<PAGE>


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

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


                                    FORM 10-Q

(Mark One)

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

          FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003

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


65,558,510 shares of Common Stock, $0.01 par value, were outstanding at October
31, 2003.






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


<PAGE>


                       W. R. GRACE & CO. AND SUBSIDIARIES

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


<TABLE>
<CAPTION>


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

                    Report of Independent Accountants                                        I - 1

                    Consolidated Statements of Operations                                    I - 2

                    Consolidated Statements of Cash Flows                                    I - 3

                    Consolidated Balance Sheets                                              I - 4

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

                    Consolidated Statements of Comprehensive
                    Income (Loss)                                                            I - 5

                    Notes to Consolidated Financial Statements                          I - 6 to I - 21

Item 2.             Management's Discussion and Analysis of
                    Results of Operations and Financial Condition                       I - 22 to I - 36

Item 3.             Quantitative and Qualitative Disclosures
                    About Market Risk                                                       I - 37

Item 4.             Controls and Procedures                                                 I - 37


PART II.   OTHER INFORMATION

Item 1.             Legal Proceedings                                                       II - 1

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


</TABLE>








<PAGE>



                        REPORT OF INDEPENDENT ACCOUNTANTS

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

We have reviewed the accompanying consolidated balance sheet of W. R. Grace &
Co. and its subsidiaries as of September 30, 2003, and the related consolidated
statements of operations and of comprehensive income (loss) for each of the
three-month and nine-month periods ended September 30, 2003 and September 30,
2002, and the consolidated statements of shareholders' equity (deficit) for the
three-month and nine-month periods ended September 30, 2003 and the consolidated
statements of cash flows for the nine-month periods ended September 30, 2003 and
September 30, 2002. These interim financial statements are the responsibility of
the Company's management.

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

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

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

We previously audited in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of December
31, 2002, and the related consolidated statements of operations, of cash flows,
of shareholders' equity (deficit) and of comprehensive loss for the year then
ended (not presented herein). Our report, which was modified as to a matter
raising substantial doubt about the Company's ability to continue as a going
concern, was dated January 29, 2003. In our opinion, the information set forth
in the accompanying consolidated balance sheet as of December 31, 2002, is
fairly stated in all material respects in relation to the consolidated balance
sheet from which it has been derived.


/s/ PricewaterhouseCoopers LLP


Baltimore, Maryland
October 23, 2003



                                      I-1

<PAGE>


<TABLE>
<CAPTION>

===================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES                                         THREE MONTHS ENDED              NINE MONTHS ENDED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)                             SEPTEMBER 30,                  SEPTEMBER 30,
===================================================================================================================================
Dollars in millions, except per share amounts                              2003            2002           2003           2002
                                                                     --------------------------------------------------------------
<S>                                                                  <C>                <C>          <C>             <C>
Net sales.....................................................         $    521.0      $   480.0     $  1,469.2      $   1,365.0
Other income..................................................                3.1            9.0           11.0             19.8
                                                                     --------------------------------------------------------------

                                                                            524.1          489.0        1,480.2          1,384.8
                                                                     --------------------------------------------------------------

Cost of goods sold, exclusive of depreciation and
    amortization shown separately below.......................              336.5          300.0          962.9            854.1
Selling, general and administrative expenses, exclusive of
    net pension expense shown separately below................               90.0           88.6          276.4            255.7
Depreciation and amortization ................................               26.1           24.6           76.1             70.8
Research and development expenses ............................               11.9           13.5           40.2             39.6
Net pension expense ..........................................               13.2            5.0           39.9             14.6
Interest expense and related financing costs .................                4.1            4.8           12.4             15.2
Provision for environmental remediation ......................               50.0           13.4           52.5             19.2
                                                                     --------------------------------------------------------------
                                                                            531.8          449.9        1,460.4          1,269.2
                                                                     --------------------------------------------------------------

Income (loss) before Chapter 11 expenses, income taxes, and
    minority interest.........................................               (7.7)          39.1           19.8            115.6
Chapter 11 expenses, net .....................................               (2.2)          (8.6)         (11.7)           (21.4)
Provision for income taxes....................................               (0.7)         (15.1)         (14.0)           (44.3)
Minority interest in consolidated entities....................                0.7           (1.4)           0.2             (2.3)
                                                                     --------------------------------------------------------------

    NET (LOSS) INCOME ........................................         $     (9.9)     $    14.0     $     (5.7)     $      47.6
===================================================================================================================================

BASIC (LOSS) EARNINGS PER COMMON SHARE........................         $    (0.15)     $    0.21     $    (0.09)     $      0.73

Average number of basic shares ...............................               65.6           65.5           65.5             65.4

DILUTED (LOSS) EARNINGS PER COMMON SHARE......................         $    (0.15)     $    0.21     $    (0.09)     $      0.73

Average number of diluted shares..............................               65.6           65.5           65.5             65.5
===================================================================================================================================
</TABLE>




















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


                                      I-2

<PAGE>


<TABLE>
<CAPTION>

====================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES                                                                     NINE MONTHS ENDED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)                                                        SEPTEMBER 30,
====================================================================================================================================
Dollars in millions                                                                                 2003               2002
                                                                                             ---------------------------------------
<S>                                                                                          <C>               <C>
OPERATING ACTIVITIES
Income before Chapter 11 expenses, income taxes, and minority interest...................    $       19.8       $        115.6
Reconciliation to net cash provided by operating activities:
     Depreciation and amortization ......................................................            76.1                 70.8
     Interest accrued on pre-petition debt subject to compromise.........................             8.5                 11.0
     Loss (gain) on disposals of assets..................................................             1.0                 (1.9)
     Provision for environmental remediation.............................................            52.5                 19.2
     Net income from life insurance policies.............................................            (4.1)                (5.3)
     Changes in assets and liabilities, excluding effect of businesses
     acquired/divested and foreign currency translation:
         Increase in working capital items...............................................           (55.5)               (20.9)
         Contributions to defined benefit pension plans..................................           (32.8)                  --
         Expenditures for asbestos-related litigation ...................................            (8.1)                (8.2)
         Proceeds from asbestos-related insurance .......................................            11.0                 10.8
         Expenditures for environmental remediation .....................................            (7.4)               (14.0)
         Expenditures for postretirement benefits .......................................            (8.8)               (17.7)
         Expenditures for retained obligations of discontinued operations ...............            (2.9)                (3.7)
         Changes in accruals and other non-cash items....................................            45.4                 20.0
                                                                                             ---------------------------------------
     NET CASH PROVIDED BY OPERATING ACTIVITIES BEFORE INCOME TAXES AND
         CHAPTER 11 EXPENSES ............................................................            94.7                175.7

Chapter 11 expenses paid, net ...........................................................           (14.4)               (13.3)
Income taxes paid, net of refunds .......................................................           (16.4)               (20.7)
                                                                                             ---------------------------------------
     NET CASH PROVIDED BY OPERATING ACTIVITIES ..........................................            63.9                141.7
                                                                                             ---------------------------------------

INVESTING ACTIVITIES
Capital expenditures ....................................................................           (65.7)               (55.4)
Businesses acquired in purchase transactions, net of cash acquired ......................            (3.6)               (28.5)
Investment in life insurance policies....................................................           (11.4)               (16.2)
Proceeds from life insurance policies....................................................            10.0                 13.8
Proceeds from sales of investments.......................................................              --                  0.9
Proceeds from disposals of assets .......................................................             3.7                  4.6
                                                                                             ---------------------------------------
     NET CASH USED FOR INVESTING ACTIVITIES .............................................           (67.0)               (80.8)
                                                                                             ---------------------------------------

FINANCING ACTIVITIES
Net payments of loans secured by cash value of life insurance policies ..................            (2.6)                (4.2)
Borrowings under credit facilities, net of repayments....................................             6.5                 (0.8)
Borrowings under debtor-in-possession facility, net of fees .............................            46.7                 19.1
Repayments of borrowings under debtor-in-possession facility.............................           (50.0)               (20.0)
                                                                                             ---------------------------------------
     NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES ...............................             0.6                 (5.9)
                                                                                             ---------------------------------------
Effect of currency exchange rate changes on cash and cash equivalents ...................            18.8                  7.1
                                                                                             ---------------------------------------
     INCREASE IN CASH AND CASH EQUIVALENTS ..............................................            16.3                 62.1
Cash and cash equivalents, beginning of period ..........................................           283.6                191.9
                                                                                             ---------------------------------------
Cash and cash equivalents, end of period ................................................    $      299.9       $        254.0
====================================================================================================================================
</TABLE>












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



                                      I-3

<PAGE>


<TABLE>
<CAPTION>

============================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES                                                      SEPTEMBER 30,       DECEMBER 31,
CONSOLIDATED BALANCE SHEETS (UNAUDITED)                                                      2003               2002
============================================================================================================================
Dollars in millions, except par value and shares
<S>                                                                                    <C>               <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents .........................................................    $       299.9     $        283.6
Accounts and other receivables, net ...............................................            361.7              316.6
Inventories .......................................................................            208.9              173.6
Deferred income taxes .............................................................             40.4               28.0
Other current assets...............................................................             23.6               35.9
                                                                                      --------------------------------------
     TOTAL CURRENT ASSETS .........................................................            934.5              837.7

Properties and equipment, net of accumulated depreciation and
     amortization of $1,170.3 (2002- $1,071.7).....................................            635.1              622.2
Goodwill ..........................................................................             69.6               65.2
Cash value of life insurance policies, net of policy loans.........................             90.5               82.4
Deferred income taxes .............................................................            567.1              566.7
Asbestos-related insurance receivable..............................................            271.6              282.6
Other assets ......................................................................            253.3              234.9
                                                                                      --------------------------------------
     TOTAL ASSETS .................................................................    $     2,821.7     $      2,691.7
                                                                                      ======================================

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE
CURRENT LIABILITIES
Debt payable within one year ......................................................    $        10.9     $          4.3
Accounts payable ..................................................................            109.0              100.3
Income taxes payable ..............................................................             12.6               11.4
Other current liabilities .........................................................            131.4              131.3
                                                                                      --------------------------------------
     TOTAL CURRENT LIABILITIES ....................................................            263.9              247.3

Deferred income taxes .............................................................             34.4               30.5
Other liabilities .................................................................            312.4              301.4
                                                                                      --------------------------------------
     TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE...................................            610.7              579.2

LIABILITIES SUBJECT TO COMPROMISE - NOTE 2.........................................          2,385.1            2,334.7
                                                                                      --------------------------------------
     TOTAL LIABILITIES.............................................................          2,995.8            2,913.9
                                                                                      --------------------------------------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY (DEFICIT)
Common stock issued, par value $0.01; 300,000,000 shares authorized;
     outstanding: 2003 - 65,558,510 (2002 - 65,466,725) ...........................              0.8                0.8
Paid-in capital ...................................................................            432.1              433.0
Accumulated deficit................................................................           (121.4)            (115.7)
Treasury stock, at cost:  shares: 2003 - 11,421,250 (2002 - 11,513,035)............           (135.9)            (137.0)
Accumulated other comprehensive loss...............................................           (349.7)            (403.3)
                                                                                      --------------------------------------
     TOTAL SHAREHOLDERS' EQUITY (DEFICIT) .........................................           (174.1)            (222.2)
                                                                                      --------------------------------------
     TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) .........................    $     2,821.7     $      2,691.7
============================================================================================================================
</TABLE>




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




                                      I-4
<PAGE>


<TABLE>
<CAPTION>

================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
================================================================================================================================
                                                                                             Accumulated           TOTAL
                                            Common Stock                                        Other           SHAREHOLDERS'
                                                 and          Accumulated       Treasury    Comprehensive          EQUITY
Dollars in millions                        Paid-in Capital       Deficit          Stock           Loss            (DEFICIT)
--------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>              <C>                <C>           <C>               <C>
BALANCE, JUNE 30, 2003..............    $        432.9   $     (111.5)      $   (136.0)    $     (353.9)      $       (168.5)
Net loss ...........................              --             (9.9)            --               --                   (9.9)
Stock plan activity ................              --             --                0.1             --                    0.1
Other comprehensive income..........              --             --               --                4.2                  4.2
                                        ----------------------------------------------------------------------------------------
   BALANCE, SEPTEMBER 30, 2003......    $        432.9   $     (121.4)      $   (135.9)    $     (349.7)      $       (174.1)
--------------------------------------------------------------------------------------------------------------------------------

BALANCE, DECEMBER 31, 2002..........    $        433.8   $     (115.7)      $   (137.0)    $     (403.3)      $       (222.2)
Net loss............................              --             (5.7)            --               --                   (5.7)
Stock plan activity ................              (0.9)          --                1.1             --                    0.2
Other comprehensive income..........              --             --               --               53.6                 53.6
                                        ----------------------------------------------------------------------------------------
   BALANCE, SEPTEMBER 30, 2003......    $        432.9   $     (121.4)      $   (135.9)    $     (349.7)      $       (174.1)
================================================================================================================================
</TABLE>

<TABLE>
<CAPTION>


=================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)                     THREE MONTHS ENDED           NINE MONTHS ENDED
(UNAUDITED)                                                                  SEPTEMBER 30,                SEPTEMBER 30,
=================================================================================================================================
Dollars in millions                                                          2003          2002          2003           2002
                                                                        ---------------------------------------------------------
<S>                                                                     <C>           <C>            <C>            <C>
NET (LOSS) INCOME..................................................     $    (9.9)    $    14.0      $   (5.7)     $    47.6
                                                                        ---------------------------------------------------------

OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustments...........................           4.2          (9.5)         53.6           22.9
                                                                        ---------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) .......................................     $    (5.7)    $     4.5      $   47.9      $    70.5
=================================================================================================================================
</TABLE>











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


                                      I-5


<PAGE>


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

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

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

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

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

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

During 2000 and the first quarter of 2001, Grace experienced several adverse
developments in its asbestos-related litigation, including: a significant
increase in bodily injury claims, higher than expected costs to resolve bodily
injury and certain property damage claims, and class action lawsuits alleging
damages from a former attic insulation product. (These claims are discussed in
more detail in Note 3 to the Consolidated Financial Statements.) After a
thorough review of these developments, the Board of Directors of Grace concluded
on April 2, 2001 that a federal court-supervised Chapter 11 process provided the
best forum available to achieve predictability and fairness in the claims
settlement process.

