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UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C.20549

FORM 10-Q

(MarkOne)

|        |                                                                                      |
|--------|--------------------------------------------------------------------------------------|
|   | QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGEACT OF 1934 |

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,2005

OR

|        |                                                                                        |
|--------|----------------------------------------------------------------------------------------|
|   | TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934 |

Commission File Number 1-13953

W. R. GRACE &CO.

|                                                                                                                                                          |  |                                                                                                                                                |  |  |  |  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|--|------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
|             Delaware             |  |            65-0773649            |
| (Stateof Incorporation)                                                                                                                                  |  | (I.R.S. EmployerIdentificationNo.)                                                                                                             |
|                                                                                                                                                          |

7500 Grace DriveColumbia,Maryland 21044                (410)531-4000                

(Addressand phone number of principal executiveoffices)

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

|  | Yes      No     |
|--|-------------------------------------------------------------------|

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

|  | Yes      No     |
|--|-------------------------------------------------------------------|

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

|  | Yes      No     |
|--|-------------------------------------------------------------------|

66,921,696 shares of Common Stock, $0.01 par value, wereoutstanding at October 31, 2005.

    

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W.R. GRACE & CO. AND SUBSIDIARIES

Table ofContents

|                                  |  |                                                                                      |  |                                                     |  |  |  |  |  |  |
|----------------------------------|--|--------------------------------------------------------------------------------------|--|-----------------------------------------------------|--|--|--|--|--|--|
|                             |  |                                                                                 |  | PageNo.                                             |
| **Part I. FinancialInformation** |  |                                                                                 |
| Item 1.                          |  | FinancialStatements                                                                  |  | I– 1                                          |
|                             |  | Report of IndependentRegistered Public Accounting Firm                               |  | I –2                                          |
|                             |  | Consolidated Statements ofOperations                                                 |  | I –3                                          |
|                             |  | Consolidated Statements of CashFlows                                                 |  | I –4                                          |
|                             |  | Consolidated BalanceSheets                                                           |  | I –5                                          |
|                             |  | Consolidated Statements ofShareholders' Equity (Deficit)                             |  | I –6                                          |
|                             |  | Consolidated Statements ofComprehensive Income (Loss)                                |  | I –6                                          |
|                             |  | Notes to Consolidated FinancialStatements                                            |  | I – 7 to I – 32                         |
| Item2.                           |  | Management's Discussion and Analysis of FinancialCondition and Results of Operations |  |     I –33 to I – 52 |
| Item 3.                          |  | Quantitative andQualitative Disclosures About Market Risk                            |  | I –53                                         |
| Item 4.                          |  | Controls and Procedures                                                              |  | I– 53                                         |
| **Part II. OtherInformation**    |  |                                                                                 |
| Item 1.                          |  | LegalProceedings                                                                     |  | II – 1                                        |
| Item6.                           |  | Exhibits                                                                             |  | II –1                                         |
|                                  |

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PARTI. FINANCIAL INFORMATION

Item 1.    FINANCIALSTATEMENTS

Review by Independent Registered PublicAccounting Firm

A review of the interim consolidatedfinancial statements included in this Quarterly Report on Form 10-Q forthe three and nine months ended September 30, 2005 and 2004 has beenperformed by PricewaterhouseCoopers LLP, the company'sindependent registered public accounting firm. Their report on theinterim consolidated financial statements follows. This report is notconsidered a "report" within the meaning ofSections 7 and 11 of the Securities Act of 1933, and, therefore, theindependent accountants' liability under Section 11 does notextend to it.

I-1

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Report of Independent Registered PublicAccounting Firm

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

We have reviewed the accompanyingconsolidated balance sheets of W. R. Grace & Co. and itssubsidiaries as of September 30, 2005, and the related consolidatedstatements of operations, shareholders' equity (deficit) andcomprehensive income (loss) for each of the three-month and nine-monthperiods ended September 30, 2005 and September 30, 2004 and theconsolidated statements of cash flows for the nine-month periods endedSeptember 30, 2005 and September 30, 2004. These interim financialstatements are the responsibility of the Company'smanagement.

We conducted our review in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates). A review of interim financial information consists principallyof applying analytical procedures and making inquiries of personsresponsible for financial and accounting matters. It is substantiallyless in scope than an audit conducted in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theobjective of which is the expression of an opinion regarding thefinancial statements taken as a whole. Accordingly, we do not expresssuch an opinion.

Based on our review, we are not aware of anymaterial modifications that should be made to the accompanying interimconsolidated financial statements for them to be in conformity withaccounting principles generally accepted in the United States ofAmerica.

The accompanying interim consolidated financialstatements have been prepared assuming that the Company will continueas a going concern. As discussed in Notes 1 and 2 to the interimconsolidated financial statements, on April 2, 2001, the Company andsubstantially all of its domestic subsidiaries voluntarily filed forprotection under Chapter 11 of the United States Bankruptcy Code, whichraises substantial doubt about the Company's ability to continueas a going concern in its present form. Management's intentionswith respect to this matter are also described in Notes 1 and 2. Theaccompanying interim consolidated financial statements do not includeany adjustments that might result from the outcome of thisuncertainty.

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

/s/ PricewaterhouseCoopersLLP McLean, Virginia November 4, 2005

I-2

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|                                                                                                    |  |                                |         |                               |  |        |         |         |  |        |         |         |  |        |         |         |  |  |
|----------------------------------------------------------------------------------------------------|--|--------------------------------|---------|-------------------------------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
| W.R. Grace & Co. and SubsidiariesConsolidated Statements ofOperations (Unaudited)              |  | Three MonthsEndedSeptember 30, |         | Nine Months EndedSeptember30, |
| In millions, except per shareamounts                                                               |  | 2005                           |         | 2004                          |  | 2005   |         | 2004    |
| Netsales                                                                                           |  | $                              | 653.4   |                          |  | $      | 579.9   |    |  | $      | 1,933.1 |    |  | $      | 1,670.8 |    |
| Costof goods sold, exclusive of depreciation and amortization shownseparatelybelow                 |  |                           | 426.0   |                          |  |   | 361.3   |    |  |   | 1,258.4 |    |  |   | 1,049.7 |    |
| Selling,general and administrative expenses, exclusive of net pension expenseshown separatelybelow |  |                           | 111.3   |                          |  |   | 104.7   |    |  |   | 350.0   |    |  |   | 317.6   |    |
| Depreciationandamortization                                                                        |  |                           | 28.7    |                          |  |   | 26.9    |    |  |   | 86.1    |    |  |   | 80.4    |    |
| Researchand development expenses                                                                   |  |                           | 14.9    |                          |  |   | 13.1    |    |  |   | 45.1    |    |  |   | 38.8    |    |
| Netpensionexpense                                                                                  |  |                           | 17.3    |                          |  |   | 16.3    |    |  |   | 54.4    |    |  |   | 45.9    |    |
| Interestexpense and related financingcosts                                                         |  |                           | 13.4    |                          |  |   | 4.5     |    |  |   | 41.3    |    |  |   | 12.3    |    |
| Provisionfor environmentalremediation                                                              |  |                           | — |                          |  |   | 20.0    |    |  |   | — |    |  |   | 20.0    |    |
| Provisionfor asbestos-related litigation, net ofinsurance                                          |  |                           | — |                          |  |   | — |    |  |   | — |    |  |   | — |    |
| Other(income)expense                                                                               |  |                           | (4.4    | )                        |  |   | (50.5   | )  |  |   | (34.4   | )  |  |   | (49.1   | )  |
|                                                                                               |  |                           | 607.2   |                          |  |   | 496.3   |    |  |   | 1,800.9 |    |  |   | 1,515.6 |    |
| Income(loss) before Chapter 11 expenses, income taxes, and minorityinterest                        |  |                           | 46.2    |                          |  |   | 83.6    |    |  |   | 132.2   |    |  |   | 155.2   |    |
| Chapter11 expenses,net                                                                             |  |                           | (9.3    | )                        |  |   | (4.3    | )  |  |   | (19.9   | )  |  |   | (11.8   | )  |
| Benefitfrom (provision for) incometaxes                                                            |  |                           | 2.6     |                          |  |   | (28.0   | )  |  |   | (26.0   | )  |  |   | (51.9   | )  |
| Minorityinterest in consolidatedentities                                                           |  |                           | (7.4    | )                        |  |   | (3.3    | )  |  |   | (18.4   | )  |  |   | (6.4    | )  |
| **Netincome(loss)**                                                                                |  | $                              | 32.1    |                          |  | $      | 48.0    |    |  | $      | 67.9    |    |  | $      | 85.1    |    |
| **Basicearnings (loss) per common share:**                                                         |  |                           |    |                          |  |   |    |    |  |   |    |    |  |   |    |    |
| Netincome(loss)                                                                                    |  | $                              | 0.48    |                          |  | $      | 0.73    |    |  | $      | 1.02    |    |  | $      | 1.30    |    |
| Averagenumber of basicshares                                                                       |  |                           | 66.9    |                          |  |   | 65.8    |    |  |   | 66.8    |    |  |   | 65.7    |    |
| **Dilutedearnings (loss) per common share:**                                                       |  |                           |    |                          |  |   |    |    |  |   |    |    |  |   |    |    |
| Netincome(loss)                                                                                    |  | $                              | 0.48    |                          |  | $      | 0.72    |    |  | $      | 1.01    |    |  | $      | 1.29    |    |
| Averagenumber of dilutedshares                                                                     |  |                           | 67.2    |                          |  |   | 66.3    |    |  |   | 67.3    |    |  |   | 66.0    |    |
|                                                                                                    |

TheNotes to Consolidated Financial Statements are an integral part ofthese statements.

I-3

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|                                                                                                                    |  |                               |         |         |  |        |         |         |  |  |
|--------------------------------------------------------------------------------------------------------------------|--|-------------------------------|---------|---------|--|--------|---------|---------|--|--|
| W.R. Grace & Co. and SubsidiariesConsolidated Statements of CashFlows (Unaudited)                              |  | Nine MonthsEndedSeptember 30, |
| Inmillions                                                                                                         |  | 2005                          |         | 2004    |
| **OPERATINGACTIVITIES**                                                                                            |  |                          |    |    |  |   |    |    |
| Income (loss) before Chapter 11expenses, income taxes, and minorityinterest                                        |  | $                             | 132.2   |    |  | $      | 155.2   |    |
| Reconciliationto net cash provided by (used for) operatingactivities:                                              |  |                          |    |    |  |   |    |    |
| Depreciation andamortization                                                                                       |  |                          | 86.1    |    |  |   | 80.4    |    |
| Interestaccrued on pre-petition liabilities subject tocompromise                                                   |  |                          | 37.7    |    |  |   | 8.7     |    |
| Net(gain) loss on sales of investments and disposals ofassets                                                      |  |                          | (0.2    | )  |  |   | 0.1     |    |
| Loss on saleof business                                                                                            |  |                          | 1.1     |    |  |   | — |    |
| Netpension expense                                                                                                 |  |                          | 54.4    |    |  |   | 45.9    |    |
| Netgain from litigationsettlement                                                                                  |  |                          | — |    |  |   | (50.0   | )  |
| Paymentsto fund defined benefit pensionarrangements                                                                |  |                          | (32.8   | )  |  |   | (27.6   | )  |
| Provisionfor environmentalremediation                                                                              |  |                          | — |    |  |   | 20.0    |    |
| Provisionfor asbestos-related litigation, net ofinsurance                                                          |  |                          | — |    |  |   | — |    |
| Netincome from life insurancepolicies                                                                              |  |                          | (1.6    | )  |  |   | (1.8    | )  |
| Provisionfor uncollectiblereceivables                                                                              |  |                          | 2.2     |    |  |   | 1.5     |    |
| Paymentsunder postretirement benefitplans                                                                          |  |                          | (8.3    | )  |  |   | (9.2    | )  |
| Expendituresfor environmentalremediation                                                                           |  |                          | (4.7    | )  |  |   | (6.1    | )  |
| Expendituresfor retained obligations of divestedbusinesses                                                         |  |                          | (0.7    | )  |  |   | (0.9    | )  |
| Changesin assets and liabilities, excluding effect of businessesacquired/divested and foreign currencytranslation: |  |                          |    |    |  |   |    |    |
| Working capitalitems                                                                                               |  |                          | (60.8   | )  |  |   | (46.4   | )  |
| Otheraccruals and non-cashitems                                                                                    |  |                          | (37.3   | )  |  |   | 26.9    |    |
| **Netcash provided by (used for) operating activities beforeincome****taxes and Chapter 11expenses**               |  |                          | 167.3   |    |  |   | 196.7   |    |
| Cash paidto settle noncorecontingencies                                                                            |  |                          | (119.7  | )  |  |   | — |    |
| Chapter11 expenses paid,net                                                                                        |  |                          | (14.0   | )  |  |   | (8.0    | )  |
| Income taxes paid,net ofrefunds                                                                                    |  |                          | (27.8   | )  |  |   | (21.3   | )  |
| **Netcash provided by (used for) operatingactivities**                                                             |  |                          | 5.8     |    |  |   | 167.4   |    |
| **INVESTINGACTIVITIES**                                                                                            |  |                          |    |    |  |   |    |    |
| Capitalexpenditures                                                                                                |  |                          | (50.2   | )  |  |   | (40.0   | )  |
| Businessesacquired, net of cashacquired                                                                            |  |                          | (2.5    | )  |  |   | (53.0   | )  |
| Proceeds fromtermination of life insurancepolicies                                                                 |  |                          | 14.8    |    |  |   | — |    |
| Net investmentin life insurancepolicies                                                                            |  |                          | (1.8    | )  |  |   | (13.8   | )  |
| Proceeds fromlife insurancepolicies                                                                                |  |                          | 2.2     |    |  |   | 12.5    |    |
| Proceeds fromsales of investments and disposals ofassets                                                           |  |                          | 1.7     |    |  |   | 1.7     |    |
| Proceeds from sale ofbusiness                                                                                      |  |                          | 4.5     |    |  |   | — |    |
| **Netcash provided by (used for) investingactivities**                                                             |  |                          | (31.3   | )  |  |   | (92.6   | )  |
| **FINANCINGACTIVITIES**                                                                                            |  |                          |    |    |  |   |    |    |
| Net payment of loans secured by cashvalue of lifeinsurance                                                         |  |                          | (0.5    | )  |  |   | (3.2    | )  |
| Net(repayments) borrowings under creditfacilities                                                                  |  |                          | (9.7    | )  |  |   | 6.0     |    |
| Fees underdebtor-in-possession creditfacility                                                                      |  |                          | (1.5    | )  |  |   | (1.6    | )  |
| Proceeds fromexercise of stockoptions                                                                              |  |                          | 3.1     |    |  |   | 0.8     |    |
| **Netcash provided by (used for) financingactivities**                                                             |  |                          | (8.6    | )  |  |   | 2.0     |    |
| Effectof currency exchange rate changes on cash and cashequivalents                                                |  |                          | (12.8   | )  |  |   | (0.9    | )  |
| **Increase(decrease) in cash and cashequivalents**                                                                 |  |                          | (46.9   | )  |  |   | 75.9    |    |
| Cash andcash equivalents, beginning ofperiod                                                                       |  |                          | 510.4   |    |  |   | 309.2   |    |
| Cashand cash equivalents, end ofperiod                                                                             |  | $                             | 463.5   |    |  | $      | 385.1   |    |
|                                                                                                                    |

TheNotes to Consolidated Financial Statements are an integral part ofthese statements.

I-4

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|                                                                                                                                 |  |                  |         |                 |  |        |         |         |  |  |
|---------------------------------------------------------------------------------------------------------------------------------|--|------------------|---------|-----------------|--|--------|---------|---------|--|--|
| W.R. Grace & Co. and SubsidiariesConsolidated Balance Sheets(Unaudited)                                                     |  | September30,2005 |         | December31,2004 |
| In millions, except parvalue andshares                                                                                          |  |             |         |            |
| **ASSETS**                                                                                                                      |  |             |    |            |  |   |    |    |
| **CurrentAssets**                                                                                                               |  |             |    |            |  |   |    |    |
| Cash and cashequivalents                                                                                                        |  | $                | 463.5   |            |  | $      | 510.4   |    |
| Tradeaccounts receivable, less allowance of $5.9 (2004 –$5.8)                                                             |  |             | 426.0   |            |  |   | 390.9   |    |
| Inventories                                                                                                                     |  |             | 261.1   |            |  |   | 248.3   |    |
| Deferredincome taxes                                                                                                            |  |             | 29.8    |            |  |   | 16.3    |    |
| Other currentassets                                                                                                             |  |             | 63.1    |            |  |   | 62.6    |    |
| **TotalCurrentAssets**                                                                                                          |  |             | 1,243.5 |            |  |   | 1,228.5 |    |
| Propertiesand equipment, net of accumulated depreciation andamortization of$1,353.2 (2004 –$1,325.9)                      |  |             | 588.8   |            |  |   | 645.3   |    |
| Goodwill                                                                                                                        |  |             | 104.3   |            |  |   | 111.7   |    |
| Cashvalue of life insurance policies, net of policyloans                                                                        |  |             | 83.0    |            |  |   | 96.0    |    |
| Deferred incometaxes                                                                                                            |  |             | 667.4   |            |  |   | 667.4   |    |
| Asbestos-relatedinsurance                                                                                                       |  |             | 500.0   |            |  |   | 500.0   |    |
| Otherassets                                                                                                                     |  |             | 278.1   |            |  |   | 290.0   |    |
| **TotalAssets**                                                                                                                 |  | $                | 3,465.1 |            |  | $      | 3,538.9 |    |
| **LIABILITIESAND SHAREHOLDERS' EQUITY(DEFICIT)**                                                                                |  |             |    |            |  |   |    |    |
| **Liabilities Not Subjectto Compromise**                                                                                        |  |             |    |            |  |   |    |    |
| **CurrentLiabilities**                                                                                                          |  |             |    |            |  |   |    |    |
| Debt payable within oneyear                                                                                                     |  | $                | 2.7     |            |  | $      | 12.4    |    |
| Accountspayable                                                                                                                 |  |             | 156.5   |            |  |   | 146.0   |    |
| Income taxespayable                                                                                                             |  |             | 12.7    |            |  |   | 7.7     |    |
| Other currentliabilities                                                                                                        |  |             | 223.9   |            |  |   | 221.5   |    |
| **TotalCurrentLiabilities**                                                                                                     |  |             | 395.8   |            |  |   | 387.6   |    |
| Debtpayable after oneyear                                                                                                       |  |             | 0.5     |            |  |   | 1.1     |    |
| Deferred incometaxes                                                                                                            |  |             | 57.6    |            |  |   | 64.1    |    |
| Unfunded definedbenefit pensionliability                                                                                        |  |             | 434.2   |            |  |   | 424.9   |    |
| Otherliabilities                                                                                                                |  |             | 51.2    |            |  |   | 75.3    |    |
| **TotalLiabilities Not Subject toCompromise**                                                                                   |  |             | 939.3   |            |  |   | 953.0   |    |
| **LiabilitiesSubject to Compromise – Note2**                                                                              |  |             | 3,099.9 |            |  |   | 3,207.7 |    |
| **TotalLiabilities**                                                                                                            |  |             | 4,039.2 |            |  |   | 4,160.7 |    |
| **CommitmentsandContingencies**                                                                                                 |  |             |    |            |  |   |    |    |
| **Shareholders'Equity (Deficit)**                                                                                               |  |             |    |            |  |   |    |    |
| Common stock issued, par value$0.01; 300,000,000 shares authorized;outstanding: 2005 –66,921,696 (2004 –66,395,721) |  |             | 0.8     |            |  |   | 0.8     |    |
| Paid-incapital                                                                                                                  |  |             | 423.4   |            |  |   | 426.5   |    |
| Accumulateddeficit                                                                                                              |  |             | (505.3  | )          |  |   | (573.2  | )  |
| Treasurystock, at cost: shares: 2005 – 10,058,064; (2004 –10,584,039)                                               |  |             | (119.7  | )          |  |   | (125.9  | )  |
| Accumulatedother comprehensive income(loss)                                                                                     |  |             | (373.3  | )          |  |   | (350.0  | )  |
| **TotalShareholders' Equity(Deficit)**                                                                                          |  |             | (574.1  | )          |  |   | (621.8  | )  |
| **TotalLiabilities and Shareholders' Equity(Deficit)**                                                                          |  | $                | 3,465.1 |            |  | $      | 3,538.9 |    |
|                                                                                                                                 |

TheNotes to Consolidated Financial Statements are an integral part ofthese statements.

I-5

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|                                                                                                          |  |                                |         |                    |  |                |         |                                             |  |                                   |         |         |  |        |         |         |  |        |         |         |  |  |
|----------------------------------------------------------------------------------------------------------|--|--------------------------------|---------|--------------------|--|----------------|---------|---------------------------------------------|--|-----------------------------------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
| W.R. Grace & Co. and SubsidiariesConsolidated Statements ofShareholders' Equity (Deficit)(Unaudited) |  |                           |         |               |  |           |
| Inmillions                                                                                               |  | Common StockandPaid-in Capital |         | AccumulatedDeficit |  | Treasury Stock |         | Accumulated OtherComprehensive Income(Loss) |  | TotalShareholders'Equity(Deficit) |
| **Balance,June 30,2005**                                                                                 |  | $                              | 424.2   |               |  | $              | (537.4  | )                                      |  | $                                 | (119.7  | )  |  | $      | (372.4  | )  |  | $      | (605.3  | )  |
| Netincome                                                                                                |  |                           | — |               |  |           | 32.1    |                                        |  |                              | — |    |  |   | — |    |  |   | 32.1    |    |
| Stockplanactivity                                                                                        |  |                           | — |               |  |           | — |                                        |  |                              | — |    |  |   | — |    |  |   | — |    |
| Othercomprehensive income(loss)                                                                          |  |                           | — |               |  |           | — |                                        |  |                              | — |    |  |   | (0.9    | )  |  |   | (0.9    | )  |
| **Balance,September 30,2005**                                                                            |  | $                              | 424.2   |               |  | $              | (505.3  | )                                      |  | $                                 | (119.7  | )  |  | $      | (373.3  | )  |  | $      | (574.1  | )  |
| **Balance,December 31,2004**                                                                             |  | $                              | 427.3   |               |  | $              | (573.2  | )                                      |  | $                                 | (125.9  | )  |  | $      | (350.0  | )  |  | $      | (621.8  | )  |
| Netincome                                                                                                |  |                           | — |               |  |           | 67.9    |                                        |  |                              | — |    |  |   | — |    |  |   | 67.9    |    |
| Stockplanactivity                                                                                        |  |                           | (3.1    | )             |  |           | — |                                        |  |                              | 6.2     |    |  |   | — |    |  |   | 3.1     |    |
| Othercomprehensive income(loss)                                                                          |  |                           | — |               |  |           | — |                                        |  |                              | — |    |  |   | (23.3   | )  |  |   | (23.3   | )  |
| **Balance,September 30,2005**                                                                            |  | $                              | 424.2   |               |  | $              | (505.3  | )                                      |  | $                                 | (119.7  | )  |  | $      | (373.3  | )  |  | $      | (574.1  | )  |
|                                                                                                          |

|                                                                                                       |  |                                |         |                               |  |        |         |        |  |        |         |         |  |        |        |         |  |  |
|-------------------------------------------------------------------------------------------------------|--|--------------------------------|---------|-------------------------------|--|--------|---------|--------|--|--------|---------|---------|--|--------|--------|---------|--|--|
| W.R. Grace & Co. and SubsidiariesConsolidated Statements ofComprehensive Income (Loss)(Unaudited) |  | Three MonthsEndedSeptember 30, |         | Nine Months EndedSeptember30, |
| Inmillions                                                                                            |  | 2005                           |         | 2004                          |  | 2005   |         | 2004   |
| **Netincome(loss)**                                                                                   |  | $                              | 32.1    |                          |  | $      | 48.0    |   |  | $      | 67.9    |    |  | $      | 85.1   |    |
| **Othercomprehensive income (loss):**                                                                 |  |                           |    |                          |  |   |    |   |  |   |    |    |  |   |   |    |
| Foreign currencytranslationadjustments                                                                |  |                           | (0.9    | )                        |  |   | 2.9     |   |  |   | (23.3   | )  |  |   | (4.6   | )  |
| Minimumpension liability adjustments, net of incometaxes                                              |  |                           | — |                          |  |   | — |   |  |   | — |    |  |   | (35.3  | )  |
| Totalother comprehensive income(loss)                                                                 |  |                           | (0.9    | )                        |  |   | 2.9     |   |  |   | (23.3   | )  |  |   | (39.9  | )  |
| **Comprehensiveincome (loss)**                                                                        |  | $                              | 31.2    |                          |  | $      | 50.9    |   |  | $      | 44.6    |    |  | $      | 45.2   |    |
|                                                                                                       |

TheNotes to Consolidated Financial Statements are an integral part ofthese statements.

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W.R. Grace & Co. and Subsidiaries

Notes to ConsolidatedFinancial Statements (Unaudited)

|          |                                                                                            |
|----------|--------------------------------------------------------------------------------------------|
| 1.  | Basisof Presentation and Summary of Significant Accounting and FinancialReporting Policies |

W. R. Grace & Co., through itssubsidiaries, is engaged in specialty chemicals and specialty materialsbusinesses on a worldwide basis through two business segments:"Davison Chemicals," which includes twoproduct groups – refining technologies and specialty materials;and "Performance Chemicals," which includesthree product groups – specialty construction chemicals, buildingmaterials, and sealants and coatings.

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

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

Voluntary Bankruptcy Filing –During 2000 and the first quarter of 2001, Grace experienced severaladverse developments in its asbestos-related litigation, including: asignificant increase in personal injury claims, higher than expectedcosts to resolve personal injury and certain property damage claims,and class action lawsuits alleging damages from Zonolite AtticInsulation ("ZAI") a former Grace atticinsulation product.

After a thorough review of thesedevelopments, the Board of Directors concluded that a federalcourt-supervised bankruptcy process provided the best forum availableto achieve fairness in resolving these claims and on April 2, 2001 (the"Filing Date"), Grace and 61 of its UnitedStates subsidiaries and affiliates, including Grace-Conn.(collectively, the "Debtors"), filedvoluntary petitions for reorganization (the"Filing") under Chapter 11 of the UnitedStates Bankruptcy Code in the United States Bankruptcy Court for theDistrict of Delaware (the "BankruptcyCourt"). The cases were consolidated and are being jointlyadministered under case number 01-01139 (the "Chapter 11Cases"). Grace's non-U.S. subsidiaries and certainof its U.S. subsidiaries were not included in the Filing.

UnderChapter 11, the Debtors have continued to operate their businesses asdebtors-in-possession under court protection from creditors andclaimants, while using the Chapter 11 process to develop and implementa plan for addressing the asbestos-related claims. Since the Filing,all motions necessary to conduct normal business activities have beenapproved by the Bankruptcy Court. (See Note 2 for Chapter 11 RelatedInformation.)

