<PAGE>




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

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


                                    FORM 10-Q

(Mark One)

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

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

                                       OR

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


                         Commission File Number 1-13953

                                W. R. GRACE & CO.

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


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


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



             Yes      X                                           No
                    -----                                              -----

65,466,725 shares of Common Stock, $0.01 par value, were outstanding at
October 31, 2002.


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


<PAGE>


                       W. R. GRACE & CO. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                                                      Page No.
                                                                                                      --------
<S>                 <C>                                                                               <C>
PART I.    FINANCIAL INFORMATION
-------

Item 1.             Financial Statements

                    Report of Independent Accountants                                                   I - 1

                    Consolidated Statement of Operations                                                I - 2

                    Consolidated Statement of Cash Flows                                                I - 3

                    Consolidated Balance Sheet                                                          I - 4

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

                    Consolidated Statement of Comprehensive Income                                      I - 5

                    Notes to Consolidated Financial Statements                                     I - 6 to I - 19

Item 2.             Management's Discussion and Analysis of Results of Operations and
                    Financial Condition                                                           I - 20 to I - 33

Item 3.             Quantitative and Qualitative Disclosures About Market Risk                         I - 34

Item 4.             Controls and Procedures                                                            I - 34


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

Item 1.             Legal Proceedings                                                                  II - 1

Item 6.             Exhibits and Reports on Form 8-K                                                   II - 1
</TABLE>


<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS

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

We have reviewed the accompanying consolidated balance sheet of W. R. Grace &
Co. and its subsidiaries as of September 30, 2002, and the related consolidated
statements of operations and of comprehensive income for each of the three-month
and nine-month periods ended September 30, 2002 and September 30, 2001, the
consolidated statement of shareholders' equity (deficit) for each of the
three-month and nine-month periods ended September 30, 2002, and the
consolidated statement of cash flows for the nine-month periods ended September
30, 2002 and September 30, 2001. These financial statements are the
responsibility of the Company's management.

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

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

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

We previously audited in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of December
31, 2001, and the related consolidated statements of operations, of cash flows,
of shareholders' equity (deficit) and of comprehensive (loss) income for the
year then ended (not presented herein). Our report, which was modified as to a
matter raising substantial doubt about the Company's ability to continue as a
going concern, was dated January 29, 2002. In our opinion, the information set
forth in the accompanying consolidated balance sheet as of December 31, 2001, is
fairly stated in all material respects in relation to the consolidated balance
sheet from which it has been derived.


/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Baltimore, Maryland
October 23, 2002


                                      I-1
<PAGE>


<TABLE>
<CAPTION>
===================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES                                         THREE MONTHS ENDED              NINE MONTHS ENDED
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)                              SEPTEMBER 30,                  SEPTEMBER 30,
===================================================================================================================================
Amounts in millions, except per share amounts                              2002            2001           2002           2001
                                                                     --------------------------------------------------------------
<S>                                                                  <C>              <C>             <C>            <C>
Net sales.....................................................         $    478.7     $    448.1      $   1,363.8    $  1,294.1
Other income..................................................                7.5            6.1             18.5          31.4
                                                                     --------------------------------------------------------------
                                                                            486.2          454.2          1,382.3       1,325.5
                                                                     --------------------------------------------------------------

Cost of goods sold, exclusive of depreciation and
  amortization shown separately below ........................              300.5          281.9            859.1         817.6
Selling, general and administrative expenses..................              106.3           87.5            287.5         258.4
Research and development expenses ............................               12.4           12.1             36.6          34.0
Depreciation and amortization ................................               24.5           23.6             70.6          68.7
Interest expense and related financing costs .................                4.8            8.3             15.2          30.0
                                                                     --------------------------------------------------------------
                                                                            448.5          413.4          1,269.0       1,208.7
                                                                     --------------------------------------------------------------

Income before Chapter 11 reorganization expenses and income
  taxes ......................................................               37.7           40.8            113.3         116.8
Chapter 11 reorganization expenses, net ......................               (8.6)          (4.8)           (21.4)        (12.0)
Provision for income taxes....................................              (15.1)         (16.2)           (44.3)        (47.4)
                                                                     --------------------------------------------------------------
    NET INCOME ...............................................         $     14.0     $     19.8      $      47.6    $     57.4
===================================================================================================================================


BASIC EARNINGS PER COMMON SHARE...............................         $     0.21     $     0.30      $     0.73     $      0.88

Average number of basic shares ...............................               65.5           65.3            65.4           65.3

DILUTED EARNINGS PER COMMON SHARE.............................         $     0.21     $     0.30      $     0.73     $      0.88

Average number of diluted shares..............................               65.5           65.4            65.5           65.4
===================================================================================================================================






               The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>


                                      I-2
<PAGE>


<TABLE>
<CAPTION>
====================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES                                                                     NINE MONTHS ENDED
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)                                                         SEPTEMBER 30,
====================================================================================================================================
Dollars in millions                                                                                 2002               2001
                                                                                             ---------------------------------------
<S>                                                                                                 <C>                <C>
OPERATING ACTIVITIES
Income before Chapter 11 reorganization expenses and income taxes........................    $      113.3       $        116.8
Reconciliation to cash provided by (used for) operating activities:
     Depreciation and amortization ......................................................            70.6                 68.7
     Interest accrued on pre-petition debt subject to compromise.........................            11.0                 16.5
     Gain on sales of investments........................................................              --                 (7.9)
     Gain on disposals of assets.........................................................            (1.9)                (3.0)
     Provision for environmental remediation.............................................            19.3                  5.8
     Income from life insurance policies, net............................................            (5.3)                (5.8)
     Changes in assets and liabilities, excluding effect of businesses acquired and
     foreign currency translation:
         Increase in working capital items ..............................................           (13.9)               (43.4)
         Net increase in accounts receivable due to termination of securitization
           program ......................................................................              --                (65.3)
         (Increase) decrease in net pension assets ......................................            (0.9)                 3.7
         Expenditures for asbestos-related litigation ...................................            (8.2)              (107.2)
         Proceeds from asbestos-related insurance .......................................            10.8                 72.7
         Expenditures for environmental remediation .....................................           (14.0)               (20.4)
         Expenditures for postretirement benefits .......................................           (17.7)               (14.8)
         Expenditures for retained obligations of discontinued operations ...............            (3.7)                (8.6)
         Changes in other assets and accruals  ..........................................            20.0                (60.0)
                                                                                             ---------------------------------------
     NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES BEFORE INCOME TAXES AND CHAPTER
       11 REORGANIZATION EXPENSES........................................................           179.4                (52.2)
Chapter 11 reorganization expenses paid, net ............................................           (13.3)                (8.9)
Income taxes paid, net of refunds .......................................................           (20.7)               (22.5)
                                                                                             ---------------------------------------
     NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES ...............................           145.4                (83.6)
                                                                                             ---------------------------------------

INVESTING ACTIVITIES
Capital expenditures ....................................................................           (55.4)               (36.3)
Businesses acquired in purchase transactions, net of cash acquired ......................           (25.0)               (84.4)
Investments in life insurance policies...................................................           (16.2)               (17.7)
Proceeds from life insurance policies....................................................            13.8                 17.1
Proceeds from sales of investments.......................................................             0.9                  7.9
Proceeds from disposals of assets .......................................................             4.6                  5.8
                                                                                             ---------------------------------------
     NET CASH USED FOR INVESTING ACTIVITIES .............................................           (77.3)              (107.6)
                                                                                             ---------------------------------------

FINANCING ACTIVITIES
Net (repayments) proceeds from loans secured by cash value of life insurance.............            (4.2)                33.9
Borrowings under pre-petition credit facilities, net of repayments.......................            (0.7)                97.8
Borrowings under debtor-in-possession facility, net of fees..............................            20.0                 46.5
Repayments of borrowings under debtor-in-possession facility.............................           (20.0)                --
                                                                                             ---------------------------------------
     NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES ...............................            (4.9)               178.2
                                                                                             ---------------------------------------
Effect of currency exchange rate changes on cash and cash equivalents ...................             7.1                 (3.1)
                                                                                             ---------------------------------------
     INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...................................            70.3                (16.1)
Cash and cash equivalents, beginning of period ..........................................           181.3                191.9
                                                                                             ---------------------------------------
Cash and cash equivalents, end of period ................................................    $      251.6       $        175.8
====================================================================================================================================



               The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>


                                      I-3
<PAGE>


<TABLE>
<CAPTION>
============================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES                                                      SEPTEMBER 30,        DECEMBER 31,
CONSOLIDATED BALANCE SHEET (UNAUDITED)                                                       2002                 2001
============================================================================================================================
<S>                                                                                   <C>                <C>
Amounts in millions, except par value and shares

ASSETS
CURRENT ASSETS
Cash and cash equivalents .........................................................    $       251.6     $        181.3
Notes and accounts receivable, net ................................................            332.0              302.1
Inventories .......................................................................            176.7              174.8
Deferred income taxes .............................................................              8.3               22.5
Asbestos-related insurance expected to be realized within one year ................              7.7                9.7
Other current assets...............................................................             67.0               57.7
                                                                                      --------------------------------------
     TOTAL CURRENT ASSETS .........................................................            843.3              748.1

