset increases in raw materials,
     energy and certain operating expenses.

o    Pre-tax operating income for the Davison Chemicals segment increased 14.9%
     and 16.3% for the three and six months ended June 30, 2005 from the
     respective prior year periods primarily as a result of sales increases,
     particularly in refining technologies products, accretive acquisition
     results, and favorable foreign currency translation and commodity
     contracts; offset by higher raw material and energy costs and costs to
     further integrate business functions and processes.

o    Pre-tax operating income for the Performance Chemicals segment increased
     17.5% and 9.8% for the three and six months ended June 30, 2005 from the
     respective prior year periods primarily due to sales increases and
     productivity improvements partially offset by higher raw material costs.

o    Operating cash flow was a negative $80.4 million for the six months ended
     June 30, 2005, compared with a positive cash flow of $85.8 million for the
     prior year period. Cash flow for the six months ended June 30, 2005
     included a payment of $90 million to resolve U.S. federal tax return audits
     for the 1993-1996 tax periods, a payment of $21.4 million to resolve an
     environmental contingency at a formerly owned site, and a payment of $10.5
     million to rollforward dollar-to-euro currency contracts related to a
     euro-denominated intercompany loan.

Grace is attempting to resolve noncore liabilities and contingencies through its
Chapter 11 proceeding. The noncore liabilities include asbestos-related
litigation, environmental remediation, tax disputes and business litigation.
Grace's operating statements include periodic adjustments to account for changes
in estimates of such liabilities and developments in its Chapter 11 proceeding.
These liabilities and contingencies may result in continued volatility in net
income in the future.

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

W. R. Grace & Co. and its subsidiaries are engaged in specialty chemicals and
specialty materials businesses on a worldwide basis through two business
segments: Davison Chemicals, which includes two main product groups - refining
technologies and specialty materials; and Performance Chemicals, which includes
three main product groups - specialty construction chemicals, building materials
and sealants and coatings.

GLOBAL SCOPE - Grace operates its business on a global scale with more than 60%
of its revenue and 40% of its operating property outside the United States. Its
business is conducted in more than 40 countries and in more than 20 currencies.
The business segments are managed on a global basis, serving global markets,
with currency fluctuations in relation to the U.S. dollar affecting reported
earnings, net assets and cash flows.


                                      I-27



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

================================================================================
                                                   THREE MONTHS     SIX MONTHS
PERCENTAGE OF                                         ENDED           ENDED
  TOTAL GRACE SALES                                  JUNE 30,        JUNE 30,
================================================================================
                                                   2005    2004    2005    2004
                                                  ------------------------------
Refining technologies .........................    31.5%   29.4%   31.9%   28.7%
Specialty materials ...........................    21.5%   22.6%   22.3%   23.4%
                                                  ------------------------------
DAVISON CHEMICALS .............................    53.0%   52.0%   54.2%   52.1%
                                                  ------------------------------
Construction chemicals ........................    23.6%   23.6%   22.4%   22.9%
Building materials ............................    11.7%   12.1%   11.6%   12.0%
Sealants and coatings .........................    11.7%   12.3%   11.8%   13.0%
                                                  ------------------------------
PERFORMANCE CHEMICALS .........................    47.0%   48.0%   45.8%   47.9%
                                                  ------------------------------
TOTAL .........................................   100.0%  100.0%  100.0%  100.0%
================================================================================

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

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

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

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

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

In response to a sharply increasing number of asbestos-related personal injury
claims, on April 2, 2001, Grace and 61 of its United States subsidiaries and
affiliates, including W. R. Grace & Co. - Conn. (collectively, the "Debtors"),
filed voluntary petitions for reorganization (the "Filing") under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court for the
District of Delaware (the "Bankruptcy Court"). Grace's non-U.S. subsidiaries and
certain of its U.S. subsidiaries were not included in the Filing.

Under Chapter 11, the Debtors have continued to operate their businesses as
debtors-in-possession under court protection from creditors and claimants, while
using the Chapter 11 process to develop and implement a plan for addressing the
asbestos-related claims. Since the Filing, all motions necessary to conduct
normal business activities have been approved by the Bankruptcy Court.

On January 13, 2005, Grace filed an amended plan of reorganization (the "Plan")
and related documents with the Bankruptcy Court. The Plan is supported by
committees representing general unsecured creditors and equity holders, but is
not supported by committees representing asbestos personal injury claimants and
asbestos property damage claimants. Under the terms of the Plan, a trust would
be established to which all pending and future asbestos-related claims would be
channeled for resolution. The Plan will become effective only after a vote of
eligible creditors and with the approval of the Bankruptcy Court and the U.S.


                                      I-28



District Court for the District of Delaware. See "Plan of Reorganization" below
for more information.

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

The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires that management make estimates and
assumptions affecting the assets and liabilities reported at the date of the
Consolidated Financial Statements, and the revenues and expenses reported for
the periods presented. Actual amounts could differ from those estimates. Changes
in estimates are recorded in the period identified. Grace's accounting
measurements that are most affected by management's estimates of future events
are:

o    Contingent liabilities such as asbestos-related matters (see Notes 2 and 3
     to the Consolidated Financial Statements), environmental remediation (see
     Note 12 to the Consolidated Financial Statements), income taxes (see Note
     12 to the Consolidated Financial Statements), and litigation (see Note 12
     to the Consolidated Financial Statements).

o    Pension and postretirement liabilities that depend on assumptions regarding
     discount rates and/or total returns on invested funds. (See Note 13 to the
     Consolidated Financial Statements.)

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

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

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

--------------------------------------------------------------------------------
SUMMARY FINANCIAL INFORMATION AND METRICS
--------------------------------------------------------------------------------

Set forth on the next page is a chart that lists key operating statistics, and
dollar and percentage changes for the three-month and six-month periods ended
June 30, 2005 and 2004. The chart should be referenced when reading management's
discussion and analysis of financial condition and results of operations.


                                      I-29



<TABLE>

============================================================================================================================
ANALYSIS OF CONTINUING OPERATIONS                   THREE MONTHS ENDED                          SIX MONTHS ENDED
(In millions)                                            JUNE 30,                                   JUNE 30,
============================================================================================================================
                                                            $ Change   % Change                          $ Change   % Change
                                                               Fav        Fav                               Fav        Fav
                                           2005     2004     (Unfav)    (Unfav)      2005       2004      (Unfav)    (Unfav)
                                          ----------------------------------------------------------------------------------