Basis of Presentation – The interimConsolidated Financial Statements presented herein are unaudited andshould be read in conjunction with the Consolidated FinancialStatements presented in the Company's 2004 Annual Report on Form10-K. Such interim Consolidated Financial Statements reflect alladjustments that, in the opinion of management, are necessary for afair presentation of the results of the interim periods presented; allsuch adjustments are of a normal recurring nature. Potential accountingadjustments discovered during normal reporting and accounting processesare evaluated on the basis of materiality, both individually and in theaggregate, and are recorded in the accounting period discovered, unlessa restatement of a prior period is necessary. All significantintercompany accounts and transactions have been eliminated.

Theresults of operations for the nine-month interim period ended September30, 2005 are not necessarily indicative of the results of operationsfor the year ending December 31, 2005.

Reclassifications – Certain amounts in prioryears' Consolidated Financial Statements have been reclassifiedto conform to the 2005 presentation.

Use of Estimates– The preparation of financial statements in conformity with U.S.generally accepted accounting principles requires that management makeestimates and assumptions affecting the assets 

I-7

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and liabilities reported at the date of theConsolidated Financial Statements, and the revenues and expensesreported for the periods presented. Actual amounts could differ fromthose estimates. Changes in estimates are recorded in the periodidentified. Grace's accounting measurements that are mostaffected by management's estimates of future eventsare:

|              |                                                                                                                                                                              |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Contingent liabilities such asasbestos-related matters (see Notes 2 and 3), environmental remediation(see Note 12), income taxes (see Note 12), and litigation (see Note12). |

|              |                                                                                                                                             |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Pension and postretirementliabilities that depend on assumptions regarding discount rates andtotal returns on invested funds. (See Note13.) |

|              |                                                                                                                           |
|--------------|---------------------------------------------------------------------------------------------------------------------------|
| •  | Depreciation and amortizationperiods for long-lived assets, including property and equipment,intangible, and otherassets. |

|              |                                                                                                                                          |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Realization values of variousassets such as net deferred tax assets, trade receivables, inventories,insurance receivables, and goodwill. |

The accuracy of these andother estimates may also be materially affected by the uncertaintiesarising under Grace's Chapter 11 proceeding.

Effect ofNew Accounting Standards – In March 2005, the FinancialAccounting Standards Board ("FASB") issuedFIN 47, "Accounting for Conditional Asset RetirementObligations – an interpretation of FASB Statement No.143," to provide clarification that the termconditional asset retirement obligation, refers to a legalobligation to perform an asset retirement activity in which the timingand/or method of settlement are conditional on a future event that mayor may not be within the control of the entity. This Interpretationclarifies that an entity is required to recognize a liability for thefair value of a conditional asset retirement obligation when incurred,if the liability's fair value can be reasonably estimated. Graceis currently evaluating the impact this Interpretation will have on itsConsolidated Financial Statements for 2005.

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

In November 2004, theFASB issued SFAS No. 151, "Inventory Costs – anAmendment of ARB No. 43, Chapter 4," to provideclarification that abnormal amounts of idle facility expense, freight,handling costs, and wasted material be recognized as current-periodcosts. In addition, this standard requires that allocation of fixedproduction overheads to the costs of inventory be based on the normalcapacity of the production facilities. The provisions of this standardare effective for Grace in 2006 and are not expected to have a materialimpact on Grace's Consolidated Financial Statements.

|          |                                |
|----------|--------------------------------|
| 2.  | Chapter 11 Related Information |

Plan of Reorganization**–** On November 13, 2004Grace filed a plan of reorganization, as well as several associateddocuments, including a disclosure statement, with the Bankruptcy Court.On January 13, 2005, Grace filed an amended plan of reorganization (the"Plan") and related documents to addresscertain objections of creditors and other interested parties. The Planis supported by committees representing general unsecured creditors andequity holders, but is not supported by committees representingasbestos personal injury claimants and asbestos property damageclaimants.

Under the terms of the Plan, a trust would beestablished under Section 524(g) of the Bankruptcy Code to which allpending and future asbestos-related claims would be channeled forresolution. Grace has requested that the Bankruptcy Court conduct anestimation hearing to determine the amount that would need to be paidinto the trust on the effective date of the Plan to satisfy theestimated liability for each class of asbestos claimants and trustadministration costs and expenses over time. The Plan provides thatGrace's asbestos-related liabilities would be satisfied usingcash and securities from Grace and third parties.

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The Plan will become effective only after avote of eligible creditors and with the approval of the BankruptcyCourt and the U.S. District Court for the District of Delaware. Voteson the Plan may not be solicited until the Bankruptcy Court approvesthe disclosure statement. The Debtors have received extensions of theirexclusive right to propose a plan of reorganization through December19, 2005.

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

Asbestos-Related Claims and Costs

Atrust would be established under Section 524(g) of the Bankruptcy Codeto which all pending and future asbestos-related claims would bechanneled for resolution. The trust would utilize specified trustdistribution procedures to satisfy the following allowedasbestos-related claims andcosts:

|          |                                                                                                                                                                                                                                                                                                                              |
|----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.  | Personal injury claims that meetspecified exposure and medical criteria (Personal Injury-SymptomaticEligible or "PI-SE" Claims) – Inorder to qualify for this class, claimants would have to prove thattheir health is impaired from meaningful exposure toasbestos-containing products formerly manufactured byGrace. |

|          |                                                                                                                                                                                                                                                                                                                                                                                                 |
|----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.  | Personal injury claims that donot meet the exposure and medical criteria necessary to qualify asPI-SE Claims (Personal Injury-Asymptomatic and Other or"PI-AO" Claims) – This class wouldcontain all asbestos-related personal injury claims against Grace thatdo not meet the specific requirements to be PI-SE Claims, but do meetcertain other specified exposure and medicalcriteria. |

|          |                                                                                                                                                                                                                                                                                    |
|----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.  | Property damage claims,including claims related to ZAI ("PDClaims") – In order to qualify for this class,claimants would have to prove Grace liability for loss of propertyvalue or remediation costs related to asbestos-containing productsformerly manufactured by Grace. |

|          |                                              |
|----------|----------------------------------------------|
| 4.  | Trustadministration costs and legal expenses |

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

The Bankruptcy Courthas entered case management orders for estimating liability forpersonal injury claims and property damage claims (excluding ZAIclaims), which provide for estimation hearings in September 2006. TheBankruptcy Court is expected to use the estimated liability todetermine the amounts to be paid into the trust on the effective dateof the Plan. The amounts to fund PI-SE Claims, PD Claims and theexpense of trust administration would be capped at the amountdetermined by the Bankruptcy Court. Amounts required to fund PI-AOClaims would not be capped, so if the amount funded in respect thereoflater proved to be inadequate, Grace would be responsible forcontributing additional funds into the asbestos trust to satisfy PI-AOClaims.

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

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

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the trading value of Sealed Air common stock.The Sealed Air settlement agreement has been approved by the BankruptcyCourt, but remains subject to the fulfillment of specifiedconditions.

The PI-AO Claims would be funded with warrantsexercisable for that number of shares of Grace common stock which, whenadded to the shares issued directly to the trust on the effective dateof the Plan, would represent 50.1% of Grace's votingsecurities. If the common stock issuable upon exercise of the warrantsis insufficient to pay all PI-AO Claims (the liability for which isuncapped under the Plan), then Grace would pay any additionalliabilities in cash.

Other Claims

The Plan provides that all allowed claims other than those coveredunder the asbestos trust would be paid 100% in cash (if suchclaims qualify as administrative or priority claims) or 85% incash and 15% in Grace common stock (if such claims qualify asgeneral unsecured claims). Grace estimates that claims with a recordedvalue of approximately $1,161 million, including interest accruedthrough September 30, 2005, would be satisfied in this manner at theeffective date of the Plan. Grace would finance these payments withcash on hand, cash from Fresenius Medical Care Holdings, Inc.("Fresenius") paid in settlement of asbestosand other Grace-related claims, new Grace debt, and Grace common stock.Grace would satisfy other non-asbestos related liabilities and claims(primarily certain environmental, tax, pension and retirement medicalobligations) as they become due and payable over time. Proceeds fromavailable product liability insurance applicable to asbestos-relatedclaims would supplement operating cash flow to service new debt andliabilities not paid on the effective date of the Plan.

Effect on Grace Common Stock

ThePlan provides that Grace common stock will remain outstanding at theeffective date of the Plan, but that the interests of existingshareholders would be subject to dilution by additional shares ofcommon stock issued under the Plan. In addition, in order to preservesignificant tax benefits from net operating loss carryforwards("NOLs"), which are subject to elimination orlimitation in the event of a change in control (as defined by theInternal Revenue Code) of Grace, the Plan places restrictions on thepurchase of Grace common stock. The restrictions would prohibit(without the consent of Grace), for a period of three years, a personor entity from acquiring more than 4.75% of the outstandingGrace common stock or, for those persons already holding more than4.75%, prohibit them from increasing their holdings. TheBankruptcy Court has also approved the trading restrictions describedabove until the effective date of the Plan.

Grace intends toaddress all pending and future asbestos-related claims and all otherpre-petition claims as outlined in the Plan. However, Grace may not besuccessful in obtaining approval of the Plan by the Bankruptcy Courtand other interested parties. Instead, a materially different plan ofreorganization may ultimately be approved and, under the ultimate planof reorganization, the interests of the Company's shareholderscould be substantially diluted or cancelled. The value of Grace commonstock following a plan of reorganization, and the extent of anyrecovery by non-asbestos-related creditors, will depend principally onthe allowed value of Grace's asbestos-related claims asdetermined by the Bankruptcy Court.

Official Parties toGrace's Chapter 11 Proceedings **–** Threecreditors' committees, two representing asbestos claimants andthe third representing other unsecured creditors, and a committeerepresenting shareholders, have been appointed in the Chapter 11 Cases.These committees, and a legal representative of future asbestosclaimants, have the right to be heard on all matters that come beforethe Bankruptcy Court and are likely to play important roles in theChapter 11 Cases. The Debtors are required to bear certain costs andexpenses of the committees and of the future asbestos claimants'representative, including those of their counsel and financialadvisors.

Claims Filings **–** The BankruptcyCourt established a bar date of March 31, 2003 for claims of generalunsecured creditors, asbestos-related property damage claims andmedical monitoring claims related to asbestos. The bar date did notapply to asbestos-related personal injury claims or claims related toZAI, which will be dealt with separately.

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Approximately 14,900 proofs of claim werefiled by the bar date. Of these claims, approximately 9,400 werenon-asbestos related, approximately 4,300 were for asbestos-relatedproperty damage, and approximately 1,000 were for medical monitoring.The medical monitoring claims were made by individuals who allegeexposure to asbestos through Grace's products or operations.These claims, if sustained, would require Grace to fund ongoing healthmonitoring costs for qualified claimants. In addition, approximately761 proofs of claim were filed after the bar date.

Approximately7,000 of the non-asbestos related claims involve claims by employees orformer employees for future retirement benefits such as pension andretiree medical coverage. Grace views most of these claims ascontingent and has proposed a plan of reorganization that would retainsuch benefits. The other non-asbestos related claims include claims forpayment of goods and services, taxes, product warranties, principal andinterest under pre-petition credit facilities, amounts due under leasesand other contracts, leases and other executory contracts rejected inthe Bankruptcy Court, environmental remediation, indemnification orcontribution to actual or potential co-defendants in asbestos-relatedand other litigation, pending non-asbestos-related litigation, andnon-asbestos-related personal injury.

The Debtors have analyzedthe claims as filed and have found that many are duplicates, representthe same claim filed against more than one of the Debtors, lack anysupporting documentation, or provide insufficient supportingdocumentation. As of September 30, 2005, the Debtors had filedobjections to approximately 5,400 claims, approximately 3,950 of whichwere substantive objections to asbestos property damage claims. Of the5,400 claims, approximately 1,400 have been expunged, approximately 200have been resolved, approximately 30 have been withdrawn, and theremainder will be addressed through the claims objection process andthe dispute resolution procedures approved by the Bankruptcy Court.

Grace believes that its recorded liabilities for claims subject tothe bar date represent a reasonable estimate of the ultimate allowableamount for claims that are not in dispute or have been submitted withsufficient information to both evaluate the merit and estimate thevalue of the claim. The asbestos-related claims are considered as partof Grace's overall asbestos liability and are being accounted forin accordance with the conditions precedent under the Plan, asdescribed in "Accounting Impact" below. Asclaims are resolved, or where better information becomes available andis evaluated, Grace will make adjustments to the liabilities recordedon its financial statements as appropriate. Any such adjustments couldbe material to its consolidated financial position and results ofoperations.

Litigation Proceedings in Bankruptcy Court– In September 2000, Grace was named in a purported class actionlawsuit filed in California Superior Court for the County of SanFrancisco, alleging that the 1996 reorganization involving apredecessor of Grace and Fresenius AG and the 1998 reorganizationinvolving a predecessor of Grace and Sealed Air were fraudulenttransfers. The Bankruptcy Court authorized the Official Committee ofAsbestos Personal Injury Claimants and the Official Committee ofAsbestos Property Damage Claimants to proceed with claims againstFresenius and Sealed Air and Cryovac on behalf of the Debtors'bankruptcy estate.

On November 29, 2002, Sealed Air (andCryovac) and Fresenius each announced that they had reached agreementsin principle with such Committees to settle asbestos, successorliability and fraudulent transfer claims related to such transactions(the "litigation settlement agreements").Under the terms of the Fresenius settlement, subject to the fulfillmentof certain conditions, Fresenius would contribute $115.0 million to theDebtors' estate as directed by the Bankruptcy Court uponconfirmation of the Debtors' plan of reorganization. In July2003, the Fresenius settlement was approved by the Bankruptcy Court.Under the terms of the Sealed Air settlement, subject to thefulfillment of certain conditions, Cryovac would make a payment of$512.5 million (plus interest at 5.5% compounded annually,commencing on December 21, 2002) and nine million shares of Sealed Aircommon stock (collectively valued at $1,021.8 million as of September30, 2005), as directed by the Bankruptcy Court upon confirmation of theDebtors' plan of reorganization. In June 2005, the Sealed Airsettlement was approved by the Bankruptcy Court.

I-11

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Debt Capital – All of theDebtors' pre-petition debt is in default due to the Filing. Theaccompanying Consolidated Balance Sheets reflect the classification ofthe Debtors' pre-petition debt within "liabilitiessubject to compromise."

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

Accounting Impact – The accompanying ConsolidatedFinancial Statements have been prepared in accordance with Statement ofPosition 90-7 ("SOP 90-7"),"Financial Reporting by Entities in Reorganization Underthe Bankruptcy Code," promulgated by the AmericanInstitute of Certified Public Accountants. SOP 90-7 requires thatfinancial statements of debtors-in-possession be prepared on a goingconcern basis, which contemplates continuity of operations, realizationof assets and liquidation of liabilities in the ordinary course ofbusiness. However, as a result of the Filing, the realization ofcertain of the Debtors' assets and the liquidation of certain ofthe Debtors' liabilities are subject to significant uncertainty.While operating as debtors-in-possession, the Debtors may sell orotherwise dispose of assets and liquidate or settle liabilities foramounts other than those reflected in the Consolidated FinancialStatements. Further, the ultimate plan of reorganization couldmaterially change the amounts and classifications reported in theConsolidated Financial Statements.

Pursuant to SOP 90-7,Grace's pre-petition liabilities that are subject to compromiseare required to be reported separately on the balance sheet at anestimate of the amount that will ultimately be allowed by theBankruptcy Court. As of September 30, 2005, such pre-petitionliabilities include fixed obligations (such as debt and contractualcommitments), as well as estimates of costs related to contingentliabilities (such as asbestos-related litigation, environmentalremediation, and other claims). Obligations of Grace subsidiaries notcovered by the Filing continue to be classified on the ConsolidatedBalance Sheets based upon maturity dates or the expected dates ofpayment. SOP 90-7 also requires separate reporting of certain expenses,realized gains and losses, and provisions for losses related to theFiling as reorganization items.

Grace has not recorded thebenefit of any assets that may be available to fund asbestos-relatedand other liabilities under the litigation settlements with Sealed Airand Fresenius, as such agreements are subject to conditions which,although expected to be met, have not been satisfied and confirmed bythe Bankruptcy Court. The value available under these litigationsettlement agreements as measured at September 30, 2005, was $1,136.8million comprised of $115.0 million in cash from Fresenius and $1,021.8million in cash and stock from Cryovac. Payments under the Sealed Airsettlement will be paid directly to the asbestos trust by Cryovac, andwill be accounted for as a satisfaction of a portion of Grace'srecorded asbestos-related liability and a credit to shareholder'sequity.

Grace's Consolidated Balance Sheets separatelyidentify the liabilities that are "subject tocompromise" as a result of the Chapter 11 proceedings. InGrace's case, "liabilities subject tocompromise" represent pre-petition liabilities asdetermined under U.S. generally accepted accounting principles. Changesto the recorded amount of such liabilities will be based ondevelopments in the Chapter 11 Cases and management's assessmentof the claim amounts that will ultimately be allowed by the BankruptcyCourt. Changes to pre-petition liabilities subsequent to the FilingDate reflect: 1) cash payments under approved court orders; 2) theterms of Grace's proposed plan of reorganization, as discussedabove, including the accrual of interest on pre-petition debt and theadjustment to Grace's recorded asbestos-related liability; 3)accruals for employee-related programs; and 4) changes in estimatesrelated to other pre-petition contingent liabilities.

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Components of liabilities subject tocompromise are asfollows:

|                                            |  |                   |         |                   |  |        |         |        |  |  |
|--------------------------------------------|--|-------------------|---------|-------------------|--|--------|---------|--------|--|--|
| (In millions) (Unaudited)        |  | September30, 2005 |         | December 31, 2004 |
| Debt,pre-petition plus accruedinterest     |  | $                 | 674.7   |              |  | $      | 645.8   |   |
| Asbestos-relatedliability                  |  |              | 1,700.0 |              |  |   | 1,700.0 |   |
| Incometaxes                                |  |              | 126.0   |              |  |   | 210.4   |   |
| Environmentalremediation                   |  |              | 318.9   |              |  |   | 345.0   |   |
| Postretirementbenefits other thanpension   |  |              | 106.4   |              |  |   | 118.9   |   |
| Unfunded specialpensionarrangements        |  |              | 75.0    |              |  |   | 77.4    |   |
| Retainedobligations of divestedbusinesses  |  |              | 15.4    |              |  |   | 25.1    |   |
| Accountspayable                            |  |              | 31.5    |              |  |   | 31.3    |   |
| Other accruedliabilities                   |  |              | 52.0    |              |  |   | 53.8    |   |
| **TotalLiabilities Subject to Compromise** |  | $                 | 3,099.9 |              |  | $      | 3,207.7 |   |
|                                            |

Notethat the unfunded special pension arrangements reflected above excludenon-U.S. plans and qualified U.S. plans that became underfundedsubsequent to the Filing. Contributions to qualified U.S. plans aresubject to Bankruptcy Court approval.

Change inLiabilities Subject to Compromise

Set forth below is areconciliation of the changes in pre-filing date liability balances forthe period from the Filing Date through September 30,2005.

|                                                                                                 |  |                        |         |         |  |  |
|-------------------------------------------------------------------------------------------------|--|------------------------|---------|---------|--|--|
| (In millions) (Unaudited)                                                             |  | CumulativeSince Filing |
| Balance, FilingDate                                                                             |  | $                      | 2,366.0 |    |
| Cash disbursementsand/or reclassifications under Bankruptcy Courtorders:                        |  |                   |    |    |
| Freight and distributionorder                                                                   |  |                   | (5.7    | )  |
| Trade accounts payableorder                                                                     |  |                   | (9.1    | )  |
| Settlements of noncorecontingencies                                                             |  |                   | (119.7  | )  |
| Other courtorders including employee wages and benefits, sales and use tax, andcustomerprograms |  |                   | (289.9  | )  |
| Expense/(income)items:                                                                          |  |                   |    |    |
| Interest on pre-petitionliabilities                                                             |  |                   | 190.7   |    |
| Employee-relatedaccruals                                                                        |  |                   | 22.9    |    |
| Change in estimate ofasbestos-relatedcontingencies                                              |  |                   | 744.8   |    |
| Change inestimate of environmentalcontingencies                                                 |  |                   | 240.6   |    |
| Change inestimate of income taxcontingencies                                                    |  |                   | (15.0   | )  |
| Balance sheetreclassifications                                                                  |  |                   | (25.7   | )  |
| Balance,end ofperiod                                                                            |  | $                      | 3,099.9 |    |
|                                                                                                 |

Additionalliabilities subject to compromise may arise due to the rejection ofexecutory contracts or unexpired leases, or as a result of theallowance of contingent or disputed claims.

Chapter 11 Expenses

|                                     |  |                                |      |                              |  |        |      |         |  |        |      |         |  |        |      |         |  |  |
|-------------------------------------|--|--------------------------------|------|------------------------------|--|--------|------|---------|--|--------|------|---------|--|--------|------|---------|--|--|
| (In millions) (Unaudited) |  | ThreeMonths EndedSeptember 30, |      | Nine MonthsEndedSeptember30, |
|                                |  | 2005                           |      | 2004                         |  | 2005   |      | 2004    |
| Legaland financial advisoryfees     |  | $                              | 11.2 |                         |  | $      | 4.9  |    |  | $      | 25.2 |    |  | $      | 13.0 |    |
| Interestincome                      |  |                           | (1.9 | )                       |  |   | (0.6 | )  |  |   | (5.3 | )  |  |   | (1.2 | )  |
| Chapter11 expenses,net              |  | $                              | 9.3  |                         |  | $      | 4.3  |    |  | $      | 19.9 |    |  | $      | 11.8 |    |
|                                     |

Pursuantto SOP 90-7, interest income earned on the Debtors' cash balancesmust be offset against Chapter  11 expenses.

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Condensed FinancialInformation of the Debtors

|                                                                                                                                                                             |  |                              |         |         |  |        |       |         |  |  |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|------------------------------|---------|---------|--|--------|-------|---------|--|--|
| W.R. Grace & Co. – Chapter 11 FilingEntities    Debtor-in-Possession     Statements ofOperations(In millions) (Unaudited) |  | NineMonths EndedSeptember30, |
|                                                                                                                                                                        |  | 2005                         |         | 2004    |
| Netsales, includingintercompany                                                                                                                                             |  | $                            | 952.6   |    |  | $      | 865.3 |    |
| Costof goods sold, including intercompany, exclusive of depreciation andamortization shown separatelybelow                                                                  |  |                         | 659.7   |    |  |   | 583.5 |    |
| Selling, generaland administrative expenses, exclusive of net pension expense shownseparatelybelow                                                                          |  |                         | 202.2   |    |  |   | 191.5 |    |
| Research anddevelopmentexpenses                                                                                                                                             |  |                         | 28.7    |    |  |   | 26.2  |    |
| Depreciation andamortization                                                                                                                                                |  |                         | 46.0    |    |  |   | 42.4  |    |
| Net pensionexpense                                                                                                                                                          |  |                         | 39.2    |    |  |   | 34.4  |    |
| Interest expenseand related financingcosts                                                                                                                                  |  |                         | 40.8    |    |  |   | 11.9  |    |
| Other (income)expense                                                                                                                                                       |  |                         | (65.5   | )  |  |   | (79.7 | )  |
| Provision forenvironmentalremediation                                                                                                                                       |  |                         | — |    |  |   | 20.0  |    |
|                                                                                                                                                                        |  |                         | 951.1   |    |  |   | 830.2 |    |
| Income(loss) before Chapter 11 expenses, income taxes, and equity in netincome of non-filingentities                                                                        |  |                         | 1.5     |    |  |   | 35.1  |    |
| Chapter 11expenses, net                                                                                                                                                     |  |                         | (19.7   | )  |  |   | (11.8 | )  |
| Benefitfrom (provision for) incometaxes                                                                                                                                     |  |                         | 4.2     |    |  |   | (21.7 | )  |
| Income(loss) before equity in net income of non-filingentities                                                                                                              |  |                         | (14.0   | )  |  |   | 1.6   |    |
| Equity in netincome of non-filingentities                                                                                                                                   |  |                         | 81.9    |    |  |   | 83.5  |    |
| **Netincome (loss)**                                                                                                                                                        |  | $                            | 67.9    |    |  | $      | 85.1  |    |
|                                                                                                                                                                             |

I-14

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|                                                                                                                                                                                       |  |                              |        |         |  |        |         |         |  |  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|------------------------------|--------|---------|--|--------|---------|---------|--|--|
| W.R. Grace & Co. – Chapter 11 Filing Entities    Debtor-in-Possession    Condensed Statements of CashFlows(In millions) (Unaudited) |  | Nine MonthsEndedSeptember30, |
|                                                                                                                                                                                  |  | 2005                         |        | 2004    |
| **OperatingActivities**                                                                                                                                                               |  |                         |   |    |  |   |    |    |
| Income (loss)before Chapter 11 expenses, income taxes, and equity in net income ofnon-filingentities                                                                                  |  | $                            | 1.5    |    |  | $      | 35.1    |    |
| Reconciliationto net cash provided by (used for) operatingactivities:                                                                                                                 |  |                         |   |    |  |   |    |    |
| Non-cash items,net                                                                                                                                                                    |  |                         | 82.1   |    |  |   | 19.4    |    |
| Contributionsto defined benefit pensionplans                                                                                                                                          |  |                         | (24.9  | )  |  |   | (23.1   | )  |
| Cash paidto settle noncorecontingencies                                                                                                                                               |  |                         | (119.7 | )  |  |   | — |    |
| Changesin other assets and liabilities, excluding the effect of businessesacquired/divested                                                                                           |  |                         | (52.8  | )  |  |   | (16.4   | )  |
| **Netcash provided by (used for) operatingactivities**                                                                                                                                |  |                         | (113.8 | )  |  |   | 15.0    |    |
| **Netcash provided by (used for) investingactivities**                                                                                                                                |  |                         | 50.1   |    |  |   | 41.1    |    |
| **Net cashprovided by (used for) financingactivities**                                                                                                                                |  |                         | (2.1   | )  |  |   | (4.0    | )  |
| **Netincrease (decrease) in cash and cashequivalents**                                                                                                                                |  |                         | (65.8  | )  |  |   | 52.1    |    |
| Cash andcash equivalents, beginning ofperiod                                                                                                                                          |  |                         | 340.0  |    |  |   | 120.5   |    |
| Cashand cash equivalents, end ofperiod                                                                                                                                                |  | $                            | 274.2  |    |  | $      | 172.6   |    |
|                                                                                                                                                                                       |

|                                                                                                                                                                   |  |                   |         |                  |  |        |         |        |  |  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|-------------------|---------|------------------|--|--------|---------|--------|--|--|
| W.R. Grace & Co. – Chapter 11 Filing Entities    Debtor-in-Possession    Balance Sheets(Inmillions) (Unaudited) |  | September 30,2005 |         | December 31,2004 |
| **ASSETS**                                                                                                                                                        |  |              |    |             |  |   |    |   |
| **CurrentAssets**                                                                                                                                                 |  |              |    |             |  |   |    |   |
| Cash and cashequivalents                                                                                                                                          |  | $                 | 274.2   |             |  | $      | 340.0   |   |
| Tradeaccounts receivable,net                                                                                                                                      |  |              | 119.6   |             |  |   | 111.6   |   |
| Receivables fromnon-filing entities,net                                                                                                                           |  |              | 56.1    |             |  |   | 37.8    |   |
| Inventories                                                                                                                                                       |  |              | 80.1    |             |  |   | 76.9    |   |
| Othercurrentassets                                                                                                                                                |  |              | 43.4    |             |  |   | 38.1    |   |
| **TotalCurrentAssets**                                                                                                                                            |  |              | 573.4   |             |  |   | 604.4   |   |
|                                                                                                                                                              |  |              |    |             |  |   |    |   |
| Propertiesand equipment, net                                                                                                                                      |  |              | 338.7   |             |  |   | 359.9   |   |
| Cashvalue of life insurance policies, net of policyloans                                                                                                          |  |              | 83.0    |             |  |   | 96.0    |   |
| Deferred incometaxes                                                                                                                                              |  |              | 665.8   |             |  |   | 666.2   |   |
| Asbestos-relatedinsurance                                                                                                                                         |  |              | 500.0   |             |  |   | 500.0   |   |
| Loansreceivable from non-filing entities,net                                                                                                                      |  |              | 315.2   |             |  |   | 358.6   |   |
| Investment innon-filingentities                                                                                                                                   |  |              | 513.2   |             |  |   | 468.4   |   |
| Otherassets                                                                                                                                                       |  |              | 109.4   |             |  |   | 101.7   |   |
| **TotalAssets**                                                                                                                                                   |  | $                 | 3,098.7 |             |  | $      | 3,155.2 |   |
|                                                                                                                                                                   |