Properties and equipment, net of accumulated depreciation and
     amortization of $1,060.3 (2001 - $995.3)......................................            603.8              589.0
Goodwill ..........................................................................             61.1               55.8
Cash value of life insurance policies, net of policy loans.........................             87.5               75.6
Deferred income taxes .............................................................            507.2              502.9
Asbestos-related insurance expected to be realized after one year..................            274.9              283.7
Other assets ......................................................................            453.3              461.9
                                                                                      --------------------------------------
     TOTAL ASSETS .................................................................    $     2,831.1     $      2,717.0
                                                                                      ======================================

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE
CURRENT LIABILITIES
Debt payable within one year ......................................................    $         6.9     $          7.8
Accounts payable ..................................................................             94.6               99.0
Income taxes payable ..............................................................             16.9               14.4
Other current liabilities .........................................................            154.0              127.9
                                                                                      --------------------------------------
     TOTAL CURRENT LIABILITIES ....................................................            272.4              249.1

Debt payable after one year .......................................................             --                 --
Deferred income taxes .............................................................             24.4               20.8
Other liabilities .................................................................            283.8              275.2
                                                                                      --------------------------------------
     TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE...................................            580.6              545.1

LIABILITIES SUBJECT TO COMPROMISE - NOTE 2.........................................          2,321.7            2,313.6
                                                                                      --------------------------------------
     TOTAL LIABILITIES.............................................................          2,902.3            2,858.7
                                                                                      --------------------------------------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY (DEFICIT)
Common stock issued, par value $0.01; 300,000,000 shares authorized;
outstanding: 2002 - 65,466,725 shares (2001 - 65,399,600) .........................              0.8                0.8
Paid-in capital ...................................................................            433.0              433.0
Accumulated deficit................................................................            (90.2)            (137.8)
Treasury stock, at cost:  shares: 2002 - 11,513,035 (2001 - 11,500,800)............           (137.0)            (137.0)
Accumulated other comprehensive loss ..............................................           (277.8)            (300.7)
                                                                                      --------------------------------------
     TOTAL SHAREHOLDERS' EQUITY (DEFICIT) .........................................            (71.2)            (141.7)
                                                                                      --------------------------------------
     TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) .........................    $     2,831.1     $      2,717.0
============================================================================================================================




               The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>


                                      I-4
<PAGE>


<TABLE>
<CAPTION>
================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
================================================================================================================================
                                                                                             Accumulated             TOTAL
                                         Common Stock                                           Other            SHAREHOLDERS'
                                              and            Accumulated       Treasury      Comprehensive          EQUITY
Dollars in millions                     Paid-in Capital        Deficit          Stock            Loss              (DEFICIT)
--------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>              <C>                <C>          <C>                <C>
BALANCE, JUNE 30, 2002...............   $        433.8   $     (104.2)      $   (137.0)  $     (268.2)      $        (75.6)
Net income ..........................               --           14.0               --             --                 14.0
Stock plan activity .................               --             --               --             --                   --
Other comprehensive income...........               --             --               --           (9.6)                (9.6)
                                        ----------------------------------------------------------------------------------------
   BALANCE, SEPTEMBER 30, 2002.......   $        433.8   $      (90.2)      $   (137.0)  $     (277.8)      $        (71.2)
--------------------------------------------------------------------------------------------------------------------------------


BALANCE, DECEMBER 31, 2001...........   $        433.8   $     (137.8)      $   (137.0)  $     (300.7)      $       (141.7)
Net income ..........................               --           47.6               --             --                 47.6
Other comprehensive income...........               --             --               --           22.9                 22.9
                                        ----------------------------------------------------------------------------------------
   BALANCE, SEPTEMBER 30, 2002.......   $        433.8   $      (90.2)      $   (137.0)  $     (277.8)      $        (71.2)
================================================================================================================================
</TABLE>


<TABLE>
<CAPTION>
================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME                             THREE MONTHS ENDED           NINE MONTHS ENDED
(UNAUDITED)                                                                   SEPTEMBER 30,                SEPTEMBER 30,
================================================================================================================================
Dollars in millions                                                        2002           2001          2002           2001
                                                                        --------------------------------------------------------
<S>                                                                     <C>           <C>            <C>           <C>
NET INCOME.........................................................     $    14.0     $    19.8      $   47.6      $    57.4
                                                                        --------------------------------------------------------

OTHER COMPREHENSIVE (LOSS) INCOME:
Foreign currency translation adjustments...........................          (9.6)         12.1          22.9          (10.8)
Net unrealized loss on investment..................................            --            --            --           (0.2)
                                                                        --------------------------------------------------------
   Total other comprehensive (loss) income.........................          (9.6)         12.1          22.9          (11.0)
                                                                        --------------------------------------------------------
COMPREHENSIVE INCOME ..............................................     $     4.4     $    31.9      $   70.5      $    46.4
================================================================================================================================







               The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>


                                      I-5
<PAGE>


W. R. GRACE & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
--------------------------------------------------------------------------------
1.    BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND FINANCIAL
      REPORTING POLICIES
================================================================================

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

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

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

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

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

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

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

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

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

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



                                     I-6
<PAGE>


through February 1, 2003, and an extension of the Debtors' exclusive rights
to solicit acceptances of a reorganization plan through April 1, 2003.

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

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

At a hearing on April 22, 2002 the Bankruptcy Court entered an order
establishing a bar date of March 31, 2003 for claims of general unsecured
creditors, asbestos property damage claims and medical monitoring claims
related to asbestos. The bar date does not apply to asbestos-related bodily
injury claims or claims related to Zonolite(R) attic insulation ("ZAI"),
which will be addressed separately. Grace has distributed notices and run
media announcements of the bar date under a program approved by the
Bankruptcy Court. Rust Consulting, the court-approved claims handling agent
for the Chapter 11 Cases, is maintaining a register of all claims filed. As
claims are filed, Grace will be cataloguing and assessing their validity.

In July 2002, the Bankruptcy Court approved special counsel to represent the
ZAI claimants, at the Debtors' expense, in a proceeding to determine certain
threshold scientific issues regarding ZAI. The court has set a litigation
schedule that would result in pretrial hearings on these issues in the second
and third quarters of 2003.

Fraudulent Conveyance Claims - Judge Wolin has authorized the Official
Committee of Asbestos Personal Injury Claimants and the Official Committee of
Asbestos Property Damage Claimants to proceed with claims against Sealed Air
Corporation that the 1998 transaction involving Grace's former packaging
business and Sealed Air Corporation constituted a fraudulent conveyance. A
trial originally had been set to begin on September 30, 2002. However, the
Third Circuit Court of Appeals recently issued an opinion in another case
(The Official Committee of Unsecured Creditors of Cybergenics Corp. v.
Chinery) holding that creditors committees do not have the capacity under the
Bankruptcy Code to pursue fraudulent conveyance claims on behalf of the
bankruptcy estate, and that only a trustee or a debtor-in-possession may
bring such an action.

Judge Wolin requested that each interested party propose a course of action
for proceeding with the fraudulent conveyance case in light of the
Cybergenics decision. Among the responses to this request, the Official
Committee of Asbestos Personal Injury Claimants proposed the appointment of a
trustee with full powers, stating that the Debtors' failure to prosecute the
fraudulent conveyance claims constitutes sufficient grounds for such
appointment. The Debtors determined not to bring such claims as
debtors-in-possession because the Debtors believe that the fraudulent
conveyance claims are without merit and that prosecuting such claims would
not be in the interests of all of its creditors and other stakeholders.
However, the Debtors proposed that the court appoint an examiner or a trustee
with limited powers to prosecute the case against Sealed Air Corporation so
that the case could proceed without conflicting with the holding in
Cybergenics. Judge Wolin rejected the proposals to appoint a trustee with
full powers, a limited trustee or an examiner to pursue the case and instead
rescheduled the trial date for December 2, 2002, to be pursued by the two
asbestos claimants committees notwithstanding the Cybergenics decision. He
certified his decision to proceed in this manner for immediate appeal to the
Third Circuit Court of Appeals. The Third Circuit Court of Appeals is
considering whether to grant the parties' requests for appeal of these
issues.

While the Debtors do not believe that sufficient grounds exist under the
Bankruptcy Code for the court to appoint a trustee with full powers, if the
court ultimately determines to do so, the Debtors would no longer operate
their businesses as debtors-in-possession, which could have a material
adverse effect on Grace's results of operations and financial condition.



                                     I-7
<PAGE>


The trial of the fraudulent conveyance claims will include, for purposes of
determining Grace's solvency at the time of the Sealed Air transaction, an
estimation or other determination of Grace's asbestos-related liabilities.
Findings made with respect to Grace's asbestos-related liabilities in this
case could affect the determination of Grace's ultimate asbestos-related
liability in the Chapter 11 proceedings.

Impact on Debt Capital - All of the Debtor's pre-petition debt is in default
due to the Filing. The accompanying Consolidated Balance Sheet as of
September 30, 2002 reflects the classification of the Debtors' pre-petition
debt within "liabilities subject to compromise."