NET SALES:
   Davison Chemicals ..................   $358.9   $297.8    $ 61.1      20.5%     $  693.6   $  568.7    $124.9     22.0%
   Performance Chemicals ..............    317.6    274.6      43.0      15.7%        586.1      522.2      63.9     12.2%
                                          ----------------------------------------------------------------------------------
TOTAL GRACE NET SALES .................   $676.5   $572.4    $104.1      18.2%     $1,279.7   $1,090.9    $188.8     17.3%
============================================================================================================================
PRE-TAX OPERATING INCOME
   Davison Chemicals ..................   $ 43.1   $ 37.5    $  5.6      14.9%     $   80.8   $   69.5    $ 11.3     16.3%
   Performance Chemicals ..............     45.7     38.9       6.8      17.5%         73.0       66.5       6.5      9.8%
                                          ----------------------------------------------------------------------------------
   Corporate costs:
      Support functions ...............     (9.7)    (8.6)     (1.1)    (12.8%)       (19.2)     (16.6)     (2.6)   (15.7%)
      Pension, performance-related
         compensation, and other ......    (22.5)   (18.5)     (4.0)    (21.6%)       (38.3)     (31.6)     (6.7)   (21.2%)
                                          ----------------------------------------------------------------------------------
   Total Corporate costs ..............    (32.2)   (27.1)     (5.1)    (18.8%)       (57.5)     (48.2)     (9.3)   (19.3%)
                                          ----------------------------------------------------------------------------------
PRE-TAX INCOME FROM CORE OPERATIONS ...     56.6     49.3       7.3      14.8%         96.3       87.8       8.5      9.7%
PRE-TAX INCOME (LOSS) FROM NONCORE
   ACTIVITIES .........................     13.1     (9.5)     22.6        NM           5.0      (13.8)     18.8    136.2%
      Interest expense ................    (13.3)    (3.9)     (9.4)       NM         (27.9)      (7.8)    (20.1)      NM
      Interest income .................      0.9      1.4      (0.5)    (35.7%)         1.6        2.3      (0.7)   (30.4%)
                                          ----------------------------------------------------------------------------------
INCOME (LOSS) BEFORE CHAPTER 11
   EXPENSES AND INCOME TAXES ..........     57.3     37.3      20.0      53.6%         75.0       68.5       6.5      9.5%
Chapter 11 expenses, net ..............     (4.6)    (3.0)     (1.6)    (53.3%)       (10.6)      (7.5)     (3.1)   (41.3%)
Benefit from (provision for)
   income taxes .......................    (20.0)   (13.0)     (7.0)    (53.8%)       (28.6)     (23.9)     (4.7)   (19.7%)
                                          ----------------------------------------------------------------------------------
NET INCOME (LOSS) .....................   $ 32.7   $ 21.3    $ 11.4      53.5%     $   35.8   $   37.1    $ (1.3)    (3.5%)
============================================================================================================================
KEY FINANCIAL MEASURES:
PRE-TAX INCOME FROM CORE OPERATIONS
   AS PERCENTAGE OF SALES:
      Davison Chemicals ...............     12.0%    12.6%       NM      (0.6)pts      11.6%      12.2%       NM     (0.6)pts
      Performance Chemicals ...........     14.4%    14.2%       NM       0.2pts       12.5%      12.7%       NM     (0.2)pts
      Total Core Operations ...........      8.4%     8.6%       NM      (0.2)pts       7.5%       8.0%       NM     (0.5)pts
PRE-TAX INCOME FROM CORE OPERATIONS
   BEFORE DEPRECIATION AND
   AMORTIZATION .......................   $ 85.2   $ 75.6    $  9.6      12.7%     $  153.7   $  141.3    $ 12.4      8.8%
      AS A PERCENTAGE OF SALES ........     12.6%    13.2%       NM      (0.6)pts      12.0%      13.0%       NM     (1.0)pts
DEPRECIATION AND AMORTIZATION .........   $ 28.6   $ 26.3    $  2.3       8.7%     $   57.4   $   53.5    $  3.9      7.3%
============================================================================================================================
NET CONSOLIDATED SALES BY REGION:
      North America ...................   $280.9   $250.7    $ 30.2      12.0%     $  541.1   $  475.8    $ 65.3     13.7%
      Europe ..........................    244.7    205.9      38.8      18.8%        465.9      399.3      66.6     16.7%
      Asia Pacific ....................    117.6     86.7      30.9      35.6%        205.7      159.5      46.2     29.0%
      Latin America ...................     33.3     29.1       4.2      14.4%         67.0       56.3      10.7     19.0%
                                          ----------------------------------------------------------------------------------
TOTAL .................................   $676.5   $572.4    $104.1      18.2%     $1,279.7   $1,090.9    $188.8     17.3%
============================================================================================================================
</TABLE>

NM = Not meaningful

The above chart, as well as the financial information presented throughout this
discussion, divides Grace's financial results between "core operations" and
"noncore activities." Core operations comprise the financial results of Davison
Chemicals, Performance Chemicals, and the costs of corporate activities that
directly or indirectly support business operations. In contrast, noncore
activities comprise all other events and transactions not directly related to
the generation of operating revenue or the support of core operations and
generally relate to Grace's former operations and products. Grace uses pre-tax
income from core operations as a factor in determining certain incentive
compensation and as a key factor in its management's decision-making process.

Neither pre-tax income from core operations nor pre-tax income from core
operations before depreciation and amortization purport to represent income or
cash flow as defined under generally accepted accounting principles, and should
not be considered an alternative to such measures as an indicator of Grace's
performance. These measures are provided to distinguish operating results of
Grace's current business base from results and related assets and liabilities of
past businesses, discontinued products, and corporate legacies including the
effect of Grace's Chapter 11 proceedings.


                                      I-30



--------------------------------------------------------------------------------
GRACE OVERVIEW
--------------------------------------------------------------------------------

NET SALES - The following tables identify the year-over-year increase or
decrease in sales attributable to changes in product volume, product price
and/or mix, and the impact of foreign currency translation for the three and six
months ended June 30, 2005 and 2004, respectively.

================================================================================
                                         THREE MONTHS ENDED JUNE 30, 2005 AS A
NET SALES                                 PERCENTAGE INCREASE (DECREASE) FROM
  VARIANCE ANALYSIS                         THREE MONTHS ENDED JUNE 30, 2004
================================================================================
                                                              CURRENCY
                                        VOLUME   PRICE/MIX   TRANSLATION   TOTAL
                                        ----------------------------------------
Davison Chemicals ...................     5.2%     12.9%         2.4%      20.5%
Performance Chemicals ...............     9.7%      3.5%         2.5%      15.7%
Net sales ...........................     7.4%      8.4%         2.4%      18.2%
--------------------------------------------------------------------------------
BY REGION:
   North America ....................     7.8%      3.9%         0.3%      12.0%
   Europe ...........................     9.1%      4.4%         5.3%      18.8%
   Asia Pacific .....................     9.9%     23.7%         2.0%      35.6%
   Latin America ....................   (12.7%)    25.0%         2.1%      14.4%
================================================================================

Grace's sales in the three months ended June 30, 2005 compared with the prior
year period were favorably impacted by higher sales volume, especially in
refining technologies and construction chemicals products, with acquisitions
contributing $16.7 million or 2.9 percentage points of the sales volume growth.
Foreign currency translation contributed $14.0 million or 2.4 percentage points
of the sales growth, mainly due to the strengthening of the Euro against the
U.S. dollar compared with the prior year period. Selling price increases,
implemented to partially offset a significant increase in raw material and
energy costs, added approximately $17 million to 2005 second quarter sales.

================================================================================
                                           SIX MONTHS ENDED JUNE 30, 2005 AS A
NET SALES                                  PERCENTAGE INCREASE (DECREASE) FROM
   VARIANCE ANALYSIS                          SIX MONTHS ENDED JUNE 30, 2004
================================================================================
                                                              CURRENCY
                                        VOLUME   PRICE/MIX   TRANSLATION   TOTAL
                                        ----------------------------------------
Davison Chemicals ...................     7.5%     12.1%         2.4%      22.0%
Performance Chemicals ...............     7.0%      2.8%         2.4%      12.2%
Net sales ...........................     7.3%      7.6%         2.4%      17.3%
--------------------------------------------------------------------------------
BY REGION:
   North America ....................     6.9%      6.5%         0.3%      13.7%
   Europe ...........................     6.5%      4.9%         5.3%      16.7%
   Asia Pacific .....................     9.0%     18.1%         1.9%      29.0%
   Latin America ....................    10.3%      7.1%         1.6%      19.0%
================================================================================

Grace's sales in the six months ended June 30, 2005 compared with the prior year
period were favorably impacted by higher sales volume, especially in refining
technologies and construction chemicals products, with acquisitions contributing
$33.1 million or 3.0 percentage points of the sales volume growth. Foreign
currency translation contributed $26.2 million or 2.4 percentage points of the
sales growth, mainly due to the strengthening of the Euro against the U.S.
dollar compared with the prior year period. Selling price increases, implemented
to partially offset a significant increase in raw material and energy costs,
added approximately $26 million to year-to-date sales.

PRE-TAX INCOME FROM CORE OPERATIONS - Operating profit for the three-month and
six-month periods ended June 30, 2005 was higher as compared with the respective
prior year periods due to strong sales volume growth (including acquisitions and
a better product mix), higher selling prices to partially offset the impact of
cost inflation, and favorable foreign currency translation.

Corporate costs include corporate functional costs (such as financial and legal
services, human resources, communications and information technology), the cost
of corporate governance (including directors and officers liability insurance, a
portion of which is allocated to noncore activities) and pension costs related
to both corporate employees and to the effects of changes in assets and
liabilities for all Grace pension plans. Corporate costs for the three and six
months ended June 30, 2005 increased over the prior year periods primarily due
to higher pension expense that reflects updated assumptions for expected
life-spans, the longevity of Grace's active work force, and amortization of
deferred costs related to capital market returns in recent years.

PRE-TAX INCOME (LOSS) FROM NONCORE ACTIVITIES - Pre-tax income (loss) from
noncore activities reflects items not directly related to Grace's core operating
units. This category of costs and income is expected to be volatile as
potentially material items are addressed through Grace's Chapter 11 proceedings
and/or as the financial implications of Grace's legal contingencies become
apparent.

