<PAGE>



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



                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-Q


                Quarterly Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

                  For the Quarterly Period Ended March 31, 1999


                         Commission File Number 1-13953

                                W. R. GRACE & CO.



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

                              1750 Clint Moore Road
                            Boca Raton, Florida 33487
                                 (561) 362-2000

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


         69,149,622 shares of Common Stock, $.01 par value, were outstanding at
May 5, 1999.



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



<PAGE>


                       W. R. GRACE & CO. AND SUBSIDIARIES

                               Table of Contents


                                                              Page No.
                                                              --------

PART I.  FINANCIAL INFORMATION

Item 1.    Financial Statements - Unaudited

           Consolidated Statement of Operations                   I - 1

           Consolidated Statement of Cash Flows                   I - 2

           Consolidated Balance Sheet                             I - 3

           Consolidated Statement of Shareholders' Equity         I - 4

           Notes to Consolidated Financial Statements        I - 5 to I - 12

Item 2.    Management's Discussion and Analysis of

           Results of Operations and Financial Condition    I - 13 to I - 20

Item 3.    Quantitative and Qualitative Disclosure About 
           Market Risk                                           I - 20



PART II.   OTHER INFORMATION
Item 1.    Legal Proceedings                                      II - 1

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



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





<PAGE>



                                           PART 1. FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
W. R. GRACE & CO. AND SUBSIDIARIES                                              THREE MONTHS ENDED
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)                                    MARCH 31,
----------------------------------------------------------------------------------------- -------------
Dollars in millions, except per share amounts                                  1999           1998
----------------------------------------------------------------------------------------- -------------

<S>                                                                            <C>           <C>    
Sales and revenues.......................................................      $ 345.4       $ 340.8
Other income.............................................................         12.7           7.8
                                                                               -------      ---------

     TOTAL...............................................................        358.1         348.6
                                                                               -------      ---------
Cost of goods sold and operating expenses................................        208.8         209.6
Selling, general and administrative expenses.............................         75.4          80.6
Depreciation and amortization............................................         23.0          21.8
Interest expense and related financing costs.............................          3.8           6.8
Research and development expenses........................................         11.1          10.4
Provision for restructuring..............................................          4.3            --
                                                                               -------      ---------

     Total...............................................................        326.4         329.2
                                                                               -------      ---------
     INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES...............         31.7          19.4
Provision for income taxes...............................................         11.7           7.6
                                                                               -------      ---------
     INCOME FROM CONTINUING OPERATIONS...................................         20.0          11.8
Loss from discontinued operations........................................           --          (2.6)
                                                                               -------      ---------
     INCOME BEFORE EXTRAORDINARY ITEM....................................         20.0           9.2
Extraordinary item - loss from extinguishment of debt, net of tax........           --         (35.2)
                                                                               -------      ---------

     NET INCOME/(LOSS)...................................................       $ 20.0       $ (26.0)
                                                                                ======       =======
-------------------------------------------------------------------------- -------------- -------------

Basic earnings per share:
     Continuing operations...............................................        $ .28        $  .16
     Net income/(loss)...................................................        $ .28        $ (.35)

Diluted earnings per share:
     Continuing operations...............................................        $ .27        $  .15
     Net income/(loss)...................................................        $ .27        $ (.32)

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




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

                                     I - 1
<PAGE>




<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------- -----------------------------
W. R. GRACE & CO. AND SUBSIDIARIES                                                                   THREE MONTHS ENDED
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)                                                         MARCH 31,
----------------------------------------------------------------------------------------------- -------------- -------------
In millions                                                                                          1999            1998
----------------------------------------------------------------------------------------------- --------------- ---------------
<S>                                                                                             <C>              <C>   
OPERATING ACTIVITIES

Income from continuing operations before income taxes.....................................           $ 31.7           $ 19.4
Reconciliation to cash provided by/(used for) operating activities:

     Depreciation and amortization........................................................             23.0             21.8
     Provision for restructuring..........................................................              4.3               --
     Changes in assets and liabilities, excluding effect of businesses
        acquired/divested and foreign currency exchange:
         Increase in notes and accounts receivable, net...................................             (4.2)           (28.0)
         Increase in inventories..........................................................             (8.8)            (3.2)
         Decrease in other current assets due to sales of accounts receivable.............             40.7               --
         Proceeds from asbestos-related insurance settlements.............................             13.1             13.8
         Expenditures for asbestos-related litigation.....................................            (25.6)          (167.8)
         Decrease in accounts payable.....................................................             (6.7)           (13.1)
         Decrease in accrued liabilities..................................................            (21.5)          (106.6)
         Other............................................................................            (28.5)           (31.8)
                                                                                                    -------           -------
     NET PRETAX CASH PROVIDED BY/(USED FOR) OPERATING ACTIVITIES
         OF CONTINUING OPERATIONS.........................................................             17.5           (295.5)
Net pretax cash (used for)/provided by operating activities of discontinued operations....            (10.4)            21.2
                                                                                                    -------           -------
     NET PRETAX CASH PROVIDED BY/(USED FOR) OPERATING ACTIVITIES..........................              7.1           (274.3)
Income taxes paid, net of refunds.........................................................            (20.6)            15.5
                                                                                                    -------           -------

     NET CASH USED FOR OPERATING ACTIVITIES...............................................            (13.5)          (258.8)
                                                                                                    -------           -------

INVESTING ACTIVITIES
Capital expenditures......................................................................            (17.0)           (16.7)
Businesses acquired in purchase transactions, net of cash acquired........................              (.5)               --
Net investing activities of discontinued operations.......................................               --            (14.3)
Proceeds from disposal of assets..........................................................             20.4               --
Other.....................................................................................               --               .5
                                                                                                    -------           -------
     NET CASH PROVIDED BY/(USED FOR) INVESTING ACTIVITIES.................................              2.9            (30.5)
                                                                                                    -------           -------

FINANCING ACTIVITIES
Repayments of borrowings having original maturities in excess of three months.............               --             (5.4)
Net increase/(repayments) of borrowings having original maturities of three months or less             22.3           (326.4)
Exercise of stock options.................................................................               .8             41.9
Net financing activities of discontinued operations.......................................               --          1,256.6
Purchase of treasury stock................................................................            (26.0)              --
                                                                                                    -------           -------
     NET CASH (USED FOR)/PROVIDED BY FINANCING ACTIVITIES.................................             (2.9)           966.7
                                                                                                    -------           -------