The Debtors have entered into a debtor-in-possession post-petition loan and
security agreement with Bank of America, N. A. (the "DIP facility") in the
aggregate amount of $250 million. The DIP facility has a term expiring on
April 1, 2003 and bears interest under a formula based on the London
Inter-Bank Offered Rate ("LIBOR") plus 2.00 to 2.25 percentage points
depending on the level of loans outstanding. The Debtors are in the process
of evaluating their needs for a renewal of the DIP facility, which will be
subject to Bankruptcy Court approval.

Accounting Impact - The accompanying Consolidated Financial Statements have
been prepared in accordance with Statement of Position 90-7 ("SOP 90-7")
"Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code," promulgated by the American Institute of Certified Public Accountants.
SOP 90-7 requires that financial statements of debtors-in-possession be
prepared on a going concern basis, which contemplates continuity of
operations, realization of assets and liquidation of liabilities in the
ordinary course of business. However, as a result of the Filing, the
realization of certain Debtors' assets and liquidation of certain Debtors'
liabilities are subject to significant uncertainty. While operating as
debtors-in-possession, the Debtors may sell or otherwise dispose of assets
and liquidate or settle liabilities for amounts other than those reflected in
the Consolidated Financial Statements. Further, a plan of reorganization
could materially change the amounts and classifications reported in the
Consolidated Financial Statements, which do not currently give effect to any
adjustments to the carrying value or classification of assets or liabilities
that might be necessary as a consequence of a plan of reorganization.

Pursuant to SOP 90-7, Grace's pre-petition liabilities that are subject to
compromise are required to be reported separately on the balance sheet at an
estimate of the amount that will ultimately be allowed by the Bankruptcy
Court. As of September 30, 2002, such pre-petition liabilities include fixed
obligations (such as debt and contractual commitments) as well as estimates
of costs related to contingent liabilities (such as asbestos-related
litigation and other claims). The recorded amounts of such liabilities
generally reflect accounting measurements as of the Filing Date, adjusted as
warranted, for changes in facts and circumstances and/or rulings under
Grace's Chapter 11 proceedings subsequent to the Filing. (See Note 2 to the
Consolidated Financial Statements for detail of the liabilities subject to
compromise as of September 30, 2002, and as of the Filing Date.) Obligations
of Grace subsidiaries not covered by the Filing continue to be classified on
the Consolidated Balance Sheet based upon maturity dates or the expected
dates of payment. SOP 90-7 also requires separate reporting of certain
expenses, realized gains and losses, and provisions for losses related to the
Filing as reorganization items.

BASIS OF PRESENTATION: The interim Consolidated Financial Statements
presented herein are unaudited and should be read in conjunction with the
Consolidated Financial Statements presented in the Company's 2001 Form 10-K.
Such interim Consolidated Financial Statements reflect all adjustments that,
in the opinion of management, are necessary for a fair presentation of the
results of the interim periods presented; all such adjustments are of a
normal recurring nature. Potential accounting adjustments discovered during
normal reporting and accounting processes are evaluated on the basis of
materiality, both individually and in the aggregate, and are recorded in the
accounting period discovered, unless a restatement of a prior period is
necessary. All significant intercompany accounts and transactions have been
eliminated.

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

RECLASSIFICATIONS: Certain amounts in prior years' Consolidated Financial
Statements have been reclassified to conform to the 2002 presentation.

USE OF ESTIMATES: The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires that management make
estimates and assumptions affecting the assets and liabilities (including
contingent assets and liabilities) reported at the date of the Consolidated
Financial Statements and the revenues and expenses reported for



                                     I-8
<PAGE>
the periods presented. Actual amounts could differ from those estimates.
Grace's accounting measurements that are most affected by management's
estimates of future events are:
o    Contingent liabilities such as asbestos-related matters, environmental
     remediation, tax exposures and retained obligations of divested
     businesses.
o    Pension and post-retirement liabilities that depend on assumptions
     regarding discount rates and total returns on invested funds.
o    Depreciation and amortization periods for long-lived assets including
     property and equipment and intangible assets.
o    Realization values of various assets such as receivables, inventories,
     goodwill, insurance and tax attributes.

The accuracy of these and other estimates may also be materially affected by
developments in the Chapter 11 Cases.

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

Grace's Consolidated Balance Sheet as of September 30, 2002 separately
identifies the liabilities that are "subject to compromise" as a result of
the Chapter 11 proceedings. In Grace's case, "liabilities subject to
compromise" represent pre-petition liabilities, the amount of which has been
determined under U.S. generally accepted accounting principles. Changes to
the recorded amount of such liabilities will be based on developments in the
Chapter 11 Cases and management's assessment of the claim amounts that will
ultimately be allowed by the Bankruptcy Court.

The Debtors have been receiving pre-petition claims and expect to receive
additional pre-petition claims through March 31, 2003, the bar date established
by the Bankruptcy Court (see Note 1). These claims are being reviewed as they
are received and are being compared with the Debtors' recorded pre-petition
liabilities subject to compromise. As sufficient information becomes available
for the Debtors' to adequately assess all claims, adjustments may be necessary
to recorded liabilities subject to compromise.

Changes to pre-petition liabilities subsequent to the Filing Date reflect: 1)
cash payments under approved court orders; 2) the accrual of interest on
pre-petition debt at the pre-petition contractual rate; 3) accruals for
employee-related programs; and 4) changes in estimates related to
pre-petition contingent liabilities.

Components of liabilities subject to compromise are as follows:

================================================================
(Dollars in millions)            SEPTEMBER 30,     Filing Date
(Unaudited)                           2002
================================================================

Pre-petition debt plus
  accrued interest.........     $      535.2      $      511.5
Accounts payable...........             32.1              43.0
Income taxes payable.......            244.6             210.1
Asbestos-related liability.            978.2           1,002.8
Postretirement benefits ...            152.6             185.4
Environmental remediation..            156.4             164.8
Retained obligations of
  divested businesses......             57.8              75.5
Pension related ...........             76.7              70.8
Other accrued liabilities .             88.1             102.1
                                ----------------- --------------
                                $    2,321.7      $    2,366.0
================================================================

Set forth below is a reconciliation of the changes in pre-filing date
liability balances for the period from the Filing Date through
September 30, 2002.

================================================================
                                                  Cumulative
(Dollars in millions)                            Since Filing
================================================================
Balance, Filing Date......................     $    2,366.0
Cash disbursements and/or reclassifications
  under Bankruptcy Court orders:
  Freight and distribution order..........             (5.7)
  Trade accounts payable order............             (8.7)
Other court orders including employee wages
  and benefits, sales and use tax and
  customer programs.......................           (122.2)
Expense/(income) items:
  Interest on pre-petition debt...........             31.9
  Employee related accruals...............             20.7
  Environmental accruals..................             25.1
  Interest on income tax contingencies....             18.0
Balance sheet reclassifications...........             (3.4)
                                               -----------------
Balance, end of period....................     $    2,321.7
================================================================

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

                                     I-9
<PAGE>


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

================================================================
                               THREE MONTHS      NINE MONTHS
                                   ENDED            ENDED
                               SEPTEMBER 30,    SEPTEMBER 30,
(Dollars in millions)              2002              2002
================================================================

Legal and financial
  advisory fees.........      $        8.8     $       21.8
Interest income.........              (0.2)            (0.4)
                              ---------------- -----------------
Chapter 11 reorganization
  expenses, net.........      $        8.6     $       21.4
================================================================

Pursuant to SOP 90-7, interest income earned on Grace's cash balances must be
offset against reorganization expenses.

Condensed financial information of the Debtors is presented below:

===============================================================
W. R. GRACE & CO. - CHAPTER 11 FILING
ENTITIES                                         JANUARY 1,
DEBTOR-IN-POSSESSION STATEMENT OF                 2002 TO
OPERATIONS  (Dollars in millions)              SEPTEMBER 30,
(Unaudited)                                         2002
===============================================================
Net sales, including intercompany.........    $    782.1
Other income..............................          13.2
                                              -----------------
                                                   795.3
                                              -----------------
Cost of goods, including intercompany,
  exclusive of depreciation and
  amortization shown separately below ....         478.0
Selling, general and administrative
  expenses ...............................         196.9
Research and development expenses.........          31.4
Depreciation and amortization ............          45.9
Interest expense and related financing
  costs ..................................          14.8
                                              -----------------
                                                   767.0
                                              -----------------
Income before Chapter 11 reorganization
   expenses, income taxes, and equity in
   net income of non-filing entities......          28.3
Chapter 11 reorganization expenses, net ..         (21.4)
Provision for income taxes ...............         (20.8)
Equity in net income of non-filing entities         61.5
                                              -----------------
   NET INCOME ............................    $     47.6
===============================================================



===============================================================
W. R. GRACE & CO. - CHAPTER 11 FILING
ENTITIES
DEBTOR-IN-POSSESSION CONDENSED STATEMENT OF      JANUARY 1,
CASH FLOWS                                         2002 TO
(Dollars in millions)                           SEPTEMBER 30,
(Unaudited)                                         2002
===============================================================
OPERATING ACTIVITIES
Net income.................................   $      47.6
Reconciliation to net cash provided by
  operating activities:
Non-cash items, net........................          54.7
Changes in other assets and liabilities,
  excluding the effect of businesses
  acquired ................................         (45.8)
                                              -----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES..          56.5