I-15

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|                                                         |  |                   |         |                  |  |        |         |         |  |  |
|---------------------------------------------------------|--|-------------------|---------|------------------|--|--------|---------|---------|--|--|
| (In millions) (Unaudited)                     |  | September30, 2005 |         | December 31,2004 |
| **LIABILITIES ANDSHAREHOLDERS' EQUITY(DEFICIT)**        |  |              |    |             |  |   |    |    |
| **LiabilitiesNot Subject toCompromise**                 |  |              |    |             |  |   |    |    |
| Currentliabilities                                      |  | $                 | 197.5   |             |  | $      | 187.5   |    |
| Otherliabilities                                        |  |              | 375.4   |             |  |   | 381.8   |    |
| **TotalLiabilities Not Subject toCompromise**           |  |              | 572.9   |             |  |   | 569.3   |    |
|                                                    |  |              |    |             |  |   |    |    |
| **LiabilitiesSubject toCompromise**                     |  |              | 3,099.9 |             |  |   | 3,207.7 |    |
| **TotalLiabilities**                                    |  |              | 3,672.8 |             |  |   | 3,777.0 |    |
|                                                    |  |              |    |             |  |   |    |    |
| **Shareholders'Equity(Deficit)**                        |  |              | (574.1  | )           |  |   | (621.8  | )  |
| **TotalLiabilities and Shareholders' Equity (Deficit)** |  | $                 | 3,098.7 |             |  | $      | 3,155.2 |    |
|                                                         |

Inaddition to Grace's financial reporting obligations as prescribedby the U.S. Securities and Exchange Commission, the Debtors are alsorequired, under the rules and regulations of the Bankruptcy Code, toperiodically file certain statements and schedules and a monthlyoperating report with the Bankruptcy Court. This information isavailable to the public through the Bankruptcy Court. This informationis prepared in a format that may not be comparable to information inGrace's quarterly and annual financial statements as filed withthe SEC. The monthly operating reports are not audited, do not purportto represent the financial position or results of operations of Graceon a consolidated basis, and should not be relied on for suchpurposes.

|          |                            |
|----------|----------------------------|
| 3.  | Asbestos-RelatedLitigation |

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

Property Damage Litigation – Theplaintiffs in asbestos property damage lawsuits generally seek to havethe defendants pay for the cost of removing, containing or repairingthe asbestos-containing materials in the affected buildings. Eachproperty damage case is unique in that the age, type, size and use ofthe building, and the difficulty of asbestos abatement, if necessary,vary from structure to structure. Information regarding productidentification, the amount of product in the building, the age, type,size and use of the building, the legal status of the claimant, thejurisdictional history of prior cases and the court in which the caseis pending has provided meaningful guidance as to the range ofpotential costs.

Out of 380 asbestos property damage cases(which involved thousands of buildings) filed prior to the Filing Date,140 were dismissed without payment of any damages or settlementamounts; judgments were entered in favor of Grace in nine cases(excluding cases settled following appeals of judgments in favor ofGrace); judgments were entered in favor of the plaintiffs in eightcases (one of which is on appeal) for a total of $86.1 million; 207property damage cases were settled for a total of $696.8 million; and16 cases remain outstanding (including the one on appeal). Of the 16remaining cases, eight relate to ZAI and eight relate to a number offormer asbestos-containing products (two of which also are alleged toinvolve ZAI).

Approximately 4,300 additional property damageclaims were filed prior to the March 31, 2003 claims bar dateestablished by the Bankruptcy Court. (The bar date did not apply to ZAIclaims.) Such claims were reviewed in detail by Grace, categorized intoclaims with sufficient information to be 

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evaluated or claims that require additionalinformation and, where sufficient information existed, the estimatedcost of resolution was considered as part of Grace's recordedasbestos-related liability. (Approximately 140 claims did not containsufficient information to permit an evaluation.) Grace has objected tovirtually all property damage claims on a number of different bases,including: no authorization to file a claim; the claim was previouslysettled or adjudicated; no or insufficient documentation; failure toidentify a Grace product; the expiration of the applicable statute oflimitations and/or statute of repose, and/or laches; and a defense thatthe product in place is not hazardous. As of October 31, 2005,following the reclassification, withdrawal or expungement of claims,approximately 2,100 property damage claims remain outstanding.

Eight of the ZAI cases were filed as purported class action lawsuitsin 2000 and 2001. In addition, eight lawsuits were filed as purportedclass actions in 2004 and 2005 with respect to persons and homes inCanada. These cases seek damages and equitable relief, including theremoval, replacement and/or disposal of all such insulation. Theplaintiffs assert that this product is in millions of homes and thatthe cost of removal could be several thousand dollars per home. As aresult of the Filing, the eight U.S. cases have been transferred to theBankruptcy Court. Based on Grace's investigation of the claimsdescribed in these lawsuits, and testing and analysis of this productby Grace and others, Grace believes that the product was and continuesto be safe for its intended purpose and poses little or no threat tohuman health. The plaintiffs in the ZAI lawsuits (and the U.S.government in the Montana criminal proceeding described in Note 12)dispute Grace's position on the safety of ZAI. In July 2002, theBankruptcy Court approved special counsel to represent, at theDebtors' expense, the ZAI claimants in a proceeding to determinecertain threshold scientific issues regarding ZAI. On October 18, 2004,the Bankruptcy Court held a hearing on motions filed by the parties toaddress a number of important legal and factual issues regarding theZAI claims, and has taken the motions under advisement. The BankruptcyCourt has indicated that it may require further proceedings withrespect to the matters addressed in the motions and no decision has yetbeen rendered. Given the early stage of litigation, Grace'srecorded asbestos-related liability at September 30, 2005 assumes therisk of loss from ZAI litigation is not probable.

PersonalInjury Litigation – Asbestos personal injury claimantsallege adverse health effects from exposure to asbestos-containingproducts formerly manufactured by Grace. Claims are generally similarto each other, differing primarily in the type of asbestos-relatedillness allegedly suffered by the plaintiff. Claimants allege adversehealth effects from exposure to asbestos-containing products formerlymanufactured by Grace. Grace's cost to resolve such claims hasbeen influenced by numerous variables, including the solvency of otherformer producers of asbestos containing products, cross-claims byco-defendants, the rate at which new claims are filed, the jurisdictionin which the claims are filed, and the defense and disposition costsassociated with these claims.

Cumulatively through the FilingDate, 16,354 asbestos personal injury lawsuits involving approximately35,720 claims were dismissed without payment of any damages orsettlement amounts (primarily on the basis that Grace products were notinvolved) and approximately 55,489 lawsuits involving approximately163,698 claims were disposed of (through settlements and judgments) fora total of $645.6 million. As of the Filing Date, 129,191 claims forpersonal injury were pending against Grace. Grace believes that asubstantial number of additional personal injury claims would have beenreceived between the Filing Date and September 30, 2005 had such claimsnot been stayed by the Bankruptcy Court.

Asbestos-RelatedLiability – The total recorded asbestos-related liabilitybalance as of September 30, 2005 and December 31, 2004 was $1,700.0million and is included in "liabilities subject tocompromise." Grace adjusted its asbestos-related liabilityin the fourth quarter of 2004 based on its proposed plan ofreorganization as discussed in Note 2. The amount recorded at December31, 2004 includes the $1,613 million maximum amount reflected as acondition precedent to the Plan and $87 million related to pre-Chapter11 contractual settlements and judgments included in general unsecuredclaims.

Under the Plan, Grace is requesting that the BankruptcyCourt determine the aggregate dollar amount, on a net present valuebasis (the "Funding Amount"), that must befunded on the effective 

I-17

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date of the Plan into an asbestos trust(established under Section 524(g) of the Bankruptcy Code) to pay allallowed pending and future asbestos-related personal injury andproperty damage claims (including ZAI) and related trust administrationcosts and expenses on the later of the effective date of the Plan orwhen allowed. It is a condition to confirmation of the Plan that theBankruptcy Court shall conclude that the Funding Amount is not greaterthan $1,613 million. This amount, which should be sufficient to fundover $2 billion in pending and future claims, is based in part onGrace's evaluation of (1) existing but unresolved personal injuryand property damage claims, (2)  actuarially-based estimates offuture personal injury claims, (3) the risk of loss from ZAIlitigation, (4) proposed claim payments reflected in the Plan, and (5)the cost of the trust administration and litigation. This amount maynot be consistent with what the Bankruptcy Court may conclude would bea sufficient Funding Amount.

The Bankruptcy Court has issuedseparate case management orders for estimating liability for pendingand future personal injury claims and pending property damage claims,excluding ZAI claims. Both case management orders target estimationhearings in September 2006. For personal injury claims, the Court hasordered that all claimants with claims pending as of the Filing Datemust complete detailed questionnaires providing information on, amongother things, their medical condition, including diagnostic support,exposure to Grace and non-Grace asbestos-containing products,employment history, and pending lawsuits against other companies. Suchinformation will be analyzed by experts and presented to the BankruptcyCourt, including estimates of the number of personal injury claimsexpected to be filed in the future, as the basis for determining theFunding Amount in respect of all pending and future asbestos personalinjury claims.

For property damage claims, the case managementorder provides that estimation will be preceded by litigation oncertain common threshold issues affecting a substantial majority ofclaims. Such litigation will consist of determining the date by whichbuilding owners knew or should have known of the reported hazards ofasbestos-containing materials in their buildings, which would providethe basis for a statute of limitations defense, and the evidentiaryadmissibility of certain asbestos testing methodologies. During theperiod preceding the estimation hearing, Grace will also ask theBankruptcy Court to rule on Grace's specific objections toindividual claims and groups of claims. Claims not resolved or expungedthrough the common issue litigation or the objection process would bethe subject of an estimation hearing, which would provide the basis fora Bankruptcy Court determination of the Funding Amount in respect ofall property damage claims.

The Funding Amount will be primarilya function of the number of allowed property damage and personal injuryclaims, and the amount payable per claim. Through the estimationprocess, Grace will seek to demonstrate that most claims should not beallowed because they fail to establish any material property damage,health impairment or significant occupational exposure to asbestos fromGrace's operations or products. If the Bankruptcy Court agreeswith Grace's position on the number of, and the amounts to bepaid in respect of, allowed personal injury and property damage claims,then Grace believes that the Funding Amount could be less than $1,613million. However, this outcome is highly uncertain and will depend on anumber of Bankruptcy Court rulings favorable to Grace'sposition.

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

However,as Grace is willing to proceed with confirmation of the Plan with aFunding Amount of up to $1,613 million (assuming that other conditionsprecedent to confirmation of the Plan are satisfied, including theavailability of the payment from Cryovac directly to the asbestos trustunder the settlement agreement described in Note 2), during the fourthquarter of 2004, Grace accrued and took a charge of $714.8 million toincrease its recorded asbestos-related liability to reflect the maximumamount allowed as a condition precedent under the Plan. This amount,plus $87.0 million for 

I-18

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pre-Chapter 11 contractual settlements andjudgments, brings the total recorded asbestos-related liability as ofDecember 31, 2004 and September 30, 2005 to $1,700 million. Anydifferences between the Plan as filed and as approved for confirmationcould fundamentally change the accounting measurement of Grace'sasbestos-related liability and that change could be material.

Insurance Rights – Grace previously purchasedinsurance policies that provide coverage for years 1962 to 1985 withrespect to asbestos-related lawsuits and claims. Since 1985, insurancecoverage for asbestos-related liabilities has not been commerciallyavailable to Grace.

With one exception, coverage disputesregarding Grace's primary insurance policies have been settled,and the settlement amounts paid in full. Grace's excess coverageis for loss above certain levels. The levels vary from policy topolicy, creating "layers" of excess coverage,some of which are triggered before others. As of September 30, 2005,after subtracting previous reimbursements by insurers and allowing fordiscounts pursuant to certain settlement agreements, there remainsapproximately $978  million of excess coverage from more than 30presently solvent insurers.

Grace has entered into settlementagreements with various excess insurance carriers. These settlementsinvolve amounts paid and to be paid to Grace. The unpaid maximumaggregate amount available under these settlement agreements isapproximately $495 million. With respect to asbestos-related personalinjury claims, the settlement agreements generally require that theclaims be spread over the claimant's exposure period and thateach insurer pay a pro rata portion of each claim based on the amountof coverage provided during each year of the total exposure period.

Presently, Grace has no agreements in place with insurers withrespect to approximately $483  million of excess coverage, whichis at layers of coverage that have not yet been triggered, but certainlayers would be triggered if the Plan were approved at the recordedasbestos-related liability of $1,700 million. Grace believes that theZAI claims also are covered under the settlement agreements andunsettled policies discussed above to the extent they relate toinstallations of ZAI occurring after July  1, 1973.

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

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

|          |                                |
|----------|--------------------------------|
| 4.  | Acquisitions and JointVentures |

During the first nine months of 2005, Grace completedtwo business combinations for a total cash cost of $2.5 million asfollows:

|              |                                                                                                                                                                                                           |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | In February 2005, Graceacquired certain assets of Midland Dexter Venezuela, S.A. (Midevensa).Midevensa supplied coatings and sealants for rigid packaging in thelocal and export markets of LatinAmerica. |

|              |                                                                                                                                                                                                                                                                                |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | In March 2005, Grace acquiredcertain assets relating to the concrete admixtures business of PerstorpPeramin AB ("Perstorp") located in Sweden.Perstorp supplied specialty chemicals and materials to the constructionindustry in Sweden and other Northern European countries. |

Duringthe first nine months of 2004, Grace completed three businesscombinations for a total cash cost of $53.0 million asfollows:

|              |                                                                                                                                                                    |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | In July 2004, Grace acquiredGROM ANALYTIK + HPLC GmbH, a leader in column packing technology andservices designed for high performance small moleculeapplications. |

|              |                                                                                                                                   |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------|
| •  | In August 2004, Graceacquired Alltech International Holdings, Inc., a global manufacturerand supplier of chromatography products. |

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|              |                                                                                                                                                                                               |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | In August 2004,Grace acquired Pieri Benelux NV. Pieri Benelux had been the exclusivedistributor of Grace's line of Pieri products for architecturalconcrete in Benelux since the early 1980s. |

Goodwill recognizedin the 2004 transactions amounted to $5.1 million, of which $3.6million was assigned to Davison Chemicals and $1.5 million was assignedto Performance Chemicals. No goodwill was recognized in the 2005transactions.

|          |                       |
|----------|-----------------------|
| 5.  | Other (Income)Expense |

Components of other (income) expense are asfollows:

|                                                               |  |                                |         |                              |  |        |         |         |  |        |         |         |  |        |         |         |  |  |
|---------------------------------------------------------------|--|--------------------------------|---------|------------------------------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
| Other(Income) Expense(In millions)(Unaudited)                 |  | Three Months EndedSeptember30, |         | Nine MonthsEndedSeptember30, |
|                                                          |  | 2005                           |         | 2004                         |  | 2005   |         | 2004    |
| Incomefrom insurancesettlements                               |  | $                              | (4.2    | )                       |  | $      | — |    |  | $      | (24.5   | )  |  | $      | — |    |
| Investment(income)loss                                        |  |                           | 0.3     |                         |  |   | 0.4     |    |  |   | (1.6    | )  |  |   | (1.8    | )  |
| Interestincome                                                |  |                           | (0.8    | )                       |  |   | (0.7    | )  |  |   | (2.4    | )  |  |   | (3.0    | )  |
| Net(gain) loss on sales of investments and disposals ofassets |  |                           | 1.4     |                         |  |   | (0.2    | )  |  |   | 0.9     |    |  |   | 0.1     |    |
| Tollingrevenue                                                |  |                           | (0.1    | )                       |  |   | (0.2    | )  |  |   | (0.7    | )  |  |   | (0.7    | )  |
| Currencytranslation – intercompanyloan                  |  |                           | 1.1     |                         |  |   | (2.3    | )  |  |   | 32.5    |    |  |   | (1.2    | )  |
| Valueof currencycontracts                                     |  |                           | (1.1    | )                       |  |   | 2.3     |    |  |   | (32.3   | )  |  |   | 11.6    |    |
| Othercurrency transactioneffects                              |  |                           | 0.3     |                         |  |   | 2.8     |    |  |   | 0.8     |    |  |   | 2.2     |    |
| Netgain on litigationsettlement                               |  |                           | — |                         |  |   | (50.0   | )  |  |   | — |    |  |   | (50.0   | )  |
| Othermiscellaneousincome                                      |  |                           | (1.3    | )                       |  |   | (2.6    | )  |  |   | (7.1    | )  |  |   | (6.3    | )  |
| Totalother (income)expense                                    |  | $                              | (4.4    | )                       |  | $      | (50.5   | )  |  | $      | (34.4   | )  |  | $      | (49.1   | )  |
|                                                               |

Other(income) expense for the nine-month period ended September 30, 2005includes $24.5 million paid by insurance carriers with respect tocoverage for past environmental remediation costs and asbestos-relatedliability under liquidation arrangements or dispute settlements.

In March 2004, Grace began accounting for currency fluctuations on a€293 million intercompany loan between Grace'ssubsidiaries in the United States and Germany as a component ofoperating results instead of as a component of other comprehensiveincome. The change was prompted by new tax laws in Germany andGrace's cash flow planning for its Chapter 11 reorganization,which indicated that it is no longer reasonable to consider this loanas part of the permanent capital structure in Germany. In May 2004,Grace entered into a series of foreign currency forward contracts tomitigate future currency fluctuations on the remaining loan balance.These contracts were extended in June 2005 and have varying rates onnotional amounts that coincide with loan repayments due periodicallythrough December 2008. No loan repayments have been made in 2005. Forthe nine months ended September 30, 2005, a $32.3 million contract gainwas recognized, offset by a $32.5 million foreign currency loss. Theseforward contracts are viewed as risk management instruments by Graceand are not used for trading or speculative purposes.

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|          |                             |
|----------|-----------------------------|
| 6.  | Other BalanceSheet Accounts |

|                                                                                                  |  |                  |        |                  |  |        |        |         |  |  |
|--------------------------------------------------------------------------------------------------|--|------------------|--------|------------------|--|--------|--------|---------|--|--|
| (In millions) (Unaudited)                                                              |  | September30,2005 |        | December 31,2004 |
| **Inventories**                                                                                  |  |             |   |             |  |   |   |    |
| Rawmaterials                                                                                     |  | $                | 61.4   |             |  | $      | 62.4   |    |
| Inprocess                                                                                        |  |             | 38.8   |             |  |   | 36.1   |    |
| Finishedproducts                                                                                 |  |             | 185.2  |             |  |   | 166.7  |    |
| Generalmerchandise                                                                               |  |             | 32.0   |             |  |   | 32.2   |    |
| Less:    Adjustmentof certain inventories to a last-in/first-out (LIFO)basis |  |             | (56.3  | )           |  |   | (49.1  | )  |
|                                                                                             |  | $                | 261.1  |             |  | $      | 248.3  |    |
| **OtherAssets**                                                                                  |  |             |   |             |  |   |   |    |
| Deferred pensioncosts                                                                            |  | $                | 109.9  |             |  | $      | 119.5  |    |
| Deferredcharges                                                                                  |  |             | 58.4   |             |  |   | 49.9   |    |
| Long-termreceivables, less allowances of $0.7 (2004 -$0.8)                                       |  |             | 7.9    |             |  |   | 8.3    |    |
| Patents, licenses andother intangible assets,net                                                 |  |             | 86.0   |             |  |   | 96.3   |    |
| Pension-unamortizedprior servicecost                                                             |  |             | 15.3   |             |  |   | 15.3   |    |
| Investments inunconsolidated affiliates andother                                                 |  |             | 0.6    |             |  |   | 0.7    |    |
|                                                                                             |  | $                | 278.1  |             |  | $      | 290.0  |    |
| **OtherCurrent Liabilities**                                                                     |  |             |   |             |  |   |   |    |
| Accruedcompensation                                                                              |  | $                | 61.9   |             |  | $      | 92.9   |    |
| Deferredtax liability                                                                            |  |             | 1.2    |             |  |   | 1.2    |    |
| Customervolume rebates                                                                           |  |             | 29.8   |             |  |   | 31.7   |    |
| Accruedcommissions                                                                               |  |             | 10.0   |             |  |   | 11.0   |    |
| Accruedreorganization fees                                                                       |  |             | 17.2   |             |  |   | 11.4   |    |
| Otheraccruedliabilities                                                                          |  |             | 103.8  |             |  |   | 73.3   |    |
|                                                                                             |  | $                | 223.9  |             |  | $      | 221.5  |    |
|                                                                                                  |

|          |               |
|----------|---------------|
| 7.  | LifeInsurance |

Grace is the beneficiary of life insurance policieson certain current and former employees with a net cash surrender valueof $83.0 million and $96.0 million at September 30, 2005 and December31, 2004, respectively. The policies were acquired to fund variousemployee benefit programs and other long-term liabilities and arestructured to provide cash flow (primarily tax-free) over an extendednumber of years.

The following tables summarize activity inthese policies for the nine months ended September  30, 2005 and2004, and the components of net cash value at September 30, 2005 andDecember 31,2004:

|                                                                                        |  |                               |       |         |  |        |         |         |  |  |
|----------------------------------------------------------------------------------------|--|-------------------------------|-------|---------|--|--------|---------|---------|--|--|
| Life Insurance –    Activity Summary(In millions)(Unaudited) |  | Nine Months EndedSeptember30, |
|                                                                                   |  | 2005                          |       | 2004    |
| Earningson policyassets                                                                |  | $                             | 4.1   |    |  | $      | 24.0    |    |
| Intereston policyloans                                                                 |  |                          | (2.5  | )  |  |   | (22.2   | )  |
| Premiums                                                                               |  |                          | 1.8   |    |  |   | 2.4     |    |
| Policyloan repayments                                                                  |  |                          | 0.5   |    |  |   | 3.2     |    |
| Proceedsfrom termination of life insurancepolicies                                     |  |                          | (14.8 | )  |  |   | — |    |
| Netinvestingactivity                                                                   |  |                          | (2.2  | )  |  |   | (1.1    | )  |
| Changein net cashvalue                                                                 |  | $                             | (13.1 | )  |  | $      | 6.3     |    |
| Tax-freeproceedsreceived                                                               |  | $                             | 2.2   |    |  | $      | 12.5    |    |
|                                                                                        |

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|                                                     |  |                  |       |                 |  |        |         |         |  |  |
|-----------------------------------------------------|--|------------------|-------|-----------------|--|--------|---------|---------|--|--|
| Componentsof Net CashValue(In millions) (Unaudited) |  | September30,2005 |       | December31,2004 |
| Gross cashvalue                                     |  | $                | 107.2 |            |  | $      | 484.2   |    |
| Principal– policyloans                        |  |             | (23.9 | )          |  |   | (368.2  | )  |
| Accruedinterest – policyloans                 |  |             | (0.3  | )          |  |   | (20.0   | )  |
| Netcashvalue                                        |  | $                | 83.0  |            |  | $      | 96.0    |    |
| Insurancebenefits inforce                           |  | $                | 194.2 |            |  | $      | 2,191.3 |    |
|                                                     |

Grace'sfinancial statements display income statement activity and balancesheet amounts on a net basis, reflecting the contractualinterdependency of policy assets and liabilities.

In January2005, Grace surrendered and terminated most of these life insurancepolicies and received $14.8 million of net cash value from thetermination. As a result of the termination, gross cash value of thepolicies was reduced by approximately $381 million and policy loans ofapproximately $365 million were satisfied. Grace's insurancebenefits in force was reduced by approximately $2 billion. See Note 12for a discussion of a settlement agreement with the Internal RevenueService ("IRS") with respect to taxcontingencies related to these life insurance policies and the taxconsequences of terminating suchpolicies.

|          |      |
|----------|------|
| 8.  | Debt |

|                                                        |  |                  |         |                 |  |        |         |         |  |  |
|--------------------------------------------------------|--|------------------|---------|-----------------|--|--------|---------|---------|--|--|
| Componentsof Debt(In millions) (Unaudited)             |  | September30,2005 |         | December31,2004 |
| **Debt payablewithin one year**                        |  |             |    |            |  |   |    |    |
| Othershort-termborrowings                              |  | $                | 2.7     |            |  | $      | 12.4    |    |
|                                                   |  | $                | 2.7     |            |  | $      | 12.4    |    |
| **Debtpayable after one year**                         |  |             |    |            |  |   |    |    |
| DIPfacility                                            |  | $                | — |            |  | $      | — |    |
| Otherlong-termborrowings                               |  |             | 0.5     |            |  |   | 1.1     |    |
|                                                   |  | $                | 0.5     |            |  | $      | 1.1     |    |
|                                                   |  |             |    |            |  |   |    |    |
| **DebtSubject to Compromise**                          |  |             |    |            |  |   |    |    |
| Bankborrowings                                         |  | $                | 500.0   |            |  | $      | 500.0   |    |
| Otherborrowings                                        |  |             | 14.4    |            |  |   | 15.0    |    |
| Accruedinterest                                        |  |             | 160.3   |            |  |   | 130.8   |    |
|                                                   |  | $                | 674.7   |            |  | $      | 645.8   |    |
| Annualizedweighted average interest rates on totaldebt |  |             | 6.0     | %          |  |   | 6.0     | %  |
|                                                        |

InApril 2001, the Debtors entered into the DIP facility for a two-yearterm in the aggregate amount of $250 million. The DIP facility issecured by a priority lien on substantially all assets of the Debtors,and bears interest based on the London Interbank Offered Rate. TheDebtors have extended the term of the DIP facility through April 1,2006. Grace had no outstanding borrowings under the DIP facility as ofSeptember 30, 2005; however, $29.9 million of standby letters of creditwere issued and outstanding under the facility. The letters of credit,which reduce available funds under the facility, were issued primarilyfor trade-related matters such as performance bonds, and certaininsurance and environmentalmatters.

|          |                               |
|----------|-------------------------------|
| 9.  | Shareholders' Equity(Deficit) |

The Company is authorized to issue 300,000,000 sharesof common stock. Of the common stock unissued on September 30, 2005,approximately 7,094,146 shares were reserved for issuance pursuant tostock option and other stock incentive plans. Since the Filing Date,Grace has not granted any stock options.