================================================================================
PRE-TAX INCOME (LOSS) FROM                        THREE MONTHS     SIX MONTHS
   NONCORE ACTIVITIES                                ENDED            ENDED
(In millions)                                       JUNE 30,        JUNE 30,
================================================================================
                                                  2005    2004    2005    2004
                                                 -------------------------------
Insurance settlements ........................   $20.3   $  --   $20.3   $   --
Asbestos administration, net .................    (1.9)     --    (4.2)      --
COLI income, net .............................     0.6     0.7     1.9      2.2
D&O insurance cost ...........................    (1.5)   (1.3)   (3.0)    (2.6)
Pension and postretirement benefit
   costs .....................................    (1.3)   (2.3)   (2.6)    (4.5)
Translation effects - intercompany loan ......   (16.5)    0.5   (31.4)    (1.1)
Value of currency contracts ..................    16.7    (9.3)   31.2     (9.3)
Foreign currency transaction effects .........    (0.3)    0.4    (0.5)     0.6
Legal fees ...................................    (3.2)     --    (9.2)      --
Other ........................................     0.2     1.8     2.5      0.9
                                                 -------------------------------
                                                 $13.1   $(9.5)  $ 5.0   $(13.8)
================================================================================

Pre-tax income (loss) from noncore activities for the three and six months ended
June 30, 2005 was comparable with the prior year periods except for: (1) the
foreign currency effect of an intercompany loan as described below, (2) the
receipt of approximately $20 million of income and cash proceeds from the
settlement of two disputes with insurance carrier groups with respect to
coverage for past

                                      I-31



environmental remediation and asbestos-related costs, and (3) an accrual for
defense costs related to the Montana and New Jersey legal proceedings (see Note
12 to the Consolidated Financial Statements for more information).

In March 2004, Grace began accounting for currency fluctuations on a (euro)293
million intercompany loan between Grace's subsidiaries in the United States and
Germany as a component of operating results instead of as a component of other
comprehensive income. The change was prompted by new tax laws in Germany and
Grace's cash flow planning for its Chapter 11 reorganization, which indicated
that it is no longer reasonable to consider this loan as part of the permanent
capital structure in Germany. In May 2004, Grace entered into a series of
foreign currency forward contracts to mitigate future currency fluctuations on
the remaining loan balance. These contracts were extended in June 2005 and have
varying rates that coincide with loan repayments due periodically through
December 2008. In 2005, (euro)30.9 million of loan principal was repaid. For the
six months ended June 30, 2005, a $31.2 million contract gain was recognized,
offset by a $31.4 million foreign currency loss, and was reported in other
(income) expense. These forward contracts are considered derivative instruments
that are viewed as risk management tools by Grace and are not used for trading
or speculative purposes.

CHAPTER 11 EXPENSES - Although it is difficult to measure precisely how Chapter
11 has impacted Grace's overall financial performance, there are certain added
costs that are directly attributable to operating under the Bankruptcy Code. Net
Chapter 11 expenses consist primarily of legal, financial and consulting fees
incurred by Grace and three creditors' committees. Chapter 11 expenses for the
three and six months ended June 30, 2005 were higher than the respective prior
year periods primarily due to higher legal costs.

Grace's pre-tax income from core operations included expenses for Chapter
11-related compensation charges of $6.5 million and $7.1 million for the three
months ended June 30, 2005 and 2004, respectively, and $9.4 million and $10.8
million for the six months ended June 30, 2005 and 2004, respectively. Poor
stock price performance in the period leading up to and after the Filing
diminished the value of Grace's stock option program as an incentive
compensation tool for current and prospective employees, which caused Grace to
change its long-term incentive compensation program into a cash-based program.

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

INTEREST EXPENSE - Net interest expense for the three and six months ended June
30, 2005 was up $9.9 million and $20.8 million, respectively, compared with the
prior year periods. This increase is due to the interest to which general
unsecured creditors would be entitled under the Plan. The Plan states that each
holder of an allowed general unsecured claim shall be paid in full, plus
post-petition interest. Post-petition interest shall accrue through the date of
payment and shall be (i) for the holders of the Debtors' pre-petition bank
credit facilities, at a rate of 6.09% per annum, compounded quarterly, (ii) for
the holders of claims who, but for the Filing would be entitled under a contract
or otherwise to accrue or be paid interest on such claim in a non-default (or
non-overdue payment) situation under applicable non-bankruptcy law, the rate
provided in the contract between a Debtor(s) and the claimant or such rate as
may otherwise apply under applicable non-bankruptcy law, or (iii) for all other
holders of allowed general unsecured claims, at a rate of 4.19% per annum,
compounded annually. Under the Plan, such interest, which is payable 85% in cash
and 15% in Grace common stock, will not be paid until the Plan is confirmed and
funded.

INCOME TAXES - Grace's provision for income taxes at the federal corporate rate
of 35.0% was $22.5 million and $21.4 million for the six months ended June 30,
2005 and 2004, respectively. The primary differences between these amounts and
the overall provision for income taxes is attributable to current period
interest on tax contingencies and the non-deductibility of certain Chapter 11
expenses.

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

DAVISON CHEMICALS

================================================================================
                                                THREE MONTHS ENDED JUNE 30,
                                           -------------------------------------
                                                             $ Change   % Change
NET SALES BY PRODUCT LINE                                       Fav        Fav
(In millions)                               2005     2004     (Unfav)    (Unfav)
--------------------------------------------------------------------------------
Refining technologies ..................   $213.3   $168.5     $44.8      26.6%
Specialty materials ....................    145.6    129.3      16.3      12.6%
TOTAL DAVISON CHEMICALS ................   $358.9   $297.8     $61.1      20.5%
================================================================================
                                                THREE MONTHS ENDED JUNE 30,
                                           -------------------------------------
                                                             $ Change   % Change
NET SALES BY REGION                                             Fav        Fav
(In millions)                               2005     2004     (Unfav)    (Unfav)
--------------------------------------------------------------------------------
North America ..........................   $127.6   $115.8     $11.8      10.2%
Europe .................................    143.0    122.8      20.2      16.4%
Asia Pacific ...........................     74.7     47.4      27.3      57.6%
Latin America ..........................     13.6     11.8       1.8      15.3%
TOTAL DAVISON CHEMICALS ................   $358.9   $297.8     $61.1      20.5%
================================================================================

                                      I-32



Sales

The increase in sales for the Davison segment for the three months ended June
30, 2005 from the prior year period was attributable primarily to higher volume
in refining technologies, sales from the acquisition of Alltech International
Holdings, Inc. completed in August 2004, and favorable product mix.

The increase in sales of refining technologies products for the three months
ended June 30, 2005 compared with the prior year period resulted primarily from
volume gains in response to high worldwide demand for catalysts that enhance
refinery through-put, upgrade crude oil feedstocks and help produce cleaner
fuels, and from added revenue from the contractual pass-through of commodity
metals costs.

The increase in sales of specialty materials products for the three months ended
June 30, 2005 from the prior year period was primarily attributable to sales
from the acquisition of Alltech, higher selling prices to partially offset raw
material and energy cost inflation, favorable product mix, and favorable
currency; offset by lower sales of engineered materials in Europe as a result of
a decline in economic activity in parts of that region.

Sales from acquisitions accounted for $12.5 million, or 4.2 percentage points of
the sales growth in the period, almost all of which was attributable to the
acquisition of Alltech. Sales increases also reflected favorable foreign
currency translation, which contributed 2.4 percentage points of the sales
increase in the period.

Sales growth was strong in all regions. Sales in Asia Pacific and Latin America
were up due to strong demand in all product lines from economic activity in
China and increased sales activity in Latin America. In North America, increased
sales were primarily attributable to volume growth, as well as favorable product
price/mix, reflecting stronger economic activity in the United States. European
sales were higher due to the effects of favorable currency translation and
higher demand for refining technologies products, which more than offset the
effects of lower economic activity in parts of that region.

Operating Income

Pre-tax operating income for the Davison Chemicals segment was up 14.9% for the
three months ended June 30, 2005. The increase was attributable to contributions
from higher sales volume in refining technologies, a more profitable product
mix, increased selling prices implemented to partially offset higher raw
materials and energy costs, accretive acquisition results, and favorable
currency translation and commodity contracts. Costs associated with integrating
business functions and processes partially offset the increase.