NET CASH USED FOR INVESTING ACTIVITIES.....         (46.9)

NET CASH USED FOR FINANCING ACTIVITIES.....          (3.0)
                                              -----------------

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


===============================================================
W. R. GRACE & CO. - CHAPTER 11 FILING
ENTITIES
DEBTOR-IN-POSSESSION BALANCE SHEET
(Dollars in millions)                           SEPTEMBER 30,
(Unaudited)                                         2002
===============================================================
ASSETS
CURRENT ASSETS
Cash and cash equivalents ..................   $       44.6
Notes and accounts receivable, net .........          126.1
Receivables from non-filing entities, net ..           38.3
Inventories ................................           78.0
Other current assets........................           68.9
                                               ----------------
   TOTAL CURRENT ASSETS ....................          355.9

Properties and equipment, net...............          381.2
Cash value of life insurance policies,
net of policy loans.........................           87.5
Deferred income taxes ......................          506.8
Asbestos-related insurance expected to be
realized after one year.....................          274.9
Loans receivable from non-filing entities,
net ........................................          426.9
Investment in non-filing entities ..........          207.0
Other assets ...............................          321.0
                                               ----------------
   TOTAL ASSETS ............................   $    2,561.2
===============================================================
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE
Current liabilities ........................   $       90.8
Debt payable within one year ...............            1.6
Other liabilities ..........................          218.3
                                               ----------------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE.          310.7

LIABILITIES SUBJECT TO COMPROMISE ..........        2,321.7
                                               ----------------
TOTAL LIABILITIES...........................        2,632.4

SHAREHOLDERS' EQUITY (DEFICIT) .............          (71.2)
                                               ----------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT) ...........................   $    2,561.2
===============================================================



                                    I-10
<PAGE>


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

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

Grace is a defendant in property damage and bodily injury lawsuits relating
to previously sold asbestos-containing products. On April 2, 2001, Grace
filed voluntary petitions for reorganization under Chapter 11 to use the
court-supervised reorganization process to achieve predictability and
fairness in the claims settlement process. (See Note 1 for further
discussion.)

As of the Filing Date, Grace was a defendant in 65,656 asbestos-related
lawsuits, 16 involving claims for property damage (one of which has since
been dismissed), and the remainder involving 129,191 claims for bodily
injury. Due to the Filing, holders of asbestos-related claims are stayed from
continuing to prosecute pending litigation and from commencing new lawsuits
against the Debtors. Separate creditors' committees representing the
interests of property damage and bodily injury claimants have been appointed
in the Chapter 11 Cases. Grace's obligations with respect to present and
future claims will be determined through proceedings in the Bankruptcy Court
and through negotiations with each of the official committees appointed in
the Chapter 11 Cases and a legal representative of future asbestos claimants.
This process is expected to provide the basis for a plan of reorganization.

PROPERTY DAMAGE LITIGATION

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

Through September 30, 2002, out of 379 asbestos property damage cases filed:
141 were dismissed without payment of any damages or settlement amounts;
judgments were entered in favor of Grace in nine cases (excluding cases
settled following appeals of judgments in favor of Grace); judgments were
entered in favor of the plaintiffs in seven cases for a total of $60.3
million; 207 property damage cases were settled for a total of $696.8
million; and 15 cases remain outstanding. Additional asbestos property damage
claims (other than claims with respect to ZAI) are to be filed as part of the
Chapter 11 claims process and are subject to the March 31, 2003 bar date
established by the Bankruptcy Court.

Of the 15 remaining cases, seven relate to ZAI and eight relate to a number
of former asbestos-containing products (two of which also involve ZAI). The
ZAI cases were filed as class action lawsuits in 2000 and 2001 on behalf of
owners of homes containing ZAI. These cases seek damages and equitable
relief, including the removal, replacement and/or disposal of all such
insulation. The plaintiffs assert that this product is in millions of homes
throughout the U.S. and that the cost of removal could be several thousand
dollars per home. While Grace has not completed its investigation of the
claims described in these cases, Grace believes that this product was and
continues to be safe for its intended purpose and poses little or no threat
to human health. At this time, Grace is not able to assess the extent of any
possible liability related to this matter. In July 2002, the Bankruptcy Court
approved special counsel to represent the ZAI claimants, at the Debtors'
expense, in a proceeding to determine certain threshold scientific issues
regarding ZAI. The court has set a litigation schedule that would result in
pretrial hearings on these issues in the second and third quarters of 2003.

BODILY INJURY LITIGATION

Bodily injury claims are generally similar to each other (differing primarily
in the type of asbestos-related illness allegedly suffered by the plaintiff).
However, Grace's estimated liability for such claims has been influenced by
numerous variables, including the solvency of other former asbestos
producers, cross-claims by co-defendants, the rate at which new claims are
filed, the jurisdiction in which the claims are filed,



                                    I-11
<PAGE>
and the defense and disposition costs associated with these claims. Grace's
bodily injury liability reflects management's estimate, as of the Filing
Date, of the number and ultimate cost of present and future bodily injury
claims expected to be asserted against Grace given demographic assumptions of
possible exposure to asbestos containing products previously manufactured by
Grace.

Through the Filing Date, 16,354 asbestos bodily injury lawsuits involving
approximately 35,720 claims were dismissed without payment of any damages or
settlement amounts (primarily on the basis that Grace products were not
involved), and approximately 55,489 lawsuits involving approximately 163,698
claims were disposed of (through settlement and judgments) for a total of
$645.6 million. At the Filing Date, 129,191 claims remained unresolved. Grace
expects that the Bankruptcy Court will establish a process for determining
the validity of, and the ultimate liability for, these unresolved claims as
well as additional claims that may be filed in the future. The Bankruptcy
Court has not yet established a procedure for submission of asbestos bodily
injury claims.

ASBESTOS-RELATED LIABILITY

Since litigation is stayed by the Chapter 11 Cases, ongoing costs are
generally limited to claims administration costs and to defense costs
incurred in connection with litigation permitted by the Bankruptcy Court. Any
other adjustments to the recorded liability will be based on developments in
the Chapter 11 Cases. For periods prior to and as of the Filing Date, Grace's
estimated property damage and bodily injury liabilities were based on its
experience with, and recent trends in, asbestos litigation. Its recorded
liabilities covered indemnity and defense costs for pending property damage
cases and for pending and projected future bodily injury claims. However, due
to the Filing and the uncertainties of asbestos-related litigation, actual
amounts could differ materially from the recorded liability. The total
asbestos-related liability balances as of September 30, 2002 and December 31,
2001 were $978.2 million and $996.3 million, respectively. The decrease in
the liability is primarily due to settlements paid through draws on letters
of credit securing the settlements. These draws were reclassified to "other
accrued liabilities" in "liabilities subject to compromise" as payables to the
issuing banks. The remaining decrease is due to the payment of normal
post-Filing administrative costs primarily relating to claims management.

ASBESTOS INSURANCE

Grace previously purchased insurance policies that cover a portion of its
asbestos-related lawsuits and claims. Insurance coverage for asbestos-related
liabilities has not been commercially available since 1985. Grace has settled
with and has been paid by all of its primary insurance carriers with respect
to both property damage and bodily injury cases and claims. Grace has also
settled with its excess insurance carriers that wrote policies available for
property damage cases; those settlements involve amounts paid and to be paid
to Grace. Grace believes that certain of these settlements may cover ZAI
claims as well as other property damage claims. In addition, Grace believes
that additional coverage for ZAI claims may exist under excess insurance
policies not subject to settlement agreements. Grace has settled with excess
insurance carriers that wrote policies available for bodily injury claims in
layers of insurance that Grace believes may be reached based on its current
estimates.

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

==============================================================
ESTIMATED INSURANCE RECOVERY ON ASBESTOS-RELATED LIABILITIES
-------------------------------------------------------------
(Dollars in millions)
==============================================================
INSURANCE RECEIVABLE
Asbestos-related insurance receivable,
beginning of year..........................       $    293.4
Proceeds received under asbestos-related
insurance settlements .....................            (10.8)
--------------------------------------------------------------
Asbestos-related insurance receivable, end
of quarter.................................            282.6
--------------------------------------------------------------
Total amounts due from insurance carriers .            282.6
Expected to be realized within one year ...             (7.7)
--------------------------------------------------------------
Expected to be realized after one year ....       $    274.9
==============================================================

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

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

                                    I-12
<PAGE>


Corporation and its subsidiary Orient Catalyst Company. Grace does not
exercise governance control over ART LLC; therefore, it accounts for its
interest under the equity method. Grace's equity in the net income or loss of
ART LLC is reported in "Other income" in Grace's Consolidated Statement of
Operations.

In January 2002, Grace, through its Swedish subsidiary, acquired the catalyst
manufacturing assets of Borealis A/S. In March 2002, Grace acquired Addiment,
Incorporated, a leading supplier of specialty chemicals to the concrete paver
and masonry industries in the U.S. and Canada.