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

|           |                    |
|-----------|--------------------|
| 10.  | Earnings Per Share |

The following table shows a reconciliation of the numerators anddenominators used in calculating basic and diluted earnings pershare.

|                                                                     |  |                                |        |                               |  |        |        |        |  |        |        |        |  |        |        |        |  |  |
|---------------------------------------------------------------------|--|--------------------------------|--------|-------------------------------|--|--------|--------|--------|--|--------|--------|--------|--|--------|--------|--------|--|--|
| EarningsPer Share(In millions, except per share amounts)(Unaudited) |  | Three Months EndedSeptember30, |        | Nine Months EndedSeptember30, |
|                                                                |  | 2005                           |        | 2004                          |  | 2005   |        | 2004   |
| **Numerators**                                                      |  |                           |   |                          |  |   |   |   |  |   |   |   |  |   |   |   |
| Netincome                                                           |  | $                              | 32.1   |                          |  | $      | 48.0   |   |  | $      | 67.9   |   |  | $      | 85.1   |   |
| **Denominators**                                                    |  |                           |   |                          |  |   |   |   |  |   |   |   |  |   |   |   |
| Weightedaverage common shares – basiccalculation              |  |                           | 66.9   |                          |  |   | 65.8   |   |  |   | 66.8   |   |  |   | 65.7   |   |
| Dilutiveeffect of employee stockoptions                             |  |                           | 0.3    |                          |  |   | 0.5    |   |  |   | 0.5    |   |  |   | 0.3    |   |
| Weightedaverage common shares –dilutedcalculation             |  |                           | 67.2   |                          |  |   | 66.3   |   |  |   | 67.3   |   |  |   | 66.0   |   |
|                                                                |  |                           |   |                          |  |   |   |   |  |   |   |   |  |   |   |   |
| **Basicearnings pershare**                                          |  | $                              | 0.48   |                          |  | $      | 0.73   |   |  | $      | 1.02   |   |  | $      | 1.30   |   |
| **Dilutedearnings per share**                                       |  | $                              | 0.48   |                          |  | $      | 0.72   |   |  | $      | 1.01   |   |  | $      | 1.29   |   |
|                                                                     |

|           |                            |
|-----------|----------------------------|
| 11.  | ComprehensiveIncome (Loss) |

The table below presents the pre-tax, tax andafter tax amounts of Grace's other comprehensive income (loss)for the three months and nine months ended September 30, 2005 and2004:

|                                                                                     |  |               |      |            |  |                 |         |        |  |   |      |         |  |  |
|-------------------------------------------------------------------------------------|--|---------------|------|------------|--|-----------------|---------|--------|--|---|------|---------|--|--|
| ThreeMonths Ended    September 30, 2005(In millions)(Unaudited) |  | Pre-TaxAmount |      | TaxBenefit |  | After-TaxAmount |
| Foreigncurrency translationadjustments                                              |  | $             | (0.9 | )     |  | $               | — |   |  | $ | (0.9 | )  |
| Othercomprehensive income(loss)                                                     |  | $             | (0.9 | )     |  | $               | — |   |  | $ | (0.9 | )  |
|                                                                                     |

|                                                                                    |  |               |       |            |  |                 |         |        |  |   |       |         |  |  |
|------------------------------------------------------------------------------------|--|---------------|-------|------------|--|-----------------|---------|--------|--|---|-------|---------|--|--|
| Nine MonthsEnded    September 30, 2005(In millions)(Unaudited) |  | Pre-TaxAmount |       | TaxBenefit |  | After-TaxAmount |
| Foreigncurrency translationadjustments                                             |  | $             | (23.3 | )     |  | $               | — |   |  | $ | (23.3 | )  |
| Othercomprehensive income(loss)                                                    |  | $             | (23.3 | )     |  | $               | — |   |  | $ | (23.3 | )  |
|                                                                                    |

|                                                                                     |  |               |     |            |  |                 |         |        |  |   |     |        |  |  |
|-------------------------------------------------------------------------------------|--|---------------|-----|------------|--|-----------------|---------|--------|--|---|-----|--------|--|--|
| ThreeMonths Ended    September 30, 2004(In millions)(Unaudited) |  | Pre-TaxAmount |     | TaxBenefit |  | After-TaxAmount |
| Foreigncurrency translationadjustments                                              |  | $             | 2.9 |       |  | $               | — |   |  | $ | 2.9 |   |
| Othercomprehensive income(loss)                                                     |  | $             | 2.9 |       |  | $               | — |   |  | $ | 2.9 |   |
|                                                                                     |

|                                                                                    |  |               |       |            |  |                 |         |        |  |        |       |         |  |  |
|------------------------------------------------------------------------------------|--|---------------|-------|------------|--|-----------------|---------|--------|--|--------|-------|---------|--|--|
| NineMonths Ended    September 30, 2004(In millions)(Unaudited) |  | Pre-TaxAmount |       | TaxBenefit |  | After-TaxAmount |
| Minimumpensionliability                                                            |  | $             | (54.3 | )     |  | $               | 19.0    |   |  | $      | (35.3 | )  |
| Foreigncurrency translationadjustments                                             |  |          | (4.6  | )     |  |            | — |   |  |   | (4.6  | )  |
| Othercomprehensive income(loss)                                                    |  | $             | (58.9 | )     |  | $               | 19.0    |   |  | $      | (39.9 | )  |
|                                                                                    |

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The table below presents the componentsof Grace's accumulated other comprehensive income (loss) atSeptember 30, 2005 and December 31, 2004:

|                                                                                    |  |                   |        |                 |  |        |        |         |  |  |
|------------------------------------------------------------------------------------|--|-------------------|--------|-----------------|--|--------|--------|---------|--|--|
| Componentsof Accumulated Other Comprehensive Income (Loss)(In millions)(Unaudited) |  | September 30,2005 |        | December31,2004 |
| Foreign currencytranslation                                                        |  | $                 | (25.8  | )          |  | $      | (2.5   | )  |
| Minimumpensionliability                                                            |  |              | (347.5 | )          |  |   | (347.5 | )  |
| Accumulatedother comprehensive income(loss)                                        |  | $                 | (373.3 | )          |  | $      | (350.0 | )  |
|                                                                                    |

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

The decline inequity market returns in 2000-2002, coupled with a decline in interestrates from 2000-2004, as well as updated assumptions for expectedlife-spans and the longevity of Grace's active work force,created a shortfall between the accounting measurement of Grace'sobligations under certain of its qualified pension plans for U.S.employees and the market value of dedicated pension assets. Thiscondition required Grace to record a minimum pension liability forthese plans equal to the funding shortfall and to offset relateddeferred costs against shareholders' equity (deficit) at December31, 2004.

|           |                                       |
|-----------|---------------------------------------|
| 12.  | Commitments and ContingentLiabilities |

Asbestos-Related Litigation – SeeNote 3

Environmental Remediation – Grace issubject to loss contingencies resulting from extensive and evolvingfederal, state, local and foreign environmental laws and regulationsrelating to the generation, storage, handling, discharge anddisposition of hazardous wastes and other materials. Grace accrues foranticipated costs associated with investigative and remediation effortswhere an assessment has indicated that a probable liability has beenincurred and the cost can be reasonably estimated. These accruals donot take into account any discounting for the time value of money.

Grace's environmental liabilities are reassessed whenevercircumstances become better defined or remediation efforts and theircosts can be better estimated. These liabilities are evaluated based oncurrently available information, including the progress of remedialinvestigation at each site, the current status of discussions withregulatory authorities regarding the method and extent of remediationat each site, existing technology, prior experience in contaminatedsite remediation and the apportionment of costs among potentiallyresponsible parties. Grace expects that the funding of environmentalremediation activities will be affected by the Chapter 11proceedings.

At September 30, 2005, Grace's estimatedliability for environmental investigative and remediation costs totaled$318.9 million, as compared with $345.0 million at December 31, 2004.The amount is based on funding and/or remediation agreements in placeand Grace's best estimate of its cost for sites not subject to aformal remediation plan. Grace's estimated environmentalliabilities are included in "liabilities subject tocompromise."

Net cash expenditures charged againstpreviously established reserves for the nine months ended September 30,2005 and 2004 were $26.1 million and $6.1 million, respectively. Thedecrease in the liability in 2005 was primarily due to a $21.4 millionpayment made in settlement of remediation liability at a formerly ownedsite.

Vermiculite Related Matters

From the1920's until 1992, Grace (beginning in 1963) and previous ownersconducted vermiculite mining and related activities near Libby,Montana. The mined vermiculite ore contained varying 

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amounts of asbestos as an impurity, almostall of which was removed during processing. Expanded vermiculite wasused in products such as fireproofing, insulation and potting soil.

EPA Lawsuit – In November 1999, Region 8 of theEnvironmental Protection Agency ("EPA") beganan investigation into alleged excessive levels of asbestos-relateddisease in the Libby population related to these former miningactivities. This investigation led the EPA to undertake additionalinvestigative activity and to carry out response actions in and aroundLibby. On March 30, 2001, the EPA filed a lawsuit in U.S. DistrictCourt for the District of Montana, Missoula Division (United Statesv. W. R. Grace & Company et al.) under the ComprehensiveEnvironmental Response, Compensation and Liability Act for the recoveryof costs allegedly incurred by the United States in response to therelease or threatened release of asbestos in the Libby, Montana arearelating to such former mining activities. These costs include cleaningand/or demolition of contaminated buildings, excavation and removal ofcontaminated soil, health screening of Libby residents and former mineworkers, and investigation and monitoring costs. In this action, theEPA also sought a declaration of Grace's liability that would bebinding in future actions to recover further response costs.

InDecember 2002, the District Court granted the United States'motion for partial summary judgment on a number of issues that limitedGrace's ability to challenge the EPA's response actions. InJanuary 2003, a trial was held on the remainder of the issues, whichprimarily involved the reasonableness and adequacy of documentation ofthe EPA's cost recovery claims through December 31, 2001. OnAugust 28, 2003, the District Court issued a ruling in favor of theUnited States that requires Grace to reimburse the government for $54.5million (plus interest) in costs expended through December 2001, andfor all appropriate future costs to complete the clean-up. Graceappealed the court's ruling to the Ninth Circuit Court ofAppeals, which heard oral argument on February 7, 2005. No decision hasbeen issued on the appeal.

As a result of the District Courtruling and Grace's evaluation of estimated costs for remediationin and around Libby and at vermiculite processing sites currently orformerly operated by Grace, Grace's total estimated liability forvermiculite-related remediation at September 30, 2005 and December 31,2004 was $204.0 million and $204.2 million, respectively. Grace'sestimate of costs is based on public comments regarding the EPA'sspending plans, discussions of spending forecasts with EPArepresentatives, analysis of other information made available from theEPA, and evaluation of probable remediation costs at vermiculiteprocessing sites. However, the EPA's cost estimates haveincreased regularly and substantially over the course of this clean-up.Consequently, as the EPA's spending on these matters increases,Grace's liability for remediation will increase.

Montana Criminal Proceeding – On February 7, 2005,the United States Department of Justice announced the unsealing of a10-count grand jury indictment against Grace and seven current orformer senior level employees (United States of America v. W. R.Grace & Co. et al) relating to Grace's former vermiculitemining and processing activities in Libby, Montana. The indictmentaccuses the defendants of (1) conspiracy to violate environmental lawsand obstruct federal agency proceedings; (2) violations of the federalClean Air Act; (3) wire fraud in connection with the sale of allegedlycontaminated properties; and (4) obstruction of justice. The U.S.District Court for the District of Montana has entered a schedulingorder setting a trial date of September 11, 2006.

Gracepurchased the Libby mine in 1963 and operated it until 1990;vermiculite processing activities continued until 1992. The grand jurycharges that the conspiracy took place from 1976 to 2002 and alsocharges that the alleged endangerment to the areas surrounding Libbycontinues to the present day. According to the U.S. Department ofJustice, Grace could be subject to fines in an amount equal to twicethe after-tax profit earned from its Libby operations or twice thealleged loss suffered by Libby victims, plus additional amounts forrestitution to victims. The indictment alleges that such after taxprofits were $140 million. Grace has categorically denied any criminalwrongdoing and intends to vigorously defend itself at trial.

TheU.S. Bankruptcy Court previously granted Grace's request toadvance legal and defense costs to the employees, subject to areimbursement obligation if it is later determined that the employeesdid 

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not meet the standards for indemnificationset forth under the appropriate state corporate law. For the nine-monthperiod ended September 30, 2005, total expense for Grace and theemployees was $12.8 million.

Grace is unable to assess whetherthe indictment, or any conviction resulting therefrom, will have amaterial adverse effect on the results of operations or financialcondition of Grace or affect Grace's bankruptcy proceedings.However, Grace expects legal fees for this matter could be severalmillion dollars per quarter through the trial date. Such costs will beexpensed as incurred.

New Jersey Lawsuit – OnJune 1, 2005, the New Jersey Department of Environmental Protection("DEP") filed a lawsuit against Grace and twoemployees seeking civil penalties for alleged misrepresentations andfalse statements made in a Preliminary Assessment/Site InvestigationReport and Negative Declarations submitted by Grace to the DEP in 1995pursuant to the New Jersey Industrial Site Recovery Act. Gracesubmitted the Report, which was prepared by an independentenvironmental consultant, in connection with the closing ofGrace's former plant in Hamilton Township, New Jersey. Grace isalso aware that the State of New Jersey and U.S. Department of Justiceeach are conducting criminal investigations related to Grace'sformer operations of such plant.

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

Grace is unable at this time to assess the effect of thevermiculite-related lawsuits or pending investigations on Grace'sresults of operations, cash flows, or liquidity, or on its bankruptcyproceeding.

Non-Vermiculite Related Matters

AtSeptember 30, 2005 and December 31, 2004, Grace's estimatedliability for remediation of sites not related to its formervermiculite mining and processing activities was $114.9 million and$140.8 million, respectively. This liability relates to Grace'scurrent and former operations, including its share of liability foroff-site disposal at facilities where it has been identified as apotentially responsible party. Grace's estimated liability isbased upon an evaluation of claims for which sufficient information wasavailable. As Grace receives new information and continues its claimsevaluation process, its estimated liability may change materially. Thedecrease in the liability in 2005 was primarily due to a $21.4 millionpayment made in settlement of remediation liability at a formerly ownedsite.

Tax Matters – On May 19, 2005, Gracereceived a revised examination report (the "ExaminationReport") from the Internal Revenue Service (the"IRS") for the 1993-1996 tax periodsasserting, in the aggregate, approximately $77.3 million of proposedtax adjustments, plus accrued interest. The most significant issueaddressed in the Examination Report concerns corporate-owned lifeinsurance ("COLI") policies, as discussedbelow. Grace reached an agreement with the IRS with respect to allproposed tax adjustments in the Examination Report with the exceptionof approximately $7.0 million of proposed adjustments relating toresearch and development credits. On April 14, 2005, Grace made a $90million payment to the IRS with respect to federal taxes and accruedinterest for the 1993-1996 tax periods, consistent with the revisedExamination Report. On June 17, 2005, Grace filed its protest withrespect to the R&D matter with the IRS Office of Appeals and isawaiting a response from the IRS.

With respect to COLI, in 1988and 1990, Grace acquired COLI policies and funded policy premiums inpart using loans secured against policy cash surrender value. Graceclaimed a total of approximately $258 million in deductionsattributable to interest accrued on such loans through the 1998 taxyear, after which such deductions were no longer permitted by law. OnJanuary 20, 2005, Grace terminated the COLI policies and Grace,Fresenius, Sealed Air and the IRS entered into a COLI ClosingAgreement. Under the COLI Closing Agreement, the government allowed20% of the aggregate amount of the COLI interest deductions andGrace owed federal income tax and interest with respect to theremaining 80% of the COLI interest deductions disallowed. Thefederal tax liability resulting from the COLI settlement isapproximately $52.5 million, $10.4 million of which was paid in 2000 in

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connection with the 1990-1992 tax audit, and$30.8 million of which was paid in the April 14, 2005 payment inconnection with the 1993-1996 federal tax audit discussed above. Theremaining approximately $11.3 million of additional tax liability willbe satisfied in connection with the 1997 and 1998 federal tax audits,which are still under examination by the IRS. The COLI ClosingAgreement also provides that, with respect to the termination of theCOLI policies, Grace will include 20% of the gain realized intaxable income, with the government exempting 80% of such gainfrom tax. As a result of the termination, Grace received $14.8 millionin cash proceeds and will record income for tax purposes ofapproximately $60 million in 2005. It is anticipated that Grace willapply its net operating loss carryforwards to offset the taxable incomegenerated from terminating the COLI policies, although alternativeminimum taxes may apply.

As a consequence of having finallydetermined federal tax adjustments for the 1990-1996 tax periods, Gracebecame liable for additional state taxes plus interest accrued thereon.Grace's estimate for state taxes and interest to be paid forthese years is approximately $18.3 million, of which it has alreadypaid approximately $6.3 million. The remainder is expected to be paidin the near future.

Grace's federal tax returns covering1997 and later years are either under examination by the IRS or openfor future examination. In connection with the years 1997 – 2001that are currently under examination, during the third quarter Gracereached agreement with the IRS on a number of issues. After taking allissues into consideration, Grace reduced its recorded liabilitiesduring the third quarter by $16 million. Grace believes that theremaining recorded tax liability is adequate to cover the impact ofprobable tax return adjustments at September 30, 2005.

The IRShas assessed additional federal income tax withholding and FederalInsurance Contributions Act taxes plus interest and related penaltiesfor calendar years 1993 through 1998 against a Grace subsidiary thatformerly operated a temporary staffing business for nurses and otherhealth care personnel. The assessments, aggregating $61.9 million, weremade in connection with a meal and incidental expense per diem plan fortraveling health care personnel, which was in effect through 1999, theyear in which Grace sold the business. (The statute of limitations hasexpired with respect to 1999.) The IRS contends that certain per diemreimbursements should have been treated as wages subject to employmenttaxes and federal income tax withholding. Grace contends that its perdiem and expense allowance plans were in accordance with statutory andregulatory requirements, as well as other published guidance from theIRS. Grace has a right to indemnification from its former partner inthe business for approximately 36% of any tax liability(including interest thereon) for the period from July 1996 throughDecember 1998. The matter is currently pending in the United StatesCourt of Claims. Grace has tentatively agreed with the Department ofJustice and IRS on a settlement amount and certain other terms thatwould resolve the matter. The preliminary settlement is subject to theexecution of written closing agreements with the IRS and a writtensettlement agreement with the Department of Justice, and to BankruptcyCourt approval.

On October 22, 2004, President Bush signed theAmerican Jobs Creation Act of 2004 (the "JobsAct") into law. The Jobs Act provides for, among otherthings, an 85% dividends received deduction with respect tocertain dividends received from a U.S. corporation's foreignsubsidiaries. The dividends must be used to fund certain permitteddomestic activities, as specified in the Jobs Act. These domesticactivities include the building or improvement of infrastructure,research and development, and the financial stabilization of thecorporation. The IRS recently issued guidelines clarifying thatcompanies such as Grace with net operating loss carryforwards would beeligible to utilize foreign tax credits to offset U.S. taxes on certainforeign dividends. As a result of this clarification, Grace will electto apply the provisions of the Jobs Act to the approximately $40million dividend that it received from its German subsidiary on May 6,2005. Grace also intends to elect to apply the provisions of the JobsAct to any dividends that it may receive from foreign subsidiaries inthe fourth quarter of 2005. The company is currently in the process offinalizing the amount of such dividends.

PurchaseCommitments – From time to time, Grace engages in purchasecommitments in its various business activities, all of which areexpected to be fulfilled with no material adverse consequences toGrace's operations or financial position.

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Guarantees and IndemnificationObligations – Grace is a party to many contracts containingguarantees and indemnification obligations. These contracts primarilyconsist of:

|              |                                                                                                                                                                                                                                                                                                                                           |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Contracts providing for thesale of a former business unit or product line in which Grace hasagreed to indemnify the buyer against liabilities arising prior to theclosing of the transaction, including environmental liabilities. Theseliabilities are included in "liabilities subject tocompromise" in the Consolidated BalanceSheets; |

|              |                                                                                                                                                                                                                                                                                                                               |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Guarantees of real propertylease obligations of third parties, typically arising out of (a) leasesentered into by former subsidiaries of Grace, or (b) the assignment orsublease of a lease by Grace to a third party. These obligations areincluded in "liabilities subject tocompromise" in the Consolidated BalanceSheets; |

|              |                                                                                                                                                       |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Licenses of intellectualproperty by Grace to third parties in which Grace has agreed toindemnify the licensee against third party infringementclaims; |

|              |                                                                                                                                                                                                                                                                                                                                                                                          |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Contracts entered into withthird party consultants, independent contractors, and other serviceproviders in which Grace has agreed to indemnify such parties againstcertain liabilities in connection with their performance. Based onhistorical experience and the likelihood that such parties will evermake a claim against Grace, such indemnification obligations areimmaterial; and |

|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Product warrantieswith respect to certain products sold to customers in the ordinarycourse of business. These warranties typically provide that productwill conform to specifications. Grace generally does not establish aliability for product warranty based on a percentage of sales or otherformula. Grace accrues a warranty liability on a transaction-specificbasis depending on the individual facts and circumstances related toeach sale. Both the liability and annual expense related to productwarranties are immaterial to the Consolidated Financial Statements. |

Financial Assurances – Financial assurances have beenestablished for a variety of purposes, including insurance andenvironmental matters, asbestos settlements and appeals, trade-relatedcommitments and other matters. At September 30, 2005, Grace had grossfinancial assurances issued and outstanding of $257.8 million,comprised of $135.1 million of surety bonds issued by various insurancecompanies, and $122.7 million of standby letters of credit and otherfinancial assurances issued by various banks.

Accounting forContingencies – Although the outcome of each of the mattersdiscussed above cannot be predicted with certainty, Grace has assessedits risk and has made accounting estimates as required under U.S.generally accepted accounting principles. As a result of the Filing,claims related to certain of the items discussed above will beaddressed as part of Grace's Chapter 11 proceedings. Accrualsrecorded for such contingencies have been included in"liabilities subject to compromise" on theaccompanying Consolidated Balance Sheets. The amounts of theseliabilities as ultimately determined through the Chapter 11 proceedingscould be materially different from amounts recorded at September 30,2005.

|           |                                                     |
|-----------|-----------------------------------------------------|
| 13.  | Pension Plans and OtherPostretirement Benefit Plans |

Pension Plans –Grace maintains defined benefit pension plans covering employees ofcertain units who meet age and service requirements. Benefits aregenerally based on final average salary and years of service. Gracefunds its U.S. qualified domestic pension plans("qualified domestic pension plans") inaccordance with U.S. federal laws and regulations. Non-U.S. pensionplans are funded under a variety of methods, as required under locallaws and customs.

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Grace also provides, through nonqualifiedplans, supplemental pension benefits in excess of qualified domesticpension plan limits imposed by federal tax law. These plans coverofficers and higher-level employees and serve to increase the combinedpension amount to the level that they otherwise would have receivedunder the qualified domestic pension plans in the absence of suchlimits. The nonqualified plans are unfunded and Grace pays the costs ofbenefits as they are incurred.

At the December 31, 2004measurement date for Grace's defined benefit pension plans (the"Plans"), the accumulated benefit obligation("ABO") was approximately $1,367 million asmeasured under U.S. generally accepted accounting principles. AtSeptember 30, 2005, Grace's recorded pension liability forunderfunded plans was $509.2 million ($434.2 million included inliabilities not subject to compromise and $75.0 million related tosupplemental pension benefits, included in "liabilitiessubject to compromise"). The recorded liability reflects(1) the shortfall between dedicated assets and the ABO of underfundedplans ($310.6 million); and (2) the ABO of pay-as-you-go plans ($198.6million).

Postretirement Benefits Other Than Pensions– Grace provides postretirement health care and life insurancebenefits (referred to as other post-employment benefits or"OPEB") for retired employees of certain U.S.business units and certain divested units. The postretirement medicalplan provides various levels of benefits to employees hired before 1991and who retire from Grace after age 55 with at least 10 years ofservice. These plans are unfunded, and Grace pays a portion of thecosts of benefits under these plans as they are incurred. Grace appliesSFAS No. 106, "Employers' Accounting forPostretirement Benefits Other Than Pensions," whichrequires that the future costs of postretirement health care and lifeinsurance benefits be accrued over the employees' years ofservice.

Retirees and beneficiaries covered by thepostretirement medical plan are required to contribute a minimum of40% of the calculated premium for that coverage. During 2002,per capita costs under the retiree medical plans exceeded caps on theamount Grace was required to contribute under a 1993 amendment to theplan. As a result, for 2003 and future years, retirees bear 100%of any increase in premium costs. For this reason, assumed health carecost trend rates are not used in the determination of Grace'sOPEB expense.

In December 2003, President Bush signed theMedicare Prescription Drug, Improvement and Modernization Act of 2003(the "Act") into law. The Act introduces aprescription drug benefit under Medicare ("Medicare PartD") as well as a federal subsidy to companies that providea benefit that is at least actuarially equivalent (as defined in theAct) to Medicare Part D. On January 21, 2005, the Center for Medicareand Medicaid Services released the final regulations implementing theAct. Grace has determined that the prescription drug benefit under itspostretirement health care plan is actuarially equivalent to theMedicare Part D benefit. Therefore, the accumulated postretirementbenefit obligation (APBO) was remeasured as of January 21, 2005 toreflect the amount associated with the federal subsidy. The APBO wasreduced by approximately $14.1 million and the net periodic benefitcost for 2005 will be reduced by approximately $1.9 million ($1.5million for the nine-month period ended September 30, 2005) due to theeffect of the federal subsidy.