================================================================================
                                                 SIX MONTHS ENDED JUNE 30,
                                           -------------------------------------
                                                             $ Change   % Change
NET SALES BY PRODUCT LINE                                       Fav        Fav
(In millions)                               2005     2004     (Unfav)    (Unfav)
--------------------------------------------------------------------------------
Refining technologies ..................   $407.7   $313.6    $ 94.1      30.0%
Specialty materials ....................    285.9    255.1      30.8      12.1%
                                           -------------------------------------
TOTAL DAVISON CHEMICALS ................   $693.6   $568.7    $124.9      22.0%
================================================================================

                                                SIX MONTHS ENDED JUNE 30,
                                           -------------------------------------
                                                             $ Change   % Change
NET SALES BY REGION                                             Fav        Fav
(In millions)                               2005     2004     (Unfav)    (Unfav)
--------------------------------------------------------------------------------
North America ..........................   $257.6   $220.8    $ 36.8      16.7%
Europe .................................    280.4    240.3      40.1      16.7%
Asia Pacific ...........................    125.0     85.2      39.8      46.7%
Latin America ..........................     30.6     22.4       8.2      36.6%
                                           -------------------------------------
TOTAL DAVISON CHEMICALS ................   $693.6   $568.7    $124.9      22.0%
================================================================================

Sales

The sales increase for the six months ended June 30, 2005 over the prior year
period was 22.0% which reflects similar economic conditions and cost factors as
those experienced in the three months ended June 30, 2005.

Operating Income

The 16.3% increase in operating income for the six months ended June 30, 2005
over the prior year period was a result of similar economic conditions and cost
factors as those experienced in the three months ended June 30, 2005.

PERFORMANCE CHEMICALS
================================================================================
                                                 THREE MONTHS ENDED JUNE 30,
                                           -------------------------------------
                                                             $ Change   % Change
NET SALES BY PRODUCT LINE                                       Fav        Fav
(In millions)                               2005     2004     (Unfav)    (Unfav)
--------------------------------------------------------------------------------
Construction chemicals .................   $159.4   $135.0     $24.4      18.1%
Building materials .....................     79.2     69.1      10.1      14.6%
Sealants and coatings ..................     79.0     70.5       8.5      12.1%
                                           -------------------------------------
TOTAL PERFORMANCE CHEMICALS ............   $317.6   $274.6     $43.0      15.7%
================================================================================
                                                 THREE MONTHS ENDED JUNE 30,
                                           -------------------------------------
                                                             $ Change   % Change
NET SALES BY REGION                                             Fav        Fav
(In millions)                               2005     2004     (Unfav)    (Unfav)
--------------------------------------------------------------------------------
North America ..........................   $153.3   $134.9     $18.4      13.6%
Europe .................................    101.7     83.1      18.6      22.4%
Asia Pacific ...........................     42.9     39.3       3.6       9.2%
Latin America ..........................     19.7     17.3       2.4      13.9%
                                           -------------------------------------
TOTAL PERFORMANCE CHEMICALS ............   $317.6   $274.6     $43.0      15.7%
================================================================================

Sales

The 15.7% increase in sales for the Performance Chemicals segment for the three
months ended June 30, 2005 from the prior year period was primarily a result of

                                      I-33



strong growth in sales volumes worldwide and increases in selling prices to
partially offset higher raw material costs. Favorable currency translation
accounted for 2.5 percentage points of the increase.

The increase in sales of construction chemicals reflected geographic expansion
and other growth initiatives, as well as stronger construction activity,
particularly in North America. The sales increase in building materials reflects
strong sales of roofing underlayments, particularly in North America, added
sales from the acquisition of the Triflex(R) synthetic roofing underlayment
product line in December 2004, and higher sales of specialty below-grade
waterproofing worldwide; partially offset by lower sales of fire protection
products compared with a strong second quarter of 2004. The increase in sales of
sealants and coatings was due to higher volumes and selling price increases
implemented to offset higher raw material costs, with sales of Daraform(R)
closure sealants and can coatings accounting for most of the growth.

Sales increases in North America reflected very strong U.S. construction
activity, growth programs in construction chemicals and residential
waterproofing, and the Triflex(R) acquisition. In Europe, higher sales were
primarily due to favorable foreign currency translation and growth programs in
construction chemicals. Sales in Asia Pacific increased as a result of
broad-based volume growth and the effects of favorable foreign currency
translation. Sales in Latin America were favorably impacted by currency
translation and volume increases in construction chemicals and can sealants,
offset by lower sales of closure sealants and coatings.

Operating Income

Pre-tax operating income increased 17.5% for the three months ended June 30,
2005 from the prior year period, primarily as a result of sales increases and
productivity improvements, partially offset by higher raw material costs.

================================================================================
                                                 SIX MONTHS ENDED JUNE 30,
                                           -------------------------------------
                                                             $ Change   % Change
NET SALES BY PRODUCT LINE                                       Fav        Fav
(In millions)                               2005     2004     (Unfav)    (Unfav)
--------------------------------------------------------------------------------
Construction chemicals .................   $287.0   $249.4     $37.6      15.1%
Building materials .....................    148.2    130.9      17.3      13.2%
Sealants and coatings ..................    150.9    141.9       9.0       6.3%
                                           -------------------------------------
TOTAL PERFORMANCE CHEMICALS ............   $586.1   $522.2     $63.9      12.2%
================================================================================

                                                 SIX MONTHS ENDED JUNE 30,
                                           -------------------------------------
                                                             $ Change   % Change
NET SALES BY REGION                                             Fav        Fav
(In millions)                               2005     2004     (Unfav)    (Unfav)
--------------------------------------------------------------------------------
North America ..........................   $283.5   $255.0     $28.5      11.2%
Europe .................................    185.5    159.0      26.5      16.7%
Asia Pacific ...........................     80.7     74.3       6.4       8.6%
Latin America ..........................     36.4     33.9       2.5       7.4%
                                           -------------------------------------
TOTAL PERFORMANCE CHEMICALS ............   $586.1   $522.2     $63.9      12.2%
================================================================================

Sales

The 12.2% increase in sales for the six months ended June 30, 2005 over the
prior year period was largely attributable to the same favorable factors that
affected sales in the three months ended June 30, 2005.

Operating Income

The 9.8% increase in pre-tax operating income for the six months ended June 30,
2005 over the prior year period was due to sales increases and positive results
from productivity and cost containment initiatives, partially offset by raw
material cost increases.

OPERATING RETURNS ON ASSETS EMPLOYED - The following charts set forth the
Davison Chemicals and Performance Chemicals total asset position and pre-tax
return on average total assets as of June 30, 2005 and December 31, 2004. It
should be noted that the manufacture of Davison Chemicals products generally
requires significantly higher capital costs than the manufacture of Performance
Chemicals products.

================================================================================
DAVISON CHEMICALS                                        JUNE 30,   December 31,
(In millions)                                              2005         2004
--------------------------------------------------------------------------------
Trade receivables ....................................    $192.9       $172.0
Inventory ............................................     160.9        151.8
Other current assets .................................      17.1          4.9
                                                         -----------------------
Total current assets .................................     370.9        328.7
Properties and equipment, net ........................     398.8        437.6
Goodwill and other intangible assets .................      97.0        105.7
Other assets .........................................       3.3         18.9
                                                         -----------------------
Total assets .........................................    $870.0       $890.9
                                                         =======================
Pre-tax return on average total assets ...............      18.2%        17.8%
================================================================================

Davison Chemicals' total assets decreased by $20.9 million as of June 30, 2005
compared with December 31, 2004. The decrease was due to depreciation and
amortization expense and $40.0 million lower foreign currency translation due to
the stronger U.S. dollar on June 30, 2005 than on December 31, 2004. Increased
trade receivables and inventory, due to increased sales

                                      I-34



and higher raw material costs, partially offset the decrease.

================================================================================
PERFORMANCE CHEMICALS                                    JUNE 30,   December 31,
(In millions)                                              2005         2004
--------------------------------------------------------------------------------
Trade receivables ....................................    $242.4       $219.1
Inventory ............................................     105.4         96.5
Other current assets .................................      16.8         14.5
                                                         -----------------------
Total current assets .................................     364.6        330.1
Properties and equipment, net ........................     186.7        198.3
Goodwill and other intangible assets .................      95.1        102.2
Other assets .........................................      46.9         43.9
                                                         -----------------------
Total assets .........................................    $693.3       $674.5
                                                         =======================
Pre-tax return on average total assets ...............      20.7%        20.7%
================================================================================

Performance Chemicals' total assets increased by $18.8 million as of June 30,
2005 compared with December 31, 2004, net of a decrease of $29.0 million from
lower foreign currency translation due to the stronger U.S. dollar on June 30,
2005 than on December 31, 2004. Aside from currency effects, current assets
reflected sales increases as well as some inventory building for seasonal peaks,
while the decline in properties and equipment reflected capital spending in the
first six months of 2005 at a lower level than depreciation.