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

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

Components of other income are as follows:

======================================================================
                                    THREE MONTHS       NINE MONTHS
OTHER INCOME                            ENDED             ENDED
(Dollars in millions)               SEPTEMBER 30,     SEPTEMBER 30,
======================================================================
                                   2002      2001     2002     2001
                                 -------------------------------------
Investment income (loss)          $   0.5  $ (0.4)   $   5.3  $  5.8
Gain  on sale of
  investments .................        --     0.2         --     7.9
Net gains on
  dispositions of assets ......       2.3      --        1.9     3.0
Tolling revenue ...............       1.8     1.1        2.7     2.3
Interest income ...............       0.9     1.1        2.5     3.8
Equity in net (loss) income of
  affiliates ..................      (0.4)    2.9       (1.4)    3.9
Other miscellaneous
  income ......................       2.4     1.2        7.5     4.7
                                 -------- --------- -------- --------
Total other income ............   $   7.5  $  6.1    $  18.5  $ 31.4
======================================================================

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

===================================================================
                                      SEPTEMBER 30, December 31,
(Dollars in millions)                      2002         2001
-------------------------------------------------------------------
NOTES AND ACCOUNTS RECEIVABLE, NET
Trade receivables, less allowance of
  $4.6 (2001 - $5.7)................  $   316.0     $   276.4
Other receivables, less allowances
  of $1.7 (2001 - $1.9).............       16.0          25.7
                                      ------------- ------------
                                      $   332.0     $   302.1
===================================================================
INVENTORIES
Raw materials ......................  $    41.6     $    39.2
In process .........................       32.6          27.6
Finished products ..................      102.5         108.1
General merchandise ................       26.2          25.8
Less:  Adjustment of certain
  inventories to a
  last-in/first-out (LIFO) basis ...      (26.2)        (25.9)
                                      ------------- ------------
                                      $   176.7     $   174.8
===================================================================
OTHER ASSETS
Deferred pension costs..............  $   326.9     $   326.1
Deferred charges ...................       36.2          44.9
Long-term receivables, less
  allowances of $0.7
  (2001 - $0.6) ....................        2.0           2.8
Investments in unconsolidated
  affiliates ......................         2.5           3.0
Patents, licenses and other
  intangible assets, net ...........       59.8          57.5
Intangible asset - pension
  related ..........................       19.6          19.6
Other assets .......................        6.3           8.0
                                      ------------- ------------
                                      $   453.3     $   461.9
===================================================================
OTHER CURRENT LIABILITIES
Accrued compensation ...............  $    43.6     $    39.4
Accrued interest ...................        5.8           4.8
Deferred tax liability .............        0.9           0.8
Customer volume rebates ............       17.8          19.2
Accrued commissions ................        5.9           6.1
Accrued reorganization fees ........       14.2           6.4
Other accrued liabilities ..........       65.8          51.2
                                      ------------- ------------
                                      $   154.0     $   127.9
===================================================================
OTHER LIABILITIES
Pension related ....................  $   277.0     $   266.5
Other accrued liabilities ..........        6.8           8.7
                                      ------------- ------------
                                      $   283.8     $   275.2
===================================================================

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

Grace is the beneficiary of life insurance policies on certain current and
former employees with benefits in force of approximately $2,241.3 million and
a net cash surrender value of $87.5 million at September 30, 2002. The
policies were acquired to fund various employee benefit programs and other
long-term liabilities and are structured to provide cash flow (primarily
tax-free) over an extended number of years. The following table summarizes
activity in these policies for the nine months ended September 30, 2002 and
2001 and components of the net cash value at September 30, 2002 and December
31, 2001:



                                    I-13
<PAGE>


================================================================
LIFE INSURANCE -
ACTIVITY SUMMARY                       NINE MONTHS ENDED
(Dollars in millions)                    SEPTEMBER 30,
================================================================
                                     2002             2001
                                ---------------- ---------------
Earnings on policy assets.      $      31.2      $      31.5
Interest on policy loans..            (25.9)           (25.7)
Proceeds from policy loans             --              (48.7)
Policy loan repayments....              4.2             14.8
Premiums..................              2.5              2.6
Net investing activity....             (0.1)            (2.0)
                                ---------------- ---------------
  Change in net cash value      $      11.9      $     (27.5)
================================================================
Tax-free proceeds received      $      13.8      $      17.1
================================================================
COMPONENTS OF                    SEPTEMBER 30,    December 31,
NET CASH VALUE                       2002             2001
================================================================
Gross cash value...........     $     468.8      $     477.5
Principal - policy loans...          (366.3)          (377.6)
Accrued interest - policy
  loans ...................           (15.0)           (24.3)
                                ---------------- ---------------
   Net cash value..........     $      87.5      $      75.6
================================================================
Insurance benefits in force     $   2,241.3      $   2,291.0
================================================================

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

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

On September 30, 2002, and December 31, 2001, Grace's debt was as follows:

==============================================================
COMPONENTS OF DEBT              SEPTEMBER 30,   December 31,
(Dollars in millions)                2002            2001
==============================================================
DEBT PAYABLE WITHIN ONE YEAR
Bank borrowings............     $        --    $        --
Other short-term borrowings             6.9            7.8
                                -------------- ---------------
                                $       6.9    $       7.8
                                ============== ===============
DEBT PAYABLE AFTER ONE YEAR
DIP facility ..............     $        --    $        --
Other long-term borrowings               --             --
                                -------------- ---------------
                                $        --    $        --
                                ============== ===============
DEBT SUBJECT TO COMPROMISE
Bank borrowings ...........     $     500.0    $     500.0
Other borrowings ..........             1.0            1.3
Accrued interest ..........            34.2           23.2
                                -------------- ---------------
                                $     535.2    $     524.5
                                ============== ===============
Annualized weighted average
  interest rates on total
  debt ....................             3.5%           5.8%
==============================================================

In April 2001, the Debtors entered into the DIP facility in the aggregate
amount of $250 million. The DIP facility has a term of two years, is secured
by a priority lien on substantially all assets of the Debtors, and bears
interest based on LIBOR. Grace had no outstanding borrowings under the DIP
facility as of September 30, 2002; however, $13.5 million of standby letters
of credit were issued and outstanding under the facility. The letters of
credit, which reduce available funds under the facility, were issued mainly
for trade-related matters such as performance bonds, as well as certain
insurance and environmental matters.

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

The Company is authorized to issue 300,000,000 shares of common stock. Of the
common stock unissued on September 30, 2002, approximately 10,684,217 shares
were reserved for issuance pursuant to stock option and other stock incentive
plans. In the first nine months of 2002, the Company did not grant any stock
options. For the year ended December 31, 2001, the Company granted a total of
1,339,846 options with an average exercise price of $2.53.

For additional information, see Notes 16 and 18 to the Consolidated Financial
Statements in Grace's 2001 Form 10-K.

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

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

=============================================================
EARNINGS PER SHARE
(Amounts in millions,     THREE MONTHS       NINE MONTHS
except per share              ENDED            ENDED
amounts)                  SEPTEMBER 30,     SEPTEMBER 30,
=============================================================
                          2002     2001     2002      2001
                        --------- -------- -------- ---------
NUMERATORS
  Net income ......     $  14.0   $  19.8  $  47.6    $ 57.4
                        ========= ======== ======== =========
DENOMINATORS
  Weighted average
  common shares -
  basic calculation        65.5      65.3     65.4      65.3

  Dilutive effect of
  employee stock
  options and
  restricted shares          --       0.1      0.1       0.1
                        --------- -------- -------- ---------
  Weighted average
  common shares
  diluted calculation      65.5      65.4     65.5      65.4
                        ========= ======== ======== =========
BASIC EARNINGS PER
 SHARE ............     $  0.21   $  0.30  $  0.73  $   0.88
                        ========= ======== ======== =========
DILUTED EARNINGS PER
 SHARE ............     $  0.21   $  0.30  $  0.73  $   0.88
=============================================================

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

The tables below present the pre-tax, tax and after-tax components of Grace's
other comprehensive income (loss) for the three-month and nine-month periods
ended September 30, 2002 and 2001:



                                    I-14
<PAGE>


=============================================================
THREE MONTHS ENDED                                  After-
SEPTEMBER 30, 2002           Pre-tax      Tax         Tax
(Dollars in millions)        Amount     Benefit     Amount
=============================================================
Foreign currency
  translation adjustments   $   (9.6)  $       --  $   (9.6)
                            ---------- ----------- ----------
Other comprehensive income  $   (9.6)  $       --  $   (9.6)
=============================================================
NINE MONTHS ENDED                                   After-
SEPTEMBER 30, 2002           Pre-tax      Tax         Tax
(Dollars in millions)        Amount     Benefit     Amount
=============================================================
Foreign currency
  translation adjustments   $   22.9   $       --  $   22.9
                            ---------- ----------- ----------
Other comprehensive income  $   22.9   $       --  $   22.9
=============================================================