By filing under Chapter 11, Grace expects to be able to both obtain a
comprehensive resolution of the claims against it and preserve the inherent
value of its businesses. Under Chapter 11, the Debtors expect to continue to
operate their businesses as debtors-in-possession under court protection from
their creditors and claimants, while using the Chapter 11 process to develop and
implement a plan for addressing the asbestos-related claims against them.

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

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

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

As provided by the Bankruptcy Code, the Debtors had the exclusive right to
propose a plan of reorganization for a 120-day period following the Filing Date.
The Debtors have received extensions of their exclusivity



                                      I-6
<PAGE>


period during which to file a plan of reorganization through February 1, 2004,
and extensions of the Debtors' exclusive rights to solicit acceptances of a
reorganization plan through April 1, 2004.

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

The Debtors' Chapter 11 cases have been assigned to Judge Alfred M. Wolin, a
senior federal judge who sits in Newark, New Jersey. Judge Wolin is presiding
over asbestos bodily injury matters and the fraudulent conveyance litigation
described below. He has assigned the Debtors' other bankruptcy matters to Judge
Judith Fitzgerald, a U.S. bankruptcy judge from the Western District of
Pennsylvania, sitting in Wilmington, Delaware.

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 bodily injury claims or claims related to Zonolite(R)
attic insulation ("ZAI"), which will be dealt with separately.

Approximately 15,000 proofs of claim were filed by the bar date. Of these
claims, approximately 10,000 were non-asbestos related, approximately 4,000 were
for asbestos-related property damage, and approximately 1,000 were for medical
monitoring. In addition, approximately 400 proofs of claim were filed after the
bar date. The discussion below refers to claims filed before the bar date.

Approximately 7,000 of the 10,000 non-asbestos related claims involve claims by
employees or former employees for future retirement benefits such as pension and
retiree medical coverage. Grace views these claims as contingent and does not
plan to address them until a later date in the Chapter 11 Cases. The other
non-asbestos related claims include claims for payment for goods and services;
taxes; product warranties; principal plus interest under pre-petition credit
facilities; amounts due under leases; contracts rejected in the Bankruptcy
Court; environmental remediation; indemnification or contribution from actual or
potential co-defendants in asbestos-related and other litigation; pending
non-asbestos related litigation; and non-asbestos related personal injury.

The Debtors' preliminary analysis indicated that many claims 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 September 30, 2003, the Debtors had filed with the Bankruptcy Court
approximately 1,100 objections with respect to such claims, most of which were
non-substantive (duplicates, no supporting documentation, late filed claims,
etc.). The Debtors expect to file a substantial number of additional objections,
most of which will be substantive, as analysis and evaluation of the claims
progresses.

As claims are resolved, Grace will make adjustments to the liabilities recorded
on its financial statements as appropriate. Any such adjustments could be
material to the Company's consolidated financial position and results of
operations. Because of the uncertainties of the Chapter 11 process, the
in-progress state of the Debtors' investigation of submitted claims, and the
lack of documentation submitted in support of many claims, Grace, at this time,
is not able to estimate the value of the claims that may ultimately be
determined and allowed by the Bankruptcy Court.

Litigation Proceedings in Bankruptcy Court - In July 2002, the Bankruptcy Court
approved special counsel to represent the ZAI claimants, at the Debtors'
expense, in a proceeding to determine certain threshold scientific issues
regarding ZAI. The court has set a litigation schedule that would result in
pretrial hearings on these issues in November of 2003. (See Note 3 for
background information.)

On November 29, 2002, Sealed Air Corporation ("Sealed Air") and Fresenius
Medical Care AG ("Fresenius") each announced that they had reached agreements in
principle with the Official Committee of Asbestos Personal Injury Claimants and
the Official Committee of Asbestos Property Damage Claimants to settle asbestos
and fraudulent conveyance claims related to the 1998 transaction involving
Grace's former packaging business and Sealed Air, and the 1996 transaction
involving Grace's former medical care business and Fresenius, respectively.
Under the



                                      I-7
<PAGE>


terms of the Fresenius settlement, as subsequently revised and subject
to certain conditions, Fresenius would contribute $115.0 million to the Grace
estate. In July 2003, the Fresenius settlement was approved by the Bankruptcy
Court. Under the terms of the proposed Sealed Air settlement, Sealed Air would
make a payment of $512.5 million (plus interest at 5.5% per annum, commencing on
December 21, 2002) and nine million shares of Sealed Air common stock, valued at
$425.1 million as of September 30, 2003, as directed by the Bankruptcy Court
upon confirmation of Grace's plan of reorganization. The Sealed Air settlement
remains subject to the approval of the Bankruptcy Court and the fulfillment of
specified conditions. Grace is unable to predict how these settlements may
ultimately affect its plan of reorganization.

Impact on Debt Capital - All of the Debtors' pre-petition debt is in default due
to the Filing. The accompanying Consolidated Balance Sheet as of September 30,
2003 reflects the classification of the Debtors' pre-petition debt within
"liabilities subject to compromise."

The Debtors have entered into a debtor-in-possession post-petition loan and
security agreement with Bank of America, N. A. (the "DIP facility") in the
aggregate amount of $250 million. The term of the DIP facility, originally set
to expire April 1, 2003, has been extended for up to an additional three years
through 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 Debtors' assets
and the liquidation of certain Debtors' liabilities are subject to significant
uncertainty. While operating as debtors-in-possession, the Debtors may sell or
otherwise dispose of assets and liquidate or settle liabilities for amounts
other than those reflected in the Consolidated Financial Statements. Further, a
plan of reorganization could materially change the amounts and classifications
reported in the Consolidated Financial Statements, which do not currently give
effect to any adjustments to the carrying value or classification of assets or
liabilities that might be necessary as a consequence of a plan of
reorganization.

Pursuant to SOP 90-7, Grace's pre-petition liabilities that are subject to
compromise are required to be reported separately on the balance sheet at an
estimate of the amount that will ultimately be allowed by the Bankruptcy Court.
As of September 30, 2003, 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). The recorded amounts of such
liabilities generally reflect accounting measurements as of the Filing Date,
adjusted as warranted for changes in facts and circumstances and/or rulings
under Grace's Chapter 11 proceedings subsequent to the Filing. (See Note 2 to
the Consolidated Financial Statements for detail of the liabilities subject to
compromise as of September 30, 2003, and December 31, 2002.) 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.

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 2002 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 three-month and nine-month interim periods
ended September 30, 2003 are not necessarily indicative of the results of
operations for the year ending December 31, 2003.

RECLASSIFICATIONS: Certain amounts in prior years' Consolidated Financial
Statements have been reclassified to conform to the 2003 presentation.



                                      I-8
<PAGE>


EFFECT OF NEW ACCOUNTING STANDARDS: In January 2003, the Financial Accounting
Standards Board ("FASB") issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). Grace early adopted the provisions of
FIN 46 in the fourth quarter of 2002. The adoption of FIN 46 required Grace to
consolidate Advanced Refining Technologies LLC, a joint venture between Grace
and Chevron Products Company. The impact of this consolidation was not material.

In December 2002, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure, an amendment of SFAS Statement No. 123." SFAS No. 148 amends SFAS
No. 123 to provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The disclosure provisions of SFAS
No. 148, which Grace adopted in December 2002, are incorporated below.

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements of Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). Grace adopted FIN 45 in the
first quarter of 2003. FIN 45 did not have a material effect on the Consolidated
Financial Statements. (See Note 13 for required disclosures.)

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses significant issues
relating to the recognition, measurement, and reporting of costs associated with
exit and disposal activities, including restructuring activities. Grace adopted
SFAS No. 146 in the first quarter of 2003. SFAS No. 146 did not have a material
effect on the Consolidated Financial Statements.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires the accrual of asset retirement obligations
by increasing the initial carrying amount of the related long-lived asset, and
systematically expensing the cost of such obligations over the asset's useful
life. Grace adopted SFAS No. 143 in the first quarter of 2003. SFAS No. 143 did
not have a material effect 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. Had compensation cost for the
Company's stock-based incentive compensation plans been determined based on the
fair value at the grant dates of awards under those plans, consistent with the
fair value methodology prescribed by SFAS No. 123, the Company's net (loss)
income and related (loss) earnings per share for the three-month and nine-month
periods ended September 30, 2003 and 2002 would have been reduced to the pro
forma amounts indicated below:

==============================================================
PRO FORMA EARNINGS
UNDER SFAS NO. 123           THREE MONTHS     NINE MONTHS
(Dollars in millions,            ENDED            ENDED
except per share amounts)    SEPTEMBER 30,    SEPTEMBER 30,
==============================================================
                               2003    2002   2003      2002
                             ---------------------------------
Net (loss) income, as
  reported.................. $  (9.9) $ 14.0 $ (5.7)  $  47.6
Deduct:
Total stock-based employee
  compensation expense
  determined under fair
  value based method for all
  awards, net of related tax
  effects...................    (0.4)   (1.0)  (1.1)     (3.1)
                             ---------------------------------

Pro forma net (loss)
  income (1)................ $ (10.3) $ 13.0 $ (6.8)  $  44.5
                             =================================

Basic (loss) earnings
  per share:
As reported................. $ (0.15) $ 0.21 $(0.09)  $  0.73
Pro forma net (loss)
  income (1)................ $ (0.16) $ 0.20 $(0.10)  $  0.68
Diluted (loss) earnings
  per share:
As reported................. $ (0.15) $ 0.21 $(0.09)  $  0.73
Pro forma net (loss)
  income (1)................ $ (0.16) $ 0.20 $(0.10)  $  0.68
==============================================================

(1)   These pro forma amounts may not be indicative of future income (loss) and
      earnings (loss) per share due to Grace's Chapter 11 Filing.



<PAGE>



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,
with the following historical weighted average assumptions applied to grants in
2001 and 2000:

==============================================================
OPTION VALUE ASSUMPTIONS                  2001        2000
--------------------------------------------------------------
Dividend yield........................     --%         --%
Expected volatility...................     61%         59%
Risk-free interest rate...............      5%          7%
Expected life (in years)..............      4           4
==============================================================



                                      I-9
<PAGE>


Based upon the above assumptions, the weighted average fair value of each option
granted was $1.28 per share for 2001 and $6.86 per share for 2000.

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, environmental
     remediation, income taxes, and retained obligations of divested businesses.
o    Pension and postretirement liabilities that depend on assumptions regarding
     discount rates and/or total returns on invested funds.
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 trade receivables,
     inventories, insurance receivables, income taxes, and goodwill.

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

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

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

Components of liabilities subject to compromise are as follows:

================================================================
(Dollars in millions)           SEPTEMBER 30,     December 31,
(Unaudited)                          2003             2002
================================================================
Debt, pre-petition plus
  accrued interest............ $      547.5      $      538.8
Asbestos-related liability            964.6             973.2
Income taxes..................        238.3             227.8
Environmental remediation.....        244.4             201.1
Postretirement benefits
  other than pension .........        139.0             147.2
Special pension
  arrangements ...............         76.5              74.9
Retained obligations of
  divested businesses ........         57.6              55.3
Accounts payable .............         32.2              32.4
Other accrued liabilities ....         85.0              84.0
                               ---------------------------------
                               $    2,385.1      $    2,334.7
================================================================

Set forth below is a reconciliation of the changes in pre-filing date liability
balances for the period from the Filing Date through September 30, 2003.

================================================================
                                                   Cumulative
(Dollars in millions)                             Since Filing
================================================================
Balance, Filing Date.......................... $    2,366.0
Cash disbursements and/or reclassifications
  under Bankruptcy Court orders:
   Freight and distribution order.............         (5.7)
   Trade accounts payable order...............         (9.1)
Other court orders including employee wages
  and benefits, sales and use tax, and
  customer programs...........................       (167.9)
Expense/(income) items:
   Interest on pre-petition debt..............         44.0
   Current period employee-related
     accruals.................................         25.8
   Change in estimate of environmental
     contingencies............................        129.0
   Change in estimate of income tax
     contingencies............................         26.7
Balance sheet reclassifications...............        (23.7)
                                               -----------------
Balance, end of period........................ $    2,385.1
================================================================






<PAGE>

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.