--------------------------------------------------------------------------------
NONCORE LIABILITIES
--------------------------------------------------------------------------------

Grace has a number of financial exposures originating from past businesses,
products and events. These obligations arose from transactions and/or business
practices that date back to when Grace was a much larger company, when it
produced products or operated businesses that are no longer part of its revenue
base, and when government regulation was less stringent and scientific knowledge
with respect to such businesses and products was much less advanced than today.

The following table summarizes net noncore liabilities at June 30, 2005 and
December 31, 2004:

================================================================================
NET NONCORE LIABILITIES                                  JUNE 30,   December 31,
(In millions)                                              2005         2004
--------------------------------------------------------------------------------
Asbestos-related liabilities ........................   $(1,700.0)   $(1,700.0)
Asbestos-related insurance receivable ...............       500.0        500.0
                                                       -------------------------
Asbestos-related liability, net .....................    (1,200.0)    (1,200.0)
Environmental remediation ...........................      (320.6)      (345.0)
Postretirement benefits .............................      (111.1)      (118.9)
Income taxes ........................................      (143.2)      (210.4)
Retained obligations and other ......................       (20.9)       (25.1)
                                                       -------------------------
NET NONCORE LIABILITY ...............................   $(1,795.8)   $(1,899.4)
================================================================================

The resolution of most of these noncore recorded and contingent liabilities will
be determined through the Chapter 11 proceedings. Grace cannot predict with any
certainty how, and for what amounts, any of these contingencies will be
resolved. The amounts of these liabilities as ultimately determined through the
Chapter 11 proceedings could be materially different from amounts recorded by
Grace at June 30, 2005.

--------------------------------------------------------------------------------
PLAN OF REORGANIZATION
--------------------------------------------------------------------------------

As described under "Voluntary Bankruptcy Filing" in Notes 1 and 2 to the
Consolidated Financial Statements, Grace and its principal U.S. operating
subsidiary are debtors-in-possession under Chapter 11 of the Bankruptcy Code.
Grace's non-U.S. subsidiaries, although not part of the Filing, are owned
directly or indirectly by Grace's principal operating subsidiary or other filing
entities. Consequently, it is likely that a Chapter 11 reorganization plan will
involve the combined value of Grace's global businesses and its other assets to
fund (with cash and/or securities) Grace's obligations as adjudicated through
the bankruptcy process. Grace has analyzed its cash flow and capital needs to
continue to fund its businesses and believes that, while in Chapter 11,
sufficient cash flow and credit facilities are available to support its business
strategy.

On January 13, 2005, Grace filed a revised plan of reorganization (the "Plan")
and related documents to address certain objections of creditors and other
interested parties to its original plan of reorganization and disclosure
statement filed on November 13, 2004. The Plan is supported by committees
representing general unsecured creditors and equity holders, but is not
supported by committees representing asbestos personal injury claimants and
asbestos property damage claimants. See Note 2 to the Consolidated Financial
Statements for more information on the Plan.

RISKS OF THE PLAN - Grace intends to address all pending and future
asbestos-related claims and all other pre-petition claims as outlined in the
Plan. However, Grace may not be successful in obtaining approval of the Plan by
the Bankruptcy Court. Instead, a materially different plan of reorganization may
ultimately be approved and, under the ultimate plan of reorganization, the
interests of Grace's shareholders could be substantially diluted or cancelled.
The value of Grace common stock following a plan of reorganization, and the
extent of any recovery by non-asbestos-related creditors, will depend
principally on the allowed value of Grace's asbestos-related claims as
determined by the Bankruptcy Court.

Grace's proposed plan of reorganization assumes several fundamental conditions
including:

1.   Grace's asbestos-related liabilities can be resolved at a net present value
     cost of no more than $1,700 million (including $87 million for pre-petition
     asbestos-related contractual settlements and judgments), including all
     property damage claims

                                      I-35



     (including ZAI) and all pending and future personal injury claims; and

2.   The benefit of assets from litigation settlement agreements with Sealed Air
     Corporation and its subsidiary, Cryovac, Inc., and Fresenius Medical Care
     Holdings, Inc. will be available to satisfy liabilities under the Plan.

There can be no guarantee that these two fundamental conditions can be met. The
measure of Grace's asbestos-related liabilities could be settled by the
Bankruptcy Court (in conformity with Grace's Plan or otherwise), by a
negotiation with interested parties, and/or by legislation (currently being
considered by the U.S. Congress) for the personal injury component of this
contingency.

In May 2005 the Senate Judiciary Committee reported the Specter-Leahy Fairness
in Asbestos Injury Resolution Act of 2005 ("FAIR") to the Senate. The bill is
intended to create a fair and efficient system to resolve claims of victims for
personal injury caused by asbestos exposure. FAIR, as reported, provides for the
creation of a government-administered trust, to be funded by payments from
insurers and defendant companies. It also includes medical criteria against
which monetary values have been assigned so that people with an asbestos-related
condition will receive compensation under a no-fault system.

Under the current version of FAIR, Grace's required payments to the fund would
be based on a percentage of sales payable annually over a period of up to 30
years. Whether FAIR, as reported or as it may be amended, is enacted into law is
highly uncertain. Legislation to provide a resolution for asbestos personal
injury mass tort litigation has been considered many times before and in no
instance has legislation passed both houses of Congress. A resolution of
personal injury claims based on FAIR may not satisfy the conditions precedent
under the litigation settlement agreements with Sealed Air and Fresenius and,
therefore, may reduce or eliminate the availability of these assets to fund a
plan of reorganization.

Any resolution, other than that reflected in the Plan, could have a material
adverse effect on the percentage of Grace common stock to be retained by current
shareholders of Grace beyond that reflected in the proforma financial
information presented below. Grace will adjust its financial statements and the
proforma effects of the Plan as facts and circumstances warrant.

PROFORMA FINANCIAL INFORMATION - The proforma financial information of Grace
presented below reflects the accounting effects of the Plan (1) as if it were
put in effect on the date of Grace's most recent consolidated balance sheet -
June 30, 2005, and (2) as if it were in effect for (a) the full year ended
December 31, 2004, and (b) the six months ended June 30, 2005. The proforma
financial information included herein, may not be consistent with the Plan
documents filed on January 13, 2005 due to subsequent changes in operations and
accounting estimates. Such proforma financial statements reflect how Grace's
assets, liabilities, equity and income would be affected by the Plan as follows:

A.   Borrowings Under New Debt Agreements and Contingencies

The Plan reflects the assumed establishment of a new $1,000 million debt
facility to fund settled claims payable at the effective date of the Plan
(approximately $800 million) and to provide working capital (approximately $200
million) for continuing operations. Proforma expenses reflect an assumed 7%
interest rate on outstanding borrowings. No such facility currently exists but,
Grace expects, based on discussions with prospective lenders, that a facility
can be obtained before the effective date of the Plan. In addition, the proforma
financial information reflects $150.0 million in contingencies to pay
professional and bank fees, other non-operating liabilities and their related
tax effects that will not become liabilities until the effective date of the
Plan.

B.   Fresenius and Sealed Air Settlements

The Plan reflects the value, in the form of cash and securities, expected to be
realized under litigation settlement agreements as follows: $115.0 million of
cash from Fresenius; and, $1,034.8 million of estimated value from Cryovac,
Inc., a subsidiary of Sealed Air (calculated as of June 30, 2005) in the form of
$512.5 million of cash plus accrued interest at 5.5% from December 21, 2002
compounded annually (approximately $74.2 million), and nine million shares of
Sealed Air common stock valued at $49.79 per share (approximately $448.1
million). Tax accounts have been adjusted to reflect the satisfaction of Grace's
recorded liabilities by way of these third-party agreements. The Fresenius
settlement amount will be payable to Grace and will be accounted for as income.
Payments under the Sealed Air settlement will be paid directly to the asbestos
trust by Cryovac and will be accounted for as satisfaction of a portion of
Grace's recorded asbestos-related liability and a credit to shareholder's
equity. In addition, the valuation allowance related to Grace's federal deferred
tax assets will not be required as a result of these settlements and has
therefore been reversed. Both the Sealed Air and Fresenius settlements are
subject to the fulfillment of specified conditions.