=============================================================
THREE MONTHS ENDED                                   After-
SEPTEMBER 30, 2001           Pre-tax       Tax        Tax
(Dollars in millions)         Amount     Benefit     Amount
=============================================================
Foreign currency
  translation adjustments   $   12.1   $      --   $   12.1
                            ---------- ----------- ----------
Other comprehensive loss    $   12.1   $      --   $   12.1
=============================================================
NINE MONTHS ENDED                                   After-
SEPTEMBER 30, 2001           Pre-tax      Tax         Tax
(Dollars in millions)        Amount     Benefit     Amount
=============================================================
Unrealized losses on
  security................  $   (0.2)  $    0.1    $   (0.1)
Reclassification
  adjustment for gains
  realized in net income ..     (0.2)       0.1        (0.1)
                            ---------- ----------- ----------
Net unrealized loss .......     (0.4)       0.2        (0.2)
Foreign currency
  translation
  adjustments .............    (10.8)      --         (10.8)
                            ---------- ----------- ----------
Other comprehensive loss    $  (11.2)  $    0.2    $  (11.0)
=============================================================

The table below presents the components of Grace's accumulated
other comprehensive loss at September 30, 2002 and
December 31, 2001:


=============================================================
COMPONENTS OF ACCUMULATED
OTHER COMPREHENSIVE LOSS       SEPTEMBER 30,   December 31,
(Dollars in millions)             2002            2001
=============================================================
Foreign currency translation
  adjustments .............    $  (141.8)     $   (164.7)
Minimum pension liability
  adjustments .............       (136.0)         (136.0)
                               -------------- ---------------
Total accumulated other
  comprehensive loss.......    $  (277.8)     $   (300.7)
=============================================================

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


ASBESTOS-RELATED LITIGATION - SEE NOTE 3


ENVIRONMENTAL


General Matters and Discussion


Grace is subject to loss contingencies resulting from extensive and evolving
federal, state, local and foreign environmental laws and regulations relating to
the generation, storage, handling, discharge and disposition of hazardous wastes
and other materials. Grace accrues for anticipated costs associated with
investigative and remediation efforts where an assessment has indicated that a
probable liability has been incurred and the cost can be reasonably estimated.
These accruals do not take into account any discounting for the time value of
money. At September 30, 2002, Grace's liability for environmental investigative
and remediation costs related to continuing and discontinued operations totaled
$156.4 million, as compared to $153.1 million at December 31, 2001. This
estimate of environmental cost is based on funding and/or remediation agreements
in place and Grace's best estimate of its cost for sites not subject to a formal
remediation plan. The amounts of cash expenditures below have been charged
against previously established reserves for the periods presented.

=============================================================
                         THREE MONTHS       NINE MONTHS
                             ENDED             ENDED
(Dollars in millions)    SEPTEMBER 30,     SEPTEMBER 30,
=============================================================
                         2002    2001       2002    2001
                        -------------------------------------
Continuing Operations
                         $   3.3  $ 6.8   $  14.0  $ 20.4
Discontinued
  Operations..........       0.3   (0.9)      0.5     3.5
                        -------------------------------------
Total.................   $   3.6  $ 5.9   $  14.5  $ 23.9
=============================================================

In addition to the cash payments, charges against previously established
reserves include draws during the second quarter on letters of credit
supporting environmental remediation activity. The draws were reclassified to
"other" liabilities subject to compromise as a payable to the issuing banks.

During the three-month and nine-month periods ended September 30, 2002, Grace
recorded pre-tax charges of $13.5 million and $19.3 million, respectively,
for environmental matters. These charges were primarily for Grace's current
estimate of probable liability and defense costs in connection with a cost
recovery lawsuit brought by the U.S. government relating to Grace's former
vermiculite mining and processing activities near Libby, Montana. The
environmental risks related to such activities could result in additional
material future charges to Grace's earnings, the amounts of which are not
currently determinable. (See discussion under "Vermiculite Related Matters"
below.)

Grace's environmental liabilities are reassessed whenever circumstances
become better defined or remediation efforts and their costs can be better
estimated. These liabilities are evaluated based on


                                    I-15
<PAGE>


currently available information, including the progress of remedial
investigation at each site, the current status of discussions with regulatory
authorities regarding the method and extent of remediation at each site,
existing technology, prior experience in contaminated site remediation and
the apportionment of costs among potentially responsible parties. Grace
expects that the funding of environmental remediation activities will be
affected by the Chapter 11 proceedings, but cannot predict at this time if
such proceedings will have a favorable or adverse effect; any such effect
could be material. Grace's environmental liabilities are included in
"liabilities subject to compromise" as of September 30, 2002.

Vermiculite Related Matters

From the 1920's until 1990, Grace and previous owners conducted vermiculite
mining and related activities near Libby, Montana. The vermiculite ore that
was mined contained varying amounts of asbestos as a contaminant, almost all
of which was removed during processing. Expanded vermiculite from Libby was
used in products such as fireproofing, insulation and potting soil. In
November 1999, Region 8 of the U.S. Environmental Protection Agency ("EPA")
began an investigation into alleged excessive levels of asbestos-related
disease in the Libby population related to these former mining activities.
This investigation led the EPA to undertake additional investigative activity
and to carry out response actions in and around Libby. On March 30, 2001, the
EPA filed a lawsuit in U.S. District Court for the District of Montana,
Missoula Division (United States v. W. R. Grace & Company et al.) under the
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") for the recovery of costs allegedly incurred by the United States
in response to the release or threatened release of asbestos in the Libby,
Montana area relating to such former mining activities. These costs include
cleaning and/or demolition of contaminated buildings, the excavation and
removal of contaminated soil, health screening of Libby residents and former
mine workers, and investigation and monitoring costs.

Based upon a review of the EPA's cost invoices and related documents,
Libby-related cost claims through December 31, 2001 totaled approximately $57
million. These costs included approximately $12 million of the EPA's "indirect"
costs. In this action, the EPA is also seeking a declaration of Grace's
liability that would be binding in future actions to recover further response
costs. The EPA has approved an Action Memorandum Amendment dated May 2, 2002
that increases the EPA's spending authority and expands the scope of the EPA's
proposed response actions to include the removal of Libby vermiculite from
businesses and private residences in the Libby area. (However, the EPA has filed
an unopposed motion to withdraw claims seeking recovery of costs for removal of
ZAI from private residences.) In October 2002, the EPA added Libby to the EPA's
National Priorities List ("NPL") of Superfund sites. Under CERCLA, the formal
listing of a site on the NPL expands the EPA's authority to undertake
comprehensive investigations and carry out extensive remedial activities at the
listed site. Based on the above two EPA actions and the testimony of EPA
witnesses deposed in the cost recovery lawsuit, Grace believes that the EPA's
total cost recovery claims could reach, and potentially exceed, $100 million.

In connection with its defense, Grace has conducted its own investigation to
determine whether the EPA's actions and cost claims are justified and
reasonable. Based on its initial findings, Grace believes that most of the
EPA's actions and spending have been unwarranted and excessive. This lawsuit
is not subject to the automatic stay provided under the Bankruptcy Code and
is expected to be tried during the first quarter of 2003. Liabilities for
recovery costs are included in "liabilities subject to compromise" and any
payments would be subject to the outcome of the Chapter 11 proceedings.

Since January 2000, Grace has expended and/or accrued approximately $22.7
million for remediation of certain Libby area vermiculite processing sites
and for healthcare of Libby area residents diagnosed with asbestos-related
illness.

Insurance Matters

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

TAX MATTERS

Grace's federal tax returns covering tax periods from 1993 and forward are
either under examination by the Internal Revenue Service ("IRS") or open for
future examination. Grace has received the IRS examination report on tax
periods 1993 through 1996. The most



                                    I-16
<PAGE>


significant contested issue addressed in such report is discussed in the next
paragraph. Grace believes that previously established reserves for tax
matters will be sufficient to cover the expected net cost of probable tax
return adjustments. Any cash payment to satisfy tax adjustments would be
subject to Grace's Chapter 11 proceedings.

The IRS is challenging deductions of interest on loans secured by corporate
owned life insurance ("COLI") policies for years prior to January 1, 1999. In
2000, Grace paid $21.2 million of tax and interest related to this issue for
tax years 1990 through 1992. Subsequent to 1992, Grace deducted approximately
$163.2 million in interest attributable to COLI policy loans. Although Grace
continues to believe in the merits of its case, the IRS has successfully
challenged interest deductions claimed by other corporations with respect to
broad-based COLI policies in all of the three litigated cases to date. Grace
requested and was granted early referral to the IRS Office of Appeals for
consideration of possible settlement alternatives of the COLI interest
deduction issue in its entirety.

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

The IRS has assessed additional federal income tax withholding and Federal
Insurance Contributions Act taxes plus interest and related penalties for
calendar years 1993 through 1995 against a Grace subsidiary that formerly
operated a temporary staffing business for nurses and other healthcare
personnel. The assessments, aggregating $21.8 million, were made in
connection with a meal and incidental expense per diem plan for traveling
healthcare personnel, which was in effect through 1999. The IRS contends that
certain per diem reimbursements should have been treated as wages subject to
employment taxes and federal income tax withholding. Grace contends that its
per diem and expense allowance plans were in accordance with statutory and
regulatory requirements, as well as other published guidance from the IRS.
Grace expects that the IRS will make additional assessments for the 1996
through 1999 periods. The matter is currently pending in the United States
Court of Claims.