                                      I-10

<PAGE>

The Debtors' Chapter 11 expenses for the three-month and nine-month periods
ended September 30, 2003 and 2002 consist of:

================================================================
                              THREE MONTHS       NINE MONTHS
                                  ENDED             ENDED
(Dollars in millions)         SEPTEMBER 30,     SEPTEMBER 30,
================================================================
                              2003    2002       2003    2002
                            ------------------------------------
Legal and financial
  advisory fees............ $   2.3  $  8.8    $  12.0  $ 21.8
Interest income ...........    (0.1)   (0.2)      (0.3)   (0.4)
                            ------------------------------------
Chapter 11 expenses, net .. $   2.2  $  8.6    $  11.7  $ 21.4
================================================================

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

Condensed financial information of the Debtors is presented below:

===============================================================
W. R. GRACE & CO. - CHAPTER 11
FILING ENTITIES
DEBTOR-IN-POSSESSION STATEMENT OF
OPERATIONS                              NINE MONTHS ENDED
(Dollars in millions) (Unaudited)          SEPTEMBER 30,
===============================================================
                                        2003         2002
                                    ---------------------------
Net sales, including intercompany.. $    761.5   $    746.2
Other income.......................       44.3         46.6
                                    ---------------------------
                                         805.8        792.8
                                    ---------------------------
Cost of goods sold, including
   intercompany, exclusive of
   depreciation and amortization
   shown separately below..........      525.6        474.2
Selling, general and
   administrative expenses.........      165.7        161.6
Research and development
    expenses.......................       29.6         31.5
Depreciation and amortization .....       46.2         45.8
Net pension expense ...............       36.1         16.2
Interest expense and related
   financing costs.................       12.3         14.8
Provision for environmental
  remediation .....................       52.5         19.2
                                    ---------------------------
                                         868.0        763.3
                                    ---------------------------
(Loss) income before Chapter 11
   expenses, income taxes, and
   equity in net income of
   non-filing entities ............      (62.2)        29.5
Chapter 11 expenses, net ..........      (11.7)       (21.4)
Benefit from (provision for)
  income taxes ....................        6.2        (19.9)
Equity in net income of
  non-filing entities .............       62.0         59.4
                                    ---------------------------
   NET (LOSS)  INCOME  ............ $     (5.7)  $     47.6
===============================================================






<PAGE>




===============================================================
W. R. GRACE & CO. - CHAPTER 11 FILING
ENTITIES
DEBTOR-IN-POSSESSION CONDENSED
STATEMENT OF CASH FLOWS
(Dollars in millions)                    NINE MONTHS ENDED
(Unaudited)                                SEPTEMBER 30,
===============================================================
                                          2003        2002
                                       ------------------------
OPERATING ACTIVITIES
Net (loss) income..................... $   (5.7)   $   47.6
Reconciliation to net cash provided
  by (used for) operating activities:
Non-cash items, net...................     53.6        56.7
Changes in other assets and
   liabilities, excluding the effect
   of businesses acquired/divested....     56.7       (36.1)
                                       ------------------------
NET CASH PROVIDED BY OPERATING
   ACTIVITIES.........................    104.6        68.2

NET CASH USED FOR INVESTING ACTIVITIES    (38.8)      (40.3)

NET CASH USED FOR FINANCING ACTIVITIES    (17.3)      (21.3)
                                       ------------------------

NET  INCREASE IN CASH AND CASH
   EQUIVALENTS........................     48.5         6.6
Cash and cash equivalents, beginning
   of period..........................     56.8        38.0
                                       ------------------------
Cash and cash equivalents, end of
   period............................. $  105.3    $   44.6
===============================================================

===============================================================
W. R. GRACE & CO. - CHAPTER 11
FILING ENTITIES
DEBTOR-IN-POSSESSION BALANCE
SHEET
(Dollars in millions)             SEPTEMBER 30,   DECEMBER 31,
(Unaudited)                           2003           2002
===============================================================
ASSETS
CURRENT ASSETS
Cash and cash equivalents ...... $      105.3    $       56.8
Accounts and other
   receivables, net ............        118.2           114.7
Receivables from non-filing
   entities, net ...............         55.6            43.4
Inventories ....................         80.2            70.5
Other current assets............         55.3            53.0
                                 ------------------------------
   TOTAL CURRENT ASSETS ........        414.6           338.4

Properties and equipment, net...        387.0           389.7
Cash value of life insurance
   policies, net of policy
   loans........................         90.5            82.4
Deferred income taxes ..........        567.2           567.0
Asbestos-related insurance
   expected to be realized
   after one year...............        271.6           282.6
Loans receivable from
   non-filing entities, net ....        416.6           444.4
Investment in non-filing
entities .......................        267.9           244.7
Other assets ...................        102.5            92.2
                                 ------------------------------
   TOTAL ASSETS ................ $    2,517.9    $    2,441.4
===============================================================




                                      I-11
<PAGE>



===============================================================
(Dollars in millions)             SEPTEMBER 30,  DECEMBER 31,
(Unaudited)                           2003           2002
---------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
LIABILITIES NOT SUBJECT TO
COMPROMISE
Current liabilities ..........   $     89.6      $     99.3
Other liabilities ............        217.3           229.6
                                 ------------------------------
  TOTAL LIABILITIES NOT
  SUBJECT TO COMPROMISE.......        306.9           328.9

LIABILITIES SUBJECT TO
  COMPROMISE..................      2,385.1         2,334.7
                                 ------------------------------
  TOTAL LIABILITIES...........      2,692.0         2,663.6

 SHAREHOLDERS' EQUITY
  (DEFICIT) ..................       (174.1)         (222.2)
                                 ------------------------------
  TOTAL LIABILITIES AND
  SHAREHOLDERS'
  EQUITY (DEFICIT) ...........   $  2,517.9      $  2,441.4
===============================================================

In addition to Grace's financial reporting obligations as prescribed by the U.S.
Securities and Exchange Commission ("SEC"), the Debtors are also required, under
the rules and regulations 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 bodily injury lawsuits relating to
previously sold asbestos-containing products. On April 2, 2001, Grace filed
voluntary petitions for reorganization under Chapter 11 to use the
court-supervised reorganization process to develop and implement a plan for
addressing pending and future asbestos-related claims. (See Note 1 for further
discussion.)

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 bodily injury. Due to
the Filing, holders of asbestos-related claims are stayed from continuing to
prosecute pending litigation and from commencing new lawsuits against the
Debtors. Additional asbestos-related claims will be subject to the Chapter 11
process established by the Bankruptcy Court. Separate creditors' committees
representing the interests of property damage and bodily injury claimants have
been appointed in the Chapter 11 Cases. Grace's obligations with respect to
present and future claims will be determined through proceedings in the
Bankruptcy Court and negotiations with each of the official committees appointed
in the Chapter 11 Cases and a legal representative of future asbestos claimants,
which negotiations are expected to provide the basis for a plan of
reorganization.

PROPERTY DAMAGE LITIGATION

The plaintiffs in asbestos property damage lawsuits generally seek to have the
defendants absorb the cost of removing, containing or repairing the
asbestos-containing materials in the affected buildings. Each property damage
case is unique in that the age, type, size and use of the building, and the
difficulty of asbestos abatement, if necessary, vary from structure to
structure. Information regarding product identification, the amount of product
in the building, the age, type, size and use of the building, the jurisdictional
history of prior cases and the court in which the case is pending has provided
meaningful guidance as to the range of potential costs. Grace has recorded an
accrual for all outstanding property damage cases for which sufficient
information is available to form a reasonable estimate of such exposure. (See
"Asbestos-Related Liability" below.)

Out of 380 asbestos property damage cases filed prior to the Filing Date, 141
were dismissed without payment of any damages or settlement amounts; judgments
were entered in favor of Grace in nine cases (excluding cases settled following
appeals of judgments in favor of Grace); judgments were entered in favor of the
plaintiffs in 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 involve ZAI). Approximately
4,000 additional asbestos property damage claims were filed prior to the March
31, 2003 bar date established by the Bankruptcy Court. The Debtors are in the
process of analyzing the validity and potential liability related to these
additional claims.

The ZAI cases were filed as class action lawsuits in 2000 and 2001 on behalf of
owners of homes containing ZAI. These cases seek damages and equitable relief,
including the removal, replacement and/or disposal of all such insulation. The
plaintiffs assert that this product is in millions of homes throughout the U.S.
and that the



                                      I-12
<PAGE>



cost of removal could be several thousand dollars per home. As a result of the
Filing, these cases have been transferred to the U.S. 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. At this time, Grace is not able to assess the extent of
any possible liability related to this matter. In July 2002, the Bankruptcy
Court approved special counsel to represent the ZAI claimants, at the Debtors'
expense, in a proceeding to determine certain threshold scientific issues
regarding ZAI. The court has set a litigation schedule that would result in
pretrial hearings on these issues in November of 2003.

BODILY INJURY LITIGATION

Asbestos bodily injury claims are generally similar to each other (differing
primarily in the type of asbestos-related illness allegedly suffered by the
plaintiff). However, Grace's estimated liability for such claims has been
influenced by numerous variables, including the solvency of other former
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.
Grace's bodily injury liability reflects management's estimate, as of the Filing
Date, of the number and ultimate cost of present and future bodily injury claims
expected to be asserted against Grace given demographic assumptions of possible
exposure to asbestos containing products previously manufactured by Grace.

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

Approximately 1,000 claims for medical monitoring were filed against the Debtors
prior to the March 31, 2003 bar date. These claims were made by individuals for
medical monitoring, but not bodily injury, due to exposure to asbestos through
Grace's products or operations. Based on the number and expected value of such
claims, Grace does not believe such claims will have a material effect on the
Consolidated Financial Statements.

ASBESTOS-RELATED LIABILITY

Asbestos-related litigation is stayed by the Chapter 11 Cases. Ongoing costs are
generally limited to claims administration costs and to defense costs incurred
in connection with litigation permitted by the Bankruptcy Court. Other
adjustments to the recorded liability will be based on developments in the
Chapter 11 Cases. Recently, federal legislation has been proposed to address
asbestos bodily injury claims. In addition, several states have enacted or
proposed legislation affecting asbestos bodily injury claims. At this time,
Grace cannot predict what impact any such legislation would have on Grace's
asbestos bodily injury liability, or its ultimate plan of reorganization.

For periods prior to and as of the Filing Date, Grace's estimated property
damage and bodily injury liabilities were based on its experience with, and
recent trends in, asbestos litigation. Its recorded liabilities covered
indemnity and defense costs for pending property damage cases for which
sufficient information was available, and for pending and projected future
bodily injury claims. However, due to the Filing and the uncertainties of
asbestos-related litigation, actual amounts could differ materially from the
recorded liability. Since the Filing, Grace is aware that bodily injury claims
have continued to be filed against co-defendant companies, and at higher than
historical rates. Grace believes that had it not filed for Chapter 11
reorganization, it likely would have received thousands more claims than it had
previously projected.

The total asbestos-related liability balances as of September 30, 2003 and
December 31, 2002 were $964.6 million and $973.2 million, respectively. The
decrease in the liability is primarily due to the payment of normal post-Filing
administrative costs relating to claims management and defense costs in
connection with litigation permitted by the Bankruptcy Court. The recorded
asbestos-related liability is included in "liabilities subject to compromise."

ASBESTOS INSURANCE

Grace previously purchased insurance policies with respect to its
asbestos-related lawsuits and claims. Insurance coverage for asbestos-related
liabilities has not been commercially available since 1985. Grace has settled
with and has been paid by all of its primary insurance carriers with respect to
both property damage and bodily injury cases and claims. Grace has also settled
with its excess insurance carriers that wrote policies available for property
damage cases; those settlements involve amounts paid and to be paid to




                                      I-13
<PAGE>


Grace. Grace believes that certain of these settlements may cover ZAI claims, as
well as other property damage claims. In addition, Grace believes that
additional coverage for ZAI claims may exist under excess insurance policies not
subject to settlement agreements. Grace has settled with excess insurance
carriers that wrote policies available for bodily injury claims in layers of
insurance that Grace believes may be reached based on its current estimates.

The asbestos-related insurance asset represents amounts expected to be received
from carriers under settlement agreements for defense and disposition costs to
be paid by Grace. Estimated insurance reimbursements are based on the recorded
amount of the asbestos-related liability and are only collectible as liabilities
are satisfied. In the event that Grace's ultimate asbestos-related liability is
determined to exceed recorded amounts, insurance exists to cover a portion of
such incremental liability, but generally in a lower proportion than the
currently recorded insurance receivable bears to the currently recorded
liability.

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

In 2003, Grace completed two business combinations for a total cash cost of $3.6
million as follows:

o    In April 2003, Grace, through its subsidiary The Separations Group,
     acquired the business and assets of MODcol Corporation, a manufacturer of
     preparative chromatography columns and provider of custom column packaging
     services.

o    In July 2003, Grace acquired the chromatography business of Argonaut
     Technologies, Inc., which had been marketed under the Jones Chromatography
     name.

Goodwill recognized in those transactions amounted to $0.7 million, which was
assigned to Davison Chemicals.

In 2002, Grace completed three business combinations for a total cash cost of
$28.5 million as follows:

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

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

o    In August 2002, Advanced Refining Technologies LLC ("ART"), a joint venture
     between Grace and Chevron Products Company ("Chevron"), acquired an
     exclusive license for the hydroprocessing catalyst technology of Japan
     Energy Corporation and its subsidiary Orient Catalyst Company.

Goodwill recognized in those transactions amounted to $3.8 million, $0.9 million
of which was assigned to Davison Chemicals and $2.9 million of which was
assigned to Performance Chemicals.

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

--------------------------------------------------------------------------------
5.   OTHER INCOME
--------------------------------------------------------------------------------

Components of other income are as follows:

================================================================
OTHER INCOME                 THREE MONTHS        NINE MONTHS
(Dollars in millions)        SEPTEMBER 30,      SEPTEMBER 30,
================================================================
                            2003      2002     2003      2002
                           -------------------------------------
Investment income (loss)   $  (0.2) $  0.5    $   4.1  $  5.3
Interest income ..........     0.9     0.9        3.4     2.5
Net (loss) gain on
  dispositions of assets      (0.1)    2.3       (1.0)    1.9
Tolling revenue...........     0.2     1.8        0.9     2.7
Foreign currency..........     0.4     0.6       (3.2)    0.6
Other miscellaneous
  income .................     1.9     2.9        6.8     6.8
                           -------------------------------------
Total other income........ $   3.1  $  9.0    $  11.0  $ 19.8
================================================================




                                      I-14
<PAGE>


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


================================================================
                                       SEPTEMBER 30,December 31,
(Dollars in millions)                    2003            2002
----------------------------------------------------------------
ACCOUNTS AND OTHER RECEIVABLES, NET
Trade receivables, less allowance of
  $4.2 (2002 - $3.7).................  $   344.1    $   302.8
Other receivables, less allowances of
  $1.7(2002 - $1.7)..................       17.6         13.8
                                       -------------------------
                                       $   361.7    $   316.6
================================================================
INVENTORIES
Raw materials .......................  $    49.2    $    39.2
In process ..........................       35.1         30.3
Finished products ...................      130.8        110.8
General merchandise .................       30.1         26.8
Less:  Adjustment of certain
  inventories to a
  last-in/first-out (LIFO) basis ....      (36.3)       (33.5)
                                       -------------------------
                                       $   208.9    $   173.6
================================================================
OTHER ASSETS
Deferred pension costs...............  $   109.8    $   104.2
Deferred charges ....................       40.2         38.7
Long-term receivables, less
  allowances of $0.8 (2002 - $0.8)           7.9          2.0
Patents, licenses and other
  intangible assets, net ............       65.4         63.4
Pension-unamortized prior service
   cost .............................       26.4         26.4
Investments in unconsolidated
  affiliates and other...............        3.6          0.2
                                       -------------------------
                                       $   253.3    $   234.9
================================================================
OTHER CURRENT LIABILITIES
Accrued compensation ................  $    39.5    $    40.0
Accrued interest ....................        7.1          6.4
Deferred tax liability ..............        1.2          0.8
Customer volume rebates .............       21.9         21.2
Accrued commissions .................        7.8          6.0
Accrued reorganization fees .........        6.8          9.4
Other accrued liabilities ...........       47.1         47.5
                                       -------------------------
                                       $   131.4    $   131.3
================================================================
OTHER LIABILITIES
Pension-underfunded plans ...........   $  304.3    $   295.1
Other accrued liabilities ...........        8.1          6.3
                                       -------------------------
                                       $   312.4    $   301.4
================================================================