Effect of exchange rate changes on cash and cash equivalents..............................             (1.9)             (.9)
                                                                                                    -------           -------
     (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS.....................................           $(15.4)          $676.5
                                                                                                     =======          ======

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

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

                                      I-2
<PAGE>





<TABLE>
<CAPTION>
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
--------------------------------------------------------------------------------------------- --------------- ------------------
                                                                                              March 31, 1999  December 31, 1998
Dollars in millions, except par value
--------------------------------------------------------------------------------------------- --------------- ------------------
<S>                                                                                         <C>               <C>   
ASSETS
CURRENT ASSETS
Cash and cash equivalents...............................................................            $ 49.9           $ 65.3
Notes and accounts receivable, net......................................................             199.6            196.9
Inventories.............................................................................             135.5            130.1
Asbestos-related insurance receivable...................................................              80.4             66.7
Deferred income taxes...................................................................              80.2             81.0
Other current assets....................................................................              42.6             85.6
                                                                                                    ------           ------        
     TOTAL CURRENT ASSETS...............................................................             588.2            625.6

Properties and equipment, net of accumulated depreciation and
        amortization of $864.5 (1998 - $879.1)..........................................             630.1            661.4
Goodwill, less accumulated amortization of $10.4 (1998 - $9.8)..........................              36.5             37.8
Asbestos-related insurance receivable...................................................             349.9            376.3
Deferred income taxes...................................................................             402.4            406.9
Other assets............................................................................             483.0            469.8
                                                                                                    ------           ------        
     TOTAL ASSETS.......................................................................          $2,490.1         $2,577.8
                                                                                                  ========         ========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt.........................................................................           $ 130.8           $ 80.6
Accounts payable........................................................................             117.8            123.7
Income taxes............................................................................             124.2            135.3
Liability for asbestos-related litigation...............................................             138.4             93.0
Other current liabilities...............................................................             225.3            255.6
                                                                                                    ------           ------        
     TOTAL CURRENT LIABILITIES..........................................................             736.5            688.2

Long-term debt..........................................................................               8.1             32.8
Deferred income taxes...................................................................              23.3             24.5
Noncurrent liability for asbestos-related litigation....................................           1,030.1          1,101.1
Other liabilities.......................................................................             617.2            643.6
                                                                                                    ------           ------        
     TOTAL LIABILITIES..................................................................           2,415.2          2,490.2
                                                                                                    ------           ------        

COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock issued, par value $.01.....................................................                .7               .7
Paid in capital.........................................................................             382.3            409.3
Retained earnings.......................................................................            (197.1)          (157.6)
Deferred compensation trust.............................................................               (.5)             (.8)
Treasury stock, at cost:  1,730,400 common shares (1998 - 5,149,100)....................             (22.6)           (83.1)
Accumulated other comprehensive loss....................................................             (87.9)           (80.9)
                                                                                                    ------           ------        
     TOTAL SHAREHOLDERS' EQUITY.........................................................              74.9             87.6
                                                                                                    ------           ------        
     TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.........................................          $2,490.1         $2,577.8
                                                                                                  ========         ========
----------------------------------------------------------------------------------------------------------------------------
</TABLE>


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

                                      I-3

<PAGE>


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

<S>                              <C>      <C>        <C>         <C>           <C>       <C>           <C>            <C> 
BALANCE, DECEMBER 31, 1997......    $ .7     $563.4    $ 108.3       $ (5.7)     $ --      $(198.8)     $ 467.9           $  --
Net loss........................      --         --      (26.0)          --        --            --       (26.0)          (26.0)
Separation of Packaging
  Business......................      --     (233.8)     (82.3)          .5        --         119.2      (196.4)             --
Issuance of shares under 
 stock plans....................      .1       64.1         --           .1        --            --        64.3              --
Reclassification of assets in
  deferred compensation trust...      --         --         --          4.2        --            --         4.2              --
Foreign currency translation 
 adjustment ....................      --         --         --           --        --         (12.4)      (12.4)          (12.4)
Minimum pension liability 
 adjustment.....................      --         --         --           --        --          (9.9)       (9.9)           (9.9)
                                    ----     ------      -----        -----      ----       -------     -------         ------- 
BALANCE, MARCH 31, 1998.........    $ .8     $393.7      $  --        $ (.9)     $ --       $(101.9)    $ 291.7         $ (48.3)
                                    ====     ======      =====        =====      ====       =======     =======         ======= 


BALANCE, DECEMBER 31, 1998......    $ .7     $409.3    $(157.6)       $ (.8)   $(83.1)       $(80.9)     $ 87.6         $    --
Net income......................      --         --       20.0           --        --            --        20.0             20.0
Purchase of common stock........      --         --         --           --     (27.9)           --       (27.9)             --
Retirement of treasury stock....      --      (28.9)     (59.5)          --      88.4            --          --              --
Issuance of shares under stock 
 plans..........................      --        1.9         --           .3        --            --         2.2              --
Unrealized gain on security.....      --         --         --           --        --           8.1         8.1             8.1
Foreign currency translation 
 adjustment ....................      --         --         --           --        --         (15.1)      (15.1)          (15.1)
                                    ----     ------      -----        -----      ----       -------     -------         ------- 
BALANCE, MARCH 31, 1999.........    $ .7     $382.3    $(197.1)       $ (.5)   $(22.6)       $(87.9)     $ 74.9           $13.0
                                    ====     ======    =======        ======   ======        ======      ======           =====
----------------------------------------------------------------------------------------------------------------------------
</TABLE>


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


                                      I-4
<PAGE>


                       W. R. GRACE & CO. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                (Dollars in millions, except per share amounts)


1. CHANGE IN ORGANIZATION AND BASIS OF PRESENTATION

Grace is primarily engaged in specialty chemicals businesses on a worldwide
basis. These businesses consist of catalysts and silica-based products (Grace
Davison), specialty construction chemicals and building materials (Grace
Construction Products) and container sealants and coatings (Darex Container
Products). Grace also owns businesses and investments involved in health care
services and other products and services. Grace has classified certain other
businesses as discontinued operations.

Packaging Business Transaction

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

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

Basis of Presentation


The interim Consolidated Financial Statements in this Report are unaudited and
should be read in conjunction with the Consolidated Financial Statements in the
1998 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. Certain amounts in the
Consolidated Financial Statements for prior periods have been reclassified to
conform to the current period's basis of presentation.