Grace has received notification from a foreign taxing authority assessing tax
deficiencies plus interest relating to the purchase and sale of foreign bonds
in 1989 and 1990. This assessment, totaling approximately 463 million Belgium
francs (currently equivalent to approximately $11.2 million United States
dollars), is related to the Bekaert Group, which Grace sold in 1991, but as
to which Grace retained liability for tax deficiencies attributable to tax
periods prior to the sale. The matter is currently before the foreign
authorities; no decision has been rendered.

As a result of Grace's Chapter 11 filing, certain tax matters related to open
tax years, including COLI interest deductions, could become the direct
obligations of predecessor companies that now own Grace's former healthcare
and packaging businesses. One or both of these companies could be directly
liable to tax authorities for Grace's tax deficiencies. Pursuant to
agreements relating to each transaction, Grace is generally required to
indemnify both parties for taxes relating to periods prior to the closing of
such transactions. Any indemnification obligation that arises as a result of
these matters would be classified as a liability subject to compromise and
subject to the Chapter 11 proceedings.

FRAUDULENT TRANSFERS

The Company and one of its subsidiaries have been named in purported class
action suits alleging that the 1996 reorganization involving a predecessor of
Grace and Fresenius A.G. and the 1998 reorganization involving a predecessor
of Grace and Sealed Air Corporation were fraudulent transfers. The suits are
alleged to have been brought on behalf of all individuals who then had
lawsuits on file asserting personal injury or wrongful death claims against
any of the defendants. The other defendants in the suits have all asserted
claims against Grace for indemnification. Grace believes that the suits are
without merit. These lawsuits have been stayed as a result of Grace's Chapter
11 filing. Fraudulent transfer claims related to the Sealed Air transaction
were originally expected to be heard by the Bankruptcy



                                    I-17
<PAGE>


Court commencing on September 30, 2002. However, the trial date has been
postponed until December 2, 2002 pending resolution of certain procedural
issues by the court. (See Note 1 for additional information.)

PURCHASE COMMITMENTS

Grace regularly commits to purchase materials and services as part of its
various business activities. All such commitments are expected to be
fulfilled with no material adverse consequences to Grace's operations or
financial condition.

FINANCIAL ASSURANCES

At September 30, 2002, Grace had gross financial assurances issued and
outstanding of $234.2 million, comprised of $135.2 million of gross surety
bonds issued by various insurance companies and $99.0 million standby letters
of credit issued by various banks. Of the standby letters of credit, $19.7
million act as collateral for surety bonds, thereby reducing Grace's overall
obligations under its financial assurances to a net amount of $214.5 million.
These financial assurances were established for a variety of purposes,
including insurance and environmental matters, asbestos settlements and
appeals, trade-related commitments and other matters. Of the net amount of
$214.5 million of financial assurances, approximately $5.0 million were
issued on behalf of non-Debtor entities and $209.5 million were issued on
behalf of the Debtors. Of the amounts issued by the Debtors, approximately
$195.5 million were issued before the Filing Date, with the remaining $14.0
million being subsequent to the Filing, of which $13.5 million was issued
under the DIP facility.

ACCOUNTING FOR CONTINGENCIES

Although the outcome of each of the matters discussed above cannot be
predicted with certainty, Grace has assessed its risk and has made accounting
estimates as required under generally accepted accounting principles. As a
result of the Filing, claims related to the items discussed above will be
addressed as part of Grace's Chapter 11 proceedings. Accruals recorded for
such contingencies have been included in "liabilities subject to compromise"
on the accompanying Consolidated Balance Sheet as of September 30, 2002. The
amounts of these liabilities as ultimately determined through the Chapter 11
proceedings could be materially different from amounts recorded by Grace at
September 30, 2002.

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

The table below presents information related to Grace's business segments for
the three-month and nine-month periods ended September 30, 2002 and 2001.
Only those corporate expenses directly related to the segment are allocated
for reporting purposes. All remaining corporate items are reported separately
and labeled as such. Pre-tax operating income for Davison Chemicals includes
Grace's equity income in ART LLC. For further information concerning ART LLC,
refer to Note 6 to the Consolidated Financial Statements in Grace's 2001 Form
10-K.

================================================================
                             THREE MONTHS        NINE MONTHS
BUSINESS SEGMENT DATA            ENDED              ENDED
(Dollars in millions)        SEPTEMBER 30,      SEPTEMBER 30,
================================================================
                            2002     2001       2002      2001
                          --------------------------------------
NET SALES
Davison Chemicals ......  $  247.8 $ 224.9   $   707.5 $  656.0
Performance Chemicals ..     230.9   223.2       656.3    638.1
                          --------------------------------------
TOTAL ..................  $  478.7 $ 448.1   $ 1,363.8 $1,294.1
                          ======================================
PRE-TAX OPERATING
  INCOME
Davison Chemicals ......  $   36.6  $ 33.6   $   103.0 $   94.8
Performance Chemicals ..      31.2    30.6        80.1     78.9
                          --------------------------------------
TOTAL ..................  $   67.8  $ 64.2   $   183.1 $  173.7
================================================================

The table below presents information related to the geographic areas in which
Grace operated for the three-month and nine-month periods ended September 30,
2002 and 2001.

===============================================================
                          THREE MONTHS         NINE MONTHS
GEOGRAPHIC AREA DATA          ENDED               ENDED
(Dollars in millions)     SEPTEMBER 30,       SEPTEMBER 30,
===============================================================
                         2002      2001       2002      2001
                        ---------------------------------------
NET SALES
  United States .......  $  209.0 $ 212.4   $  617.7  $  626.8
  Canada and Puerto
    Rico ..............      19.3    13.6       44.3      35.6
  Europe ..............     146.4   124.4      409.8     351.2
  Asia Pacific ........      77.0    69.9      211.7     202.8
  Latin America .......      27.0    27.8       80.3      77.7
                         --------------------------------------
TOTAL .................  $  478.7 $ 448.1   $1,363.8  $1,294.1
===============================================================

The pre-tax operating income for Grace's business segments for the
three-month and nine-month periods ended September 30, 2002 and 2001 is
reconciled below to income before Chapter 11 reorganization expenses and
income taxes presented in the accompanying Consolidated Statement of
Operations.



                                    I-18
<PAGE>


==============================================================
RECONCILIATION OF
BUSINESS SEGMENT DATA
TO FINANCIAL              THREE MONTHS          NINE MONTHS
STATEMENTS                    ENDED               ENDED
(Dollars in millions)     SEPTEMBER 30,        SEPTEMBER 30,
==============================================================
                           2002     2001      2002      2001
                        --------------------------------------
Pre-tax operating
  income - business
  segments..........    $  67.8  $  64.2   $  183.1   $ 173.7
Interest expense ...       (4.8)    (8.3)     (15.2)    (30.0)
Interest income.....        0.9      1.1        2.5       3.8
Corporate operating
  costs.............      (14.9)   (10.4)     (39.8)    (33.4)
Other, net..........      (11.3)    (5.8)     (17.3)      2.7
                        --------------------------------------
Income before Chapter
  11 reorganization
  expenses and income
  taxes ............    $  37.7  $  40.8   $  113.3   $ 116.8
==============================================================

Corporate operating costs include expenses of corporate headquarters
functions incurred in support of core operations, such as corporate financial
and legal services, human resources management, communications and regulatory
affairs. This item also includes certain pension and postretirement benefits
that are considered a core operating cost but not allocated to business
segments.



                                    I-19
<PAGE>




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

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

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

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

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

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

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

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

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

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

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

As provided by the Bankruptcy Code, the Debtors had the exclusive right to
propose a plan of reorganization for a 120-day period following the Filing
Date. The Debtors have received an extension of their exclusivity period
during which to file a plan of reorganization through February 1, 2003, and
an extension of the Debtors' exclusive rights to solicit acceptances of a
reorganization plan through April 1, 2003.

Three creditors' committees, two representing asbestos claimants and the
third representing other unsecured creditors, and a committee representing
shareholders have been appointed in the Chapter 11 Cases. These



                                    I-20
<PAGE>


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

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

At a hearing on April 22, 2002 the Bankruptcy Court entered an order
establishing a bar date of March 31, 2003 for claims of general unsecured
creditors, asbestos property damage claims and medical monitoring claims
related to asbestos. The bar date does not apply to asbestos-related bodily
injury claims or claims related to Zonolite(R) attic insulation ("ZAI"),
which will be addressed separately. Grace has distributed notices and run
media announcements of the bar date under a program approved by the
Bankruptcy Court. Rust Counseling, the court-approved claims handling agent
for the Chapter 11 Cases, is maintaining a register of all claims filed. As
claims are filed, Grace will be cataloguing and assessing their validity.

In July 2002, the Bankruptcy Court approved special counsel to represent the
ZAI claimants, at the Debtors' expense, in a proceeding to determine certain
threshold scientific issues regarding ZAI. The court has set a litigation
schedule that would result in pretrial hearings on these issues in the second
and third quarters of 2003.