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

Grace is the beneficiary of life insurance policies on certain current and
former employees with a net cash surrender value of $90.5 million and $82.4
million at September 30, 2003 and December 31, 2002, respectively. The policies
were acquired to fund various employee benefit programs and other long-term
liabilities and are structured to provide cash flow (primarily tax-free) over an
extended number of years. The following table summarizes activity in these
policies for the nine months ended September 30, 2003 and 2002, and components
of the net cash value at September 30, 2003 and December 31, 2002:

<PAGE>

===============================================================
LIFE INSURANCE -
ACTIVITY SUMMARY                      NINE MONTHS ENDED
(Dollars in millions)                   SEPTEMBER 30,
===============================================================
                                    2003            2002
                               --------------------------------
Earnings on policy assets....  $      28.9     $       31.2
Interest on policy loans.....        (24.8)           (25.9)
Policy loan repayments.......          2.6              4.2
Annual premiums..............          2.4              2.5
Net investing activity.......         (1.0)            (0.1)
                               --------------------------------
  Change in net cash value...  $       8.1     $       11.9
===============================================================
Tax-free proceeds received...  $      10.0     $       13.8
===============================================================
COMPONENTS OF                  SEPTEMBER 30,    December 31,
NET CASH VALUE                      2003            2002
===============================================================
Gross cash value.............  $     470.7     $      471.3
Principal - policy loans.....       (365.8)          (365.4)
Accrued interest - policy
 loans.......................        (14.4)           (23.5)
                               --------------------------------
   Net cash value............  $      90.5     $       82.4
===============================================================
Insurance benefits in force..  $   2,212.4     $    2,240.8
===============================================================

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

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

On September 30, 2003, and December 31, 2002, Grace's debt was as follows:

==============================================================
COMPONENTS OF DEBT               SEPTEMBER 30,   December 31,
(Dollars in millions)                2003            2002
==============================================================

DEBT PAYABLE WITHIN ONE YEAR
DIP facility .................  $        --    $        --
Other short-term borrowings...         10.9            4.3
                                ------------------------------
                                $      10.9    $       4.3
                                ==============================
DEBT PAYABLE AFTER ONE YEAR
DIP facility .................  $        --    $        --

DEBT SUBJECT TO COMPROMISE
Bank borrowings ..............  $     500.0    $     500.0
Other borrowings .............          1.2            1.0
Accrued interest .............         46.3           37.8
                                ------------------------------
                                $     547.5    $     538.8
                                ==============================
Annualized weighted average
  interest rates on total
  debt .......................          2.1%           2.8%
==============================================================

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 for up to an
additional three years through April 1, 2006, and modified certain other
provisions. Grace had no outstanding borrowings under the DIP facility as of
September 30, 2003; however, $25.8 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 mainly for trade-related matters
such as




                                      I-15
<PAGE>


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 September 30, 2003, approximately 9,904,795 shares were
reserved for issuance pursuant to stock option and other stock incentive plans.
In the first nine months of 2003 and the year ended December 31, 2002, Grace did
not grant any stock options.

For additional information, see Notes 15 and 17 to the Consolidated Financial
Statements in Grace's 2002 Form 10-K.

--------------------------------------------------------------------------------
10.  (LOSS) 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
(Dollars in millions,       THREE MONTHS        NINE MONTHS
except per share               ENDED              ENDED
amounts)                   SEPTEMBER 30,       SEPTEMBER 30,
==============================================================
                          2003      2002      2003      2002
                        --------------------------------------
NUMERATORS
  Net (loss) income.... $   (9.9)  $ 14.0  $   (5.7) $  47.6
                        ======================================
DENOMINATORS
  Weighted average
  common shares -
  basic calculation....     65.6     65.5      65.5     65.4

  Dilutive effect of
  employee stock
  options and
  restricted shares....     --       --        --        0.1
                        --------------------------------------

  Weighted average
  common shares
  diluted calculation..     65.6     65.5      65.5     65.5
                        ======================================

BASIC (LOSS) EARNINGS
 PER SHARE ............ $  (0.15)  $ 0.21  $  (0.09) $  0.73
                        ======================================
DILUTED (LOSS)
 EARNINGS PER SHARE.... $  (0.15)  $ 0.21  $  (0.09) $  0.73
==============================================================


As a result of loss incurred during the three months and nine months ended
September 30, 2003, employee compensation shares of approximately 200,000 and
100,000, respectively, were excluded from the diluted loss per share calculation
because their effect would be antidilutive.

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

Grace's other comprehensive income (loss) consists entirely of foreign currency
translation adjustments. The table below presents the pre-tax, tax and after-tax
amounts of Grace's other comprehensive income (loss) for the three months and
nine months ended September 30, 2003 and 2002:

=============================================================
                                                    After-
                             Pre-Tax      Tax         Tax
 (Dollars in millions)       Amount     Benefit     Amount
=============================================================
THREE MONTHS ENDED:
  September 30, 2003....... $    4.2   $   --      $    4.2
  September 30, 2002....... $   (9.5)  $   --      $   (9.5)
NINE MONTHS ENDED:
  September 30, 2003....... $   53.6   $   --      $   53.6
  September 30, 2002....... $   22.9   $   --      $   22.9
=============================================================

<PAGE>

The table below presents the components of Grace's accumulated other
comprehensive loss at September 30, 2003 and December 31, 2002:

=============================================================
COMPONENTS OF ACCUMULATED
OTHER COMPREHENSIVE LOSS       SEPTEMBER 30,    December 31,
(Dollars in millions)               2003            2002
=============================================================
Foreign currency              $    (66.0)     $   (119.6)
  translation ...............
Minimum pension liability....     (283.7)         (283.7)
                              -------------------------------
Accumulated other
  comprehensive loss......... $   (349.7)     $   (403.3)
=============================================================


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

ASBESTOS-RELATED LITIGATION - SEE NOTE 3

ENVIRONMENTAL REMEDIATION

General Matters and Discussion

Grace is subject to loss contingencies resulting from extensive and evolving
federal, state, local and foreign environmental laws and regulations relating to
the generation, storage, handling, discharge and disposition of hazardous wastes
and other materials. Grace accrues for anticipated costs associated with
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.

At September 30, 2003, Grace's liability for environmental investigative and
remediation costs related to continuing and discontinued operations totaled
$244.4 million, as compared to $201.1 million at December 31, 2002. This
estimate of



                                      I-16
<PAGE>


environmental cost 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. This estimate does not include possible additional liability
related to new claims for remediation costs filed against the Debtors by
governmental authorities and private parties prior to the March 31, 2003 bar
date. One of such claims for approximately $100 million relates to a
discontinued operation at a current operating site. Grace is evaluating such
claims and is engaged in discussions with the U.S. Environmental Protection
Agency (the "EPA") and other parties with respect to such claims. At this time,
Grace is not able to determine whether the amount of liability related to such
claims is likely to be material or to require adjustment to Grace's recorded
liability.

The amounts of cash expenditures below have been charged against previously
established reserves for the periods presented.

=============================================================
                         THREE MONTHS         NINE MONTHS
(Dollars in                 ENDED                ENDED
millions)                SEPTEMBER 30,       SEPTEMBER 30,
=============================================================
                        2003      2002      2003      2002
                      ---------------------------------------
Continuing
  operations......... $    1.9  $   3.3   $   7.4   $   14.0
Discontinued
  operations.........      1.3      0.3       1.8        0.5
                      ---------------------------------------
Total................ $    3.2  $   3.6   $   9.2   $   14.5
=============================================================


During the three-month and nine-month periods ended September 30, 2003, Grace
recorded pre-tax charges of $50.0 million and $52.5 million, respectively, for
environmental matters. Approximately $50.0 million of these charges were in
connection with a cost recovery lawsuit brought by the U.S. government relating
to Grace's former vermiculite mining and processing activities near Libby,
Montana. (See discussion under "Vermiculite Related Matters" below.)

Grace's environmental liabilities are reassessed whenever circumstances become
better defined or remediation efforts and their costs can be better estimated.
These liabilities are evaluated based on currently available information,
including the progress of remedial investigation at each site, the current
status of discussions with regulatory authorities regarding the method and
extent of remediation at each site, existing technology, prior experience in
contaminated site remediation and the apportionment of costs among potentially
responsible parties. Grace expects that the funding of environmental remediation
activities will be affected by the Chapter 11 proceedings; any such effect could
be material. Grace's environmental liabilities are included in "liabilities
subject to compromise" as of September 30, 2003.

Vermiculite Related Matters

From the 1920's until 1990, Grace and previous owners conducted vermiculite
mining and related activities near Libby, Montana. The vermiculite ore that was
mined contained varying amounts of asbestos as a contaminant, almost all of
which was removed during processing. Expanded vermiculite from Libby was used in
products such as fireproofing, insulation and potting soil. In November 1999,
Region 8 of the 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, the 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 connection with its defense, Grace conducted its own investigation to
determine whether the EPA's actions and cost claims were justified and
reasonable. However, 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 in costs expended through December 2001, and for
all appropriate future costs to complete the cleanup. Grace has appealed the
court's ruling.

As a result of such ruling, Grace recorded a pre-tax charge of $50 million,
bringing its total estimated



                                      I-17
<PAGE>



liability for Libby-related reimbursable costs to $110 million. Grace's estimate
of expected reimbursable costs is based solely on public information about the
EPA's spending plans. However, the EPA's cost estimates have increased
substantially over the course of its cleanup. Consequently, Grace's estimate may
change materially as more current public information becomes available. Grace's
liability for this matter is included in "liabilities subject to compromise" and
any payments would be subject to the outcome of the Chapter 11 proceedings.

The EPA is also evaluating environmental risks at vermiculite processing sites
throughout the U.S. that processed vermiculite from Libby, Montana, and has made
claims against Grace to carry out or fund remediation activities. Grace is
reviewing the EPA's actions and cost claims to determine whether they are
justified and reasonable and, in several instances, Grace has remediated or
agreed to remediate certain sites. Costs associated with the above are included
in "provision for environmental remediation" included in the Consolidated
Statements of Operations.

Insurance Matters

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

TAX MATTERS

Grace has received the examination report from the Internal Revenue Service (the
"IRS") on tax periods 1993 through 1996 asserting, in the aggregate,
approximately $114.0 million of proposed tax adjustments. The most significant
contested issue addressed in such report concerns corporate-owned life insurance
("COLI") policies and is discussed below. Other proposed IRS tax adjustments
include Grace's tax position regarding research and development credits, the
reporting of certain divestitures and other miscellaneous proposed adjustments.
The tax audit for the 1993 through 1996 tax period is under the jurisdiction of
the IRS Office of Appeals, where Grace has filed a protest. Grace's federal tax
returns covering periods 1997 and forward are either under examination by the
IRS or open for future examination. Grace believes that the impact of probable
tax return adjustments would not have a material adverse effect upon Grace's
financial position. Any cash payment would be subject to Grace's Chapter 11
proceedings.

In 1988 and 1990, Grace acquired COLI policies on the lives of certain of its
employees as part of a strategy to fund the cost of postretirement employee
health care benefits and other long-term liabilities. COLI premiums have been
funded in part by loans issued against the cash surrender value of the COLI
policies. The IRS is challenging deductions of interest on loans secured by COLI
policies for years prior to 1999. In 2000, Grace paid $21.2 million of tax and
interest related to this issue for tax years 1990 through 1992. Subsequent to
1992, Grace deducted approximately $163.2 million in interest attributable to
COLI policy loans. Although Grace continues to believe that the deductions were
legitimate, the IRS has successfully challenged interest deductions claimed by
other corporations with respect to broad-based COLI policies in three out of
four litigated cases. Given the level of IRS success in COLI cases, Grace
requested and was granted early referral to the IRS Office of Appeals for
consideration of possible settlement alternatives of the COLI interest deduction
issue.

On September 23, 2002, Grace filed a motion in its Chapter 11 proceeding
requesting that the Bankruptcy Court authorize Grace to enter into a settlement
agreement with the IRS with respect to Grace's COLI interest deductions. The tax
years at issue are 1989 through 1998. Under the terms of the proposed
settlement, the government would allow 20% of the aggregate amount of the COLI
interest deductions and Grace would owe federal income tax and interest on the
remaining 80%. Grace has accrued for the potential tax and interest liability
related to the disallowance of all COLI interest deductions and continues to
accrue interest as part of its quarterly income tax provision. On October 22,
2002, the Bankruptcy Court issued an order authorizing Grace to enter into
settlement discussions with the IRS consistent with the aforementioned terms and
further ordered that any final agreement would be subject to Bankruptcy Court
approval. Grace is currently in negotiations with the IRS concerning the
proposed settlement, and the possible termination of the COLI policies.

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 1995 against a Grace subsidiary that formerly
operated a temporary staffing business



                                      I-18
<PAGE>



for nurses and other health care personnel. The assessments, aggregating $21.8
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
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. The IRS has issued assessments aggregating $40.1 million for the 1996
through 1998 tax periods and Grace expects the IRS will make additional
assessments for the 1999 tax period. The matter is currently pending in the
United States Court of Claims. Grace is currently in discussions with the
Department of Justice concerning possible settlement options.

LITIGATION RELATED TO FORMER PACKAGING AND MEDICAL CARE BUSINESSES

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 Sealed Air and Fresenius on behalf of
the Debtors' estates.

On November 29, 2002, Sealed Air and Fresenius each announced that they had
reached agreements in principle with such Committees to settle asbestos and
fraudulent conveyance claims related to such transactions. Under the terms of
the Fresenius settlement, as subsequently revised and subject to certain
conditions, Fresenius would contribute $115.0 million to the Grace estate. In
July 2003, the Fresenius settlement was approved by the Bankruptcy Court. Under
the terms of the proposed Sealed Air settlement, Sealed Air would make a payment
of $512.5 million (plus interest at 5.5% per annum, commencing on December 21,
2002) and nine million shares of Sealed Air common stock, valued at $425.1
million as of September 30, 2003, as directed by the Bankruptcy Court upon
confirmation of Grace's plan of reorganization. The Sealed Air settlement
remains subject to the approval of the Bankruptcy Court and the fulfillment of
specified conditions. Grace is unable to predict how these settlements may
ultimately affect its plan of reorganization.