The results of operations for the three month interim period ended March 31,
1999 are not necessarily indicative of the results of operations for the year
ending December 31, 1999.


2. ASBESTOS AND RELATED INSURANCE LITIGATION

Grace is a defendant in property damage and personal injury lawsuits relating
to previously sold asbestos-containing products and expects that it will be
named as a defendant in additional asbestos-related lawsuits in the future.
Grace was a defendant in approximately 45,800 asbestos-related lawsuits on
March 31, 1999 (13 involving claims for property damage and the remainder
involving approximately 98,100 claims for personal injury), as compared to
approximately 45,100 lawsuits on December 31, 1998 (14 involving claims for
property damage and the remainder involving approximately 97,000 claims for
personal injury).

                                      I-5

<PAGE>


Property Damage Litigation

Through March 31, 1999, 140 asbestos property damage cases were dismissed
without payment of any damages or settlement amounts; judgments were entered in
favor of Grace in nine cases (excluding cases settled following appeals of
judgments in favor of Grace); judgments were entered in favor of the plaintiffs
in seven cases for a total of $60.3; and 201 property damage cases were settled
for a total of $588.1. Property damage case activity for the three months ended
March 31, 1999 was as follows:

-----------------------------------------------------------------
Cases outstanding, December 31, 1998................  14
New cases filed.....................................  --
Settlements.........................................  (1)
Dismissals..........................................  --
                                                    -----
     Cases outstanding, March 31, 1999..............  13
                                                    =====
-----------------------------------------------------------------

Personal Injury Litigation

Through March 31, 1999, approximately 13,700 asbestos personal injury lawsuits
involving 31,200 claims were dismissed without payment of any damages or
settlement amounts (primarily on the basis that Grace products were not
involved), and approximately 45,200 lawsuits involving 114,800 claims were
disposed of (through settlements and judgments) for a total of $366.4. Personal
injury claim activity for the three months ended March 31, 1999 was as follows:


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

Claims outstanding, December 31, 1998.............    97,017
New claims........................................     7,614
Settlements.......................................    (6,086)
Dismissals........................................      (458)
Judgments.........................................        (2)
                                                      ------ 
     Claims outstanding, March 31, 1999...........    98,085
                                                      ======
-----------------------------------------------------------------

Asbestos-Related Liability

Based upon, and subject to, the factors discussed in Note 2 to the Consolidated
Financial Statements in the 1998 10-K, Grace's estimate of its probable
liability with respect to the defense and disposition of asbestos property
damage and personal injury cases and claims as of the respective date, as well
as the defense and disposition of personal injury cases and claims expected to
be filed through 2039, was as follows on March 31, 1999 and December 31, 1998:

----------------------------------------------------------- ------------------
                                             MARCH 31,         December 31,
                                               1999               1998
----------------------------------------------------------- ------------------
Current liability for asbestos-related 
 litigation.................................   $ 138.4             $ 93.0
Noncurrent liability for asbestos-related 
 litigation.................................   1,030.1            1,101.1
                                               -------            -------
     Total asbestos-related liability.......  $1,168.5           $1,194.1
                                              ========           ========
----------------------------------------------------------- ------------------

                                      I-6

<PAGE>


Asbestos-Related Insurance Receivable

Grace previously purchased insurance policies with respect to its
asbestos-related lawsuits and claims. Activity in Grace's notes receivable from
insurance carriers and asbestos-related insurance receivable during the three
months ended March 31, 1999 was as follows:

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

NOTES RECEIVABLE
Notes receivable from insurance carriers 
 on December 31, 1998, net of discount of $2.3.........        $ 18.0
Proceeds received under asbestos-related 
 insurance settlements.................................          (2.2)
Current period amortization of discount................            .4
                                                              -------
     Notes receivable from insurance carriers
        on March 31, 1999, net of discount of $1.9.....          16.2
                                                              -------

INSURANCE RECEIVABLE
Asbestos-related insurance receivable on
 December 31, 1998.....................................        425.0
Proceeds received under asbestos-related
 insurance settlements.................................        (10.9)
                                                             -------- 
     Asbestos-related insurance receivable 
       on March 31, 1999.............................          414.1
                                                             --------

     Total amounts due from insurance carriers.......         $430.3
                                                             =======

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

Insurance Litigation

Grace's ultimate exposure with respect to its asbestos-related cases and claims
will depend on the extent to which its insurance will cover damages for which
it may be held liable, amounts paid in settlements, and litigation costs. In
Grace's opinion, it is probable that recoveries from its insurance carriers
(including amounts reflected in the receivable discussed above), along with
other funds, will be available to satisfy the property damage and personal
injury cases and claims pending at March 31, 1999, as well as personal injury
claims expected to be filed through 2039. Consequently, Grace believes that the
resolution of its asbestos-related litigation will not have a material adverse
effect on its consolidated financial position.

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


3. DISCONTINUED OPERATIONS

Packaging Business Transaction


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


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


                                      I-7



<PAGE>

The Packaging Business transaction required the Company to split certain
pension plans and recognize a net curtailment loss for other plans. In
accordance with Statement of Financial Accounting Standards No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Plans and for
Termination Benefits," the Company recognized a net pretax loss of $8.4 for the
three months ended March 31, 1998 in connection with these plans. This net
pretax loss is included in "Loss from discontinued operations" in the
Consolidated Statement of Operations in this Report.

Financial Information for Discontinued Operations

Results of discontinued operations for the three months ended March 31, 1999
and 1998 were as follows:

--------------------------------------------  --------------------------------
                                                 Three Months Ended March 31,
                                                   1999                 1998
--------------------------------------------  ----------------- --------------
Sales and revenues.........................        $  --              $ 431.2
                                                   -----              -------
Income from operations before taxes (1)....           --                  6.2
Income tax provision.......................           --                  8.8
                                                   -----              ------- 
     Loss from discontinued operations.....        $  --               $ (2.6)
                                                   =====               =======

Basic loss per share from discontinued 
 operations................................        $  --               $ (.04)
Diluted loss per share from discontinued 
 operations................................        $  --               $ (.04)

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

(1)  Reflects allocated interest expense of $13.3 ($8.7 after-tax) for the
     three months ended March 31, 1998, based on the ratio of the net assets of
     the Packaging Business compared to Grace's total capital. Results for the
     three months ended March 31, 1998 also include $32.6 ($28.3 after-tax) of
     costs related to the Packaging Business transaction and $8.4 ($5.5
     after-tax) for a related pension plan curtailment loss, discussed above.