C.   Payment of Pre-Petition Liabilities

The Plan reflects the transfer of funds and securities to settle estimated
obligations payable under the Plan at the effective date. Tax accounts are
adjusted to reflect the

                                      I-36



change in nature of Grace's tax assets from predominately temporary differences
to predominately time-limited tax net operating losses. Non-asbestos
pass-through liabilities are assumed to be paid in cash when due.

D.   Proforma Consolidated Statement of Operations and Capital Structure

The proforma income adjustments reflect the elimination from Grace's June 30,
2005 and December 31, 2004 Consolidated Statements of Operations of: (1) charges
and expenses directly related to Chapter 11, (2) the accounting for estimates
and provisions directly related to the Plan, and (3) the addition of interest
and new shares of Grace common stock related to the assumed financing of the
Plan. For purposes of proforma earnings per share and proforma share capital,
the trading value of Grace's common stock at June 30, 2005 of $7.79 per share
was used for calculating issued and outstanding shares. At this per share
valuation, it is assumed that 77.8 million shares will be issued at the
effective date of the Plan to fund asbestos and general unsecured claims, 16.7
million shares would be issuable upon exercise of warrants to satisfy Grace's
estimate of PI-AO claims, and 0.7 million shares would be issued upon exercise
of in-the-money stock options. Such trading value is presented solely for
purposes of presenting a proforma Consolidated Statement of Operations and may
not be indicative of the actual trading value of Grace common stock following
the effective date of the Plan. Should Grace's distributable value per share at
the effective date of the Plan be below approximately $8.75 per share, Grace
would be required to revalue its balance sheet for a change in control. (The
trading value of Grace's common stock over the twelve-month period ended June
30, 2005 was between $4.74 and $15.49 per share.) These proforma financial
statements reflect no change in assets or income related to this potential
accounting outcome.

E.   Non-asbestos Contingencies

The accompanying proforma financial information assumes all non-asbestos related
contingencies (including environmental, tax and civil and criminal litigation)
are settled for recorded amounts as of June 30, 2005. Certain liabilities are
assumed to be paid at the effective date based on Grace's estimate of amounts
that will be determinable and payable. The remainder, which would also be
subject to the approved plan of reorganization, is assumed to be paid subsequent
to the effective date as amounts are either not due until a later date or will
be determined through post-effective-date litigation. The ultimate value of such
claims may change materially as Grace's Chapter 11 and other legal proceedings
further define Grace's non-asbestos related obligations.


                                      I-37



<TABLE>

=================================================================================================================================
                                                                                 PROFORMA ADJUSTMENTS
                                                                        ---------------------------------------------
                                                                            BORROWINGS                     PAYMENT OF
W. R. GRACE & CO AND SUBSIDIARIES                           JUNE 30,      UNDER NEW DEBT    SEALED AIR/     REMAINING    JUNE 30,
   PROFORMA CONDENSED CONSOLIDATED BALANCE SHEET              2005          AGREEMENTS       FRESENIUS    PRE-PETITION     2005
(In millions)                                             AS REPORTED   AND CONTINGENCIES   SETTLEMENTS    LIABILITIES   PROFORMA
---------------------------------------------------------------------------------------------------------------------------------

ASSETS
CURRENT ASSETS
Cash and cash equivalents .............................    $   404.0         $ 800.0         $   115.0      $(1,010.9)   $  308.1
Other current assets ..................................        778.3              --                --             --       778.3
                                                           ----------------------------------------------------------------------
   TOTAL CURRENT ASSETS ...............................      1,182.3           800.0             115.0       (1,010.9)    1,086.4

Non-current operating assets ..........................        984.7              --                --             --       984.7
Cash value of life insurance ..........................         81.3              --                --             --        81.3
Deferred income taxes:
   Net operating loss carryforwards ...................         69.3              --             (40.3)         121.7       150.7
   Temporary differences, net of valuation allowance ..        605.7            26.3            (314.2)        (121.7)      196.1
Asbestos-related insurance ............................        500.0              --                --             --       500.0
                                                           ----------------------------------------------------------------------
   TOTAL ASSETS .......................................    $ 3,423.3         $ 826.3         $  (239.5)     $(1,010.9)   $2,999.2
                                                           ======================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Total Current Liabilities .............................    $   371.4         $    --         $      --      $      --    $  371.4
Long-term debt ........................................          0.5           800.0                --             --       800.5
Other noncurrent liabilities ..........................        546.3              --                --             --       546.3
                                                           ----------------------------------------------------------------------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE ...........        918.2           800.0                --             --     1,718.2

Bank debt/letters of credit/capital leases ............        664.8              --                --         (662.7)        2.1
Liability for asbestos-related litigation and claims ..      1,700.0              --          (1,034.8)        (535.2)      130.0
Liability for environmental remediation ...............        320.6              --                --         (208.1)      112.5
Liability for postretirement health and special
   pensions ...........................................        185.3              --                --           (9.8)      175.5
Liability for accounts payable and litigation .........         96.5              --                --          (77.9)       18.6
Liability for tax claims and contingencies ............        143.2              --                --          (68.0)       75.2
Other nonoperating liabilities, including Plan
   contingencies ......................................           --           150.0                --          (50.0)      100.0
                                                           ----------------------------------------------------------------------
LIABILITIES SUBJECT TO COMPROMISE .....................      3,110.4           150.0          (1,034.8)      (1,611.7)      613.9
                                                           ----------------------------------------------------------------------
TOTAL LIABILITIES .....................................      4,028.6           950.0          (1,034.8)      (1,611.7)    2,332.1
                                                           ----------------------------------------------------------------------

SHAREHOLDER'S EQUITY (DEFICIT)
Share capital .........................................        424.2              --                --          600.8     1,025.0
Retained earnings and other equity items ..............     (1,029.5)         (123.7)            795.3             --      (357.9)
                                                           ----------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) ..................       (605.3)         (123.7)            795.3          600.8       667.1
                                                           ----------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) ..    $ 3,423.3         $ 826.3         $  (239.5)     $(1,010.9)   $2,999.2
=================================================================================================================================
</TABLE>

<TABLE>

================================================================================================================================
                                                          YEAR ENDED DECEMBER 31, 2004      SIX MONTH PERIOD ENDED JUNE 30, 2005
                                                       -------------------------------------------------------------------------
W. R. GRACE & CO. AND SUBSIDIARIES
   PROFORMA CONSOLIDATED STATEMENTS OF OPERATIONS          AS        PROFORMA                  AS        PROFORMA
(In millions, except per share amounts)                 REPORTED   ADJUSTMENTS   PROFORMA   REPORTED   ADJUSTMENTS   PROFORMA
--------------------------------------------------------------------------------------------------------------------------------

NET SALES ..........................................   $2,259.9      $    --     $2,259.9   $1,279.7     $   --      $1,279.7
                                                       -------------------------------------------------------------------------
Cost of goods sold, exclusive of depreciation and
   amortization shown separately below .............    1,431.5           --      1,431.5      832.4         --         832.4
Selling, general and administrative expenses,
   exclusive of net pension expense shown
   separately below ................................      442.8           --        442.8      238.7      (16.4)        222.3
Depreciation and amortization ......................      108.8           --        108.8       57.4         --          57.4
Research and development expenses ..................       51.1           --         51.1       30.2         --          30.2
Net pension expense ................................       61.9           --         61.9       37.1         --          37.1
Interest expense and related financing costs .......      111.1        (51.8)        59.3       27.9        0.5          28.4
Provision for environmental remediation ............       21.6        (21.6)          --         --         --            --
Provision for asbestos-related litigation,
   net of insurance ................................      476.6       (476.6)          --         --         --            --
Other (income) expense .............................      (68.4)        62.3         (6.1)     (30.0)      20.3          (9.7)
                                                       -------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES ...........................    2,637.0       (487.7)     2,149.3    1,193.7        4.4       1,198.1
INCOME (LOSS) BEFORE CHAPTER 11 EXPENSES, INCOME
   TAXES, AND MINORITY INTEREST ....................     (377.1)       487.7        110.6       86.0       (4.4)         81.6
Chapter 11 expenses, net ...........................      (18.0)        18.0           --      (10.6)      10.6            --
Benefit from (provision for) income taxes ..........        1.5        (37.2)       (35.7)     (28.6)       3.9         (24.7)
Minority interest in consolidated entities .........       (8.7)          --         (8.7)     (11.0)        --         (11.0)
                                                       -------------------------------------------------------------------------
NET INCOME (LOSS) ..................................   $ (402.3)     $ 468.5     $   66.2   $   35.8     $ 10.1      $   45.9
                                                       =========================================================================
BASIC EARNINGS (LOSS) PER COMMON SHARE .............   $  (6.11)                 $   0.46   $   0.54                 $   0.32
Weighted average number of basic shares ............       65.8         77.8        143.6       66.8       77.8         144.6
DILUTED EARNINGS (LOSS) PER COMMON SHARE ...........   $  (6.11)                 $   0.42   $   0.53                 $   0.28
Weighted average number of diluted shares ..........       65.8         94.5        160.3       67.3       94.5         161.8
=================================================================================================================================
</TABLE>


                                      I-38



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

ASBESTOS-RELATED LITIGATION - See Note 3 to the Consolidated Financial
Statements.