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



                                      I-19
<PAGE>

     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

At September 30, 2003, Grace had gross financial assurances issued and
outstanding of $249.4 million, comprised of $135.0 million of gross surety bonds
issued by various insurance companies, and $114.4 million of standby letters of
credit and other financial assurances issued by various banks. Of the standby
letters of credit, $19.0 million act as collateral for surety bonds, thereby
reducing Grace's overall obligations under its financial assurances to a net
amount of $230.4 million. These financial assurances were established for a
variety of purposes, including insurance and environmental matters, asbestos
settlements and appeals, trade-related commitments and other matters. Of the net
amount of $230.4 million of financial assurances, $9.4 million were issued by
non-Debtor entities and $221.0 million were issued by the Debtors. Of the
amounts issued by the Debtors, $192.5 million were issued before the Filing
Date, with the remaining $28.5 million being issued subsequent to the Filing, of
which $25.8 million was issued under the DIP facility.

ACCOUNTING FOR CONTINGENCIES

Although the outcome of each of the matters discussed above cannot be predicted
with certainty, Grace has assessed its risk and has made accounting estimates as
required under U.S. generally accepted accounting principles. As a result of the
Filing, claims related to the items discussed above will be addressed as part of
Grace's Chapter 11 proceedings. Accruals recorded for such contingencies have
been included in "liabilities subject to compromise" on the accompanying
Consolidated Balance Sheet as of September 30, 2003. The amounts of these
liabilities, as ultimately determined through the Chapter 11 proceedings, could
be materially different from amounts recorded by Grace at September 30, 2003.

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

Grace is a global producer of specialty chemicals and specialty materials. It
generates revenues from two business segments: Davison Chemicals and Performance
Chemicals. Davison Chemicals produces a variety of catalyst and silica products.
Performance Chemicals produces specialty construction chemicals, building
materials and sealants and coatings. Intersegment sales, eliminated in
consolidation, are not material. The table below presents information related to
Grace's business segments for the three-month and nine-month periods ended
September 30, 2003 and 2002. 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        NINE MONTHS
BUSINESS SEGMENT DATA         ENDED              ENDED
(Dollars in millions)     SEPTEMBER 30,      SEPTEMBER 30,
==============================================================
                         2003      2002      2003      2002
                        --------------------------------------
NET SALES
Davison Chemicals...... $  267.0 $ 246.5   $   767.7 $  703.0
Performance Chemicals..    254.0   233.5       701.5    662.0
                        --------------------------------------
TOTAL.................. $  521.0 $ 480.0   $ 1,469.2 $1,365.0
                        ======================================
PRE-TAX OPERATING INCOME
Davison Chemicals...... $   32.5 $  35.4   $    80.1 $   99.2
Performance Chemicals..     38.6    30.1        76.5     76.9
                        --------------------------------------
TOTAL.................. $   71.1 $  65.5   $   156.6 $  176.1
==============================================================

The table below presents information related to the geographic areas in which
Grace operated for the three months and nine months ended September 30, 2003 and
2002.

===============================================================
                          THREE MONTHS         NINE MONTHS
GEOGRAPHIC AREA DATA          ENDED               ENDED
(Dollars in millions)     SEPTEMBER 30,       SEPTEMBER 30,
===============================================================
                         2003      2002      2003      2002
                        ---------------------------------------
NET SALES
  United States........ $  214.9 $  210.7  $  604.6  $  619.5
  Canada and Puerto
    Rico...............     23.2    16.3       57.0      38.0
  Europe...............    171.3   149.3      501.2     416.4
  Asia Pacific.........     83.1    76.8      228.4     211.0
  Latin America........     28.5    26.9       78.0      80.1
                        ---------------------------------------
TOTAL..................  $ 521.0  $480.0   $1,469.2  $1,365.0
===============================================================

The pre-tax operating income for Grace's business segments for the three-month
and nine-month periods ended September 30, 2003 and 2002 is reconciled below to
income before Chapter 11 expenses, income taxes, and minority interest presented
in the accompanying Consolidated Statements of Operations.

                                      I-20
<PAGE>





===============================================================
RECONCILIATION OF
BUSINESS SEGMENT DATA
TO FINANCIAL               THREE MONTHS         NINE MONTHS
STATEMENTS                     ENDED               ENDED
(Dollars in millions)      SEPTEMBER 30,       SEPTEMBER 30,
===============================================================
                         2003      2002       2003      2002
                        ---------------------------------------
Pre-tax operating
  income - business
  segments............. $  71.1  $  65.5    $ 156.6   $ 176.1
Add back:
Minority interest .....    (0.7)     1.4       (0.2)      2.3
                        ---------------------------------------
                           70.4     66.9      156.4     178.4
Interest expense and
  related financing
  costs................    (4.1)    (4.8)     (12.4)    (15.2)
Interest income........     0.9      0.9        3.4       2.5
Corporate costs........   (20.8)   (12.6)     (59.2)    (32.8)
Other, net.............   (54.1)   (11.3)     (68.4)    (17.3)
                        ---------------------------------------
Income (loss) before
  Chapter 11
  expenses, income
  taxes, and minority
  interest  ........... $  (7.7) $  39.1    $  19.8   $ 115.6
===============================================================


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 actuarial losses, that are considered a core operating
cost but not allocated to business segments. Other includes a $50.0 million
pre-tax charge to adjust Grace's estimated liability for claims by the EPA for
recovery of environmental cleanup costs around Libby, Montana.

















                                      I-21
<PAGE>





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

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

W. R. Grace & Co. and its subsidiaries are engaged in specialty chemicals and
specialty materials businesses on a global basis. Its business segments are
Davison Chemicals, which produces catalyst and silica products, and Performance
Chemicals, which produces construction chemicals, building materials and
sealants and coatings.

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

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

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

During 2000 and the first quarter of 2001, Grace experienced several adverse
developments in its asbestos-related litigation, including: a significant
increase in bodily injury claims, higher than expected costs to resolve bodily
injury and certain property damage claims, and class action lawsuits alleging
damages from a former attic insulation product. (These claims are discussed in
more detail in Note 3 to the Consolidated Financial Statements.) After a
thorough review of these developments, the Board of Directors of Grace concluded
on April 2, 2001 that a federal court-supervised Chapter 11 process provided the
best forum available to achieve predictability and fairness in the claims
settlement process.

By filing under Chapter 11, Grace expects to be able to both obtain a
comprehensive resolution of the claims against it and preserve the inherent
value of its businesses. Under Chapter 11, the Debtors expect to continue to
operate their businesses as debtors-in-possession under court protection from
their creditors and claimants, while using the Chapter 11 process to develop and
implement a plan for addressing the asbestos-related claims against them.

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

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

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

As provided by the Bankruptcy Code, the Debtors had the exclusive right to
propose a plan of reorganization for a 120-day period following the Filing Date.
The Debtors have received extensions of their exclusivity period during which to
file a plan of reorganization through February 1, 2004, and extensions of the
Debtors' exclusive rights to solicit acceptances of a reorganization plan
through April 1, 2004.

Three creditors' committees, two representing asbestos claimants and the third
representing other unsecured creditors, and a committee representing
shareholders have been appointed in the Chapter 11 Cases. These committees will
have the right to be heard on all matters that come before the Bankruptcy Court
and, together with a legal representative of future asbestos



                                      I-22
<PAGE>


claimants (whom Grace expects to be appointed by the Bankruptcy Court in the
future), are likely to play important roles in the Chapter 11 Cases. The Debtors
are required to bear certain of the committees' and the future asbestos
claimants representative's costs and expenses, including those of their counsel
and financial advisors.

The Debtors' Chapter 11 cases have been assigned to Judge Alfred M. Wolin, a
senior federal judge who sits in Newark, New Jersey. Judge Wolin is presiding
over asbestos bodily injury matters and the fraudulent conveyance litigation
described below. He has assigned the Debtors' other bankruptcy matters to Judge
Judith Fitzgerald, a U.S. bankruptcy judge from the Western District of
Pennsylvania, sitting in Wilmington, Delaware.

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 bodily injury claims or claims related to Zonolite(R)
attic insulation ("ZAI"), which will be dealt with separately.

Approximately 15,000 proofs of claim were filed by the bar date. Of these
claims, approximately 10,000 were non-asbestos related, approximately 4,000 were
for asbestos-related property damage, and approximately 1,000 were for medical
monitoring. In addition, approximately 400 proofs of claim were filed after the
bar date. The discussion below refers to claims filed before the bar date.

Approximately 7,000 of the 10,000 non-asbestos related claims involve claims by
employees or former employees for future retirement benefits such as pension and
retiree medical coverage. Grace views these claims as contingent and does not
plan to address them until a later date in the Chapter 11 Cases. The other
non-asbestos related claims include claims for payment for goods and services;
taxes; product warranties; principal plus interest under pre-petition credit
facilities; amounts due under leases; contracts rejected in the Bankruptcy
Court; environmental remediation; indemnification or contribution from actual or
potential co-defendants in asbestos-related and other litigation; pending
non-asbestos related litigation; and non-asbestos related personal injury.

The Debtors' preliminary analysis indicated that many claims 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 September 30, 2003, the Debtors had filed with the Bankruptcy Court
approximately 1,100 objections with respect to such claims, most of which were
non-substantive (duplicates, no supporting documentation, late filed claims,
etc.). The Debtors expect to file a substantial number of additional objections,
most of which will be substantive, as analysis and evaluation of the claims
progresses.

As claims are resolved, Grace will make adjustments to the liabilities recorded
on its financial statements as appropriate. Any such adjustments could be
material to the Company's consolidated financial position and results of
operations. Because of the uncertainties of the Chapter 11 process, the
in-progress state of the Debtors' investigation of submitted claims, and the
lack of documentation submitted in support of many claims, Grace, at this time,
is not able to estimate the value of the claims that may ultimately be
determined and allowed by the Bankruptcy Court.

Litigation Proceedings in Bankruptcy Court - In July 2002, the Bankruptcy Court
approved special counsel to represent the ZAI claimants, at the Debtors'
expense, in a proceeding to determine certain threshold scientific issues
regarding ZAI. The court has set a litigation schedule that would result in
pretrial hearings on these issues in November of 2003. (See Note 3 for
background information.)

On November 29, 2002, Sealed Air Corporation ("Sealed Air") and Fresenius
Medical Care AG ("Fresenius") each announced that they had reached agreements in
principle with the Official Committee of Asbestos Personal Injury Claimants and
the Official Committee of Asbestos Property Damage Claimants to settle asbestos
and fraudulent conveyance claims related to the 1998 transaction involving
Grace's former packaging business and Sealed Air, and the 1996 transaction
involving Grace's former medical care business and Fresenius, respectively.
Under the terms of the Fresenius settlement, as subsequently revised and subject
to certain conditions, Fresenius would contribute $115.0 million to the Grace
estate. In July 2003, the Fresenius settlement was approved by the Bankruptcy
Court. Under the terms of the proposed Sealed Air settlement, Sealed Air would
make a payment of $512.5 million (plus interest at 5.5% per annum, commencing on
December 21, 2002) and nine million shares of Sealed Air common stock, valued at
$425.1 million as of September 30, 2003, as directed by the Bankruptcy Court
upon confirmation of Grace's plan of reorganization. The Sealed Air settlement
remains subject to the approval of the Bankruptcy Court and the fulfillment of
specified conditions.



                                      I-23
<PAGE>



Grace is unable to predict how these settlements may ultimately affect its plan
of reorganization.

Impact on Debt Capital - All of the Debtors' pre-petition debt is in default due
to the Filing. The accompanying Consolidated Balance Sheet as of September 30,
2003 reflects the classification of the Debtors' pre-petition debt within
"liabilities subject to compromise."

The Debtors have entered into a debtor-in-possession post-petition loan and
security agreement with Bank of America, N. A. (the "DIP facility") in the
aggregate amount of $250 million. The term of the DIP facility, originally set
to expire April 1, 2003, has been extended for up to an additional three years
through 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 Debtors' assets
and the liquidation of certain Debtors' liabilities are subject to significant
uncertainty. While operating as debtors-in-possession, the Debtors may sell or
otherwise dispose of assets and liquidate or settle liabilities for amounts
other than those reflected in the Consolidated Financial Statements. Further, a
plan of reorganization could materially change the amounts and classifications
reported in the Consolidated Financial Statements, which do not currently give
effect to any adjustments to the carrying value or classification of assets or
liabilities that might be necessary as a consequence of a plan of
reorganization.

Pursuant to SOP 90-7, Grace's pre-petition liabilities that are subject to
compromise are required to be reported separately on the balance sheet at an
estimate of the amount that will ultimately be allowed by the Bankruptcy Court.
As of September 30, 2003, 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). The recorded amounts of such
liabilities generally reflect accounting measurements as of the Filing Date,
adjusted as warranted for changes in facts and circumstances and/or rulings
under Grace's Chapter 11 proceedings subsequent to the Filing. (See Note 2 to
the Consolidated Financial Statements for detail of the liabilities subject to
compromise as of September 30, 2003, and December 31, 2002.) 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.

--------------------------------------------------------------------------------
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, environmental
     remediation, income taxes, and retained obligations of divested businesses.
o    Pension and postretirement liabilities that depend on assumptions regarding
     discount rates and/or total returns on invested funds.
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 trade receivables,
     inventories, insurance receivables, income taxes, and goodwill.

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

--------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS
--------------------------------------------------------------------------------

Set forth below is a chart that lists key operating statistics and percentage
changes for the three-month and nine-month periods ended September 30, 2003 and
2002. This chart should be referenced when reading management's discussion and
analysis of the results of operations and financial condition. The financial
information presented throughout this discussion divides Grace's financial
results between



                                      I-24
<PAGE>



"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.

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.
