The operating results of Grace's other discontinued operations have been
charged against previously established reserves and are not reflected in the
above results. The total assets and liabilities of Grace's remaining
discontinued operations (excluding intercompany balances) were $10.8 and $2.4,
respectively, on March 31, 1999 and were $10.9 and $2.6, respectively, on
December 31, 1998, and are included in other current assets in the Consolidated
Balance Sheet in this Report.


                                      I-8


<PAGE>


4. OTHER BALANCE SHEET ITEMS

------------------------------------------------- ---------------- -------------
                                                    March 31,       December 31,
                                                       1999             1998
------------------------------------------------- ---------------- -------------
INVENTORIES
Raw materials....................................      $ 45.3            $ 43.2
In process.......................................        11.6              11.3
Finished products................................        82.9              77.9
General merchandise..............................        21.4              23.3
Less: Adjustment of certain inventories
 to a last-in/first-out (LIFO) basis.............       (25.7)            (25.6)
                                                        -----             -----
                                                      $ 135.5           $ 130.1
                                                      =======           =======

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

OTHER ASSETS
Prepaid pension costs............................     $ 261.1           $ 256.1
Deferred charges.................................        47.9              49.8
Long-term receivables, less allowances 
 of $17.7 (1998 - $17.1).........................        40.3              40.5
Long-term investments............................       105.7              88.1
Patents, licenses and other intangible assets....        28.0              35.3
                                                        -----             -----
                                                      $ 483.0           $ 469.8
                                                      =======           =======

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

OTHER CURRENT LIABILITIES
Reserves for divested businesses.................      $ 63.7            $ 76.4
Accrued compensation.............................        24.5              30.6
Restructuring reserves...........................        33.1              33.3
Environmental reserves...........................        31.6              37.5
Accrued interest.................................         4.5               5.4
Other accrued liabilities........................        67.9              72.4
                                                        -----             -----
                                                      $ 225.3           $ 255.6
                                                      =======           =======

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

OTHER LIABILITIES
Other postretirement benefits....................     $ 209.4           $ 211.3
Environmental reserves...........................       199.2             203.0
Pension benefits.................................       136.8             141.8
Deferred compensation............................        31.9              42.9
Long-term self insurance reserve.................        21.4              21.4
Other accrued liabilities........................        18.5              23.2
                                                        -----             -----
                                                      $ 617.2           $ 643.6
                                                      =======           =======
--------------------------------------------------------------------------------


5. DEBT / EXTRAORDINARY ITEM

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

As a result of this extinguishment of debt, Grace incurred a pretax charge of
$56.3 ($35.2 after-tax, or a basic loss per share of $.47; diluted loss per
share of $.43) for premiums paid in excess of the Notes' principal amounts and
other costs incurred in connection with the purchase of the Notes and MTNs
(including the costs of settling

                                     I-9 
<PAGE>

related interest rate swap agreements). These costs are presented as an
extraordinary item in the Consolidated Statement of Operations in this Report.

On March 31, 1999 and December 31, 1998, the Company's short-term and long-term
debt was as follows:

--------------------------------------------- ------------------ ---------------
                                                  MARCH 31,        December 31,
                                                     1999              1998
--------------------------------------------- ------------------ ---------------
SHORT-TERM DEBT
Bank borrowings.............................         $101.2            $ 75.0
Current maturities of long-term debt........           24.7                --
Other short-term borrowings.................            4.9               5.6
                                                     ------            ------
                                                     $130.8            $ 80.6
                                                     ======            ======

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

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


In May 1999, Grace entered into a new $250.0 credit facility replacing the
existing $600.0 facility under a 364-day credit agreement expiring May 2000.
The existing $250.0 long-term facility expiring in May 2003 continues in
effect.

6. SHAREHOLDERS' EQUITY

The Company is authorized to issue 300,000,000 shares of common stock. Of the
common stock unissued on March 31, 1999, approximately 16,763,000 shares were
reserved for issuance pursuant to stock options and other stock incentives.

In April 1998, the Company's Board of Directors approved a program to
repurchase up to 20% of the Company's outstanding shares in the open market
(approximately 15,165,000 shares). Through March 31, 1999, the Company had
acquired 7,207,200 shares of common stock for $111.0 under the program (an
average price per share of $15.40). Cash payments for settled share repurchases
were $108.2 through March 31, 1999. In January 1999, Grace retired 5,476,800
shares of treasury stock at a cost of $88.4, which is reflected in the
Consolidated Statement of Shareholders' Equity in this Report.

For additional information, see Note 12 to the Consolidated Financial
Statements in the 1998 10-K.


                                     I-10

<PAGE>


7. EARNINGS PER SHARE

The following table shows a reconciliation of the numerators and denominators
used in calculating basic and diluted earnings per share from continuing
operations for the three months ended March 31, 1999 and 1998:

--------------------------------------------- -------------------------------
                                                 Three Months Ended March 31,
(shares in millions)                                    1999             1998
--------------------------------------------- ----------------- -------------
NUMERATOR:
     Income from continuing operations.......          $20.0            $11.8
                                                       =====            =====
DENOMINATOR:
     Weighted average common shares  
      - Basic calculation....................           71.7             75.1

Effect of dilutive securities:
     Employee compensation-related shares....            3.0              6.5
                                                         ---              ---

Weighted average common shares - diluted 
     calculation.............................           74.7             81.6
                                                        ====             ====

BASIC EARNINGS PER SHARE.....................          $ .28            $ .16
                                                       =====            =====

DILUTED EARNINGS PER SHARE...................          $ .27            $ .15
                                                       =====            =====
----------------------------------------------------------------------------

In the first quarter of 1999 and in 1998, the Company granted a total of 38,500
and 246,933 shares, respectively, of the Company's common stock to certain
executives, subject to various restrictions. For more information, see the Form
of Restricted Share Award Agreements filed with the Company's Form 10-Q for the
quarter ended March 31, 1998.