ENVIRONMENTAL MATTERS - See Note 12 to the Consolidated Financial Statements.

DEFINED BENEFIT PENSION PLANS - Grace sponsors defined benefit pension plans for
its employees in the United States, Canada, the United Kingdom, Australia,
Germany, Italy, France, Spain, Denmark, Japan, Philippines, South Korea, Taiwan,
South Africa, Brazil and Mexico and funds government sponsored programs in other
countries where it operates. Certain of the Grace sponsored plans are
advance-funded and others are pay-as-you-go. The advance-funded plans are
administered by trustees who direct the management of plan assets and arrange to
have obligations paid when due out of a trust. The most significant
advance-funded plans cover Grace's salaried employees in the U.S. and U.K. and
employees covered by collective bargaining agreements at certain of its U.S.
facilities.

At the December 31, 2004 measurement date for the U.S. advance-funded defined
benefit pension plans (the "Pension Plans"), the accumulated benefit obligation
("ABO") was approximately $958 million as measured under U.S. generally accepted
accounting principles. The ABO is measured as the present value (using a 5.5%
discount rate as of December 31, 2004) of vested and non-vested benefits earned
from employee service to date, based upon current salary levels. Such discount
rate is based on a high quality bond portfolio designed to meet the payout
pattern of the Pension Plans. Of the participants in the Pension Plans,
approximately 80% are current retirees or employees of former Grace businesses,
making the payout pattern skewed to the nearer term. Assets available to fund
the ABO at December 31, 2004 were approximately $666 million, or approximately
$292 million less than the measured obligation.

Assets available at June 30, 2005 totaled approximately $633 million down $33
million from December 31, 2004 primarily due to retiree benefit payments. It is
Grace's intention to satisfy its obligations under the Pension Plans and to
comply with all of the requirements of the Employee Retirement Income Security
Act of 1974. On June 22, 2005 Grace obtained Bankruptcy Court approval to fund
minimum required payments of approximately $46 million for the period July 2005
through June 2006. In that regard, in July 2005, Grace contributed approximately
$15 million to the trusts that hold assets of the Pension Plans. However, there
can be no assurance that the Bankruptcy Court will continue to approve
arrangements to satisfy the funding needs of the Pension Plans. Contributions to
non-U.S. plans are not subject to Bankruptcy Court approval and Grace intends to
fund such plans based on actuarial and trustee recommendations; $4.9 million was
funded during the six months ended June 30, 2005.

See Note 13 to the Consolidated Financial Statements for the components of net
periodic benefit cost for the second quarter and year-to-date. Grace expects
total pension expense for 2005 to be approximately $70 million, and benefit
payments to retirees to aggregate to approximately $92 million for all pension
programs in 2005. At June 30, 2005, Grace's recorded pension liability for U.S.
and non-U.S. underfunded plans was $512.8 million ($438.6 million included in
liabilities not subject to compromise and $74.2 million related to supplemental
pension benefits, included in "liabilities subject to compromise") which
includes the following components: (1) shortfall between dedicated assets and
ABO of underfunded plans ($315.3 million); and (2) ABO of pay-as-you-go plans
($197.5 million).

POSTRETIREMENT BENEFITS OTHER THAN PENSIONS - Grace provides certain health care
and life insurance benefits for retired employees, a large majority of which
pertain to retirees of previously divested businesses. These plans are unfunded,
and Grace pays the costs of benefits under these plans as they are incurred.
Grace's share of benefits under this program was $2.8 million and $5.1 million
during the three-month and six-month periods ended June 30, 2005, compared with
$2.9 million and $5.5 million during the three-month and six-month periods ended
June 30, 2004. Grace's recorded liability for postretirement benefits of $111.1
million at June 30, 2005 is stated at net present value discounted at 5.5% (as
discussed under Defined Benefit Pension Plans). Grace's Plan provides for the
continuation of these benefits.

In December 2003, President Bush signed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the "Act") into law. The Act
introduces a prescription drug benefit under Medicare ("Medicare Part D") as
well as a federal subsidy to companies that provide a benefit that is at least
actuarially equivalent (as defined in the Act) to Medicare Part D. On January
21, 2005, the Center for Medicare and Medicaid Services released the final
regulations implementing the Act. Grace has determined that the prescription
drug benefit under its postretirement health care plan is actuarially equivalent
to the Medicare Part D benefit. Therefore, the accumulated postretirement
benefit obligation (APBO) was remeasured as of January 21, 2005 to reflect the
amount associated with the federal subsidy. The APBO was reduced by
approximately $22.0 million and the net periodic benefit cost for 2005 will be
reduced


                                      I-39



by approximately $2.8 million ($1.4 million for the six-month period ended June
30, 2005) due to the effect of the federal subsidy.

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

CASH RESOURCES AND AVAILABLE CREDIT FACILITIES - At June 30, 2005, Grace had
$485.3 million in cash and cash-like assets on hand ($404.0 million in cash and
cash equivalents and $81.3 million in net cash value of life insurance). In
addition, Grace had access to committed credit facilities aggregating $250.0
million under the DIP facility, of which $212.5 million (letters of credit and
holdback provisions) was available at June 30, 2005. The term of the DIP
facility expires April 1, 2006. Grace believes that these funds and credit
facilities will be sufficient to finance its business strategy while in Chapter
11.

CASH FLOW FROM CORE OPERATIONS - Grace's net cash flow from core operations
for the six-month period ended June 30, 2005 decreased from the prior-year
period due to increased investment in working capital and an increase in capital
expenditures.

================================================================================
                                                                   SIX MONTHS
                                                                     ENDED
                                                                    JUNE 30,
CORE OPERATIONS                                                 ---------------
(In millions)                                                    2005     2004
--------------------------------------------------------------------------------
CASH FLOWS:
Pre-tax operating income ....................................   $ 96.3   $ 87.8
Depreciation and amortization ...............................     57.4     53.5
                                                                ---------------
PRE-TAX INCOME BEFORE DEPRECIATION AND AMORTIZATION .........    153.7    141.3
Working capital and other changes ...........................    (94.3)   (28.9)
                                                                ---------------
CASH FLOW BEFORE INVESTING ..................................     59.4    112.4
Capital expenditures ........................................    (31.3)   (22.5)
Businesses acquired .........................................     (2.2)      --
                                                                ---------------
NET CASH FLOW FROM CORE OPERATIONS ..........................   $ 25.9   $ 89.9
================================================================================

The increased investment in working capital was primarily due to payments of
approximately $70 million for prior year performance incentives and customer
volume rebates. Additional investment in working capital was due to a shift in
regional sales mix outside North America where standard terms of sale are longer
and advanced purchasing of key raw materials is often necessary.

Grace expects to continue to invest excess cash flow and/or other available
capital resources in its core business base. These investments are likely to be
in the form of added plant capacity, product line extensions and geographic
market expansions, and/or acquisitions in existing product lines. Investments
that are outside the ordinary course of business may be subject to Bankruptcy
Court approval and review by the Chapter 11 committees.