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The components of net periodic benefitcost for the three months and nine months ended September 30, 2005 and2004 are as follows:

|                                                                |  |                                 |         |         |  |        |         |          |  |        |         |         |  |        |         |         |  |        |      |         |  |        |         |         |  |  |
|----------------------------------------------------------------|--|---------------------------------|---------|---------|--|--------|---------|----------|--|--------|---------|---------|--|--------|---------|---------|--|--------|------|---------|--|--------|---------|---------|--|--|
| Componentsof Net Periodic Benefit Cost(In millions)(Unaudited) |  | Three Months Ended September30, |
| 2005                                                           |  | 2004                            |         |
| U.S.                                                           |  | Non-U.S.                        |         | OPEB    |  | U.S.   |         | Non-U.S. |  | OPEB   |         |
| Servicecost                                                    |  | $                               | 4.1     |    |  | $      | 1.5     |     |  | $      | (0.1    | )  |  | $      | 3.6     |    |  | $      | 1.9  |    |  | $      | 0.1     |    |
| Interestcost                                                   |  |                            | 14.4    |    |  |   | 4.4     |     |  |   | 1.3     |    |  |   | 14.9    |    |  |   | 3.8  |    |  |   | 1.5     |    |
| Expectedreturn on planassets                                   |  |                            | (12.8   | )  |  |   | (3.9    | )   |  |   | — |    |  |   | (12.9   | )  |  |   | (3.0 | )  |  |   | — |    |
| Amortizationof prior servicecost                               |  |                            | 1.3     |    |  |   | 0.1     |     |  |   | (3.1    | )  |  |   | 1.3     |    |  |   | 0.2  |    |  |   | (3.2    | )  |
| Amortizationofunrecognized actuarialloss                       |  |                            | 5.8     |    |  |   | 2.4     |     |  |   | 0.4     |    |  |   | 4.4     |    |  |   | 1.8  |    |  |   | 0.5     |    |
| Netcurtailment and settlementloss                              |  |                            | — |    |  |   | — |     |  |   | — |    |  |   | — |    |  |   | 0.3  |    |  |   | — |    |
| **Netperiodic benefit cost (income)**                          |  | $                               | 12.8    |    |  | $      | 4.5     |     |  | $      | (1.5    | )  |  | $      | 11.3    |    |  | $      | 5.0  |    |  | $      | (1.1    | )  |
|                                                                |

|                                                                |  |                                |       |         |  |        |       |          |  |        |         |         |  |        |         |         |  |        |       |         |  |        |         |         |  |  |
|----------------------------------------------------------------|--|--------------------------------|-------|---------|--|--------|-------|----------|--|--------|---------|---------|--|--------|---------|---------|--|--------|-------|---------|--|--------|---------|---------|--|--|
| Componentsof Net Periodic Benefit Cost(In millions)(Unaudited) |  | Nine Months Ended September30, |
| 2005                                                           |  | 2004                           |       |
| U.S.                                                           |  | Non-U.S.                       |       | OPEB    |  | U.S.   |       | Non-U.S. |  | OPEB   |         |
| Servicecost                                                    |  | $                              | 12.3  |    |  | $      | 5.3   |     |  | $      | 0.3     |    |  | $      | 10.6    |    |  | $      | 4.9   |    |  | $      | 0.4     |    |
| Interestcost                                                   |  |                           | 43.4  |    |  |   | 13.1  |     |  |   | 3.7     |    |  |   | 44.6    |    |  |   | 12.1  |    |  |   | 5.0     |    |
| Expectedreturn on planassets                                   |  |                           | (38.4 | )  |  |   | (11.8 | )   |  |   | — |    |  |   | (38.0   | )  |  |   | (10.6 | )  |  |   | — |    |
| Amortizationof prior servicecost                               |  |                           | 3.9   |    |  |   | 0.5   |     |  |   | (9.5    | )  |  |   | 4.0     |    |  |   | 0.6   |    |  |   | (9.5    | )  |
| Amortizationofunrecognized actuarialloss                       |  |                           | 17.2  |    |  |   | 6.2   |     |  |   | 1.2     |    |  |   | 13.2    |    |  |   | 4.2   |    |  |   | 1.9     |    |
| Netcurtailment and settlementloss                              |  |                           | 1.1   |    |  |   | 1.6   |     |  |   | — |    |  |   | — |    |  |   | 0.3   |    |  |   | — |    |
| **Netperiodic benefit cost (income)**                          |  | $                              | 39.5  |    |  | $      | 14.9  |     |  | $      | (4.3    | )  |  | $      | 34.4    |    |  | $      | 11.5  |    |  | $      | (2.2    | )  |
|                                                                |

PlanContributions and Funding – Subject to the approval of theBankruptcy Court, it is Grace's intention to satisfy itsobligations under the Plans and to comply with all of the requirementsof the Employee Retirement Income Security Act of 1974. On June 22,2005, Grace obtained Bankruptcy Court approval to fund minimum requiredpayments of approximately $46 million for the period from July 2005through June 2006. In that regard, in July and October 2005, Gracecontributed approximately $15 million and $9 million, respectively, tothe trusts that hold assets of the Plans. However, there can be noassurance that the Bankruptcy Court will continue to approvearrangements to satisfy the funding needs of the Plans. Contributionsto non-U.S. plans are not subject to Bankruptcy Court approval andGrace intends to fund such plans based on actuarial and trusteerecommendations.

Grace plans to pay benefits as they become dueunder virtually all pay-as-you-go plans and to maintain compliance withfederal funding laws for its U.S. qualifiedplans.

|           |                             |
|-----------|-----------------------------|
| 14.  | Business SegmentInformation |

Grace is a global producer of specialty chemicalsand specialty materials. It generates revenues from two businesssegments: Davison Chemicals, which consists of the refiningtechnologies and specialty materials product groups; and PerformanceChemicals, which consists of the specialty construction chemicals,building materials, and sealants and coatings product groups.Intersegment sales, eliminated in consolidation, are not material. Thetable below presents information related to Grace's businesssegments for the three months and nine months ended September 30, 2005and 2004. Only those corporate expenses directly related to the segmentare allocated for reporting purposes. All remaining corporate items arereported separately and labeled as such.

I-30

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|                                              |  |                               |        |                              |  |        |        |        |  |        |         |        |  |        |         |        |  |  |
|----------------------------------------------|--|-------------------------------|--------|------------------------------|--|--------|--------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--|
| BusinessSegment Data(In millions)(Unaudited) |  | Three MonthsEndedSeptember30, |        | Nine MonthsEndedSeptember30, |
|                                         |  | 2005                          |        | 2004                         |  | 2005   |        | 2004   |
| **NetSales**                                 |  |                          |   |                         |  |   |   |   |  |   |    |   |  |   |    |   |
| DavisonChemicals                             |  | $                             | 338.3  |                         |  | $      | 303.8  |   |  | $      | 1,031.9 |   |  | $      | 872.5   |   |
| PerformanceChemicals                         |  |                          | 315.1  |                         |  |   | 276.1  |   |  |   | 901.2   |   |  |   | 798.3   |   |
| **Total**                                    |  | $                             | 653.4  |                         |  | $      | 579.9  |   |  | $      | 1,933.1 |   |  | $      | 1,670.8 |   |
| **Pre-taxOperatingIncome**                   |  |                          |   |                         |  |   |   |   |  |   |    |   |  |   |    |   |
| DavisonChemicals                             |  | $                             | 36.8   |                         |  | $      | 42.6   |   |  | $      | 117.6   |   |  | $      | 112.1   |   |
| PerformanceChemicals                         |  |                          | 45.5   |                         |  |   | 39.5   |   |  |   | 118.5   |   |  |   | 106.0   |   |
| **Total**                                    |  | $                             | 82.3   |                         |  | $      | 82.1   |   |  | $      | 236.1   |   |  | $      | 218.1   |   |
|                                              |

Thefollowing table presents information related to the geographic areas inwhich Grace operated for the three months and nine months endedSeptember 30, 2005 and 2004, respectively.

|                                             |  |                                |        |                              |  |        |        |        |  |        |         |        |  |        |         |        |  |  |
|---------------------------------------------|--|--------------------------------|--------|------------------------------|--|--------|--------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--|
| GeographicArea Data(In millions)(Unaudited) |  | Three Months EndedSeptember30, |        | Nine MonthsEndedSeptember30, |
|                                        |  | 2005                           |        | 2004                         |  | 2005   |        | 2004   |
| **NetSales**                                |  |                           |   |                         |  |   |   |   |  |   |    |   |  |   |    |   |
| UnitedStates                                |  | $                              | 244.0  |                         |  | $      | 222.9  |   |  | $      | 719.9   |   |  | $      | 649.0   |   |
| Canadaand PuertoRico                        |  |                           | 41.0   |                         |  |   | 30.1   |   |  |   | 106.2   |   |  |   | 79.8    |   |
| TotalNorthAmerica                           |  |                           | 285.0  |                         |  |   | 253.0  |   |  |   | 826.1   |   |  |   | 728.8   |   |
| Europe,other thanGermany                    |  |                           | 200.5  |                         |  |   | 178.0  |   |  |   | 607.9   |   |  |   | 519.9   |   |
| Germany                                     |  |                           | 32.0   |                         |  |   | 28.9   |   |  |   | 90.5    |   |  |   | 86.3    |   |
| TotalEurope                                 |  |                           | 232.5  |                         |  |   | 206.9  |   |  |   | 698.4   |   |  |   | 606.2   |   |
| AsiaPacific                                 |  |                           | 98.9   |                         |  |   | 92.3   |   |  |   | 304.6   |   |  |   | 251.8   |   |
| LatinAmerica                                |  |                           | 37.0   |                         |  |   | 27.7   |   |  |   | 104.0   |   |  |   | 84.0    |   |
| **Total**                                   |  | $                              | 653.4  |                         |  | $      | 579.9  |   |  | $      | 1,933.1 |   |  | $      | 1,670.8 |   |
|                                             |

Thepre-tax operating income for Grace's business segments for thethree months and nine months ended September 30, 2005 and 2004,respectively, is reconciled below to income (loss) before Chapter 11expenses, income taxes, and minority interest presented in theaccompanying Consolidated Statements ofOperations.

|                                                                                       |  |                                |         |                             |  |        |       |         |  |        |         |         |  |        |       |         |  |  |
|---------------------------------------------------------------------------------------|--|--------------------------------|---------|-----------------------------|--|--------|-------|---------|--|--------|---------|---------|--|--------|-------|---------|--|--|
| Reconciliationof Business Segment Data to Financial Statements(Inmillions)(Unaudited) |  | Three MonthsEndedSeptember 30, |         | NineMonthsEndedSeptember30, |
|                                                                                  |  | 2005                           |         | 2004                        |  | 2005   |       | 2004    |
| Pre-taxoperating income – businesssegments                                      |  | $                              | 82.3    |                        |  | $      | 82.1  |    |  | $      | 236.1   |    |  | $      | 218.1 |    |
| Minorityinterest                                                                      |  |                           | 7.4     |                        |  |   | 3.3   |    |  |   | 18.4    |    |  |   | 6.4   |    |
| Netgain (loss) on sales of investments and disposals ofassets                         |  |                           | (1.4    | )                      |  |   | 0.2   |    |  |   | (0.9    | )  |  |   | (0.1  | )  |
| Provisionfor environmentalremediation                                                 |  |                           | — |                        |  |   | (20.0 | )  |  |   | — |    |  |   | (20.0 | )  |
| Netgain from litigationsettlement                                                     |  |                           | — |                        |  |   | 50.0  |    |  |   | — |    |  |   | 50.0  |    |
| Interestexpense and related financingcosts                                            |  |                           | (13.4   | )                      |  |   | (4.5  | )  |  |   | (41.3   | )  |  |   | (12.3 | )  |
| Corporatecosts                                                                        |  |                           | (23.2   | )                      |  |   | (24.4 | )  |  |   | (80.7   | )  |  |   | (72.6 | )  |
| Other,net                                                                             |  |                           | (5.5    | )                      |  |   | (3.1  | )  |  |   | 0.6     |    |  |   | (14.3 | )  |
| Income(loss) before Chapter 11 expenses, income taxes, and minorityinterest           |  | $                              | 46.2    |                        |  | $      | 83.6  |    |  | $      | 132.2   |    |  | $      | 155.2 |    |
|                                                                                       |

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Minority interest primarily pertains toAdvanced Refining Technologies LLC ("ART"), ajoint venture between Grace and Chevron Products Company where Gracehas a 55% economic interest.

Corporate costs includeexpenses of corporate headquarters functions incurred in support ofcore operations, such as corporate financial and legal services, humanresources management, communications and regulatory affairs. This itemalso includes certain pension and postretirement benefits, includingthe amortization of deferred costs that are considered a core operatingexpense but not allocated to businesssegments.

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Item2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS

Financial Summary forSeptember 30, 2005

Following is a summary analysis of keyfinancial measures of Grace's performance for the three monthsand nine months ended September 30, 2005 compared with the prior yearperiods.

|              |                                                                                                                                                                                                                                                                 |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Grace's netincome for each period has been primarily affected by: (1) the resultsof Grace's businesses, which employ a growth and productivitystrategy to maximize business performance, and (2) the impact of legalcontingencies and other noncoreliabilities. |

|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Net incomedecreased 33.1% for the three months ended September 30, 2005.Net income for the three months ended September 30, 2004 included a$50.0 million pre-tax gain ($32.5 million after tax) from a litigationsettlement. The three months ended September 30, 2005 includes a $16.0million favorable change in estimated liabilities for tax exposures.The 20.2% decline in net income for the nine months endedSeptember 30, 2005 was principally associated with the one-time gainfrom the settlement of litigation in 2004. |

|              |                                                                                                                                                                                                                                                                                         |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Sales increased 12.7% and15.7% for the three months and nine months ended September 30,2005 as a result of higher sales volume in all geographic regions,improved product mix, selling price increases in response to costinflation and acquisitions and favorable currencytranslation. |

|              |                                                                                                                                                                                             |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Pre-tax incomefrom core operations increased 2.4% for the three months endedSeptember 30, 2005 and 6.8% for the nine months ended September30, 2005, primarily attributable to highersales. |

|              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Pre-tax operating incomeof the Davison Chemicals segment decreased 13.6% for the threemonths ended September 30, 2005 primarily due to lost sales and extracosts related to Hurricanes Katrina and Rita in the Gulf of Mexicoregion of the United States, as well as higher costs of energy andcertain raw materials. Pre-tax operating income of the DavisonChemicals segment increased 4.9% for the nine months endedSeptember 30, 2005 primarily as a result of higher sales in all regionsand major product lines, partially offset by the negative effects ofthe hurricanes in the Gulf of Mexico, higher raw material and energycosts, and costs associated with integrating business functions andprocesses. |

|              |                                                                                                                                                                                                                                                                                               |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Pre-tax operatingincome of the Performance Chemicals segment increased 15.2% and11.8% for the three months and nine months ended September 30,2005 principally due to higher sales volume, partially offset by higherraw material costs, which exceeded the effect of selling priceincreases. |

|              |                                                                                                                                                                                                                                                                                                                                                                                       |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Operating cash flowwas $5.8 million and $167.4 million for the nine months ended September30, 2005 and 2004, respectively. Cash flow for the nine months endedSeptember 30, 2005 included payments aggregating $130.2 million toresolve U.S. federal tax return audits, an environmental contingency ata formerly owned site and the rollforward of dollar-to-euro currencycontracts. |

Grace is attempting to resolve noncore liabilitiesand contingencies through its Chapter 11 proceeding. The noncoreliabilities include asbestos-related litigation, environmentalremediation, tax disputes and business litigation. Grace'soperating statements include periodic adjustments to account forchanges in estimates of such liabilities and developments in itsChapter 11 proceeding. These liabilities and contingencies may resultin continued volatility in net income in the future.

Effect of Katrina and Rita

On August 29, 2005,Hurricane Katrina made landfall in Louisiana, Mississippi and Alabama,causing widespread wind and water damage. Katrina caused shutdowns ofseveral refineries in the affected area, including a number ofcustomers of Grace's FCC business, and also disrupted otherbusiness operations and construction activity. The shutdowns anddisruptions negatively affected Grace's sales and the damage toinfrastructure in the affected area increased sales and distributioncosts of our FCC business during the three months ended September 30,2005.

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On September 25, 2005, Hurricane Rita madelandfall in Louisiana and Texas also causing widespread wind and waterdamage and further disrupting refinery and other business operationsand construction activity. Grace's production facility forrefining catalysts in Lake Charles, Louisiana is located in an areathat was particularly hard-hit by Rita. The Lake Charles facility wasshutdown for two weeks but has returned to full production. Graceavoided disruption to its customers from the shutdown, but incurredincreased production and distribution costs, by supplying products fromits other catalyst plants. Grace also incurred additional expenses tosupport its displaced workers in Lake Charles during the storm'saftermath.

The total extent of Grace's loss of business andincreased costs due to Rita and Katrina has not been determined at thistime; however, Grace estimates that the storms had a negative effect onpre-tax operating income of approximately $3 million for the thirdquarter of 2005. Since Rita hit only five days before the end of thethird quarter, Grace expects the negative effect of the storms on itsbusiness to be greater in the fourth quarter of 2005 than in the thirdquarter. Grace's insurance coverage entitles it to receivepayments for business interruption and Grace is currently evaluatingthe potential for recovery under this insurance.

Description ofCore Business

W. R. Grace & Co. and its subsidiaries areengaged in specialty chemicals and specialty materials businesses on aworldwide basis through two business segments: Davison Chemicals, whichincludes two main product groups – refining technologies andspecialty materials; and Performance Chemicals, which includes threemain product groups – specialty construction chemicals, buildingmaterials and sealants and coatings.

Global scope– Grace operates its business on a global scale with more than60% of its revenue and 40% of its operating propertyoutside the United States. Its business is conducted in more than 40countries and in more than 20 currencies. The business segments aremanaged on a global basis, serving global markets, with currencyfluctuations in relation to the U.S. dollar affecting reportedearnings, net assets and cash flows.

The table below shows theGrace business segments and product groups as a percentage of totalGracesales.

|                                |  |                               |       |                              |  |        |       |         |  |        |       |         |  |        |       |         |  |  |
|--------------------------------|--|-------------------------------|-------|------------------------------|--|--------|-------|---------|--|--------|-------|---------|--|--------|-------|---------|--|--|
| Percentageof Total Grace Sales |  | ThreeMonthsEndedSeptember 30, |       | Nine MonthsEndedSeptember30, |
|                           |  | 2005                          |       | 2004                         |  | 2005   |       | 2004    |
| Refiningtechnologies           |  |                          | 30.3  | %                       |  |   | 29.2  | %  |  |   | 31.3  | %  |  |   | 28.9  | %  |
| Specialtymaterials             |  |                          | 21.5  | %                       |  |   | 23.2  | %  |  |   | 22.1  | %  |  |   | 23.3  | %  |
| **DavisonChemicals**           |  |                          | 51.8  | %                       |  |   | 52.4  | %  |  |   | 53.4  | %  |  |   | 52.2  | %  |
| Constructionchemicals          |  |                          | 24.7  | %                       |  |   | 23.6  | %  |  |   | 23.2  | %  |  |   | 23.1  | %  |
| Buildingmaterials              |  |                          | 11.9  | %                       |  |   | 11.8  | %  |  |   | 11.7  | %  |  |   | 12.0  | %  |
| Sealantsandcoatings            |  |                          | 11.6  | %                       |  |   | 12.2  | %  |  |   | 11.7  | %  |  |   | 12.7  | %  |
| **PerformanceChemicals**       |  |                          | 48.2  | %                       |  |   | 47.6  | %  |  |   | 46.6  | %  |  |   | 47.8  | %  |
| **Total**                      |  |                          | 100.0 | %                       |  |   | 100.0 | %  |  |   | 100.0 | %  |  |   | 100.0 | %  |
|                                |

Refiningtechnologies includes: fluid cracking catalysts and additives usedin petroleum refineries to convert distilled crude oil intotransportation fuels and other petroleum-based products, andhydroprocessing catalysts used to upgrade heavy oils and remove certainimpurities. Key external factors for refining technologies products arethe economics of the refining industry, specifically the impacts ofdemand for transportation fuels and petrochemical products, and crudeoil supply.

Specialty materials includes: silica-basedengineered materials, which are used in a wide range of industrial andconsumer applications such as paper, wood and coil coatings, foodprocessing, plastics, adsorbents, and personal care products; discoverysciences materials and products which are used for biotechnology andpharmaceutical separations; and specialty catalysts, which are used ina variety of 

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chemical processes and are essentialcomponents in the manufacture of polyethylene and polypropylene resinsused in products such as plastic film, high-performance plastic pipeand other plastic parts. Sales of these products are affected most bygeneral economic conditions, and specifically by the underlying growthrate of targeted end-use applications.

Constructionchemicals and building materials are used primarily by theconstruction industry. Construction chemicals improve strength andaesthetics of finished concrete, control corrosion and enhance thehandling and application of concrete, and reduce the manufacturing costand improve the quality of cement. Performance for this product groupis affected by non-residential construction activity and, to a lesserextent, residential construction activity, which tend to lag behind thegeneral economy in both decline and recovery. Building materialsprevent water damage to structures and protect structural steel againstcollapse due to fire. The performance of this product group is alsoaffected by non-residential construction activity and by residentialconstruction and renovation activity, with greater lags thanconstruction chemicals, reflecting longer lead times for largeprojects. Since building materials is largely a North American productgroup, it is most significantly affected by the level of U.S.construction activity.

Sealants and coatings, which isGrace's most global product line, are used to seal beverage andfood cans, and glass and plastic bottles, and to protect metalpackaging from corrosion and the contents from the influences of metal.Although this product group is affected by general economic conditions,there is an ongoing shift in demand from metal and glass to plasticpackaging for foods and beverages. This shift is causing a decline incan sealant usage, but provides opportunities for closure sealants andother products for plastic packaging.

Voluntary BankruptcyFiling

In response to a sharply increasing number ofasbestos-related personal injury claims, on April 2, 2001, Grace and 61of its United States subsidiaries and affiliates, including W. R. Grace& Co. – Conn. (collectively, the"Debtors"), filed voluntary petitions forreorganization (the "Filing") under Chapter11 of the United States Bankruptcy Code in the United States BankruptcyCourt for the District of Delaware (the "BankruptcyCourt"). Grace's non-U.S. subsidiaries and certainof its U.S. subsidiaries were not included in the Filing.

UnderChapter 11, the Debtors have continued to operate their businesses asdebtors-in-possession under court protection from creditors andclaimants, while using the Chapter 11 process to develop and implementa plan for addressing the asbestos-related claims. Since the Filing,all motions necessary to conduct normal business activities have beenapproved by the Bankruptcy Court.

On January 13, 2005, Gracefiled an amended plan of reorganization (the"Plan") and related documents with theBankruptcy Court. The Plan is supported by committees representinggeneral unsecured creditors and equity holders, but is not supported bycommittees representing asbestos personal injury claimants and asbestosproperty damage claimants. Under the terms of the Plan, a trust wouldbe established to which all pending and future asbestos-related claimswould be channeled for resolution. The Plan will become effective onlyafter a vote of eligible creditors and with the approval of theBankruptcy Court and the U.S. District Court for the District ofDelaware. See "Plan of Reorganization" abovefor more information.

Critical Accounting Estimates

Thepreparation of financial statements in conformity with U.S. generallyaccepted accounting principles requires that management make estimatesand assumptions affecting the assets and liabilities reported at thedate of the Consolidated Financial Statements, and the revenues andexpenses reported for the periods presented. Actual amounts coulddiffer from those estimates. Changes in estimates are recorded in theperiod identified. Grace's accounting measurements that are mostaffected by management's estimates of future eventsare:

|              |                                                                                                                                                                                                                                                                                                                                                |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Contingent liabilitiessuch as asbestos-related matters (see Notes 2 and 3 to the ConsolidatedFinancial Statements), environmental remediation (see Note 12 to theConsolidated Financial Statements), income taxes (see Note 12 to theConsolidated Financial Statements), and litigation (see Note 12 to theConsolidated Financial Statements). |

I-35

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|              |                                                                                                                                                                                        |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Pensionand postretirement liabilities that depend on assumptions regardingdiscount rates and/or total returns on invested funds. (See Note 13 tothe Consolidated FinancialStatements.) |

|              |                                                                                                                           |
|--------------|---------------------------------------------------------------------------------------------------------------------------|
| •  | Depreciation andamortization periods for long-lived assets, including property andequipment, intangible, and otherassets. |

|              |                                                                                                                                          |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------|
| •  | Realization values ofvarious assets such as net deferred tax assets, trade receivables,inventories, insurance receivables, and goodwill. |

The accuracyof these and other estimates may also be materially affected by theuncertainties arising under Grace's Chapter 11 proceeding.

Summary Financial Information and Metrics

Set forth on thenext page is a chart that lists key operating statistics, and dollarand percentage changes for the three months and nine months endedSeptember 30, 2005 and 2004. The chart should be referenced whenreading management's discussion and analysis of financialcondition and results of operations.