                                      I-25
<PAGE>


<TABLE>
<CAPTION>
====================================================================================================================================
ANALYSIS OF CONTINUING OPERATIONS                        THREE MONTHS ENDED                          NINE MONTHS ENDED
 (Dollars in millions)                                      SEPTEMBER 30,                              SEPTEMBER 30,
====================================================================================================================================
                                                                             % Change                                    % Change
                                                  2003          2002       Fav (Unfav)        2003           2002       Fav (Unfav)
                                              --------------------------------------------------------------------------------------
<S>                                           <C>          <C>            <C>            <C>            <C>            <C>
NET SALES
    DAVISON CHEMICALS
    Catalyst products........................ $    189.6   $    179.0           5.9%     $    544.2     $    508.0         7.1%
    Silica products..........................       77.4         67.5          14.7%          223.5          195.0        14.6%
                                              --------------------------------------------------------------------------------------
  TOTAL DAVISON CHEMICALS....................      267.0        246.5           8.3%          767.7          703.0         9.2%
                                              --------------------------------------------------------------------------------------
    PERFORMANCE CHEMICALS
    Construction chemicals...................      120.1        109.8           9.4%          324.9          300.1         8.3%
    Building materials.......................       65.0         60.4           7.6%          178.1          177.6         0.3%
    Sealants and coatings....................       68.9         63.3           8.8%          198.5          184.3         7.7%
                                              --------------------------------------------------------------------------------------
  TOTAL PERFORMANCE CHEMICALS................      254.0        233.5           8.8%          701.5          662.0         6.0%
                                              --------------------------------------------------------------------------------------
TOTAL GRACE SALES - CORE OPERATIONS.......... $    521.0   $    480.0           8.5%     $  1,469.2     $  1,365.0         7.6%
====================================================================================================================================
PRE-TAX OPERATING INCOME (A):
    Davison Chemicals (b).................... $     32.5   $     35.4          (8.2%)    $     80.1     $     99.2       (19.3%)
    Performance Chemicals....................       38.6         30.1          28.2%           76.5           76.9        (0.5%)
    Corporate costs:
       Support functions.....................       (7.9)        (7.1)        (11.3%)         (23.3)         (21.3)       (9.4%)
       Pension and other.....................      (12.9)        (5.5)           NM           (35.9)         (11.5)         NM
    Total Corporate costs....................      (20.8)       (12.6)        (65.1%)         (59.2)         (32.8)      (80.5%)
                                              --------------------------------------------------------------------------------------
PRE-TAX INCOME FROM CORE OPERATIONS (C)......       50.3         52.9          (4.9%)          97.4          143.3       (32.0%)
                                              --------------------------------------------------------------------------------------
PRE-TAX LOSS FROM NONCORE ACTIVITIES.........      (54.1)       (11.3)           NM           (68.4)         (17.3)         NM
Interest expense.............................       (4.1)        (4.8)         14.6%          (12.4)         (15.2)       18.4%
Interest income..............................        0.9          0.9            --             3.4            2.5        36.0%
                                              --------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE CHAPTER 11 EXPENSES
   AND INCOME TAXES..........................       (7.0)        37.7        (118.6%)          20.0          113.3       (82.3%)
Chapter 11 expenses, net.....................       (2.2)        (8.6)         74.4%          (11.7)         (21.4)       45.3%
Provision for income taxes ..................       (0.7)       (15.1)         95.4%          (14.0)         (44.3)       68.4%
                                              --------------------------------------------------------------------------------------
Net (loss)  income .......................... $     (9.9)  $     14.0        (170.7%)    $     (5.7)    $     47.6      (112.0%)
====================================================================================================================================
KEY FINANCIAL MEASURES:
   PRE-TAX INCOME FROM CORE OPERATIONS AS
   PERCENTAGE OF SALES:
    Davison Chemicals (b)....................       12.2%        14.4%         (2.2) pts       10.4%          14.1%       (3.7) pts
    Performance Chemicals....................       15.2%        12.9%          2.3 pts        10.9%          11.6%       (0.7) pts
    Consolidated.............................        9.7%        11.0%         (1.3) pts        6.6%          10.5%       (3.9) pts
   PRE-TAX INCOME FROM CORE OPERATIONS
   BEFORE DEPRECIATION AND AMORTIZATION (C)   $     76.4   $     77.5          (1.4%)    $    173.5     $    214.1       (19.0%)
      As a percentage of sales...............       14.7%        16.1%         (1.4) pts       11.8%          15.7%       (3.9) pts
====================================================================================================================================
NET SALES BY REGION:
North America................................ $    238.1   $    227.0           4.9%     $    661.6     $    657.5         0.6%
Europe.......................................      171.3        149.3          14.7%          501.2          416.4        20.4%
Asia Pacific.................................       83.1         76.8           8.2%          228.4          211.0         8.2%
Latin America................................       28.5         26.9           5.9%           78.0           80.1        (2.6%)
                                              --------------------------------------------------------------------------------------
TOTAL........................................ $    521.0   $    480.0           8.5%     $  1,469.2     $  1,365.0         7.6%
====================================================================================================================================
</TABLE>

  NM = Not meaningful    a = Pre-tax operating income for all periods
                             presented reflects a reallocation of the cost of
                             earned pension benefits of active participants
                             from corporate to the respective business
                             segments.

                         b = Davison Chemicals pre-tax operating income
                             excludes minority interest related to the Advanced
                             Refining Technologies joint venture.

                         c = 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 the Company'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.


                                      I-26
<PAGE>


COSTS OF DOING BUSINESS IN CHAPTER 11

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 reorganization
expenses of $11.7 million in the first nine months of 2003 and $21.4 million in
the first nine months of 2002 consist primarily of legal, financial and
consulting fees incurred by Grace and three creditors' committees. In addition,
for the nine months ended September 30, 2003 and 2002, Grace's pre-tax income
from core operations included expenses of $14.2 million and $8.1 million,
respectively, for Chapter 11-related compensation charges. Poor stock price
performance in the period leading up to and after the Filing diminished the
value of Grace's stock option program to current and prospective employees,
which caused Grace to change its long-term incentive compensation program into a
cash-based program. Grace has also sought to address employee retention issues
by providing added compensation to certain employees and increasing Grace's
contribution to its retirement savings and investment plan.

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 directors and
officers liability insurance; and lost business and acquisition opportunities
due to the complexities of operating under Chapter 11.

NET SALES

The following tables identify the 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-month and nine-month periods ended September
30, 2003, respectively.

===============================================================
                      THREE MONTHS ENDED SEPTEMBER 30, 2003 AS
NET SALES              A PERCENTAGE INCREASE (DECREASE) FROM
VARIANCE ANALYSIS      THREE MONTHS ENDED SEPTEMBER 30, 2002
===============================================================
                      VOLUME   PRICE/MIX  TRANSLATION   TOTAL
                     ------------------------------------------
Davison Chemicals       0.4%       3.2%        4.7%       8.3%
Performance
  Chemicals ........    4.8%       0.2%        3.8%       8.8%
Net sales...........    2.5%       1.8%        4.2%       8.5%
---------------------------------------------------------------
By Region:
  North America.....    2.3%       2.1%        0.5%       4.9%
  Europe............    2.9%      (0.5%)      12.3%      14.7%
  Asia Pacific......   17.4%     (10.9%)       1.7%       8.2%
  Latin America.....  (25.7%)     33.1%       (1.5%)      5.9%
===============================================================

Grace's third quarter sales totaled $521.0 million compared with $480.0 million
in the prior year quarter, an 8.5% increase. Favorable currency translation
effects from a weaker U.S. dollar accounted for about half of the increase.
Revenue from added volume in certain product lines was also a contributing
factor. In addition, acquisitions contributed $4.7 million or 1.0 percentage
point of the sales volume growth, all of which related to Davison.

===============================================================
                      NINE MONTHS ENDED SEPTEMBER 30, 2003 AS A
NET SALES               PERCENTAGE INCREASE (DECREASE) FROM
VARIANCE ANALYSIS       NINE MONTHS ENDED SEPTEMBER 30, 2002
===============================================================
                      VOLUME   PRICE/MIX  TRANSLATION   TOTAL
                     ------------------------------------------

Davison Chemicals...    1.0%       2.1%        6.1%       9.2%
Performance
  Chemicals ........    1.5%       0.6%        3.9%       6.0%
Net sales...........    1.2%       1.4%        5.0%       7.6%
---------------------------------------------------------------
By Region:
  North America.....   (1.8%)      2.0%        0.4%       0.6%
  Europe............    5.4%      (1.6%)      16.6%      20.4%
  Asia Pacific......   12.5%      (6.8%)       2.5%       8.2%
  Latin America.....  (11.9%)     20.2%      (10.9%)     (2.6%)
===============================================================


Grace's year-to-date sales totaled $1,469.2 million compared with $1,365.0
million in the prior year period, a 7.6% increase. Currency translation
accounted for 5.0 percentage points of the increase. Added volume in certain
product lines was also a contributing factor. Acquisitions contributed $20.9
million or 1.5 percentage points of the sales volume growth, most of which
related to Davison.

PRE-TAX INCOME FROM CORE OPERATIONS

Pre-tax income from core operations comprises the business segment results of
Davison Chemicals and Performance Chemicals offset by corporate costs. Pre-tax
income from core operations in the third quarter of 2003 was $50.3 million,
compared with $52.9 million in the third quarter of 2002, a 4.9% decrease. Lower
profits from the Davison Chemicals group and higher U.S. pension costs were
partially offset by a record quarter from the Performance Chemicals businesses,
which delivered a 28.2% increase in operating earnings on an 8.8% increase in
sales. Pre-tax income from core operations was $97.4 million for the nine months
ended September 30, 2003, compared with $143.3 million for the prior year
period, a 32.0% decrease. Year-to-date pre-tax operating margin was 6.6%, 3.9
percentage points lower than the prior year. The decline in year-to-date
operating profit and margins was caused by higher costs for pensions, certain
raw materials, natural gas and plant maintenance, together with higher sales of
lower margin products.

Corporate costs for the third quarter of 2003 were $20.8 million, an $8.2
million increase from the prior year quarter. Corporate costs for the nine
months ended



                                      I-27
<PAGE>



September 30, 2003 were $59.2 million, a $26.4 million increase from the prior
year period. 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) and pension costs related to both corporate employees and
to the effects of changes in assets and liabilities for all Grace pension plans.
The increase is primarily attributable to added costs for pension benefits to
account for the negative financial market factors that have impacted the funded
status of defined benefit pension plans in recent years, and to higher director
and officer liability insurance premiums.

PRE-TAX LOSS FROM NONCORE ACTIVITIES

Pre-tax loss from noncore activities comprises all events and transactions not
directly related to the generation of revenue or the support of core operations.
Expense from noncore activities totaled $54.1 million for the third quarter of
2003, compared with expense of $11.3 million for the prior year period. For the
nine months ended September 30, 2003, expense from noncore activities totaled
$68.4 million, compared with $17.3 million for the prior year period.

The increase in expense from noncore activities in both the three-month and
nine-month periods ended September 30, 2003 was primarily attributable to a $50
million pre-tax charge to adjust Grace's estimated liability resulting from a
court ruling against Grace, which requires Grace to reimburse the EPA for
cleanup costs related to previously operated vermiculite mining and processing
sites near Libby, Montana. Higher pension expense related to employees of former
businesses, as well as higher insurance costs also contributed to the increase.
These expenses were offset by income from Grace's life insurance policies.

CHAPTER 11 EXPENSES

Net reorganization expenses of $2.2 million and $11.7 million for the
three-month and nine-month periods ended September 30, 2003, and $8.6 million
and $21.4 million for the three-month and nine-month periods ended September 30,
2002, consisted primarily of legal, financial and consulting fees incurred by
Grace and three creditors' committees related to the Chapter 11 Filing. Grace
believes that reorganization expenses will range between $2 million and $6
million per quarter for the foreseeable future.

INTEREST

Net interest expense for the three months ended September 30, 2003 was $4.1
million, down from $4.8 million in 2002. Net interest expense for the nine
months ended September 30, 2003 was $12.4 million, down from $15.2 million in
2002. The decrease in both periods was attributable to a lower contractual
interest rate on pre-petition debt subject to compromise. Average debt levels
were $519.8 million in the first nine months of 2003 and $508.0 million in the
first nine months of 2002. Payment of interest accrued on pre-petition debt is
subject to the outcome of Grace's Chapter 11 proceedings. Weighted average
interest rates for September 30, 2003 and 2002 were 2.1% and 2.7%, respectively.

INCOME TAXES

Grace's provision for income taxes at the federal corporate rate of 35% was $2.9
million for the nine months ended September 30, 2003. The primary difference
between this amount and the overall provision for income taxes of $14.0 million
is attributable to current period interest on tax contingencies and the
non-deductibility of certain Chapter 11 expenses.

DAVISON CHEMICALS

Business Description

Davison Chemicals is a leading global supplier of catalyst and silica products.
Catalyst products represented approximately 36% of Grace's 2003 third quarter
sales (37% - 2002). This segment includes fluid cracking catalysts and additives
used in petroleum refineries to convert distilled crude oil into transportation
fuels and other petroleum-based products; hydroprocessing catalysts, which
upgrade heavy oils and remove certain impurities; polyolefin catalysts, which
are essential components in the manufacture of polyethylene and polypropylene
used in products such as plastic film, high-performance plastic pipe and other
plastic products; and chemical catalysts, which are used in a variety of
chemical processes. Silica products, which represented 15% of Grace's 2003 third
quarter sales (14% - 2002), are used in a wide range of industrial and consumer
applications, such as coatings, food processing, plastics, adsorbents, personal
care products and biotechnology separations.

Recent Acquisitions and Joint Ventures

In July 2003, Grace acquired the chromatography business of Argonaut
Technologies, Inc., which had been marketed under the Jones Chromatography name.



                                      I-28
<PAGE>


In April 2003, Grace, through its subsidiary The Separations Group, acquired the
business and assets of MODcol Corporation, a manufacturer of preparative
chromatography columns and provider of custom column packaging services.

In August 2002, Advanced Refining Technologies LLC ("ART"), a joint venture
between Grace and Chevron Products Company, acquired an exclusive license for
the hydroprocessing catalyst technology of Japan Energy Corporation and its
subsidiary Orient Catalyst Company.

In January 2002, Grace, through its Swedish subsidiary, acquired the catalyst
manufacturing assets of Borealis A/S. This acquisition has been integrated into
Grace's polyolefin catalysts business.