8.  COMPREHENSIVE INCOME/(LOSS)

The tables below present the pretax, tax and after-tax components of the
Company's Other Comprehensive Income/(Loss) for the three months ended March 31,
1999 and 1998:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
                                                                   Tax
Other Comprehensive Income/(Loss)               Pretax         (Expense)/     After-Tax Amount
Three Months Ended March 31, 1999               Amount           Benefit  
------------------------------------------ ---------------- ----------------- ----------------
<S>                                        <C>                <C>             <C>   
Unrealized gain on security:
    Unrealized holding gains 
     arising during period...............      $ 15.1            $ (5.3)            $9.8
    Reclassification adjustment 
     for gains realized in net income....        (2.6)               .9             (1.7)
                                                 ----            ------           ------ 
Net unrealized gains.....................        12.5              (4.4)             8.1
Foreign currency translation 
     adjustments.........................       (15.1)               --            (15.1)
                                                 ----            ------           ------ 
Other comprehensive loss.................       $(2.6)           $ (4.4)          $ (7.0)
                                                =====            ======           ====== 
------------------------------------------ ---------------- ----------------- ----------------

------------------------------------------ ---------------- ----------------- ----------------
                                                                   Tax
Other Comprehensive Income/(Loss)               Pretax         (Expense)/     After-Tax Amount
Three Months Ended March 31, 1998               Amount           Benefit  
------------------------------------------ ---------------- ----------------- ----------------

Foreign currency translation adjustments.      $(12.4)             $ --           $(12.4)
Minimum pension liability adjustment.....       (15.2)              5.3             (9.9)
                                                 ----            ------           ------ 
Other comprehensive loss.................      $(27.6)            $ 5.3           $(22.3)
                                               ======             =====           ======
------------------------------------------ ---------------- ----------------- ----------------
</TABLE>


                                     I-11
<PAGE>

9.  BUSINESS SEGMENT INFORMATION

The table below presents information related to Grace's business segments for
the three months ended March 31, 1999 and 1998.

---------------------------------------- ----------------------------------
                                            Three Months Ended March 31,
                                               1999             1998
---------------------------------------- ----------------- ----------------
SALES AND REVENUES
     Grace Davison......................      $ 171.9          $ 176.2
     Grace Construction Products........        114.4            103.3
     Darex Container Products...........         59.1             61.3
                                              -------          -------
TOTAL...................................      $ 345.4          $ 340.8
                                              =======          =======

PRETAX OPERATING INCOME
     Grace Davison......................       $ 21.7           $ 24.4
     Grace Construction Products........         10.2              4.8
     Darex Container Products...........          6.6              6.7
                                               ------           ------
TOTAL...................................       $ 38.5           $ 35.9
                                               ======           ======

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

The table below presents information related to the geographic areas in which
Grace operated for the three months ended March 31, 1999 and 1998:

-------------------------------------- ----------------------------------
                                          Three Months Ended March 31,
                                             1999             1998
-------------------------------------- ----------------- ----------------

SALES AND REVENUES
     North America....................      $ 173.1          $ 177.6
     Europe...........................        105.7             92.9
     Latin America....................         19.5             19.8
     Asia Pacific.....................         47.1             50.5
                                            -------          -------  

TOTAL.................................      $ 345.4          $ 340.8
                                            =======          =======

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

The pretax operating income of Grace's business segments for the three months
ended March 31, 1999 and 1998 is reconciled below to amounts presented in the
Consolidated Statement of Operations.

----------------------------------------- ----------------------------------
                                             Three Months Ended March 31,
                                                1999             1998
----------------------------------------- ----------------- ----------------

Pretax operating income - operating
 segments................................         $ 38.5           $ 35.9
Interest expense and related 
 financing costs.........................           (3.8)            (6.8)
Interest income..........................             .6              1.1
Corporate expense........................          (12.5)           (10.0)
Other, net...............................            8.9              (.8)
                                                  -------         --------
     Income from continuing
       operations before income taxes....         $ 31.7           $ 19.4
                                                  ======           ======

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

                                     I-12

<PAGE>


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

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

OVERVIEW

FIRST QUARTER 1999 AS COMPARED TO FIRST QUARTER 1998

Sales

Grace is primarily engaged in specialty chemicals businesses on a worldwide
basis. These businesses consist of catalysts and silica-based products (Grace
Davison), specialty construction chemicals and building materials (Grace
Construction Products), and container sealants, closure sealants, and coatings
(Darex Container Products). Grace Davison contributes approximately 50% of
Grace's annual total sales, Grace Construction Products, 34% of total sales,
and Darex Container Products, 16% of total sales.

Sales and revenues of Grace's segments increased 1.3% to $345.4 million in the
first quarter of 1999. Excluding the effect of currency translation, sales
increased 0.8%. Weak refinery demand for fluid cracking catalysts (FCC) in
North America and Asia Pacific was offset by particularly strong Grace
Construction Products sales, resulting from the continued success of its new
and value-added products and strong construction activity.

Earnings

Grace reported income from continuing operations of $20.0 million, or $0.27
diluted earnings per share, up from $11.8 million ($0.15 diluted earnings per
share) in 1998.

Pretax income from continuing operations was $31.7 million, up from $19.4
million in 1998. In December 1998, Grace implemented a productivity
effectiveness program, designed to increase the Company's overall
administrative and operating effectiveness, thereby reducing costs.

In the first quarter of 1999, cost of goods sold and operating expenses as well
as selling, general and administrative expenses were reduced as a result of
these productivity initiatives. In addition, general and administrative
expenses declined $2.8 million due to Grace's divestment of the assets of its
Circe Biomedical business in January 1999. In first quarter 1998, selling
expenses included a $1.0 million charge for workforce reductions within Grace
Construction Products' manufacturing and sales organization in Europe.

Included in the first quarter 1999 results was a pretax gain on the sale of the
corporate aircraft of $4.4 million.

Interest expense and related financing costs for continuing operations were
$3.8 million, down from $6.8 million in 1998. Including the interest expense
and related financing costs allocated to discontinued operations in first
quarter 1998, total interest costs amounted to $20.1 million in that period.
While the average interest rate improved approximately 80 basis points, most of
the decline in interest expense was due to lower average debt levels as a
result of using the $1,256.6 million cash transfer related to the Spin-off and
Merger to pay down substantially all of Grace's debt (see Note 5 of this
Report).

In the first quarter of 1999, Grace recorded a pretax charge of $4.3 million
for incremental restructuring costs for severance related to the productivity
effectiveness program implemented in December 1998. This charge 

                                      I-13
<PAGE>

included $2.8 million of severance costs in connection with the relocation of
Grace's headquarters from Boca Raton, Florida to Columbia, Maryland, and the
consolidation of certain administrative functions in Columbia. The remainder of
such charge related to Grace's three operating segments as discussed below.