I-36

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|                                                                            |  |                                |        |                               |  |                    |        |                    |  |          |        |         |  |                    |        |                    |  |        |         |         |  |        |         |         |  |        |        |         |  |        |        |            |  |  |
|----------------------------------------------------------------------------|--|--------------------------------|--------|-------------------------------|--|--------------------|--------|--------------------|--|----------|--------|---------|--|--------------------|--------|--------------------|--|--------|---------|---------|--|--------|---------|---------|--|--------|--------|---------|--|--------|--------|------------|--|--|
| Analysisof Continuing Operations(Inmillions)                               |  | Three Months EndedSeptember30, |        | Nine Months EndedSeptember30, |
|                                                                       |  | 2005                           |        | 2004                          |  | $ChangeFav (Unfav) |        | % ChangeFav(Unfav) |  | **2005** |        | 2004    |  | $ ChangeFav(Unfav) |        | % ChangeFav(Unfav) |
| **NetSales:**                                                              |  |                           |   |                          |  |               |   |               |  |     |   |    |  |               |   |               |  |   |    |    |  |   |    |    |  |   |   |    |  |   |   |       |
| DavisonChemicals                                                           |  | $                              | 338.3  |                          |  | $                  | 303.8  |               |  | $        | 34.5   |    |  |               | 11.4   | %             |  | $      | 1,031.9 |    |  | $      | 872.5   |    |  | $      | 159.4  |    |  |   | 18.3   | %     |
| PerformanceChemicals                                                       |  |                           | 315.1  |                          |  |               | 276.1  |               |  |     | 39.0   |    |  |               | 14.1   | %             |  |   | 901.2   |    |  |   | 798.3   |    |  |   | 102.9  |    |  |   | 12.9   | %     |
| **TotalGrace netsales**                                                    |  | $                              | 653.4  |                          |  | $                  | 579.9  |               |  | $        | 73.5   |    |  |               | 12.7   | %             |  | $      | 1,933.1 |    |  | $      | 1,670.8 |    |  | $      | 262.3  |    |  |   | 15.7   | %     |
| **Pre-taxoperatingincome**                                                 |  |                           |   |                          |  |               |   |               |  |     |   |    |  |               |   |               |  |   |    |    |  |   |    |    |  |   |   |    |  |   |   |       |
| DavisonChemicals                                                           |  | $                              | 36.8   |                          |  | $                  | 42.6   |               |  | $        | (5.8   | )  |  |               | (13.6  | %)            |  | $      | 117.6   |    |  | $      | 112.1   |    |  | $      | 5.5    |    |  |   | 4.9    | %     |
| PerformanceChemicals                                                       |  |                           | 45.5   |                          |  |               | 39.5   |               |  |     | 6.0    |    |  |               | 15.2   | %             |  |   | 118.5   |    |  |   | 106.0   |    |  |   | 12.5   |    |  |   | 11.8   | %     |
| Corporatecosts:                                                            |  |                           |   |                          |  |               |   |               |  |     |   |    |  |               |   |               |  |   |    |    |  |   |    |    |  |   |   |    |  |   |   |       |
| Supportfunctions                                                           |  |                           | (8.9   | )                        |  |               | (7.9   | )             |  |     | (1.0   | )  |  |               | (12.7  | %)            |  |   | (28.1   | )  |  |   | (24.5   | )  |  |   | (3.6   | )  |  |   | (14.7  | %)    |
| Pension,performance-related compensation, andother                         |  |                           | (14.3  | )                        |  |               | (16.5  | )             |  |     | 2.2    |    |  |               | 13.3   | %             |  |   | (52.6   | )  |  |   | (48.1   | )  |  |   | (4.5   | )  |  |   | (9.4   | %)    |
| TotalCorporatecosts                                                        |  |                           | (23.2  | )                        |  |               | (24.4  | )             |  |     | 1.2    |    |  |               | 4.9    | %             |  |   | (80.7   | )  |  |   | (72.6   | )  |  |   | (8.1   | )  |  |   | (11.2  | %)    |
| **Pre-taxincome from coreoperations**                                      |  |                           | 59.1   |                          |  |               | 57.7   |               |  |     | 1.4    |    |  |               | 2.4    | %             |  |   | 155.4   |    |  |   | 145.5   |    |  |   | 9.9    |    |  |   | 6.8    | %     |
| **Pre-taxincome (loss) from noncore activities**                           |  |                           | (7.7   | )                        |  |               | 26.4   |               |  |     | (34.1  | )  |  |               | (129.2 | %)            |  |   | (2.7    | )  |  |   | 12.6    |    |  |   | (15.3  | )  |  |   | (121.4 | %)    |
| Interestexpense                                                            |  |                           | (13.4  | )                        |  |               | (4.5   | )             |  |     | (8.9   | )  |  |               | (197.8 | %)            |  |   | (41.3   | )  |  |   | (12.3   | )  |  |   | (29.0  | )  |  |   | NM     |       |
| Interestincome                                                             |  |                           | 0.8    |                          |  |               | 0.7    |               |  |     | 0.1    |    |  |               | 14.3   | %             |  |   | 2.4     |    |  |   | 3.0     |    |  |   | (0.6   | )  |  |   | (20.0  | %)    |
| **Income(loss) before Chapter 11 expenses and incometaxes**                |  |                           | 38.8   |                          |  |               | 80.3   |               |  |     | (41.5  | )  |  |               | (51.7  | %)            |  |   | 113.8   |    |  |   | 148.8   |    |  |   | (35.0  | )  |  |   | (23.5  | %)    |
| Chapter11 expenses,net                                                     |  |                           | (9.3   | )                        |  |               | (4.3   | )             |  |     | (5.0   | )  |  |               | (116.3 | %)            |  |   | (19.9   | )  |  |   | (11.8   | )  |  |   | (8.1   | )  |  |   | (68.6  | %)    |
| Benefitfrom (provision for) incometaxes                                    |  |                           | 2.6    |                          |  |               | (28.0  | )             |  |     | 30.6   |    |  |               | 109.3  | %             |  |   | (26.0   | )  |  |   | (51.9   | )  |  |   | 25.9   |    |  |   | 49.9   | %     |
| **Netincome(loss)**                                                        |  | $                              | 32.1   |                          |  | $                  | 48.0   |               |  | $        | (15.9  | )  |  |               | (33.1  | %)            |  | $      | 67.9    |    |  | $      | 85.1    |    |  | $      | (17.2  | )  |  |   | (20.2  | %)    |
| **KeyFinancialMeasures:**                                                  |  |                           |   |                          |  |               |   |               |  |     |   |    |  |               |   |               |  |   |    |    |  |   |    |    |  |   |   |    |  |   |   |       |
| **Pre-taxincome from core operations as percentageofsales:**               |  |                           |   |                          |  |               |   |               |  |     |   |    |  |               |   |               |  |   |    |    |  |   |    |    |  |   |   |    |  |   |   |       |
| DavisonChemicals                                                           |  |                           | 10.9   | %                        |  |               | 14.0   | %             |  |     | NM     |    |  |               | (3.1   | )pts          |  |   | 11.4    | %  |  |   | 12.8    | %  |  |   | NM     |    |  |   | (1.4   | )pts  |
| PerformanceChemicals                                                       |  |                           | 14.4   | %                        |  |               | 14.3   | %             |  |     | NM     |    |  |               | 0.1    | pts           |  |   | 13.1    | %  |  |   | 13.3    | %  |  |   | NM     |    |  |   | (0.2   | )pts  |
| TotalCoreOperations                                                        |  |                           | 9.0    | %                        |  |               | 9.9    | %             |  |     | NM     |    |  |               | (0.9   | )pts          |  |   | 8.0     | %  |  |   | 8.7     | %  |  |   | NM     |    |  |   | (0.7   | )pts  |
| **Pre-taxincome from core operations before depreciation andamortization** |  | $                              | 87.8   |                          |  | $                  | 84.6   |               |  | $        | 3.2    |    |  |               | 3.8    | %             |  | $      | 241.5   |    |  | $      | 225.9   |    |  | $      | 15.6   |    |  |   | 6.9    | %     |
| **Asa percentage ofsales**                                                 |  |                           | 13.4   | %                        |  |               | 14.6   | %             |  |     | NM     |    |  |               | (1.2   | )pts          |  |   | 12.5    | %  |  |   | 13.5    | %  |  |   | NM     |    |  |   | (1.0   | )pts  |
| **Depreciationandamortization**                                            |  | $                              | 28.7   |                          |  | $                  | 26.9   |               |  | $        | 1.8    |    |  |               | 6.7    | %             |  | $      | 86.1    |    |  | $      | 80.4    |    |  | $      | 5.7    |    |  |   | 7.1    | %     |
| **NetConsolidated Sales byRegion:**                                        |  |                           |   |                          |  |               |   |               |  |     |   |    |  |               |   |               |  |   |    |    |  |   |    |    |  |   |   |    |  |   |   |       |
| NorthAmerica                                                               |  | $                              | 285.0  |                          |  | $                  | 253.0  |               |  | $        | 32.0   |    |  |               | 12.6   | %             |  | $      | 826.1   |    |  | $      | 728.8   |    |  | $      | 97.3   |    |  |   | 13.4   | %     |
| Europe                                                                     |  |                           | 232.5  |                          |  |               | 206.9  |               |  |     | 25.6   |    |  |               | 12.4   | %             |  |   | 698.4   |    |  |   | 606.2   |    |  |   | 92.2   |    |  |   | 15.2   | %     |
| AsiaPacific                                                                |  |                           | 98.9   |                          |  |               | 92.3   |               |  |     | 6.6    |    |  |               | 7.2    | %             |  |   | 304.6   |    |  |   | 251.8   |    |  |   | 52.8   |    |  |   | 21.0   | %     |
| LatinAmerica                                                               |  |                           | 37.0   |                          |  |               | 27.7   |               |  |     | 9.3    |    |  |               | 33.6   | %             |  |   | 104.0   |    |  |   | 84.0    |    |  |   | 20.0   |    |  |   | 23.8   | %     |
| **Total**                                                                  |  | $                              | 653.4  |                          |  | $                  | 579.9  |               |  | $        | 73.5   |    |  |               | 12.7   | %             |  | $      | 1,933.1 |    |  | $      | 1,670.8 |    |  | $      | 262.3  |    |  |   | 15.7   | %     |
|                                                                            |

|  |
|--|
|  |  |
|  |

NM= Not meaningful

The above chart, as well as the financialinformation presented throughout this discussion, divides Grace'sfinancial results between "core operations"and "noncore activities." Core operationscomprise the financial results of Davison Chemicals, PerformanceChemicals, and the costs of corporate activities that directly orindirectly support business operations. In contrast, noncore activitiescomprise all other events and transactions not directly related to thegeneration of operating revenue 

I-37

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or the support of core operations andgenerally relate to Grace's former operations and products. Graceuses pre-tax income from core operations as a factor in determiningcertain incentive compensation and as a key factor in itsmanagement's decision-making process.

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

Grace Overview

The following is an overview of financial measures of Grace'sperformance for the three months and nine months ended September 30,2005 compared with the prior year periods.

Net Sales– The following tables identify the year-over-year increase ordecrease in sales attributable to changes in product volume, productprice and/or mix, and the impact of foreign currency translation forthe three months and nine months ended September 30, 2005 and 2004,respectively.

|                                      |  |                                                                                                                  |        |           |  |                     |        |         |  |        |        |         |  |        |        |         |  |  |
|--------------------------------------|--|------------------------------------------------------------------------------------------------------------------|--------|-----------|--|---------------------|--------|---------|--|--------|--------|---------|--|--------|--------|---------|--|--|
| NetSales Variance Analysis           |  | Three Months EndedSeptember 30, 2005 as a Percentage Increase (Decrease)fromThree Months Ended September 30,2004 |
|                                 |  | Volume                                                                                                           |        | Price/Mix |  | CurrencyTranslation |        | Total   |
| DavisonChemicals                     |  |                                                                                                             | 4.5    | %    |  |                | 6.5    | %  |  |   | 0.4    | %  |  |   | 11.4   | %  |
| PerformanceChemicals                 |  |                                                                                                             | 10.4   | %    |  |                | 2.6    | %  |  |   | 1.1    | %  |  |   | 14.1   | %  |
| Netsales                             |  |                                                                                                             | 7.3    | %    |  |                | 4.7    | %  |  |   | 0.7    | %  |  |   | 12.7   | %  |
| **ByRegion:**                        |  |                                                                                                             |   |      |  |                |   |    |  |   |   |    |  |   |   |    |
|     NorthAmerica |  |                                                                                                             | 5.5    | %    |  |                | 6.5    | %  |  |   | 0.6    | %  |  |   | 12.6   | %  |
|     Europe       |  |                                                                                                             | 9.4    | %    |  |                | 3.0    | %  |  |   | 0.0    | %  |  |   | 12.4   | %  |
|     AsiaPacific  |  |                                                                                                             | 0.9    | %    |  |                | 4.8    | %  |  |   | 1.5    | %  |  |   | 7.2    | %  |
|     LatinAmerica |  |                                                                                                             | 25.6   | %    |  |                | 2.9    | %  |  |   | 5.1    | %  |  |   | 33.6   | %  |
|                                      |

Grace'ssales were favorably impacted by higher sales volume, especially inrefining technologies and construction chemicals products, withacquisitions contributing $7.3 million or 1.3 percentage points of thesales volume growth. Foreign currency translation contributed $4.2million or 0.7 percentage points of the sales growth, mainly due to thestrengthening of the Euro against the U.S. dollar. Selling priceincreases, implemented to partially offset a significant increase inraw material and energy costs, added approximately $15.2 million tosales, or 2.6 percentage points of sales growth, for the three monthsended September 30,2005.

|                           |  |                                                                                                               |        |           |  |                     |        |         |  |        |        |         |  |        |        |         |  |  |
|---------------------------|--|---------------------------------------------------------------------------------------------------------------|--------|-----------|--|---------------------|--------|---------|--|--------|--------|---------|--|--------|--------|---------|--|--|
| Net SalesVarianceAnalysis |  | Nine Months Ended September 30, 2005 asaPercentage Increase (Decrease) fromNine Months EndedSeptember 30,2004 |
|                      |  | Volume                                                                                                        |        | Price/Mix |  | CurrencyTranslation |        | Total   |
| DavisonChemicals          |  |                                                                                                          | 6.5    | %    |  |                | 10.1   | %  |  |   | 1.7    | %  |  |   | 18.3   | %  |
| PerformanceChemicals      |  |                                                                                                          | 8.2    | %    |  |                | 2.7    | %  |  |   | 2.0    | %  |  |   | 12.9   | %  |
| Netsales                  |  |                                                                                                          | 7.3    | %    |  |                | 6.6    | %  |  |   | 1.8    | %  |  |   | 15.7   | %  |
| **ByRegion:**             |  |                                                                                                          |   |      |  |                |   |    |  |   |   |    |  |   |   |    |
| NorthAmerica              |  |                                                                                                          | 6.4    | %    |  |                | 6.6    | %  |  |   | 0.4    | %  |  |   | 13.4   | %  |
| Europe                    |  |                                                                                                          | 7.5    | %    |  |                | 4.3    | %  |  |   | 3.4    | %  |  |   | 15.2   | %  |
| AsiaPacific               |  |                                                                                                          | 6.0    | %    |  |                | 13.2   | %  |  |   | 1.8    | %  |  |   | 21.0   | %  |
| LatinAmerica              |  |                                                                                                          | 15.4   | %    |  |                | 5.7    | %  |  |   | 2.7    | %  |  |   | 23.8   | %  |
|                           |

Grace'ssales were favorably impacted by higher sales volume, especially inrefining technologies and construction chemicals products, withacquisitions contributing $40.4 million or 2.4 percentage points of thesales volume growth. Foreign currency translation contributed $30.4million or 1.8 percentage 

I-38

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points of the sales growth, mainly due to thestrengthening of the Euro against the U.S. dollar. Selling priceincreases, implemented to partially offset a significant increase inraw material and energy costs, added approximately $41.6 million, or2.5 percentage points of sales growth, to year-to-date sales.

Pre-tax Income from Core Operations – Operatingprofit for the three months and nine months ended September 30, 2005was higher due to sales volume growth (including acquisitions and abetter product mix), higher selling prices to partially offset theimpact of cost inflation, and favorable foreign currencytranslation.

Corporate costs include corporate functional costs(such as financial and legal services, human resources, communicationsand information technology), the cost of corporate governance(including directors and officers liability insurance, a portion ofwhich is allocated to noncore activities) and pension costs related toboth corporate employees and to the effects of changes in assets andliabilities for all Grace pension plans. Corporate costs for the ninemonths ended September 30, 2005 increased over the prior year periodprimarily due to higher pension expense, resulting from updatedassumptions for expected life-spans, the longevity of Grace'sactive work force and amortization of deferred costs related to capitalmarket returns in recent years.

Pre-tax Income (Loss) fromNoncore Activities – Pre-tax income (loss) from noncoreactivities reflects items not directly related to Grace's coreoperating units. This category of costs and income is expected to bevolatile as potentially material items are addressed throughGrace's Chapter 11 proceedings and/or as the financialimplications of Grace's legal contingencies becomeapparent.

|                                                          |  |                               |         |                               |  |        |         |         |  |        |         |         |  |        |         |         |  |  |
|----------------------------------------------------------|--|-------------------------------|---------|-------------------------------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
| Pre-taxIncome (Loss) from Noncore Activities(Inmillions) |  | Three MonthsEndedSeptember30, |         | Nine Months EndedSeptember30, |
|                                                     |  | 2005                          |         | 2004                          |  | 2005   |         | 2004    |
| Environmentalprovision – vermiculitemining         |  | $                             | — |                          |  | $      | (20.0   | )  |  | $      | — |    |  | $      | (20.0   | )  |
| Insurancesettlements                                     |  |                          | 4.2     |                          |  |   | — |    |  |   | 24.5    |    |  |   | — |    |
| Asbestosadministration, net                              |  |                          | (2.1    | )                        |  |   | — |    |  |   | (6.4    | )  |  |   | — |    |
| COLIincome,net                                           |  |                          | (0.3    | )                        |  |   | (0.4    | )  |  |   | 1.6     |    |  |   | 1.8     |    |
| D&Oinsurance cost                                    |  |                          | (1.2    | )                        |  |   | (1.3    | )  |  |   | (4.2    | )  |  |   | (3.9    | )  |
| Pensionand postretirementbenefit costs                   |  |                          | (0.9    | )                        |  |   | (3.0    | )  |  |   | (3.5    | )  |  |   | (7.5    | )  |
| Translationeffects – intercompanyloan              |  |                          | (1.1    | )                        |  |   | 2.3     |    |  |   | (32.5   | )  |  |   | 1.2     |    |
| Valueof currency contracts                               |  |                          | 1.1     |                          |  |   | (2.3    | )  |  |   | 32.3    |    |  |   | (11.6   | )  |
| Foreigncurrency transactioneffects                       |  |                          | (0.3    | )                        |  |   | (2.8    | )  |  |   | (0.8    | )  |  |   | (2.2    | )  |
| Netgain from litigationsettlement                        |  |                          | — |                          |  |   | 50.0    |    |  |   | — |    |  |   | 50.0    |    |
| Legalfees                                                |  |                          | (5.5    | )                        |  |   | — |    |  |   | (14.5   | )  |  |   | — |    |
| Other                                                    |  |                          | (1.6    | )                        |  |   | 3.9     |    |  |   | 0.8     |    |  |   | 4.8     |    |
|                                                     |  | $                             | (7.7    | )                        |  | $      | 26.4    |    |  | $      | (2.7    | )  |  | $      | 12.6    |    |
|                                                          |

Pre-tax income (loss) from noncore activitieswas consistent with the prior year period except for: (1) the foreigncurrency effect of an intercompany loan as described below, (2) $24.5million paid by insurance carriers with respect to coverage for pastenvironmental remediation costs and asbestos-related liability underliquidation arrangements or dispute settlements, (3) defense costsrelated to the Montana and New Jersey legal proceedings (see Note 12 tothe Consolidated Financial Statements for more information), (4) apre-tax charge of $20.0 million in 2004 for a change in Grace'sestimate of the costs necessary to address vermiculite clean-up inLibby, Montana, and (5) a net gain of $50.0 million in 2004 from thesettlement of litigation under an agreement with HoneywellInternational, Inc. related to environmental contamination of anon-operating parcel of land.

In March 2004, Grace beganaccounting for currency fluctuations on a €293 millionintercompany loan between Grace's subsidiaries in the UnitedStates and Germany as a component of operating results instead of as acomponent of other comprehensive income. This change was prompted byGrace's analysis of new tax laws in Germany and its cash flowplanning in connection with its Chapter 11 reorganization, whichtogether indicated that Grace should no longer consider this loan aspart of its 

I-39

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permanent capital structure in Germany. InMay 2004, Grace entered into a series of foreign currency forwardcontracts to mitigate future currency fluctuations on the remainingloan balance. These contracts were extended in June 2005 and havevarying rates that coincide with loan repayments due periodicallythrough December 2008. No loan repayments have been made in 2005. Forthe nine months ended September 30, 2005, a $32.3 million contract gainwas recognized, offset by a $32.5 million foreign currency loss, andwas reported in other (income) expense. These forward contracts areconsidered derivative instruments that are viewed as risk managementtools by Grace and are not used for trading or speculativepurposes.

Chapter 11 Expenses – Although Grace isunable to measure precisely the impact of the Chapter 11 proceedings onits overall financial performance, Grace incurs certain added coststhat are directly attributable to operating in Chapter 11. Net Chapter11 expenses consist primarily of legal, financial and consulting feesincurred by Grace and the three creditors' committees. Chapter 11expenses for the three months and nine months ended September 30, 2005increased primarily due to higher legal costs related to activity inGrace's Bankruptcy Court proceedings.

Grace'spre-tax income from core operations included expenses for Chapter11-related compensation charges of $4.5 million and $8.5 million forthe three months ended September 30, 2005 and 2004, respectively, and$13.9 million and $19.3 million for the nine months ended September 30,2005 and 2004, respectively. Poor stock price performance in the periodleading up to and after the Filing diminished the value ofGrace's stock option program as an incentive compensation toolfor current and prospective employees, which caused Grace to change itslong-term incentive compensation program into a cash-based program.

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

Interest Expense– Net interest expense is higher in 2005 as a result of reachingagreement with general unsecured creditors on the amount of interestunder Grace's proposed Plan of Reorganization. The Plan statesthat each holder of an allowed general unsecured claim shall be paid infull, plus post-petition interest. Post-petition interest shall accruethrough the date of payment asfollows:

|              |                                                                                                                       |
|--------------|-----------------------------------------------------------------------------------------------------------------------|
| •  | for the holders of theDebtors' pre-petition bank credit facilities, at a rate of6.09% per annum, compoundedquarterly; |

|              |                                                                                                                                                                                                                                                                                                                                                                                     |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | for the holders ofclaims who, but for the Filing would be entitled under a contract orotherwise to accrue or be paid interest on such claim in a non-default(or non-overdue payment) situation under applicable non-bankruptcy law,the rate provided in the contract between a Debtor(s) and the claimantor such rate as may otherwise apply under applicable non-bankruptcylaw; or |

|              |                                                                                                             |
|--------------|-------------------------------------------------------------------------------------------------------------|
| •  | for all other holdersof allowed general unsecured claims, at a rate of 4.19% perannum, compounded annually. |

Such interest, which under the Planis payable 85% in cash and 15% in Grace common stock,will not be paid until the Plan is confirmed and funded.

Income Taxes – Grace's provision for incometaxes at the federal corporate rate of 35.0% was $32.9 millionand $48.0 million for the nine months ended September 30, 2005 and2004, respectively. The primary differences between these amounts andthe overall provision for income taxes is due to interest on taxcontingencies, the non-deductibility of certain Chapter 11 expensesand, in 2005, a $16.0 million favorable change in estimated liabilitiesfor tax exposures.

Business Segment Overview

Thefollowing is an overview of financial measures of the performance ofGrace's business segments for the three months and nine monthsended September 30, 2005 compared with the prior year periods.

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Davison Chemicals

|                                       |  |                                |       |                   |  |                   |       |        |  |        |      |        |  |        |      |         |  |  |
|---------------------------------------|--|--------------------------------|-------|-------------------|--|-------------------|-------|--------|--|--------|------|--------|--|--------|------|---------|--|--|
| NetSales by Product Line(In millions) |  | ThreeMonths Ended September30, |
| 2005                                  |  | 2004                           |       | $ChangeFav(Unfav) |  | %ChangeFav(Unfav) |       |
| Refiningtechnologies                  |  | $                              | 197.7 |              |  | $                 | 169.1 |   |  | $      | 28.6 |   |  |   | 16.9 | %  |
| Specialtymaterials                    |  |                           | 140.6 |              |  |              | 134.7 |   |  |   | 5.9  |   |  |   | 4.4  | %  |
| **TotalDavisonChemicals**             |  | $                              | 338.3 |              |  | $                 | 303.8 |   |  | $      | 34.5 |   |  |   | 11.4 | %  |
|                                       |

|                                 |  |                                |       |                   |  |                   |       |        |  |        |      |        |  |        |      |         |  |  |
|---------------------------------|--|--------------------------------|-------|-------------------|--|-------------------|-------|--------|--|--------|------|--------|--|--------|------|---------|--|--|
| NetSales by Region(In millions) |  | Three MonthsEnded September30, |
| 2005                            |  | 2004                           |       | $ChangeFav(Unfav) |  | %ChangeFav(Unfav) |       |
| NorthAmerica                    |  | $                              | 131.3 |              |  | $                 | 117.0 |   |  | $      | 14.3 |   |  |   | 12.2 | %  |
| Europe                          |  |                           | 135.0 |              |  |              | 125.0 |   |  |   | 10.0 |   |  |   | 8.0  | %  |
| AsiaPacific                     |  |                           | 56.3  |              |  |              | 51.3  |   |  |   | 5.0  |   |  |   | 9.7  | %  |
| LatinAmerica                    |  |                           | 15.7  |              |  |              | 10.5  |   |  |   | 5.2  |   |  |   | 49.5 | %  |
| **TotalDavisonChemicals**       |  | $                              | 338.3 |              |  | $                 | 303.8 |   |  | $      | 34.5 |   |  |   | 11.4 | %  |
|                                 |

Sales

The increase in sales mainly reflected current global demand forreduced-sulfur transportation fuels and higher selling prices topartially offset increases in raw material costs. Currency translationwas not a significant factor during the period.

The increase insales of refining technologies products resulted from higher salesvolume of hydroprocessing catalysts in response to worldwide demand forcleaner fuels, and added revenue due to increases in commodity coststhat Grace passed through to its customers pursuant to the terms of itssupply contracts. Hurricanes Katrina and Rita, which caused shut-downsof a number of refineries in the United States, negatively affectedsales of fluid cracking catalysts during the period and Grace believesthe negative effects of the hurricanes are likely to continue throughat least the end of the year. Grace is evaluating the potential forrecovery under its business interruption insurance.

The increasein sales of specialty materials products was primarily attributable tosales from the acquisition of Alltech International Holdings, Inc.,completed in August 2004, increases in selling prices to address rawmaterial cost inflation, and a better product sales mix; partiallyoffset by lower sales of engineered materials in Europe as a result oflower economic activity in parts of that region.

Sales fromacquisitions accounted for $3.4 million, or 1.1 percentage points ofthe sales growth in the period, almost all of which was attributable tothe acquisition of Alltech.

Sales growth was strong in allregions. Sales in Asia Pacific and Latin America were up due to strongdemand in all product lines from economic activity in China andincreased sales activity in Latin America. In North America, increasedsales were primarily attributable to volume growth, as well asfavorable product price/mix, reflecting stronger economic activity inthe United States. European sales were higher due to higher demand forrefining technologies products, which more than offset the effects oflower economic activity in parts of that region.

Operating Income and Margin

The decrease in pre-taxoperating income was primarily attributable to the loss of sales andadded costs related to Hurricanes Katrina and Rita, higher energy andraw material costs, and exposure to the bankruptcy filing of a keycustomer. These losses more than offset improvements in income fromoperations not affected by the hurricanes. Operating margin was downprimarily due to the negative impact of raw materials and hurricanes,combined with minority interest accounting. Grace reports 100%of sales for the Advanced Refining Technologies LLC joint venture, butonly accounts for 55% of the income in its measure of operatingperformance.