Three Months Ended September 30, 2003

Third quarter sales for the Davison Chemicals segment were $267.0 million, up
8.3% from the prior year quarter. Excluding the effects of favorable currency
translation, sales were up 3.6% for the quarter. Acquisitions accounted for $4.7
million or 1.9 percentage points of sales growth. Operating income of the
Davison Chemicals segment was $32.5 million, 8.2% lower than the 2002 third
quarter; operating margin of 12.2% was 2.2 percentage points lower than the
prior year quarter. Although strong sales in silica products helped to increase
profitability, operating income and margins in the third quarter of 2003
continued to be negatively affected by higher manufacturing costs, primarily
from higher natural gas prices and maintenance requirements at certain
production facilities, and from a product and regional sales mix that resulted
in lower average margins.

Sales of catalyst products, which include refining catalysts, polyolefin
catalysts and other chemical catalysts, were $189.6 million, up 5.9% compared
with the prior year quarter, primarily attributable to currency effects and an
acquisition completed in Japan in August 2002. Catalyst sales increased by 6.7%
in North America compared to the third quarter of 2002 due to higher sales in
the hydroprocessing catalyst business. Sales of silica products were $77.4
million, up 14.7% compared with the prior year quarter. Excluding favorable
currency effects, sales were up 5.8%, primarily due to growth programs in
digital printing and separations applications, and higher sales of adsorbents
and precipitated silica products.

Sales were up in all regions, with increases of 6.4% in North America, 11.5% in
Europe, 7.6% in Asia Pacific, and 2.4% in Latin America. In Europe, the increase
in sales was attributable to growth in both the catalyst and silica product
lines, as well as favorable currency translation. In Asia Pacific, the increase
in sales was primarily attributable to growth within the catalyst product line,
while silica sales decreased 4.9%. The sales increases in North America and
Latin America were due to volume growth in both the catalyst and silica product
lines.

Nine Months Ended September 30, 2003

Year-to-date sales for the Davison Chemicals segment were $767.7 million, up
9.2% from 2002 (excluding currency translation impacts, sales were up 3.1%).
Acquisitions accounted for $20.5 million or 2.9 percentage points of the sales
growth. Year-to-date operating income was $80.1 million, compared with $99.2
million for the prior year, a 19.3% decrease. Year-to-date operating results
reflect a sluggish U.S. economy, and higher utilities, raw materials and other
manufacturing costs.

Sales of catalyst products were up 7.1% compared with the prior year period, as
a result of currency effects and acquisitions in the polyolefin and
hydroprocessing catalyst businesses, partially offset by lower sales in North
America caused by a decrease in demand. Sales of silica products were up 14.6%
for the period, primarily from currency translation impacts, growth programs in
coatings, digital printing, and separations applications, and added volume in
North America and Europe.

Sales in North America, Europe, and Asia Pacific were up 3.9%, 18.5%, and 7.3%,
respectively. Sales in Latin America were down 8.8%. In North America, the
increase in sales was primarily due to growth in both the catalyst and silica
product lines. In Europe, the increase in sales was primarily due to favorable
currency translation impacts and growth in both the catalyst and silica product
lines. The increase in Asia Pacific reflects growth within the catalyst product
line, as well as the effect of favorable currency translation, offset by a
slight decline in the silica product line. The decrease in Latin America was
attributable to lower demand in both the catalyst and silica product lines.

PERFORMANCE CHEMICALS

Business Description

The major product groups of the Performance Chemicals segment are (1) specialty
construction chemicals and specialty building materials, which are used
primarily by the nonresidential construction



                                      I-29
<PAGE>



industry; and (2) container sealants and coatings for food and beverage
packaging, and other related products. Specialty construction chemicals, which
represented 23% of Grace's 2003 and 2002 third quarter sales, add strength,
control corrosion, and enhance the handling and application of concrete, and
reduce the manufacturing cost and improve the quality of cement. Specialty
building materials, which represented 13% of Grace's 2003 and 2002 third quarter
sales, prevent water damage to structures and protect structural steel against
collapse caused by fire. Sealants and coatings products, which represented 13%
of Grace's 2003 and 2002 third quarter sales, are used to seal beverage and food
cans, glass and plastic bottles, and protect metal packaging from corrosion and
package contents from the influences of the metal.

Recent Acquisitions and Joint Ventures

On October 1, 2003, Grace, through a German subsidiary, acquired the
construction products business and certain assets of Tricosal Beton-Chemie GmbH
& Co. KG. Tricosal Beton-Chemie was a leading supplier of specialty chemicals
and materials to the European construction industry. The business is being
integrated into the construction chemicals product line.

In March 2002, Grace acquired the business and the assets of Addiment,
Incorporated, a leading supplier of specialty chemicals to the concrete paver
and masonry industries in the U.S. and Canada. This business has been integrated
into the construction chemicals product line.

Three Months Ended September 30, 2003

Third quarter sales for the Performance Chemicals segment were $254.0 million,
up 8.8% from the prior year quarter, reflecting favorable currency translation,
strong demand for concrete admixtures and waterproofing products, and continued
success of growth programs in coatings. Operating income for the Performance
Chemicals segment was $38.6 million, up 28.2% versus $30.1 million in the prior
year quarter. Operating margin of 15.2% was 2.3 percentage points higher than
the prior year period, primarily reflecting sales growth and cost containment
programs.

Sales of specialty construction chemicals, which include concrete admixtures,
cement additives and masonry products, were up 9.4% versus the prior year
quarter (5.0% excluding currency translation impacts). Sales were strong in
Europe and Asia, reflecting the success of new product programs and sales
initiatives in key economies worldwide. Sales were also up in North America,
reflecting growth programs as well as good construction weather, which allowed a
catch-up in project activity delayed due to poor weather earlier in the year.
Also, there are indications that the significant decline in U.S. construction
activity since early 2001 may be slowing or leveling, in line with recent
industry projections. Sales of specialty building materials, which include
waterproofing and fire protection products, were up 7.6% (5.8% before
translation impacts) compared with the third quarter of 2002. This improvement
reflects good construction weather in North America and the leveling of the
decline in U.S. construction activity, offset by the effects of new building
codes that permit less fire protection materials for structural steel used in
commercial buildings. Sales of specialty sealants and coatings, which include
container sealants, coatings and polymers, were up 8.8% compared with the third
quarter of 2002 (4.3% before the effect of currency translation), mainly
reflecting coatings growth programs in Latin America and Asia.

Sales were up 3.8% in North America, mainly reflecting an increase in demand for
waterproofing products and concrete admixture. In Europe, a sales increase of
20.0% reflected favorable currency translation as well as growth programs in
concrete admixtures, waterproofing and coatings. Asia Pacific sales were up
9.1%, mainly reflecting growth in concrete admixtures and favorable currency
translation. Sales increased by 8.9% in Latin America, reflecting growth
programs in coatings and closure sealants, offset by unfavorable currency
translation impacts.

Nine Months Ended September 30, 2003

Sales for the Performance Chemicals segment for the nine months ended September
30, 2003 were $701.5 million, up 6.0% from the prior year period, driven by
favorable currency translation impacts, as well as increases in construction
chemicals and sealants and coatings. Operating margin of 10.9% was 0.7
percentage points unfavorable to the prior year period, and operating income of
$76.5 million was down 0.5%; these results reflected a strong third quarter,
which offset a weak first half caused by soft construction activity and
weather-delayed projects in the U.S.

Sales of construction chemicals were up 8.3%, reflecting favorable currency
translation impacts and the success of new product programs and sales
initiatives in key economies worldwide. Sales of building materials were
essentially flat, as favorable currency translation impacts and growth programs
in waterproofing were offset by the effects of new building codes that permit
less fire protection materials for structural steel used in commercial
buildings, as



                                      I-30
<PAGE>



well as weak U.S. construction activity. Sales of sealants and coatings were up
7.7%, reflecting favorable currency translation impacts in Europe and growth
initiatives in coatings and closure sealants, particularly in Latin America and
Europe, offset by unfavorable currency exchange in Latin America.

Sales in Europe, Asia Pacific and Latin America were up 23.4%, 9.5% and 3.1%,
respectively, while sales in North America were down 1.8%. In Europe, higher
sales were due to favorable foreign currency translation and growth in all
product groups, primarily concrete admixtures. Sales in Asia Pacific increased
from the effects of favorable foreign currency, as well as volume growth in
construction chemicals. The increase in Latin America reflects growth programs
in coatings and closure sealants, offset by unfavorable foreign currency
translation. The decline in North America was primarily caused by the effects of
new building codes that permit less fire protection materials for structural
steel used in commercial buildings, as well as weak U.S. construction activity.

FINANCIAL POSITION AND CASH FLOWS

The following chart sets forth Grace's net asset position supporting its core
operations and its net cash flows from core operations.

==============================================================
CORE OPERATIONS                  SEPTEMBER 30,  December 31,
(Dollars in millions)                2003           2002
--------------------------------------------------------------
BOOK VALUE OF INVESTED CAPITAL
Receivables.................... $     358.9     $    313.7
Inventory......................       208.9          173.6
Properties and equipment, net..       629.0          616.0
Pension accounts and other.....       557.1          604.6
                                ------------------------------
ASSETS SUPPORTING CORE
 OPERATIONS....................     1,753.9        1,707.9
Accounts payable and accruals..      (327.2)        (313.5)
                                ------------------------------
CAPITAL INVESTED IN CORE
 OPERATIONS.................... $   1,426.7     $   1,394.4
Pre-tax return on average
 invested capital (trailing
 twelve months)................      9.6%            12.8%
==============================================================
NET CASH FLOWS FROM                   NINE MONTHS ENDED
CORE OPERATIONS:                        SEPTEMBER 30,
--------------------------------------------------------------
                                      2003           2002
                                ------------------------------
Pre-tax operating income....... $      97.4      $    143.3
Depreciation and amortization..        76.1            70.8
                                ------------------------------
PRE-TAX EARNINGS BEFORE
 DEPRECIATION AND AMORTIZATION.       173.5           214.1
Working capital and other
 changes.......................       (59.3)           (8.3)
                                ------------------------------
CASH FLOW BEFORE INVESTING.....       114.2           205.8
Capital expenditures...........       (65.7)          (55.4)
Businesses acquired............        (3.6)          (28.5)
                                ------------------------------
NET CASH FLOW FROM CORE
 OPERATIONS.................... $      44.9      $    121.9
==============================================================


Grace had a net asset position supporting its core operations of $1,426.7
million at September 30, 2003, compared with $1,394.4 million at December 31,
2002 (including the cumulative translation account reflected in Shareholders'
Equity (Deficit) of $66.0 million for 2003 and $119.6 million for 2002). The
change in invested capital supporting core operations was primarily due to:

a)   An increase in receivables of $45.2 million, which was due to the
     seasonality of Grace's businesses. In addition, $14.9 million was
     attributable to currency translation, primarily of European and Asian
     receivables, reflecting a weaker dollar.

b)   An overall increase in inventory of $35.3 million, consisting of increases
     in catalyst inventory to satisfy expected fourth quarter deliveries, as
     well as $9.1 million attributable to currency translation impacts,
     primarily in European and Asian inventories, reflecting a weaker dollar.

c)   A decline in pension accounts and other of $47.5 million caused primarily
     by net pension expense of $39.9 million, as well as an overall decline in
     the cumulative translation adjustment.

The pre-tax return (trailing twelve months) on capital invested in core
operations decreased by 3.2 percentage points in the nine months ended September
30, 2003, due to a 32.0% decline in pre-tax operating income. In addition, net
cash flows from core operations decreased due to the decline in pre-tax
operating income, an increase in capital spending and a decrease in working
capital, offset by a decline in cash invested in business acquisitions.


<PAGE>



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

EFFECT OF CHAPTER 11

As described under "Voluntary Bankruptcy Filing," the Company 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 the Company'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,



                                      I-31
<PAGE>


sufficient cash flow and credit facilities are available to support its business
strategy.

The following sections address Grace's financial condition in more detail and
describe the major contingencies that are being addressed as part of the Chapter
11 process. Grace's ability to present a plan of reorganization to the
Bankruptcy Court depends largely on the timing of resolution of these
contingencies.

LIABILITIES AND CONTINGENCIES

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 regulations and scientific knowledge were much less
advanced than today. The following table summarizes the net noncore liability at
September 30, 2003 and December 31, 2002 and the net cash flow from noncore
activities for the nine months ended September 30, 2003 and 2002:

==============================================================
NONCORE ACTIVITIES
(Dollars in millions)            SEPTEMBER 30,  December 31,
NET NONCORE LIABILITIES:              2003           2002
==============================================================
Asbestos-related liabilities....  $  (964.6)      $  (973.2)
Asbestos-related insurance
 receivable ....................      271.6           282.6
                                ------------------------------
Asbestos-related liability, net      (693.0)         (690.6)
Environmental remediation.......     (244.4)         (201.1)
Postretirement benefits.........     (139.0)         (147.2)
Retained obligations and other..      (57.6)          (55.3)
                                ------------------------------
NET NONCORE LIABILITY...........  $(1,134.0)      $(1,094.2)
==============================================================
NET CASH FLOWS FROM NONCORE             NINE MONTHS ENDED
ACTIVITIES:                               SEPTEMBER 30,
--------------------------------------------------------------
                                      2003            2002
                                ------------------------------
Pre-tax loss from noncore
 activities.....................  $   (68.4)      $   (17.3)
Non-cash changes................       68.4            23.8
Cash spending for:
  Asbestos-related litigation,
   net of insurance recovery....        2.9             2.6
  Environmental remediation.....       (9.1)          (14.5)
  Postretirement benefits.......       (8.8)          (17.7)
  Retained obligations and
   other........................       (1.2)           (3.2)
--------------------------------------------------------------
NET CASH FLOW FROM NONCORE
 ACTIVITIES ....................  $   (16.2)      $   (26.3)
==============================================================


As described under "Voluntary Bankruptcy Filing," the resolution of most of
these noncore recorded and contingent liabilities will be determined through the
Chapter 11 proceedings. Grace cannot predict with any certainty how, and for
what amounts, any of such estimates will be resolved. The amounts of these
liabilities as ultimately determined through the Chapter 11 proceedings could be
materially different from amounts recorded by Grace at September 30, 2003.