Grace's effective tax rate was 37.0%, down from 39.0% in 1998. The decrease in
the tax rate was due to a reorganization of certain Grace foreign operations
resulting in lower foreign taxes.

Included in the 1998 first quarter net loss of $26.0 million, were a loss from
discontinued operations of $2.6 million and a loss from extinguishment of debt
of $35.2 million (see Note 5 of this Report).


GRACE DAVISON

FIRST QUARTER 1999 AS COMPARED TO FIRST QUARTER 1998

Sales

Grace Davison is a leading global supplier of catalysts and silica products.
Refining catalysts, representing approximately 58% of Davison's annual total
sales, include fluid cracking catalysts (FCC) used by petroleum refiners to
convert distilled crude oil into transportation fuels and other petroleum-based
products, and hydroprocessing catalysts, which upgrade heavy oils and remove
certain impurities. Silica products and adsorbents (28% of Davison sales) are
used in a wide variety of industrial and consumer applications. Polyolefin
catalysts (11% of Davison sales) are essential components in the manufacture of
polyethylene resins used in products such as plastic film, high performance
plastic pipe and plastic household containers.


Grace Davison's sales and revenues were $171.9 million, a 2.5% decline from
1998. Excluding the impact of currency translation, sales declined 4.2%
reflecting unfavorable price/mix of 2.6%, coupled with volume declines of 1.6%.

The following discussion of Grace Davison sales excludes the effect of currency
translation.


     Refining catalyst sales decreased 8.9% as a result of volume declines in
     North America and Asia Pacific. The impacts of reduced refinery usage and
     heavy refinery turnaround activity in North America, and the loss of a
     customer in Asia Pacific were partially offset by volume gains in Europe.


     Polyolefin catalyst sales increased 4.6% due to strong volume growth of
     14.2%. Double-digit volume growth in North America and Europe was
     partially offset by unfavorable product mix and pricing pressures.


     Silicas and adsorbent sales were essentially flat due to volume gains of
     6.0% offset by unfavorable price/mix of 5.8%. In North America and Europe,
     pricing pressures for insulated glass molecular sieves were offset by
     volume growth in coatings, dentrifrice, and food and beverage products.


Earnings

Grace Davison's pretax operating income of $21.7 million decreased 10.9% from
1998. Gross margin decreased $2.9 million, reflecting the decline in sales
(primarily FCC) coupled with unfavorable product mix. Cost reductions,
resulting from productivity initiatives, were realized in direct manufacturing
costs as well as operating expenses. First quarter 1999 results included
additional restructuring costs of $0.9 million resulting from the
implementation of the productivity effectiveness program at the end of 1998.
This program will reduce expenses for the remainder of 1999 and beyond.

                                     I-14


<PAGE>


GRACE CONSTRUCTION PRODUCTS

FIRST QUARTER 1999 AS COMPARED TO FIRST QUARTER 1998

Sales

Grace Construction Products is a leading supplier of specialty chemicals and
building materials to the nonresidential (commercial and government)
construction industry, and to a lesser extent, the residential construction
industry. Specialty construction chemicals, which contribute approximately 58%
of Grace Construction Products annual total sales, add strength, control
corrosion, and enhance the handling and application of concrete. Specialty
building materials prevent water damage to structures and protect structural
steel against collapse due to fire.


Grace Construction Products sales and revenues were $114.4 million, a 10.7%
increase over 1998. Excluding the effect of currency translation, sales
increased 10.9%. Worldwide volumes increased 10.3%.

The following discussion of Grace Construction Products sales excludes the
effect of currency translation.


     Specialty construction chemicals sales increased 11.1%, driven by volume
     increases across all regions. In North America and Europe, volumes
     benefited from continued penetration of value-added concrete products as
     well as share gains and healthy construction activity. Asia Pacific
     volumes increased 12.6% due to the consolidation of the results of a
     concrete products subsidiary in Japan, as Grace increased its ownership in
     a joint venture to 81% in January 1999.

     Specialty building materials sales increased 10.5% on higher volumes in
     North America, Europe, and Asia Pacific. Volumes benefited from favorable
     weather conditions in North America, steady construction activity in both
     North America and Europe, and increased penetration of value-added
     waterproofing products in Asia Pacific.


Earnings

Grace Construction Products pretax operating income of $10.2 million increased
113.8% over 1998. Gross margin increased $6.4 million compared to 1998,
primarily driven by sales increases as well as margin improvements from
value-added product penetration. The first quarter of 1998 included a $1.0
million charge for workforce reductions in the European waterproofing
manufacturing and sales organization. First quarter 1999 results included
additional restructuring costs of $0.3 million resulting from the
implementation of the productivity effectiveness program at the end of 1998.
This program will reduce expenses for the remainder of 1999 and beyond.



DAREX CONTAINER PRODUCTS

FIRST QUARTER 1999 AS COMPARED TO FIRST QUARTER 1998

Sales

Darex Container Products is a leading global producer of can sealants, closure
sealants, coatings for metal packaging, and other related products. Can
sealants, which represent approximately 52% of Darex annual total sales,
hermetically seal beverage, food, and other cans; closure sealants (13% of
sales) seal glass and plastic bottles and jars used in beverage and food
applications; and coatings (19% of sales) protect metal packaging from
corrosion and its contents from the influences of the metal.

                                     I-15


<PAGE>



Darex Container Products sales and revenues were $59.1 million, a 3.6% decrease
from 1998. Contributing to the sales decline were the divestment of a can
forming lubricants business in North America (May 1998) and the impact of
currency translation. Excluding the impact of these items, sales were
essentially flat.

The following discussion of Darex Container Products sales excludes the effect
of currency translation.


         Can sealant sales declined 4.9% due primarily to reduced demand in
         North America caused by customer consolidations, and the continued
         economic challenges in Asia Pacific. Closure sealants sales increased
         5.8%, driven by volume increases in all regions except North America.
         Coatings sales increased 7.9%, mainly due to increased volumes on
         competitive gains in Latin America.


Earnings

Darex Container Products pretax operating income of $6.6 million decreased 1.9%
from 1998. Excluding the effect of currency translation, pretax operating
income was up 1.6%. Continued cost containment efforts resulted in reduced
operating expenses and flat gross margin, despite a decrease in sales. First
quarter 1999 results included additional restructuring costs of $0.3 million
resulting from the implementation of the productivity effectiveness program at
the end of 1998. This program will reduce expenses for the remainder of 1999
and beyond.