I-41

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|                                       |  |                               |         |                   |  |                   |       |        |  |        |       |        |  |        |      |         |  |  |
|---------------------------------------|--|-------------------------------|---------|-------------------|--|-------------------|-------|--------|--|--------|-------|--------|--|--------|------|---------|--|--|
| NetSales by Product Line(In millions) |  | NineMonths Ended September30, |
| 2005                                  |  | 2004                          |         | $ChangeFav(Unfav) |  | %ChangeFav(Unfav) |       |
| Refiningtechnologies                  |  | $                             | 605.4   |              |  | $                 | 482.7 |   |  | $      | 122.7 |   |  |   | 25.4 | %  |
| Specialtymaterials                    |  |                          | 426.5   |              |  |              | 389.8 |   |  |   | 36.7  |   |  |   | 9.4  | %  |
| **TotalDavisonChemicals**             |  | $                             | 1,031.9 |              |  | $                 | 872.5 |   |  | $      | 159.4 |   |  |   | 18.3 | %  |
|                                       |

|                                 |  |                               |         |                   |  |                   |       |        |  |        |       |        |  |        |      |         |  |  |
|---------------------------------|--|-------------------------------|---------|-------------------|--|-------------------|-------|--------|--|--------|-------|--------|--|--------|------|---------|--|--|
| NetSales by Region(In millions) |  | Nine MonthsEnded September30, |
| 2005                            |  | 2004                          |         | $ChangeFav(Unfav) |  | %ChangeFav(Unfav) |       |
| NorthAmerica                    |  | $                             | 388.9   |              |  | $                 | 337.8 |   |  | $      | 51.1  |   |  |   | 15.1 | %  |
| Europe                          |  |                          | 415.4   |              |  |              | 365.3 |   |  |   | 50.1  |   |  |   | 13.7 | %  |
| AsiaPacific                     |  |                          | 181.3   |              |  |              | 136.5 |   |  |   | 44.8  |   |  |   | 32.8 | %  |
| LatinAmerica                    |  |                          | 46.3    |              |  |              | 32.9  |   |  |   | 13.4  |   |  |   | 40.7 | %  |
| **TotalDavisonChemicals**       |  | $                             | 1,031.9 |              |  | $                 | 872.5 |   |  | $      | 159.4 |   |  |   | 18.3 | %  |
|                                 |

Sales

The sales increase resulted from similar economic conditions andcost factors as those previously discussed for the three months endedSeptember 30, 2005.

Sales from acquisitions accounted for $28.5million, or 3.3 percentage points of the sales growth in the period,almost all of which was attributable to the acquisition of Alltech.Sales increases also reflected favorable foreign currency translation,which contributed 1.7 percentage points of the sales increase in theperiod.

Operating Income and Margin

The increasein operating income reflected higher sales in all regions and majorproduct lines offset by the negative effects of the hurricanes in theGulf of Mexico, higher raw material and energy costs, and costsassociated with integrating business functions and processes. Operatingmargin was down primarily due to the negative impact of raw materialsand hurricanes, combined with minority interest accounting. Gracereports 100% of sales for the Advanced Refining Technologies LLCjoint venture, but only accounts for 55% of the income in itsmeasure of operating performance.

PerformanceChemicals

|                                       |  |                                |       |                   |  |                   |       |        |  |        |      |        |  |        |      |         |  |  |
|---------------------------------------|--|--------------------------------|-------|-------------------|--|-------------------|-------|--------|--|--------|------|--------|--|--------|------|---------|--|--|
| NetSales by Product Line(In millions) |  | ThreeMonths Ended September30, |
| 2005                                  |  | 2004                           |       | $ChangeFav(Unfav) |  | %ChangeFav(Unfav) |       |
| Constructionchemicals                 |  | $                              | 161.2 |              |  | $                 | 136.7 |   |  | $      | 24.5 |   |  |   | 17.9 | %  |
| Buildingmaterials                     |  |                           | 77.9  |              |  |              | 68.6  |   |  |   | 9.3  |   |  |   | 13.6 | %  |
| Sealantsandcoatings                   |  |                           | 76.0  |              |  |              | 70.8  |   |  |   | 5.2  |   |  |   | 7.3  | %  |
| **TotalPerformanceChemicals**         |  | $                              | 315.1 |              |  | $                 | 276.1 |   |  | $      | 39.0 |   |  |   | 14.1 | %  |
|                                       |

|                                 |  |                                |       |                   |  |                   |       |        |  |        |      |        |  |        |      |         |  |  |
|---------------------------------|--|--------------------------------|-------|-------------------|--|-------------------|-------|--------|--|--------|------|--------|--|--------|------|---------|--|--|
| NetSales by Region(In millions) |  | Three MonthsEnded September30, |
| 2005                            |  | 2004                           |       | $ChangeFav(Unfav) |  | %ChangeFav(Unfav) |       |
| NorthAmerica                    |  | $                              | 153.7 |              |  | $                 | 136.0 |   |  | $      | 17.7 |   |  |   | 13.0 | %  |
| Europe                          |  |                           | 97.5  |              |  |              | 81.9  |   |  |   | 15.6 |   |  |   | 19.0 | %  |
| AsiaPacific                     |  |                           | 42.6  |              |  |              | 41.0  |   |  |   | 1.6  |   |  |   | 3.9  | %  |
| LatinAmerica                    |  |                           | 21.3  |              |  |              | 17.2  |   |  |   | 4.1  |   |  |   | 23.8 | %  |
| **TotalPerformanceChemicals**   |  | $                              | 315.1 |              |  | $                 | 276.1 |   |  | $      | 39.0 |   |  |   | 14.1 | %  |
|                                 |

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Sales

The increase in saleswas primarily from growth in sales volume worldwide and increases inselling prices, which partially offset higher raw material costs.Currency translation was not a significant factor during theperiod.

The increase in sales of construction chemicalsreflected geographic expansion and other growth initiatives, as well ashigher construction activity, primarily in North America. The salesincrease in building materials reflected higher sales of roofingunderlayments to the residential segment in North America, added salesfrom the acquisition of the Triflex® synthetic roofingunderlayment product line in December 2004, and higher sales ofspecialty below-grade commercial waterproofing worldwide. The increasein sales of sealants and coatings was due to the continued commercialsuccess of Daraform® closure sealants and specialty can coatings,as well as selling price increases, which partially offset higher rawmaterial costs.

Sales increases in North America reflectedhigher U.S. construction activity, growth programs in constructionchemicals and residential waterproofing, and theTriflex® acquisition. In Europe, higher sales wereprimarily due to favorable foreign currency translation and growthprograms in construction chemicals. Sales in Asia Pacific increased asa result of broad-based volume growth and the effects of favorableforeign currency translation. Sales in Latin America were favorablyimpacted by currency translation and volume increases in constructionchemicals and can sealants, offset by lower sales of closure sealantsand coatings.

Operating Income and Margin

Pre-taxoperating income increased primarily as a result of sales volumegrowth, partially offset by raw material inflation, which exceeded theeffect of selling price increases. Operating margin was about even withthe three months ended September 30, 2004, as the net impact of rawmaterial cost and selling price increases was offset by the leveragingeffect of sales volumegrowth.

|                                       |  |                               |       |                   |  |                   |       |        |  |        |       |        |  |        |      |         |  |  |
|---------------------------------------|--|-------------------------------|-------|-------------------|--|-------------------|-------|--------|--|--------|-------|--------|--|--------|------|---------|--|--|
| NetSales by Product Line(In millions) |  | NineMonths Ended September30, |
| 2005                                  |  | 2004                          |       | $ChangeFav(Unfav) |  | %ChangeFav(Unfav) |       |
| Constructionchemicals                 |  | $                             | 448.2 |              |  | $                 | 386.1 |   |  | $      | 62.1  |   |  |   | 16.1 | %  |
| Buildingmaterials                     |  |                          | 226.1 |              |  |              | 199.5 |   |  |   | 26.6  |   |  |   | 13.3 | %  |
| Sealantsandcoatings                   |  |                          | 226.9 |              |  |              | 212.7 |   |  |   | 14.2  |   |  |   | 6.7  | %  |
| **TotalPerformanceChemicals**         |  | $                             | 901.2 |              |  | $                 | 798.3 |   |  | $      | 102.9 |   |  |   | 12.9 | %  |
|                                       |

|                                 |  |                               |       |                   |  |                   |       |        |  |        |       |        |  |        |      |         |  |  |
|---------------------------------|--|-------------------------------|-------|-------------------|--|-------------------|-------|--------|--|--------|-------|--------|--|--------|------|---------|--|--|
| NetSales by Region(In millions) |  | Nine MonthsEnded September30, |
| 2005                            |  | 2004                          |       | $ChangeFav(Unfav) |  | %ChangeFav(Unfav) |       |
| NorthAmerica                    |  | $                             | 437.2 |              |  | $                 | 391.0 |   |  | $      | 46.2  |   |  |   | 11.8 | %  |
| Europe                          |  |                          | 283.0 |              |  |              | 240.9 |   |  |   | 42.1  |   |  |   | 17.5 | %  |
| AsiaPacific                     |  |                          | 123.3 |              |  |              | 115.3 |   |  |   | 8.0   |   |  |   | 6.9  | %  |
| LatinAmerica                    |  |                          | 57.7  |              |  |              | 51.1  |   |  |   | 6.6   |   |  |   | 12.9 | %  |
| **TotalPerformanceChemicals**   |  | $                             | 901.2 |              |  | $                 | 798.3 |   |  | $      | 102.9 |   |  |   | 12.9 | %  |
|                                 |

Sales

The increase in sales was largely attributable to the same favorablefactors that affected sales in the three months ended September 30,2005.

Operating Income and Margin

The increase inpre-tax operating income reflected higher sales volume and positiveresults from productivity and cost containment initiatives, partiallyoffset by raw material cost inflation, which exceeded selling priceincreases. Operating margin was about even with the nine months endedSeptember 30, 2004, as the net impact of raw material cost and sellingprice increases was offset by the leveraging effect of sales volumegrowth.

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Operating Returns on AssetsEmployed – The following charts set forth the DavisonChemicals and Performance Chemicals total asset position and pre-taxreturn on average total assets as of September 30, 2005 and December31, 2004. It should be noted that the manufacture of Davison Chemicalsproducts generally involves significantly higher capital costs than themanufacture of Performance Chemicalsproducts.

|                                      |  |                  |       |                 |  |        |       |         |  |  |
|--------------------------------------|--|------------------|-------|-----------------|--|--------|-------|---------|--|--|
| DavisonChemicals(In millions)        |  | September30,2005 |       | December31,2004 |
| Tradereceivables                     |  | $                | 187.4 |            |  | $      | 172.0 |    |
| Inventory                            |  |             | 161.9 |            |  |   | 151.8 |    |
| Othercurrentassets                   |  |             | 25.4  |            |  |   | 4.9   |    |
| Totalcurrentassets                   |  |             | 374.7 |            |  |   | 328.7 |    |
| Properties andequipment, net         |  |             | 391.7 |            |  |   | 437.6 |    |
| Goodwilland other intangibleassets   |  |             | 96.4  |            |  |   | 105.7 |    |
| Otherassets                          |  |             | 2.2   |            |  |   | 18.9  |    |
| Totalassets                          |  | $                | 865.0 |            |  | $      | 890.9 |    |
| Pre-taxreturn on average totalassets |  |             | 17.4  | %          |  |   | 17.8  | %  |
|                                      |

DavisonChemicals' total assets decreased by $25.9 million as ofSeptember 30, 2005 compared with December 31, 2004. The decrease wasdue to depreciation and amortization expense exceeding capitalinvestment and to foreign currency translation reflecting a strongerU.S. dollar on September 30, 2005 than on December 31, 2004. Increasedtrade receivables and inventory, reflecting higher sales and rawmaterial costs, partially offset thedecrease.

|                                      |  |                  |       |                 |  |        |       |         |  |  |
|--------------------------------------|--|------------------|-------|-----------------|--|--------|-------|---------|--|--|
| PerformanceChemicals(In millions)    |  | September30,2005 |       | December31,2004 |
| Tradereceivables                     |  | $                | 237.8 |            |  | $      | 219.1 |    |
| Inventory                            |  |             | 99.1  |            |  |   | 96.5  |    |
| Othercurrentassets                   |  |             | 15.2  |            |  |   | 14.5  |    |
| Totalcurrentassets                   |  |             | 352.1 |            |  |   | 330.1 |    |
| Properties andequipment, net         |  |             | 182.3 |            |  |   | 198.3 |    |
| Goodwilland other intangibleassets   |  |             | 95.7  |            |  |   | 102.2 |    |
| Otherassets                          |  |             | 47.1  |            |  |   | 43.9  |    |
| Totalassets                          |  | $                | 677.2 |            |  | $      | 674.5 |    |
| Pre-taxreturn on average totalassets |  |             | 21.3  | %          |  |   | 20.7  | %  |
|                                      |

PerformanceChemicals' total assets increased by $2.7 million as of September30, 2005 compared with December 31, 2004. The increase was primarilyattributable to higher trade receivables caused by increased sales,partially offset by $29.8 million from lower foreign currencytranslation reflecting a stronger U.S. dollar. Aside from currencyeffects, current assets reflected sales increases, while the decline inproperties and equipment reflected capital spending in the first ninemonths of 2005 at a lower level than depreciation.

NoncoreLiabilities

Grace has a number of financial exposuresoriginating from past businesses, products and events. Theseobligations arose from transactions and/or business practices that dateback to when Grace was a much larger company, when it produced productsor operated businesses that are no longer part of its revenue base, andwhen government regulation was less stringent and scientific knowledgewith respect to such businesses and products was much less advancedthan today.

I-44

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The following table summarizes netnoncore liabilities at September 30, 2005 and December 31,2004:

|                                     |  |                  |          |                  |  |        |          |         |  |  |
|-------------------------------------|--|------------------|----------|------------------|--|--------|----------|---------|--|--|
| NetNoncore Liabilities(In millions) |  | September30,2005 |          | December 31,2004 |
| Asbestos-relatedliabilities         |  | $                | (1,700.0 | )           |  | $      | (1,700.0 | )  |
| Asbestos-relatedinsurancereceivable |  |             | 500.0    |             |  |   | 500.0    |    |
| Asbestos-relatedliability,net       |  |             | (1,200.0 | )           |  |   | (1,200.0 | )  |
| Environmentalremediation            |  |             | (318.9   | )           |  |   | (345.0   | )  |
| Postretirementbenefits              |  |             | (106.4   | )           |  |   | (118.9   | )  |
| Incometaxes                         |  |             | (126.0   | )           |  |   | (210.4   | )  |
| Retainedobligations andother        |  |             | (20.7    | )           |  |   | (25.1    | )  |
| **Netnoncoreliability**             |  | $                | (1,772.0 | )           |  | $      | (1,899.4 | )  |
|                                     |

Theresolution of most of these noncore recorded and contingent liabilitieswill be determined through the Chapter 11 proceedings. Grace cannotpredict with any certainty how, and for what amounts, any of thesecontingencies will be resolved. The amounts of these liabilities asultimately determined through the Chapter 11 proceedings could bematerially different from amounts recorded by Grace at September 30,2005.

Plan of Reorganization

As described under"Voluntary Bankruptcy Filing" in Notes 1 and2 to the Consolidated Financial Statements, Grace and its principalU.S. operating subsidiary are debtors-in-possession under Chapter 11 ofthe Bankruptcy Code. Grace's non-U.S. subsidiaries, although notpart of the Filing, are owned directly or indirectly by Grace'sprincipal operating subsidiary or other filing entities. Consequently,Grace expects that a Chapter 11 reorganization plan will involve thecombined value of Grace's global businesses and its other assetsto fund (with cash and/or securities) Grace's obligations asadjudicated through the bankruptcy process. Grace has analyzed its cashflow and capital needs to continue to fund its businesses and believesthat, while in Chapter 11, sufficient cash flow and credit facilitiesare available to support its business strategy.

On January 13,2005, Grace filed an amended plan of reorganization (the"Plan") and related documents to addresscertain objections of creditors and other interested parties to itsoriginal plan of reorganization and disclosure statement filed onNovember 13, 2004. The Plan is supported by committees representinggeneral unsecured creditors and equity holders, but is not supported bycommittees representing asbestos personal injury claimants and asbestosproperty damage claimants. See Note 2 to the Consolidated FinancialStatements for more information on the Plan.

Risks of thePlan **–** Grace intends to address all pending andfuture asbestos-related claims and all other pre-petition claims asoutlined in the Plan. However, Grace may not be successful in obtainingapproval of the Plan by the Bankruptcy Court. Instead, a materiallydifferent plan of reorganization may ultimately be approved and, underthe ultimate plan of reorganization, the interests of Grace'sshareholders could be substantially diluted or cancelled. The value ofGrace common stock following a plan of reorganization, and the extentof any recovery by non-asbestos-related creditors, will dependprincipally on the allowed value of Grace's asbestos-relatedclaims as determined by the Bankruptcy Court.

Grace'sproposed plan of reorganization assumes several fundamental conditionsincluding:

|          |                                                                                                                                                                                                                                                                                                                        |
|----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.  | Grace'sasbestos-related liabilities can be resolved at a net present valuecost of no more than $1,700 million (including $87 million forpre-petition asbestos-related contractual settlements and judgments),including all property damage claims (including ZAI) and all pendingand future personal injury claims;and |

|          |                                                                                                                                                                                                                            |
|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.  | The benefit of assets fromlitigation settlement agreements with Sealed Air Corporation and itssubsidiary, Cryovac, Inc., and Fresenius Medical Care Holdings, Inc.will be available to satisfy liabilities under the Plan. |

Therecan be no guarantee that these two fundamental conditions can be met.The measure of Grace's asbestos-related liabilities could besettled by the Bankruptcy Court (in conformity with Grace's Plan

I-45

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or otherwise), by a negotiation withinterested parties, and/or by legislation (currently being consideredby the U.S. Congress) for the personal injury component of thiscontingency.

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

Under the current versionof FAIR, Grace's required payments to the fund would be based ona percentage of sales payable annually over a period of up to 30 years.Whether FAIR, as reported or as it may be amended, is enacted into lawis highly uncertain. Legislation to provide a resolution for asbestospersonal injury mass tort litigation has been considered many timesbefore and in no instance has legislation passed both houses ofCongress. A resolution of personal injury claims based on FAIR may notsatisfy the conditions precedent under the litigation settlementagreements with Sealed Air and Fresenius and, therefore, may reduce oreliminate the availability of these assets to fund a plan ofreorganization.

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

ProformaFinancial Information – The proforma financial informationof Grace presented below reflects the accounting effects of the Plan(1) as if it were put in effect on the date of Grace's mostrecent consolidated balance sheet – September 30, 2005, and (2)as if it were in effect for (a) the full year ended December 31, 2004,and (b) the nine months ended September 30, 2005. The proformafinancial information included herein, may not be consistent with thePlan documents filed on January 13, 2005 due to subsequent changes inoperations and accounting estimates. Such proforma financial statementsreflect how Grace's assets, liabilities, equity and income wouldbe affected by the Plan asfollows:

|          |                                                       |
|----------|-------------------------------------------------------|
| A.  | Borrowings Under New DebtAgreements and Contingencies |

The Plan reflects the assumedestablishment of a new $1,000 million debt facility to fund settledclaims payable at the effective date of the Plan (approximately $800million) and to provide working capital (approximately $200 million)for continuing operations. Proforma expenses reflect an assumed7% interest rate on outstanding borrowings. No such facilitycurrently exists but, Grace expects, based on discussions withprospective lenders, that a facility can be obtained before theeffective date of the Plan. In addition, the proforma financialinformation reflects $150.0 million in contingencies to payprofessional and bank fees, other non-operating liabilities and theirrelated tax effects that will not become liabilities until theeffective date of the Plan.

|          |                                     |
|----------|-------------------------------------|
| B.  | Fresenius and Sealed AirSettlements |

The Plan reflects the value, in the form of cash andsecurities, expected to be realized under litigation settlementagreements as follows: $115.0 million of cash from Fresenius; and,$1,021.8 million of estimated value from Cryovac, Inc., a subsidiary ofSealed Air (calculated as of September 30, 2005) in the form of $512.5million of cash plus accrued interest at 5.5% from December 21,2002 compounded annually (approximately $82.2 million), and ninemillion shares of Sealed Air common stock valued at $47.46 per share(approximately $427.1 million). Tax accounts have been adjusted toreflect the satisfaction of Grace's recorded liabilities by wayof these third-party agreements. The Fresenius settlement amount willbe payable to Grace and will be accounted for as income. Payments underthe Sealed Air settlement will be paid directly to the asbestos trustby Cryovac and will be accounted for as satisfaction of a portion ofGrace's recorded asbestos-related liability and a credit toshareholder's equity. In addition, the valuation allowancerelated to Grace's federal deferred tax assets will not berequired as a result of these settlements and has therefore beenreversed. Both the Sealed Air and Fresenius settlements are subject tothe fulfillment of specified conditions.

I-46

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|          |                                    |
|----------|------------------------------------|
| C.  | Payment of Pre-PetitionLiabilities |

The Plan reflects the transfer of funds andsecurities to settle estimated obligations payable under the Plan atthe effective date. Tax accounts are adjusted to reflect the change innature of Grace's tax assets from predominately temporarydifferences to predominately time-limited tax net operating losses.Non-asbestos pass-through liabilities are assumed to be paid in cashwhen due.

|          |                                                                    |
|----------|--------------------------------------------------------------------|
| D.  | Proforma Consolidated Statement ofOperations and Capital Structure |

The proforma income adjustmentsreflect the elimination from Grace's September 30, 2005 andDecember 31, 2004 Consolidated Statements of Operations of: (1) chargesand expenses directly related to Chapter 11, (2) other expenses andincome related to matters expected to be resolved before emerging fromChapter 11, (3) the accounting for estimates and provisions directlyrelated to the Plan, and (4) the addition of interest and new shares ofGrace common stock related to the assumed financing of the Plan. Forpurposes of proforma earnings per share and proforma share capital, thetrading value of Grace's common stock at September 30, 2005 of$8.95 per share was used for calculating issued and outstanding shares.At this per share valuation, it is assumed that 68.7 million shareswill be issued at the effective date of the Plan to fund asbestos andgeneral unsecured claims, 14.5 million shares would be issuable uponexercise of warrants to satisfy Grace's estimate of PI-AO claims,and 0.7 million shares would be issued upon exercise of in-the-moneystock options. Such trading value is presented solely for purposes ofpresenting a proforma Consolidated Statement of Operations and may notbe indicative of the actual trading value of Grace common stockfollowing the effective date of the Plan. Should Grace'sdistributable value per share at the effective date of the Plan bebelow approximately $9.00 per share, Grace would be required to revalueits balance sheet for a change in control. (The trading value ofGrace's common stock over the twelve-month period ended September30, 2005 was between $7.11 and $14.95 per share.) These proformafinancial statements reflect no change in assets or income related tothis potential accountingoutcome.

|          |                           |
|----------|---------------------------|
| E.  | Non-asbestosContingencies |

The accompanying proforma financial informationassumes all non-asbestos related contingencies (includingenvironmental, tax and civil and criminal litigation) are settled forrecorded amounts as of September 30, 2005. Certain liabilities areassumed to be paid at the effective date based on Grace'sestimate of amounts that will be determinable and payable. Theremainder, which would also be subject to the approved plan ofreorganization, is assumed to be paid subsequent to the effective dateas amounts are either not due until a later date or will be determinedthrough post-effective-date litigation. The ultimate value of suchclaims may change materially as Grace's Chapter 11 and otherlegal proceedings further define Grace's non-asbestos relatedobligations.