CASH FLOW FROM NONCORE ACTIVITIES - The cash flow from Grace's noncore
activities can be volatile. Expenditures are generally governed by Bankruptcy
Court rulings and receipts are generally nonrecurring. Much of the noncore
spending in the past three years has been under Chapter 11 first-day motions
that allow Grace to fund postretirement benefits and required environmental
remediation on Grace-owned sites. Cash inflows have been from asbestos-related
insurance recovery on pre-Chapter 11 liability payments, and unusual events. In
April 2005, Grace made a $90 million payment to the U.S. Internal Revenue
Service to fund taxes and interest on settled amounts as approved by the
Bankruptcy Court.

================================================================================
                                                                  SIX MONTHS
                                                                     ENDED
                                                                   JUNE 30,
NONCORE ACTIVITIES                                             -----------------
(In millions)                                                    2005     2004
--------------------------------------------------------------------------------
CASH FLOWS:
Pre-tax income (loss) from noncore activities ..............   $   5.0   $(13.8)
Non-cash charges ...........................................       6.0     15.4
Cash spending for:
   Chapter 11 contingencies:
      Tax settlement .......................................     (90.0)      --
      Environmental settlements ............................     (29.7)      --
   Environmental remediation ...............................      (3.0)    (2.9)
   Postretirement benefits .................................      (5.1)    (5.5)
   Retained obligations and other ..........................      (0.5)    (0.7)
                                                               -----------------
NET CASH OUTFLOW FOR NONCORE ACTIVITIES ....................   $(117.3)  $ (7.5)
================================================================================

Net cash flow from core operations and net cash flow from noncore activities do
not represent income or cash flow as defined under generally accepted accounting
principles, and should not be considered an alternative to such measures as an
indicator of Grace's performance. These measures are provided to distinguish
operating results of Grace's current business base from results and related
assets and liabilities of past businesses, discontinued products, and corporate
legacies and the effect of Grace's Chapter 11 proceedings.

See the Consolidated Statements of Cash Flows included in the Consolidated
Financial Statements for investing and financing activities for each of the
six-month periods ended June 30, 2005 and 2004.

DEBT AND OTHER CONTRACTUAL OBLIGATIONS - Total debt outstanding at June 30, 2005
was $676.3 million, including $150.3 million of accrued interest on pre-petition
debt. As a result of the Filing, Grace is now in default on $514.5 million of
pre-petition debt which, together with accrued interest thereon, has been
included in "liabilities subject to compromise" as of June 30,


                                      I-40



2005. The automatic stay provided under the Bankruptcy Code prevents Grace's
lenders from taking any action to collect the principal amounts as well as
related accrued interest. However, Grace will continue to accrue and report
interest on such debt during the Chapter 11 proceedings unless further
developments lead management to conclude that it is probable that such interest
will be compromised.

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

FORWARD-LOOKING STATEMENTS - This Report contains forward-looking statements
that involve risks and uncertainties, as well as statements that are preceded
by, followed by or include the words "believes," "plans," "intends," "targets,"
"will," "expects," "anticipates," or similar expressions. For such statements,
Grace claims the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995. Actual
results may differ materially from the results predicted, and reported results
should not be considered as an indication of future performance. In addition to
the uncertainties referred to in this Report in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," factors that could
cause actual results to differ materially from those contained in the
forward-looking statements include the results of the civil and criminal legal
proceedings in which Grace is involved, the impact of worldwide economic
conditions; pricing of both Grace's products and raw materials; customer outages
and customer demand; factors resulting from fluctuations in interest rates and
foreign currencies; the impact of competitive products and pricing; the
continued success of Grace's process improvement initiatives; the impact of tax,
legislation and other regulations in the jurisdictions in which Grace operates;
and developments in and the outcome of the Chapter 11 proceedings discussed in
this Report and other factors set forth in Grace's most recent Annual Report on
Form 10-K, quarterly reports on Form 10-Q and other reports which have been
filed with the SEC. Readers are cautioned not to place undue reliance on
forward-looking statements, which speak only as of the date thereof. Grace
undertakes no obligation to publicly release any revisions to the
forward-looking statements contained in this Report or to update them to reflect
events or circumstances occurring after the date of this Report.


                                      I-41



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

Grace had no outstanding derivative financial instruments that qualify for
accounting treatment under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" at June 30, 2005. Grace has entered into foreign
exchange forward contracts to manage exposure to fluctuations in foreign
currency exchange rates on an intercompany loan between Grace and a subsidiary
in Germany. (See Note 5 to the Consolidated Financial Statements.) For further
information concerning Grace's quantitative and qualitative disclosures about
market risk, refer to Note 8 in the Consolidated Financial Statements in Grace's
2004 Annual Report on Form 10-K.

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

GENERAL STATEMENT OF RESPONSIBILITY

The management of Grace is responsible for the preparation, integrity and
objectivity of the Consolidated Financial Statements and the other information
included in this report. Such financial information has been prepared in
conformity with accounting principles generally accepted in the United States of
America and accordingly includes certain amounts that represent management's
best estimates and judgments. Actual amounts could differ from those estimates.
Management is also responsible for establishing and maintaining adequate
internal control over financial reporting. These internal controls consist of
policies and procedures that are designed to assess and monitor the
effectiveness of the control environment including: risk identification,
governance structure, delegations of authority, information flow, communications
and control activities. A chartered Disclosure Committee oversees Grace's public
financial reporting process and key managers are required to confirm their
compliance with Grace's policies and internal controls quarterly. While no
system of internal controls can ensure elimination of all errors and
irregularities, Grace's internal controls, which are reviewed and modified in
response to changing conditions, have been designed to provide reasonable
assurance that assets are safeguarded, policies and procedures are followed,
transactions are properly executed and reported, and appropriate disclosures are
made. The concept of reasonable assurance is based on the recognition that there
are limitations in all systems of internal control and that the costs of such
systems should be balanced with their benefits. The Audit Committee of the Board
of Directors, which is comprised solely of independent directors, meets
regularly with Grace's senior financial management, internal auditors and
independent auditors to review audit plans and results, as well as the actions
taken by management in discharging its responsibilities for accounting,
financial reporting and internal controls. The Audit Committee is responsible
for the selection and compensation of the independent auditors. Grace's
financial management, internal auditors and independent auditors have direct and
confidential access to the Audit Committee at all times.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As of June 30, 2005, Grace carried out an evaluation of the effectiveness of the
design and operation of its disclosure controls and procedures pursuant to Rule
13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Based upon that evaluation, Grace's Chief Executive Officer and Chief
Financial Officer concluded that Grace's disclosure controls and procedures are
effective to ensure that information required to be disclosed in Grace's
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and that material
information relating to Grace is made known to management, including Grace's
Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There was no significant change in Grace's internal control over financial
reporting during the quarter ended June 30, 2005 that has materially affected,
or is reasonably likely to materially affect, Grace's internal control over
financial reporting.


                                      I-42



                           PART II. OTHER INFORMATION

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

Notes 2, 3 and 12 to the interim consolidated financial statements in Part I of
this Report are incorporated herein by reference.

ITEM 6. EXHIBITS
--------------------------------------------------------------------------------

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

     3.1  Amended and Restated By-laws of W. R. Grace & Co. (incorporated by
          reference from Grace's Form 8-K filed with the Commission on April 29,
          2005)

     10.1 Alfred E. Festa Employment Agreement (incorporated by reference from
          Grace's Form 8-K filed with the Commission on April 29, 2005)

     10.2 Paul J. Norris Consulting Agreement (incorporated by reference from
          Grace's Form 8-K filed with the Commission on April 29, 2005)

     10.3 Richard C. Brown Employment Agreement (incorporated by reference from
          Grace's Form 8-K filed with the Commission on April 29, 2005)

     10.4 David B. Siegel Consulting Agreement (incorporated by reference from
          Grace's Form 8-K filed with the Commission on June 28, 2005)

     15   Accountants' Awareness Letter

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

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

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


                                      II-1



                                    SIGNATURE

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

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


Date: August 8, 2005                           By /s/ A. E. Festa
                                                  ------------------------------
                                                  A. E. Festa
                                                  President and
                                                  Chief Executive Officer


Date: August 8, 2005                           By /s/ Robert M. Tarola
                                                  ------------------------------
                                                  Robert M. Tarola
                                                  Senior Vice President and
                                                  Chief Financial Officer
                                                  (Principal Accounting Officer)


                                      II-2



                                  EXHIBIT INDEX

EXHIBIT NO.   DESCRIPTION OF EXHIBIT
-----------   ----------------------
    15        Accountants' Awareness Letter

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

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

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


                                      II-3`