DISCONTINUED OPERATIONS

PACKAGING BUSINESS

As discussed in Notes 1 and 3 to the interim Consolidated Financial Statements
in this Report, the Spin-off and Merger were completed on March 31, 1998.
Results from discontinued operations for the three months ended March 31, 1998
included $32.6 million ($28.3 million after-tax) of costs related to the
Packaging Business transaction and $8.4 million ($5.5 million after-tax) for a
related pension plan curtailment loss.


FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES

Grace's continuing operating activities provided net pretax cash of $17.5
million in the first quarter of 1999, compared to using $295.5 million in the
first quarter of 1998. After giving effect to the net pretax cash provided by
operating activities of discontinued operations and payments of income taxes,
the net cash used by operating activities was $13.5 million in the first three
months of 1999 compared to $258.8 million for the same period in 1998. The
decrease from the first quarter of 1998 was primarily due to the first quarter
1999 expenditure of $12.5 million for the defense and disposition of
asbestos-related litigation, net of amounts received from settlements with
certain insurance carriers in connection with such litigation, as compared to
the net expenditure of $154.0 million for asbestos-related litigation in the
first quarter of 1998. In addition, environmental remediation payments totaled
$9.7 million for the first quarter of 1999 compared to $24.4 million in the
first quarter of 1998. There was also a decrease in long-term incentive
compensation program disbursements of approximately $95.0 million in 1999
compared to 1998. The long-term incentive compensation program has been
discontinued going forward. Future disbursements on the runoff of existing
plans will total less than $5.0 million over the next two years.

The decrease in other current assets during the first quarter of 1999 of $40.7
million was due to the special purpose subsidiary (SPS) retaining a smaller
interest in the pool of accounts receivable sold. The remaining balance of the
retained interest held by the SPS at March 31, 1999 totaled $24.4 million.
Grace has an agreement

                                     I-16

<PAGE>



to sell, on an ongoing basis, a pool of its trade accounts receivable to a
multi-seller receivables company (the "conduit") through the wholly-owned
bankruptcy-remote SPS. Cash proceeds, net of remittances to the conduit for
collections, received during the first quarter of 1999 were $34.6 million.

Cash flows provided by investing activities in the first quarter of 1999 were
$2.9 million, compared to cash used of $30.5 million in the first quarter of
1998. The 1999 cash inflows were primarily due to $20.4 million of proceeds
received from the sale of the corporate aircraft, partially offset by $17.0
million of capital expenditures. Cash used for investing activities in the
first quarter of 1998 represented capital expenditures primarily related to the
Grace Davison business and the discontinued Packaging Business. Grace
anticipates that total 1999 capital expenditures will not exceed $100.0
million, most of which will be directed towards its operating business
segments, with the remainder to be used for capital improvement costs incurred
in the 1999 move of the corporate headquarters to Columbia, Maryland.

Net cash provided by financing activities in the first quarter of 1999 was
minimal, as short-term borrowings of $22.3 million were used to help purchase
$26.0 million of the Company's shares as part of the 1998 share repurchase
program. Net cash provided by financing activities in the first quarter of 1998
was $966.7 million, primarily reflecting the cash transfer of $1,256.6 million
received in connection with the Packaging Business transaction and proceeds
from the exercise of employee stock options, partially offset by net repayments
of borrowings.

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


On March 31, 1999, Grace had committed borrowing facilities totaling $850.0
million, consisting of $600.0 million expiring in May 1999 and $250.0 million
under a long-term facility expiring May 2003. These facilities support the
issuance of commercial paper and bank borrowings, of which $101.2 million was
outstanding on March 31, 1999. The aggregate amount of net unused and
unreserved borrowings under short-term facilities at March 31, 1999 was $748.8
million. In May 1999, Grace entered into a new $250.0 million credit facility
replacing the $600.0 million facility under a 364-day credit agreement expiring
May 2000. The existing $250.0 million long-term facility continues in effect.


Grace has targeted a ratio of debt to EBITDA (earnings before interest, taxes,
depreciation and amortization) of less than 1.0, although Grace will continue
to have the flexibility to exceed this target as business needs dictate. The
debt to EBITDA ratio for the three months ended March 31, 1999 was estimated 
at .52.

In April 1998, the Company's Board of Directors approved a program to
repurchase up to 20% of the Company's outstanding shares in the open market
(approximately 15,165,000 shares). Through March 31, 1999, the Company had
acquired 7,207,200 shares of common stock for $111.0 million under the program
(an average price per share of $15.40). Cash payments for settled share
repurchases were $108.2 million through March 31, 1999.

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

                                     I-17
<PAGE>


ASBESTOS-RELATED MATTERS

Through March 31, 1999, Grace paid $12.5 million for the defense and
disposition of asbestos-related property damage and personal injury litigation,
net of amounts received under settlements with insurance carriers. Although the
total amount to be paid in 1999 with respect to asbestos-related claims (after
giving effect to payments to be received from insurance carriers) cannot be
precisely estimated, Grace currently expects that it will expend approximately
$40.0-$70.0 million (pretax) in 1999 to defend against and dispose of such
claims. The amounts, with respect to the probable cost of defending against and
disposing of asbestos-related claims and probable recoveries from insurance
carriers, represent estimates and are on an undiscounted basis; the outcomes of
such claims cannot be predicted with certainty.


See Note 2 to the interim Consolidated Financial Statements in this Report for
further information concerning asbestos-related lawsuits and claims.

ENVIRONMENTAL MATTERS

There were no significant developments relating to environmental liabilities in
the first quarter of 1999.

For additional information relating to environmental liabilities, see Note 11
to the Consolidated Financial Statements in the 1998 10-K and Part II, Item 1
to this Report.

YEAR 2000 COMPUTER SYSTEMS COMPLIANCE

OVERVIEW

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

Grace is reviewing both its information technology ("IT") and non-information
technology ("non-IT") systems for Year 2000 compliance. IT systems include
hardware, infrastructure, local and wide area networks, software, application
systems, electronic data exchange and interfaces. Non-IT systems cover process
control and manufacturing support equipment, laboratory systems, instruments
and scales, telecommunications, and facility and utility support systems.
Non-IT systems include systems containing date dependent software as well as
embedded date dependent chip technology. Grace is targeting to achieve Year
2000 compliance or to have an appropriate contingency plan in place for all of
its critical IT and non-IT systems by mid-1999.