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|                                                                                              |  |                             |         |                                                    |  |                                |         |                                  |  |                          |          |         |  |        |          |         |  |        |         |         |  |  |
|----------------------------------------------------------------------------------------------|--|-----------------------------|---------|----------------------------------------------------|--|--------------------------------|---------|----------------------------------|--|--------------------------|----------|---------|--|--------|----------|---------|--|--------|---------|---------|--|--|
|                                                                                         |  |                        |         | ProformaAdjustments                                |  |                           |
| W.R. Grace & Co and SubsidiariesProforma CondensedConsolidated Balance Sheet(Inmillions) |  | September 30,2005AsReported |         | BorrowingsUnder New DebtAgreementsandContingencies |  | SealedAir/FreseniusSettlements |         | PaymentofPre-PetitionLiabilities |  | September30,2005Proforma |
| **ASSETS**                                                                                   |  |                        |    |                                               |  |                           |    |                             |  |                     |     |    |  |   |     |    |  |   |    |    |
| **CurrentAssets**                                                                            |  |                        |    |                                               |  |                           |    |                             |  |                     |     |    |  |   |     |    |  |   |    |    |
| Cashand cashequivalents                                                                      |  | $                           | 463.5   |                                               |  | $                              | 800.0   |                             |  | $                        | 115.0    |    |  | $      | (1,007.3 | )  |  | $      | 371.2   |    |
| Othercurrentassets                                                                           |  |                        | 780.0   |                                               |  |                           | — |                             |  |                     | —  |    |  |   | —  |    |  |   | 780.0   |    |
| **TotalCurrentAssets**                                                                       |  |                        | 1,243.5 |                                               |  |                           | 800.0   |                             |  |                     | 115.0    |    |  |   | (1,007.3 | )  |  |   | 1,151.2 |    |
| Non-currentoperatingassets                                                                   |  |                        | 971.2   |                                               |  |                           | — |                             |  |                     | —  |    |  |   | —  |    |  |   | 971.2   |    |
| Cashvalue of lifeinsurance                                                                   |  |                        | 83.0    |                                               |  |                           | — |                             |  |                     | —  |    |  |   | —  |    |  |   | 83.0    |    |
| Deferredincometaxes:                                                                         |  |                        |    |                                               |  |                           |    |                             |  |                     |     |    |  |   |     |    |  |   |    |    |
| Netoperating losscarryforwards                                                               |  |                        | 69.3    |                                               |  |                           | — |                             |  |                     | (40.3    | )  |  |   | 126.1    |    |  |   | 155.1   |    |
| Temporarydifferences, net of valuationallowance                                              |  |                        | 598.1   |                                               |  |                           | 26.3    |                             |  |                     | (309.6   | )  |  |   | (126.1   | )  |  |   | 188.7   |    |
| Asbestos-relatedinsurance                                                                    |  |                        | 500.0   |                                               |  |                           | — |                             |  |                     | —  |    |  |   | —  |    |  |   | 500.0   |    |
| **TotalAssets**                                                                              |  | $                           | 3,465.1 |                                               |  | $                              | 826.3   |                             |  | $                        | (234.9   | )  |  | $      | (1,007.3 | )  |  | $      | 3,049.2 |    |
| **LIABILITIESAND SHAREHOLDERS' EQUITY(DEFICIT)**                                             |  |                        |    |                                               |  |                           |    |                             |  |                     |     |    |  |   |     |    |  |   |    |    |
| TotalCurrentLiabilities                                                                      |  | $                           | 395.8   |                                               |  | $                              | — |                             |  | $                        | —  |    |  | $      | —  |    |  | $      | 395.8   |    |
| Long-termdebt                                                                                |  |                        | 0.5     |                                               |  |                           | 800.0   |                             |  |                     | —  |    |  |   | —  |    |  |   | 800.5   |    |
| Othernoncurrentliabilities                                                                   |  |                        | 543.0   |                                               |  |                           | — |                             |  |                     | —  |    |  |   | —  |    |  |   | 543.0   |    |
| **TotalLiabilities Not Subject toCompromise**                                                |  |                        | 939.3   |                                               |  |                           | 800.0   |                             |  |                     | —  |    |  |   | —  |    |  |   | 1,739.3 |    |
| Bankdebt/letters of credit/capitalleases                                                     |  |                        | 674.7   |                                               |  |                           | — |                             |  |                     | —  |    |  |   | (672.7   | )  |  |   | 2.0     |    |
| Liabilityfor asbestos-related litigation andclaims                                           |  |                        | 1,700.0 |                                               |  |                           | — |                             |  |                     | (1,021.8 | )  |  |   | (548.2   | )  |  |   | 130.0   |    |
| Liabilityfor environmentalremediation                                                        |  |                        | 318.9   |                                               |  |                           | — |                             |  |                     | —  |    |  |   | (206.4   | )  |  |   | 112.5   |    |
| Liabilityfor postretirement health and specialpensions                                       |  |                        | 181.4   |                                               |  |                           | — |                             |  |                     | —  |    |  |   | (10.4    | )  |  |   | 171.0   |    |
| Liabilityfor accounts payable andlitigation                                                  |  |                        | 98.9    |                                               |  |                           | — |                             |  |                     | —  |    |  |   | (78.8    | )  |  |   | 20.1    |    |
| Liabilityfor tax claims andcontingencies                                                     |  |                        | 126.0   |                                               |  |                           | — |                             |  |                     | —  |    |  |   | (56.0    | )  |  |   | 70.0    |    |
| Othernonoperating liabilities, including Plancontingencies                                   |  |                        | — |                                               |  |                           | 150.0   |                             |  |                     | —  |    |  |   | (50.0    | )  |  |   | 100.0   |    |
| **LiabilitiesSubject toCompromise**                                                          |  |                        | 3,099.9 |                                               |  |                           | 150.0   |                             |  |                     | (1,021.8 | )  |  |   | (1,622.5 | )  |  |   | 605.6   |    |
| **TotalLiabilities**                                                                         |  |                        | 4,039.2 |                                               |  |                           | 950.0   |                             |  |                     | (1,021.8 | )  |  |   | (1,622.5 | )  |  |   | 2,344.9 |    |
| **Shareholder'sEquity(Deficit)**                                                             |  |                        |    |                                               |  |                           |    |                             |  |                     |     |    |  |   |     |    |  |   |    |    |
| Sharecapital                                                                                 |  |                        | 424.2   |                                               |  |                           | — |                             |  |                     | —  |    |  |   | 615.2    |    |  |   | 1,039.4 |    |
| Retainedearnings and other equityitems                                                       |  |                        | (998.3  | )                                             |  |                           | (123.7  | )                           |  |                     | 786.9    |    |  |   | —  |    |  |   | (335.1  | )  |
| **TotalShareholders' Equity (Deficit)**                                                      |  |                        | (574.1  | )                                             |  |                           | (123.7  | )                           |  |                     | 786.9    |    |  |   | 615.2    |    |  |   | 704.3   |    |
| **TotalLiabilities and Shareholders' Equity (Deficit)**                                      |  | $                           | 3,465.1 |                                               |  | $                              | 826.3   |                             |  | $                        | (234.9   | )  |  | $      | (1,007.3 | )  |  | $      | 3,049.2 |    |
|                                                                                              |

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|                                                                                                                          |  |                             |         |                                          |  |            |         |                     |  |          |         |         |  |        |         |         |  |        |         |         |  |        |         |         |  |  |
|--------------------------------------------------------------------------------------------------------------------------|--|-----------------------------|---------|------------------------------------------|--|------------|---------|---------------------|--|----------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
| W.R. Grace & Co. and SubsidiariesProforma ConsolidatedStatements of Operations(In millions, except per shareamounts) |  | Year EndedDecember 31, 2004 |         | Nine Month Period Ended September30,2005 |
| AsReported                                                                                                               |  | ProformaAdjustments         |         | Proforma                                 |  | AsReported |         | ProformaAdjustments |  | Proforma |         |
| **NetSales**                                                                                                             |  | $                           | 2,259.9 |                                     |  | $          | — |                |  | $        | 2,259.9 |    |  | $      | 1,933.1 |    |  | $      | — |    |  | $      | 1,933.1 |    |
| Costof goods sold, exclusive of depreciation and amortization shownseparatelybelow                                       |  |                        | 1,431.5 |                                     |  |       | — |                |  |     | 1,431.5 |    |  |   | 1,258.4 |    |  |   | — |    |  |   | 1,258.4 |    |
| Selling,general and administrative expenses, exclusive of net pension expenseshown separatelybelow                       |  |                        | 442.8   |                                     |  |       | — |                |  |     | 442.8   |    |  |   | 350.0   |    |  |   | (26.4   | )  |  |   | 323.6   |    |
| Depreciationandamortization                                                                                              |  |                        | 108.8   |                                     |  |       | — |                |  |     | 108.8   |    |  |   | 86.1    |    |  |   | — |    |  |   | 86.1    |    |
| Researchand developmentexpenses                                                                                          |  |                        | 51.1    |                                     |  |       | — |                |  |     | 51.1    |    |  |   | 45.1    |    |  |   | — |    |  |   | 45.1    |    |
| Netpensionexpense                                                                                                        |  |                        | 61.9    |                                     |  |       | — |                |  |     | 61.9    |    |  |   | 54.4    |    |  |   | — |    |  |   | 54.4    |    |
| Interestexpense and related financingcosts                                                                               |  |                        | 111.1   |                                     |  |       | (51.8   | )              |  |     | 59.3    |    |  |   | 41.3    |    |  |   | 1.5     |    |  |   | 42.8    |    |
| Provisionfor environmentalremediation                                                                                    |  |                        | 21.6    |                                     |  |       | (21.6   | )              |  |     | — |    |  |   | — |    |  |   | — |    |  |   | — |    |
| Provisionfor asbestos-related litigation, net ofinsurance                                                                |  |                        | 476.6   |                                     |  |       | (476.6  | )              |  |     | — |    |  |   | — |    |  |   | — |    |  |   | — |    |
| Other(income) expense                                                                                                    |  |                        | (68.4   | )                                   |  |       | 62.3    |                |  |     | (6.1    | )  |  |   | (34.4   | )  |  |   | 24.5    |    |  |   | (9.9    | )  |
| **Totalcosts andexpenses**                                                                                               |  |                        | 2,637.0 |                                     |  |       | (487.7  | )              |  |     | 2,149.3 |    |  |   | 1,800.9 |    |  |   | (0.4    | )  |  |   | 1,800.5 |    |
| **Income(loss) before Chapter 11 expenses, income taxes, and minorityinterest**                                          |  |                        | (377.1  | )                                   |  |       | 487.7   |                |  |     | 110.6   |    |  |   | 132.2   |    |  |   | 0.4     |    |  |   | 132.6   |    |
| Chapter11 expenses,net                                                                                                   |  |                        | (18.0   | )                                   |  |       | 18.0    |                |  |     | — |    |  |   | (19.9   | )  |  |   | 19.9    |    |  |   | — |    |
| Benefitfrom (provision for) incometaxes                                                                                  |  |                        | 1.5     |                                     |  |       | (37.2   | )              |  |     | (35.7   | )  |  |   | (26.0   | )  |  |   | (14.0   | )  |  |   | (40.0   | )  |
| Minorityinterest in consolidatedentities                                                                                 |  |                        | (8.7    | )                                   |  |       | — |                |  |     | (8.7    | )  |  |   | (18.4   | )  |  |   | — |    |  |   | (18.4   | )  |
| **Netincome(loss)**                                                                                                      |  | $                           | (402.3  | )                                   |  | $          | 468.5   |                |  | $        | 66.2    |    |  | $      | 67.9    |    |  | $      | 6.3     |    |  | $      | 74.2    |    |
| **Basic earnings(loss) per common share**                                                                                |  | $                           | (6.11   | )                                   |  |       |    |                |  | $        | 0.49    |    |  | $      | 1.02    |    |  |   |    |    |  | $      | 0.54    |    |
| Weightedaverage number of basicshares                                                                                    |  |                        | 65.8    |                                     |  |       | 69.4    |                |  |     | 135.2   |    |  |   | 66.8    |    |  |   | 69.4    |    |  |   | 136.2   |    |
| **Dilutedearnings (loss) per commonshare**                                                                               |  | $                           | (6.11   | )                                   |  |       |    |                |  | $        | 0.44    |    |  | $      | 1.01    |    |  |   |    |    |  | $      | 0.49    |    |
| Weightedaverage number of dilutedshares                                                                                  |  |                        | 65.8    |                                     |  |       | 83.9    |                |  |     | 149.7   |    |  |   | 67.3    |    |  |   | 83.9    |    |  |   | 151.2   |    |
|                                                                                                                          |

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FinancialCondition

Asbestos-Related Litigation – See Note3 to the Consolidated Financial Statements.

EnvironmentalMatters – See Note 12 to the Consolidated FinancialStatements.

Defined Benefit Pension Plans – Gracesponsors defined benefit pension plans for its employees in the UnitedStates, Canada, the United Kingdom, Australia, Germany, Italy, France,Spain, Denmark, Japan, Philippines, South Korea, Taiwan, South Africa,Brazil and Mexico and funds government sponsored programs in othercountries where it operates. Certain of the Grace sponsored plans areadvance-funded and others are pay-as-you-go. The advance-funded plansare administered by trustees who direct the management of plan assetsand arrange to have obligations paid when due out of a trust. The mostsignificant advance-funded plans cover Grace's salaried employeesin the U.S. and U.K. and employees covered by collective bargainingagreements at certain of its U.S. facilities.

At the December31, 2004 measurement date for the U.S. advance-funded defined benefitpension plans (the "Pension Plans"), theaccumulated benefit obligation ("ABO") wasapproximately $958 million as measured under U.S. generally acceptedaccounting principles. The ABO is measured as the present value (usinga 5.5% discount rate as of December 31, 2004) of vested andnon-vested benefits earned from employee service to date, based uponcurrent salary levels. Such discount rate is based on a high qualitybond portfolio designed to meet the payout pattern of the PensionPlans. Of the participants in the Pension Plans, approximately80% are current retirees or employees of former Gracebusinesses, making the payout pattern skewed to the nearer term. Assetsavailable to fund the ABO at December 31, 2004 were approximately $666million, or approximately $292 million less than the measuredobligation.

Assets available at September 30, 2005 totaledapproximately $648 million down $18 million from December 31, 2004primarily due to retiree benefit payments. It is Grace'sintention to satisfy its obligations under the Pension Plans and tocomply with all of the requirements of the Employee Retirement IncomeSecurity Act of 1974. On June 22, 2005 Grace obtained Bankruptcy Courtapproval to fund minimum required payments of approximately $46 millionfor the period July 2005 through June 2006. In that regard, in July andOctober 2005, Grace contributed approximately $15 million and $9million, respectively, to the trusts that hold assets of the PensionPlans. However, there can be no assurance that the Bankruptcy Courtwill continue to approve arrangements to satisfy the funding needs ofthe Pension Plans. Contributions to non-U.S. plans are not subject toBankruptcy Court approval and Grace intends to fund such plans based onactuarial and trustee recommendations; $7.9 million was funded duringthe nine months ended September 30, 2005.

See Note 13 to theConsolidated Financial Statements for the components of net periodicbenefit cost for the second quarter and year-to-date. Grace expectstotal pension expense for 2005 to be approximately $70 million, andbenefit payments to retirees to aggregate to approximately $92 millionfor all pension programs in 2005. At September 30, 2005, Grace'srecorded pension liability for U.S. and non-U.S. underfunded plans was$509.2 million ($434.2 million included in liabilities not subject tocompromise and $75.0 million related to supplemental pension benefits,included in "liabilities subject tocompromise") which includes the following components: (1)shortfall between dedicated assets and ABO of underfunded plans ($310.6million); and (2) ABO of pay-as-you-go plans ($198.6 million).

Postretirement Benefits Other Than Pensions – Graceprovides certain health care and life insurance benefits for retiredemployees, a large majority of which pertain to retirees of previouslydivested businesses. These plans are unfunded, and Grace pays the costsof benefits under these plans as they are incurred. Grace's shareof benefits under this program was $3.2 million and $8.3 million duringthe three months and nine months ended September 30, 2005, comparedwith $3.7 million and $9.2 million during the three months and ninemonths ended September 30, 2004. Grace's recorded liability forpostretirement benefits of $106.4 million at September 30, 2005 isstated at net present value discounted at 5.5% (as discussedunder Defined Benefit Pension Plans). Grace's Plan provides forthe continuation of these benefits.

In December 2003, PresidentBush signed the Medicare Prescription Drug, Improvement andModernization Act of 2003 (the "Act") intolaw. The Act introduces a prescription drug benefit under 

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Medicare ("Medicare PartD") as well as a federal subsidy to companies that providea benefit that is at least actuarially equivalent (as defined in theAct) to Medicare Part D. On January 21, 2005, the Center for Medicareand Medicaid Services released the final regulations implementing theAct. Grace has determined that the prescription drug benefit under itspostretirement health care plan is actuarially equivalent to theMedicare Part D benefit. Therefore, the accumulated postretirementbenefit obligation (APBO) was remeasured as of January 21, 2005 toreflect the amount associated with the federal subsidy. The APBO wasreduced by approximately $14.1 million and the net periodic benefitcost for 2005 will be reduced by approximately $1.9 million ($1.5million for the nine-month period ended September 30, 2005) due to theeffect of the federal subsidy.

Liquidity and CapitalResources

Cash Resources and Available CreditFacilities – At September 30, 2005, Grace had $546.5 millionin cash and cash-like assets ($463.5 million in cash and cashequivalents and $83.0 million in net cash value of life insurance). Inaddition, Grace had access to committed credit facilities aggregating$250.0 million under the DIP facility, of which $211.6 million (afterletters of credit and holdback provisions) was available at September30, 2005. The term of the DIP facility expires April 1, 2006. Gracebelieves that these funds and credit facilities will be sufficient tofinance its business strategy while in Chapter 11.

Cash FlowFrom Core Operations – Grace's net cash flow from coreoperations for the nine-month period ended September 30, 2005 decreasedfrom the prior-year period due to increased investment in workingcapital and an increase in capitalexpenditures.

|                                                                            |  |                             |        |         |  |        |        |         |  |  |
|----------------------------------------------------------------------------|--|-----------------------------|--------|---------|--|--------|--------|---------|--|--|
| CoreOperations(Inmillions)         |  | NineMonthsEndedSeptember30, |
| 2005                                                                       |  | 2004                        |        |
| **Cashflows:**                                                             |  |                        |   |    |  |   |   |    |
| Pre-tax operatingincome                                                    |  | $                           | 155.4  |    |  | $      | 145.5  |    |
| Depreciationandamortization                                                |  |                        | 86.1   |    |  |   | 80.4   |    |
| **Pre-taxincome before depreciation andamortization**                      |  |                        | 241.5  |    |  |   | 225.9  |    |
| Workingcapital and otherchanges                                            |  |                        | (71.9  | )  |  |   | (13.0  | )  |
| **Cashflow beforeinvesting**                                               |  |                        | 169.6  |    |  |   | 212.9  |    |
| Capitalexpenditures                                                        |  |                        | (50.2  | )  |  |   | (40.0  | )  |
| Businessesacquired                                                         |  |                        | (2.5   | )  |  |   | (53.0  | )  |
| **Netcash flow from coreoperations**                                       |  | $                           | 116.9  |    |  | $      | 119.9  |    |
|                                                                            |

Theincreased investment in working capital was primarily due to paymentsof approximately $70 million for prior year performance incentives andcustomer volume rebates. Additional investment in working capital wasdue to a shift in regional sales mix outside North America wherestandard terms of sale are longer and advanced purchasing of key rawmaterials is often necessary.

Grace expects to continue toinvest excess cash flow and/or other available capital resources in itscore business base. These investments are likely to be in the form ofadded plant capacity, product line extensions and geographic marketexpansions, and/or acquisitions in existing product lines. Investmentsthat are outside the ordinary course of business may be subject toBankruptcy Court approval and review by the Chapter 11 committees.

Cash Flow From Noncore Activities – The cash flowfrom Grace's noncore activities can be volatile. Expenditures aregenerally governed by Bankruptcy Court rulings and receipts aregenerally nonrecurring. Much of the noncore spending in the past threeyears has been under Chapter 11 first-day motions that allow Grace tofund postretirement benefits and required environmental remediation onGrace-owned sites. Cash inflows have been from asbestos-relatedinsurance recovery on pre-Chapter 11 liability payments, and unusualevents. In April 2005, Grace made a $90 million payment to the U.S.Internal Revenue Service to fund taxes and interest on settled amountsas approved by the Bankruptcy Court.

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|                                                                                                       |  |                             |        |         |  |        |         |         |  |  |
|-------------------------------------------------------------------------------------------------------|--|-----------------------------|--------|---------|--|--------|---------|---------|--|--|
| NoncoreActivities(Inmillions)             |  | NineMonthsEndedSeptember30, |
| 2005                                                                                                  |  | 2004                        |        |
| **Cashflows:**                                                                                        |  |                        |   |    |  |   |    |    |
| Pre-tax income (loss)from noncoreactivities                                                           |  | $                           | (2.7   | )  |  | $      | 12.6    |    |
| Non-cashcharges                                                                                       |  |                        | 12.2   |    |  |   | (15.5   | )  |
| Cashspendingfor:                                                                                      |  |                        |   |    |  |   |    |    |
|     Noncorecontingencies:                                                         |  |                        |   |    |  |   |    |    |
|         Taxsettlement                                         |  |                        | (90.0  | )  |  |   | — |    |
|         Environmentalsettlements                              |  |                        | (29.7  | )  |  |   | — |    |
|     Environmentalremediation                                                      |  |                        | (4.7   | )  |  |   | (6.1    | )  |
|     Postretirementbenefits                                                        |  |                        | (8.3   | )  |  |   | (9.2    | )  |
|     Retainedobligations andother                                                  |  |                        | (0.7   | )  |  |   | (0.9    | )  |
| **Netcash outflow for noncore activities**                                                            |  | $                           | (123.9 | )  |  | $      | (19.1   | )  |
|                                                                                                       |

Netcash flow from core operations and net cash flow from noncoreactivities do not represent income or cash flow as defined undergenerally accepted accounting principles, and should not be consideredan alternative to such measures as an indicator of Grace'sperformance. These measures are provided to distinguish operatingresults of Grace's current business base from results and relatedassets and liabilities of past businesses, discontinued products, andcorporate legacies and the effect of Grace's Chapter 11proceedings.

See the Consolidated Statements of Cash Flowsincluded in the Consolidated Financial Statements for investing andfinancing activities for each of the nine-month periods ended September30, 2005 and 2004.

Debt and Other ContractualObligations – Total debt outstanding at September 30, 2005was $677.9 million, including $160.3 million of accrued interest onpre-petition debt. As a result of the Filing, Grace is now in defaulton $514.4 million of pre-petition debt which, together with accruedinterest thereon, has been included in "liabilitiessubject to compromise" as of September 30, 2005. Theautomatic stay provided under the Bankruptcy Code preventsGrace's lenders from taking any action to collect the principalamounts as well as related accrued interest. However, Grace willcontinue to accrue and report interest on such debt during the Chapter11 proceedings unless further developments lead management to concludethat it is probable that such interest will be compromised.

SeeNote 12 to the Consolidated Financial Statements for a discussion offinancial assurances.

Forward-Looking Statements– This Report contains forward-looking statements thatinvolve risks and uncertainties, as well as statements that arepreceded by, followed by or include the words"believes,""plans," "intends,""targets," "will,""expects,""anticipates," or similar expressions. Forsuch statements, Grace claims the protection of the safe harbor forforward-looking statements contained in the Private SecuritiesLitigation Reform Act of 1995. Actual results may differ materiallyfrom the results predicted, and reported results should not beconsidered as an indication of future performance. In addition to theuncertainties referred to in this Report in"Management's Discussion and Analysis of FinancialCondition and Results of Operations," factors that couldcause actual results to differ materially from those contained in theforward-looking statements include the results of the civil andcriminal legal proceedings in which Grace is involved, the impact ofworldwide economic conditions; pricing of both Grace's products,raw materials and utilities; customer outages and customer demand;factors resulting from fluctuations in interest rates and foreigncurrencies; the impact of competitive products and pricing; thecontinued success of Grace's process improvement initiatives; theimpact of tax, legislation and other regulations in the jurisdictionsin which Grace operates; and developments in and the outcome of theChapter 11 proceedings discussed in this Report and other factors setforth in Grace's most recent Annual Report on Form 10-K,quarterly reports on Form 10-Q and other reports which have been filedwith the SEC. Readers are cautioned not to place undue reliance onforward-looking statements, which speak only as of the date thereof.Grace undertakes no obligation to publicly release any revisions to theforward-looking statements contained in this Report or to update themto reflect events or circumstances occurring after the date of thisReport.

I-52

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Item 3.    QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK

Grace had no outstandingderivative financial instruments that qualify for accounting treatmentunder SFAS No. 133, "Accounting for Derivative Instrumentsand Hedging Activities" at September 30, 2005. Grace hasentered into foreign exchange forward contracts to manage exposure tofluctuations in foreign currency exchange rates on an intercompany loanbetween Grace and a subsidiary in Germany. (See Note 5 to theConsolidated Financial Statements.) For further information concerningGrace's quantitative and qualitative disclosures about marketrisk, refer to Note 8 in the Consolidated Financial Statements inGrace's 2004 Annual Report on Form 10-K.

Item4.    CONTROLS AND PROCEDURES

GENERAL STATEMENT OFRESPONSIBILITY

The management of Grace is responsible for thepreparation, integrity and objectivity of the Consolidated FinancialStatements and the other information included in this report. Suchfinancial information has been prepared in conformity with accountingprinciples generally accepted in the United States of America andaccordingly includes certain amounts that represent management'sbest estimates and judgments. Actual amounts could differ from thoseestimates. Management is also responsible for establishing andmaintaining adequate internal control over financial reporting. Theseinternal controls consist of policies and procedures that are designedto assess and monitor the effectiveness of the control environmentincluding: risk identification, governance structure, delegations ofauthority, information flow, communications and control activities. Achartered Disclosure Committee oversees Grace's public financialreporting process and key managers are required to confirm theircompliance with Grace's policies and internal controls quarterly.While no system of internal controls can ensure elimination of allerrors and irregularities, Grace's internal controls, which arereviewed and modified in response to changing conditions, have beendesigned to provide reasonable assurance that assets are safeguarded,policies and procedures are followed, transactions are properlyexecuted and reported, and appropriate disclosures are made. Theconcept of reasonable assurance is based on the recognition that thereare limitations in all systems of internal control and that the costsof such systems should be balanced with their benefits. The AuditCommittee of the Board of Directors, which is comprised solely ofindependent directors, meets regularly with Grace's seniorfinancial management, internal auditors and independent auditors toreview audit plans and results, as well as the actions taken bymanagement in discharging its responsibilities for accounting,financial reporting and internal controls. The Audit Committee isresponsible for the selection and compensation of the independentauditors. Grace's financial management, internal auditors andindependent auditors have direct and confidential access to the AuditCommittee at all times.

EVALUATION OF DISCLOSURE CONTROLSAND PROCEDURES

As of September 30, 2005, Grace carried out anevaluation of the effectiveness of the design and operation of itsdisclosure controls and procedures pursuant to Rule 13a-15 under theSecurities Exchange Act of 1934, as amended (the "ExchangeAct"). Based upon that evaluation, Grace's ChiefExecutive Officer and Chief Financial Officer concluded thatGrace's disclosure controls and procedures are effective toensure that information required to be disclosed in Grace'sExchange Act reports is recorded, processed, summarized and reportedwithin the time periods specified in the SEC's rules and forms,and that material information relating to Grace is made known tomanagement, including Grace's Chief Executive Officer and ChiefFinancial Officer, as appropriate to allow timely decisions regardingrequired disclosure.

CHANGES IN INTERNAL CONTROL OVERFINANCIAL REPORTING

There was no significant change inGrace's internal control over financial reporting during thequarter ended September 30, 2005 that has materially affected, or isreasonably likely to materially affect, Grace's internal controlover financial reporting.

I-53

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PARTII. OTHER INFORMATION

Item 1.    LEGAL PROCEEDINGS

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

Item 6.    EXHIBITS

|           |  |                                                                                                                                          |  |  |  |  |
|-----------|--|------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| Exhibits. |  | The following is a list of Exhibits filed as part of this QuarterlyReport on Form 10-Q:                                                  |
|      |  |                                                                                                                                     |
| 10.1      |  | 2005-2007Long-Term Incentive Program (incorporated by reference fromGrace's Form 8-K filed with the Commission on July 21,2005)          |
|      |  |                                                                                                                                     |
| 15        |  | Accountants' AwarenessLetter                                                                                                             |
|      |  |                                                                                                                                     |
| 31(i).1   |  | Certification of PeriodicReport by Chief Executive Officer under Section 302 of theSarbanes-Oxley Act of 2002                            |
|      |  |                                                                                                                                     |
| 31(i).2   |  | Certification of PeriodicReport by Chief Financial Officer under Section 302 of theSarbanes-Oxley Act of2002                             |
|      |  |                                                                                                                                     |
| 32        |  | Certification ofPeriodic Report by Chief Executive Officer and Chief Financial Officerunder Section 906 of the Sarbanes-Oxley Act of2002 |
|           |

II-1

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SIGNATURE

In accordance with the requirements of the Securities Exchange Actof 1934, the Registrant caused this Report to be signed on its behalfby the undersigned, thereunto dulyauthorized.

|                       |  |                                                                                                                                                                                                                                                                        |  |  |  |  |
|-----------------------|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
|                  |  | W.R. GRACE &CO.                                                                                                                                                                                                                                                    |
|                  |  | (Registrant)                                                                                                                                                                           |
| Date:November 4, 2005 |  | By /s/ A. E.Festa                                                                                                                                                                                                                                                      |
|                  |  |        A. E. Festa       President and        Chief ExecutiveOfficer                                                                                          |
| Date: November4, 2005 |  | By /s/ Robert M.Tarola                                                                                                                                                                                                                                                 |
|                  |  |        Robert M.Tarola        Senior Vice President and       Chief Financial Officer        (PrincipalAccounting Officer) |
|                       |

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EXHIBITINDEX

|            |  |                                                                                                                                          |  |  |  |  |
|------------|--|------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| ExhibitNo. |  | Description of Exhibit                                                                                                                   |
| 15         |  | Accountants'Awareness Letter                                                                                                             |
| 31(i).1    |  | Certification ofPeriodic Report by Chief Executive Officer under Section 302 of theSarbanes-Oxley Act of 2002                            |
| 31(i).2    |  | Certification of Periodic Report by ChiefFinancial Officer under Section 302 of the Sarbanes-Oxley Act of2002                            |
| 32         |  | Certification of Periodic Report byChief Executive Officer and Chief Financial Officer under Section 906of the Sarbanes-Oxley Act of2002 |
|            |

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