ASBESTOS-RELATED MATTERS

During the three months and nine months ended September 30, 2003, Grace had net
payments of $3.1 million and net receipts of $2.4 million, respectively, for the
defense and disposition of asbestos-related property damage and bodily injury
litigation, including amounts received under settlements with insurance
carriers. This compared to net payments of $1.3 million and net receipts of $2.6
million during the three months and nine months ended September 30, 2002,
respectively. At September 30, 2003, Grace's balance sheet reflected a gross
asbestos-related liability of $964.6 million ($693.0 million net of insurance).
This liability represents management's estimate, based on facts and
circumstances existing prior to the Filing, of the undiscounted net cash
outflows necessary to satisfy Grace's pending property damage claims for which
sufficient information is available, and its pending and projected future bodily
injury claims. Changes to the recorded amount of such liability will be based on
Chapter 11 developments and management's assessment of the claim amounts that
will ultimately be allowed by the Bankruptcy Court. Recently, federal
legislation has been proposed to address asbestos bodily injury claims. In
addition, several states have enacted or proposed legislation affecting asbestos
bodily injury claims. At this time, Grace cannot predict what impact any such
legislation would have on Grace's asbestos bodily injury liability, related
insurance coverage, or its ultimate plan of reorganization.

The Consolidated Balance Sheet at September 30, 2003 includes total amounts due
from insurance carriers of $271.6 million pursuant to settlement agreements with
those insurance carriers. The recovery of amounts due from insurance carriers is
dependent upon the timing, character and exposure periods of asbestos-related
claims. Grace's Chapter 11 proceedings and proposed federal legislation could
also affect the timing and amounts of Grace's recovery.

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



                                      I-32
<PAGE>


ENVIRONMENTAL MATTERS

Grace is subject to loss contingencies resulting from extensive and evolving
federal, state, local and foreign environmental laws and regulations. Grace has
expended substantial funds to comply with such laws and regulations and expects
to continue to do so in the future. At September 30, 2003, Grace's recorded
liability for environmental investigation and remediation costs related to both
continuing and discontinued operations totaled $244.4 million, as compared with
$201.1 million at December 31, 2002. This estimate of environmental costs is
based on funding and/or remediation agreements in place, together with Grace's
best estimate of its cost for sites not subject to a formal remediation plan.
This estimate does not include possible additional liability related to new
claims for remediation costs filed against the Debtors by governmental
authorities and private parties prior to the March 31, 2003 bar date. One of
such claims for approximately $100 million relates to a discontinued operation
at a current operating site. Grace is evaluating such claims and is engaged in
discussions with the U.S. Environmental Protection Agency (the "EPA") and other
parties with respect to such claims. At this time, Grace is not able to
determine whether the amount of liability related to such claims is likely to be
material or to require adjustment to Grace's recorded liability.

From the 1920's until 1990, Grace and previous owners conducted vermiculite
mining and related activities near Libby, Montana. The vermiculite ore that was
mined contained varying amounts of asbestos as a contaminant, almost all of
which was removed during processing. Expanded vermiculite from Libby was used in
products such as fireproofing, insulation and potting soil. In November 1999,
Region 8 of the 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, the 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 connection with its defense, Grace conducted its own investigation to
determine whether the EPA's actions and cost claims were justified and
reasonable. However, 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 in costs expended through December 2001, and for
all appropriate future costs to complete the cleanup. Grace has appealed the
court's ruling.

As a result of such ruling, Grace recorded a pre-tax charge of $50 million,
bringing its total estimated liability for Libby-related reimbursable costs to
$110 million. Grace's estimate of expected reimbursable costs is based solely on
public information about the EPA's spending plans. However, the EPA's cost
estimates have increased substantially over the course of its cleanup.
Consequently, Grace's estimate may change materially as more current public
information becomes available. Grace's liability for this matter is included in
"liabilities subject to compromise" and any payments would be subject to the
outcome of the Chapter 11 proceedings.

The EPA is also evaluating environmental risks at vermiculite processing sites
throughout the U.S. that processed vermiculite from Libby, Montana, and has made
claims against Grace to carry out or fund remediation activities. Grace is
reviewing the EPA's actions and cost claims to determine whether they are
justified and reasonable and, in several instances, Grace has remediated or
agreed to remediate certain sites. Costs associated with the above are included
in "provision for environmental remediation" included in the Consolidated
Statements of Operations.

POSTRETIREMENT BENEFITS

Grace provides certain postretirement health care and life insurance benefits
for retired employees, a large majority of which pertain to retirees of
previously divested businesses. These plans are unfunded, and Grace pays the
costs of benefits under these plans as they are incurred. Spending under this
program during the nine months ended September 30, 2003 was $8.8 million,
compared with $17.7 million in



                                      I-33
<PAGE>


2002. Grace's recorded liability for postretirement benefits of $139.0 million
at September 30, 2003 is stated at net present value discounted at 6.75%. The
continuing payment of these benefits has been approved by the Bankruptcy Court;
however, the program would still be subject to the terms of a Chapter 11
reorganization plan.

RETAINED OBLIGATIONS OF DIVESTED BUSINESSES

The principal obligations of divested businesses retained by Grace are
contractual indemnification and contingent liabilities not passed on to the new
owners. At September 30, 2003, Grace had recorded $57.6 million, to satisfy such
obligations. Most of these matters are now subject to the automatic stay of the
Bankruptcy Court and are expected to be resolved as part of Grace's Chapter 11
proceedings.

TAX MATTERS

Grace has received the examination report from the Internal Revenue Service (the
"IRS") on tax periods 1993 through 1996 asserting, in the aggregate,
approximately $114.0 million of proposed tax adjustments. The most significant
contested issue addressed in such report concerns corporate-owned life insurance
("COLI") policies and is discussed below. Other proposed IRS tax adjustments
include Grace's tax position regarding research and development credits, the
reporting of certain divestitures and other miscellaneous proposed adjustments.
The tax audit for the 1993 through 1996 tax period is under the jurisdiction of
the IRS Office of Appeals, where Grace has filed a protest. Grace's federal tax
returns covering periods 1997 and forward are either under examination by the
IRS or open for future examination. Grace believes that the impact of probable
tax return adjustments would not have a material adverse effect upon Grace's
financial position. Any cash payment would be subject to Grace's Chapter 11
proceedings.

In 1988 and 1990, Grace acquired COLI policies on the lives of certain of its
employees as part of a strategy to fund the cost of postretirement employee
health care benefits and other long-term liabilities. COLI premiums have been
funded in part by loans issued against the cash surrender value of the COLI
policies. The IRS is challenging deductions of interest on loans secured by COLI
policies for years prior to 1999. In 2000, Grace paid $21.2 million of tax and
interest related to this issue for tax years 1990 through 1992. Subsequent to
1992, Grace deducted approximately $163.2 million in interest attributable to
COLI policy loans. Although Grace continues to believe that the deductions were
legitimate, the IRS has successfully challenged interest deductions claimed by
other corporations with respect to broad-based COLI policies in three out of
four litigated cases. Given the level of IRS success in COLI cases, Grace
requested and was granted early referral to the IRS Office of Appeals for
consideration of possible settlement alternatives of the COLI interest deduction
issue.

On September 23, 2002, Grace filed a motion in its Chapter 11 proceeding
requesting that the Bankruptcy Court authorize Grace to enter into a settlement
agreement with the IRS with respect to Grace's COLI interest deductions. The tax
years at issue are 1989 through 1998. Under the terms of the proposed
settlement, the government would allow 20% of the aggregate amount of the COLI
interest deductions and Grace would owe federal income tax and interest on the
remaining 80%. Grace has accrued for the potential tax and interest liability
related to the disallowance of all COLI interest deductions and continues to
accrue interest as part of its quarterly income tax provision. On October 22,
2002, the Bankruptcy Court issued an order authorizing Grace to enter into
settlement discussions with the IRS consistent with the aforementioned terms and
further ordered that any final agreement would be subject to Bankruptcy Court
approval. Grace is currently in negotiations with the IRS concerning the
proposed settlement, and the possible termination of the COLI policies.

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 1995 against a Grace subsidiary that formerly
operated a temporary staffing business for nurses and other health care
personnel. The assessments, aggregating $21.8 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 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. The IRS has
issued assessments aggregating $40.1 million for the 1996 through 1998 tax
periods and Grace expects the IRS will make additional assessments for the 1999
tax period. The matter is currently pending in the United States Court of
Claims. Grace is currently in discussions with the Department of Justice
concerning possible settlement options.



                                      I-34
<PAGE>



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

CASH RESOURCES AND AVAILABLE CREDIT FACILITIES

At September 30, 2003, Grace had $390.4 million in cash and cash-like assets on
hand ($299.9 million in cash and cash equivalents and $90.5 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 $215.7
million (net of borrowings, letters of credit, and holdback provisions) was
available at September 30, 2003. The term of the DIP facility, originally set to
expire on April 1, 2003, has been extended for up to an additional three years
through 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

For the nine months ended September 30, 2003, Grace's net cash flow provided by
core operations before investing was $114.2 million, compared with $205.8
million for the nine months ended September 30, 2002. Total capital expenditures
for the nine months ended September 30, 2003 and 2002 were $65.7 million and
$55.4 million, respectively. A substantial portion of these expenditures was
directed toward the business segments for routine capital replacements and
construction of new catalyst production capacity at the Lake Charles, Louisiana
site. Acquisition investments, net of cash acquired, were $3.6 million and $28.5
million for the nine months ended September 30, 2003 and 2002, respectively. For
the same periods, pre-tax income from core operations before depreciation and
amortization was $173.5 million and $214.1 million, respectively. 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, geographic market expansions and
acquisitions. Investments that are outside the ordinary course of business may
be subject to Bankruptcy Court approval and Chapter 11 creditor committee
review.

The pre-tax cash outflow from noncore activities for the nine months ended
September 30, 2003 and 2002 was $16.2 million and $26.3 million, respectively.
Expenditures for environmental remediation were lower in the first nine months
of 2003, due to the completion of remediation work at certain sites.
Postretirement benefits were lower, reflecting higher cost sharing by retirees.

Net cash flows used for investing activities for the nine months ended September
30, 2003 and 2002 were $67.0 million and $80.8 million, respectively. Net cash
outflows for investing activities in the first nine months of 2003 consisted
primarily of $65.7 million for capital expenditures. Net cash outflows used for
investing activities in the first nine months of 2002 consisted primarily of
$28.5 million for acquisitions, $55.4 million for capital expenditures, and net
investments in life insurance policies of $2.4 million.

Net cash provided by financing activities in the first nine months of 2003 was
$0.6 million and net cash used for financing activities in the first nine months
of 2002 was $5.9 million. In 2003, net cash inflows were principally composed of
$6.5 million of borrowings under the non-debtor and pre-petition credit
facilities net of repayments, offset by $3.3 million of fees related to renewal
and unused line fees under the DIP facility and $2.6 million in net repayments
for loans secured by the cash value of life insurance policies. In 2002, net
cash outflows principally consisted of net repayments for loans secured by the
cash value of life insurance policies.

The Debtors have received Bankruptcy Court approval to make $48.5 million of
contributions to their defined benefit pension plans to address the underfunded
status of such plans. Through September 30, 2003, the Debtors contributed a
total of $32.8 million to such plans. The Debtors expect to contribute an
additional $15.7 million during the fourth quarter of 2003.

DEBT AND OTHER CONTRACTUAL OBLIGATIONS

Total debt outstanding at September 30, 2003 was $558.4 million, including $46.3
million of accrued interest on pre-petition debt. As a result of the Filing,
Grace is now in default on $501.2 million of pre-petition debt, which, together
with accrued interest thereon, has been included in "liabilities subject to
compromise" as of September 30, 2003. 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).




                                      I-35
<PAGE>



At September 30, 2003, Grace had gross financial assurances issued and
outstanding of $249.4 million, comprised of $135.0 million of gross surety bonds
issued by various insurance companies, and $114.4 million of standby letters of
credit and other financial assurances issued by various banks. Of the standby
letters of credit, $19.0 million act as collateral for surety bonds, thereby
reducing Grace's overall obligations under its financial assurances to a net
amount of $230.4 million. These financial assurances were established for a
variety of purposes, including insurance and environmental matters, asbestos
settlements and appeals, trade-related commitments and other matters. Of the net
amount of $230.4 million of financial assurances, $9.4 million were issued by
non-Debtor entities and $221.0 million were issued by the Debtors. Of the
amounts issued by the Debtors, $192.5 million were issued before the Filing
Date, with the remaining $28.5 million being issued subsequent to the Filing, of
which $25.8 million was issued under the DIP facility.

FORWARD-LOOKING STATEMENTS

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


















                                      I-36
<PAGE>



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

Grace had no outstanding derivative financial instruments on September 30, 2003.
For further information concerning Grace's quantitative and qualitative
disclosures about market risk, refer to Notes 13 and 15 in the Consolidated
Financial Statements in Grace's 2002 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. The financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America and accordingly include certain amounts that represent management's best
estimates and judgments. Actual amounts could differ from those estimates.
Management maintains internal control systems to assist it in fulfilling its
responsibility for financial reporting. These systems include business,
accounting and reporting policies and procedures, selection of personnel,
segregation of duties and an internal audit function. In 2002, a Disclosure
Committee was established to oversee Grace's public financial reporting process
and key managers are required to confirm their compliance with Grace's policies
and internal control systems. While no system can ensure elimination of all
errors and irregularities, Grace's systems, 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 not exceed their benefits.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As of September 30, 2003, Grace evaluated 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 the Company's disclosure controls and procedures are
effective in ensuring that information required to be disclosed in the Company's
periodic filings under the Exchange Act is accumulated and communicated to such
officers to allow timely decisions regarding required disclosures. There was no
change in the Company's internal control over financial reporting during the
third quarter of 2003 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.

















                                      I-37
<PAGE>



                           PART II. OTHER INFORMATION



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

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

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

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

              15    Accountants' Awareness Letter

              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

        (b)   Reports on Form 8-K. The following reports on Form 8-K were filed
              during the third quarter of 2003:

              July 23, 2003 - Press release announcing Grace's financial
              results for the second quarter of 2003.



















                                      II-1



<PAGE>



                                    SIGNATURE
                                    ---------


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

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

Date:  November 10, 2003                    By /s/ Paul J. Norris
                                               ------------------
                                               Paul J. Norris
                                               Chairman, President and
                                               Chief Executive Officer

Date:  November 10, 2003                    By /s/ Robert M. Tarola
                                               --------------------
                                               Robert M. Tarola
                                               Senior Vice President and
                                               Chief Financial Officer
                                               (Principal Accounting Officer)










                                      II-2



<PAGE>




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



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

     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