GRACE'S CURRENT STATE OF YEAR 2000 READINESS

Inventory

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

Compliance

As of March 1999, 78% of the critical items are Year 2000 compliant, 21% are
non-compliant, and evaluation of the remaining items will be completed in 
May 1999.


                                     I-18
<PAGE>

For non-IT systems, Grace's most significant Year 2000 exposure is with the
process control systems that control the major Grace Davison plants. Grace has
commissioned the vendor that supplies approximately 80% of the primary digital
control systems for all Grace Davison plants worldwide, to perform a Year 2000
analysis of such systems. The assessment results for the North American plants
indicate that the hardware and the system operating and application software
associated with these systems have no significant Year 2000 problems for those
areas considered non-compliant. The assessment for the international plants is
currently in process and will be completed in May 1999.

Grace Construction Products' facilities primarily utilize a batch process
approach for manufacturing and have limited automated process controls that may
be directly impacted by Year 2000 issues. Darex Container Products has more
than 20 manufacturing facilities worldwide and certain facilities have
automated process controls. All critical process control systems for both Grace
Construction Products and Darex Container Products have been reviewed, and
substantially all are Year 2000 compliant; remediation plans are in place for
the noncompliant systems.

Grace has contacted its key customers and vendors (including telecommunications
and utility providers, banks and governmental agencies) in an effort to
ascertain their compliance status. Through March 31, 1999, 67% of key vendors
and 36% of key customers had returned information on their compliance status to
Grace. Grace is currently analyzing these responses and following up with those
key vendors and customers who have not responded or whose responses are not
adequate.

REMEDIATION AND TESTING 

Grace has documented remediation (including, in certain cases, validation
testing) plans in place for all non-compliant critical IT and non-IT systems and
expects to have completed the remediation of all such systems by mid-1999.
Remediation for non-critical systems will take place throughout 1999 and into
2000. Grace will have contingency plans in place for those non-critical systems
that have not been remediated by the end of 1999.

Grace primarily uses internal resources to validate the remediation procedures
as they relate to critical IT and non-IT systems. The Grace Year 2000 Project
Director reviews the Grace Year 2000 effort on an on-going basis, reporting
regularly to the Audit Committee of the Board of Directors of Grace.

A major component of Grace's IT remediation activity is in place as a result of
the conversion of its financial and certain operational support systems to
programs using software of SAP America, Inc. (SAP), which has represented that
its systems used by Grace are Year 2000 compliant. Unrelated to its Year 2000
efforts, Grace commenced this project in 1995. Grace Construction Products and
Darex Container Products have completed the implementation of the SAP software
in North America and many countries throughout the rest of the world, and
expect to complete the implementation in the remaining countries by mid-1999.

Grace Davison is implementing SAP in conjunction with Grace Construction
Products and Darex Container Products in Asia Pacific and Latin America,
respectively. In North America and Europe, Grace Davison will not convert to
SAP until after December 31, 1999. Until Grace Davison converts to SAP, it
plans to install new software releases to upgrade existing systems and is
contracting with outside programming services to resolve its Year 2000 issue in
North America, with completion expected by June 30, 1999. In Europe, Grace
Davison uses a largely internally developed software program that is now
supported and maintained by a third party, to provide its business and
financial systems support. Grace has contracted with such third party to
provide Grace Davison with a version of system software that is Year 2000
compliant, which should be certified by June 30, 1999.

COSTS

Grace estimates as of March 31, 1999 that the total cost of its Year 2000
efforts is not expected to exceed $4.6 million, of which approximately $1.8
million has been spent to date.

                                     I-19



<PAGE>


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

CONTINGENCY PLANS

Grace is developing contingency plans to cover situations where systems are not
remediated on a timely basis and should have such contingency plans covering all
non-compliant critical IT and non-IT systems in place by June 30, 1999.
Contingency plans will also be developed for some non-critical systems that will
not be tested or remediated; such contingency plans will provide for the
remediation of these systems in the event that they are affected by Year 2000
issues. Contingency plans will also address key customer and vendor
non-compliance for Year 2000.

RISK

If Grace fails to take appropriate remedial action, Year 2000 non-compliance
could have a material adverse effect on the financial condition or results of
operations of Grace. In particular, the failure of process control equipment,
infrastructure such as utilities, or non-compliance by third parties could
affect the ability of Grace to manufacture products and meet the demands of its
customers. Also, the failure of Grace's wide area communications network could
disrupt its SAP systems and financial reporting processes. However, Grace
believes that the efforts being taken to ensure Year 2000 compliance outlined
above, together with contingency planning, will be effective to minimize
interruptions or loss of business, or environmental, health and safety risks.

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


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Grace had no outstanding interest rate swap agreements on March 31, 1999. For
further information concerning Grace's quantitative and qualitative disclosures
about market risk, refer to Note 10 in the Consolidated Financial Statements in
the 1998 10-K.


                                     I-20

<PAGE>






                          PART II - OTHER INFORMATION

Item 1.  Legal Proceedings.

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

     (b)  Reference is made to the section entitled "Environmental Proceedings"
          in Item 3 of Grace's 1998 10-K for information concerning a
          proceeding regarding a former Grace property located in Wayne, New
          Jersey. In 1998, Grace and the U.S. government executed a consent
          decree in settlement of this claim. Under the terms of the decree,
          Grace will pay $31.77 million to the U.S. government. Grace placed
          $25.77 million into an escrow account pending approval of the decree
          by the United States District Court in New Jersey. On April 7, 1998,
          the court approved the decree. Grace will pay the remaining $6
          million in 2000.

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


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

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


          27.1 Financial Data Schedule.

     (b)  Reports on Form 8-K. The following Reports on Form 8-K were filed by
          the Company during the first quarter and to date during the second
          quarter of 1999.

     February 11, 1999:  Announcement of Grace's 1998 fourth quarter and full 
                         year results; a change in the accrual period for 
                         asbestos bodily injury liabilities; the results of 
                         Grace's productivity review of its administrative and 
                         operating functions; the financial effect of certain 
                         environmental matters; and the sale of Grace's Circe 
                         biomedical operations.


                                      II-1


<PAGE>


                                   SIGNATURE

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



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



Date: May 14, 1999            By /s/ Kathleen A. Browne      
                                 ----------------------------
                                     Kathleen A. Browne
                              Vice President and Controller
                              (Principal Accounting Officer)


                                     II-2


<PAGE>




                                 EXHIBIT INDEX

Exhibit 
  No.      Description of Exhibit
----------------------------------

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

   27.1   Financial Data Schedule.