Fraudulent Conveyance Claims - Judge Wolin has authorized the Official
Committee of Asbestos Personal Injury Claimants and the Official Committee of
Asbestos Property Damage Claimants to proceed with claims against Sealed Air
Corporation that the 1998 transaction involving Grace's former packaging
business and Sealed Air Corporation constituted a fraudulent conveyance. A
trial originally had been set to begin on September 30, 2002. However, the
Third Circuit Court of Appeals recently issued an opinion in another case
(The Official Committee of Unsecured Creditors of Cybergenics Corp. v.
Chinery) holding that creditors committees do not have the capacity under the
Bankruptcy Code to pursue fraudulent conveyance claims on behalf of the
bankruptcy estate, and that only a trustee or a debtor-in-possession may
bring such an action.

Judge Wolin requested that each interested party propose a course of action
for proceeding with the fraudulent conveyance case in light of the
Cybergenics decision. Among the responses to this request, the Official
Committee of Asbestos Personal Injury Claimants proposed the appointment of a
trustee with full powers, stating that the Debtors' failure to prosecute the
fraudulent conveyance claims constitutes sufficient grounds for such
appointment. The Debtors determined not to bring such claims as
debtors-in-possession because the Debtors believe that the fraudulent
conveyance claims are without merit and that prosecuting such claims would
not be in the interests of all of its creditors and other stakeholders.
However, the Debtors proposed that the court appoint an examiner or a trustee
with limited powers to prosecute the case against Sealed Air Corporation so
that the case could proceed without conflicting with the holding in
Cybergenics. Judge Wolin rejected the proposals to appoint a trustee with
full powers, a limited trustee or an examiner to pursue the case and instead
rescheduled the trial date for December 2, 2002, to be pursued by the two
asbestos claimants committees notwithstanding the Cybergenics decision. He
certified his decision to proceed in this manner for immediate appeal to the
Third Circuit Court of Appeals. The Third Circuit Court of Appeals is
considering whether to grant the parties' requests for appeal of these
issues.

While the Debtors do not believe that sufficient grounds exist under the
Bankruptcy Code for the court to appoint a trustee with full powers, if the
court ultimately determines to do so, the Debtors would no longer operate
their businesses as debtors-in-possession, which could have a material
adverse effect on Grace's results of operations and financial condition.

The trial of the fraudulent conveyance claims will include, for purposes of
determining Grace's solvency at the time of the Sealed Air transaction, an
estimation or other determination of Grace's asbestos-related liabilities.
Findings made with respect to Grace's asbestos-related liabilities in this
case could affect the determination of Grace's ultimate asbestos-related
liability in the Chapter 11 proceedings.

Impact on Debt Capital - All of the Debtor's pre-petition debt is in default due
to the Filing. The accompanying Consolidated Balance Sheet as of



                                    I-21
<PAGE>


September 30, 2002 reflects the classification of the Debtors' pre-petition
debt within "liabilities subject to compromise."

The Debtors have entered into a debtor-in-possession post-petition loan and
security agreement with Bank of America, N.A. (the "DIP facility") in the
aggregate amount of $250 million. The DIP facility has a term expiring on
April 1, 2003 and bears interest under a formula based on the London
Inter-Bank Offered Rate ("LIBOR") plus 2.00 to 2.25 percentage points
depending on the level of loans outstanding. The Debtors are in the process
of evaluating their needs for a renewal of the DIP facility, which will be
subject to the Bankruptcy Court approval. Although the DIP facility is
subject to renewal, Grace expects that the availability of credit will continue
beyond that date.

Accounting Impact - The accompanying Consolidated Financial Statements have
been prepared in accordance with Statement of Position 90-7 ("SOP 90-7")
"Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code," promulgated by the American Institute of Certified Public Accountants.
SOP 90-7 requires that financial statements of debtors-in-possession be
prepared on a going concern basis, which contemplates continuity of
operations, realization of assets and liquidation of liabilities in the
ordinary course of business. However, as a result of the Filing, the
realization of certain Debtors' assets and liquidation of certain Debtors'
liabilities are subject to significant uncertainty. While operating as
debtors-in-possession, the Debtors may sell or otherwise dispose of assets
and liquidate or settle liabilities for amounts other than those reflected in
the Consolidated Financial Statements. Further, a plan of reorganization
could materially change the amounts and classifications reported in the
Consolidated Financial Statements, which do not currently give effect to any
adjustments to the carrying value or classification of assets or liabilities
that might be necessary as a consequence of a plan of reorganization.

Pursuant to SOP 90-7, Grace's pre-petition liabilities that are subject to
compromise are required to be reported separately on the balance sheet at an
estimate of the amount that will ultimately be allowed by the Bankruptcy
Court. As of September 30, 2002, such pre-petition liabilities include fixed
obligations (such as debt and contractual commitments) as well as estimates
of costs related to contingent liabilities (such as asbestos-related
litigation and other claims). The recorded amounts of such liabilities
generally reflect accounting measurements as of the Filing Date, adjusted as
warranted, for changes in facts and circumstances and/or rulings under
Grace's Chapter 11 proceedings subsequent to the Filing. (See Note 2 to the
Consolidated Financial Statements for detail of the liabilities subject to
compromise as of September 30, 2002, and as of the Filing Date.) Obligations
of Grace subsidiaries not covered by the Filing continue to be classified on
the Consolidated Balance Sheet based upon maturity dates or the expected
dates of payment. SOP 90-7 also requires separate reporting of certain
expenses, realized gains and losses, and provisions for losses related to the
Filing as reorganization items.

During the nine-month period ended September 30, 2002, the Debtors recorded
Chapter 11 reorganization expenses of $21.4 million.

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

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

o    Contingent liabilities such as asbestos-related matters, environmental
     remediation, tax exposures and retained obligations of divested
     businesses.
o    Pension and postretirement liabilities that depend on assumptions
     regarding discount rates and total returns on invested funds.
o    Depreciation and amortization periods for long-lived assets including
     property and equipment and intangible assets.
o    Realization values of various assets such as receivables, inventories,
     goodwill, insurance and tax attributes.

The accuracy of these and other estimates may also be materially affected by
developments in the Chapter 11 Cases.


-----------------------------------------------------------------------------
CONTINUING OPERATIONS
=============================================================================

Set forth below is a chart that lists key operating statistics and percentage
changes for the three-month and nine-month periods ended September 30, 2002
and 2001. The chart should be referenced when reading management's discussion
and analysis of the results of continuing operations.


                                    I-22
<PAGE>


The chart below, as well as the financial information presented throughout
this discussion, divides Grace's financial results between "core operations"
and "noncore activities." Core operations comprise the financial results of
Davison Chemicals and Performance Chemicals, as well as the costs of
corporate activities that directly or indirectly support business operations.
In contrast, noncore activities comprise all other events and transactions
not directly related to the generation of revenue or the support of core
operations.



                                    I-23
<PAGE>


<TABLE>
<CAPTION>
=================================================================================================================================

ANALYSIS OF CONTINUING OPERATIONS                      THREE MONTHS ENDED                         NINE MONTHS ENDED
 (Dollars in millions)                                    SEPTEMBER 30,                             SEPTEMBER 30,
=================================================================================================================================
                                                                           % Change                                    % Change
                                                2002          2001       Fav (Unfav)        2002           2001       Fav (Unfav)
                                            -------------------------------------------------------------------------------------
<S>                                         <C>          <C>                <C>       <C>            <C>                <C>
NET SALES:
    DAVISON CHEMICALS
    Catalyst products ....................   $    179.6   $    160.2         12.1%     $    510.0     $    469.9         8.5%
    Silica products ......................         68.2         64.7          5.4%          197.5          186.1         6.1%
                                             -------------------------------------------------------------------------------------
  TOTAL DAVISON CHEMICALS ................        247.8        224.9         10.2%          707.5          656.0         7.9%
                                             -------------------------------------------------------------------------------------
    PERFORMANCE CHEMICALS
    Construction chemicals ...............        106.5         97.3          9.5%          291.9          268.2         8.8%
    Building materials ...................         60.5         64.5         (6.2%)         178.2          184.9        (3.6%)
    Sealants and coatings ................         63.9         61.4          4.1%          186.2          185.0         0.6%
                                             -------------------------------------------------------------------------------------
  TOTAL PERFORMANCE CHEMICALS ............        230.9        223.2          3.4%          656.3          638.1         2.9%
                                             -------------------------------------------------------------------------------------
TOTAL GRACE SALES - CORE OPERATIONS ......   $    478.7   $    448.1          6.8%     $  1,363.8     $  1,294.1         5.4%
=================================================================================================================================
PRE-TAX OPERATING INCOME:
    Davison Chemicals ....................   $     36.6   $     33.6          8.9%     $    103.0     $     94.8         8.6%
    Performance Chemicals ................         31.2         30.6          2.0%           80.1           78.9         1.5%
    Corporate operating costs ............        (14.9)       (10.4)       (43.3%)         (39.8)         (33.4)      (19.2%)
                                             -------------------------------------------------------------------------------------
PRE-TAX INCOME FROM CORE OPERATIONS.......         52.9         53.8         (1.7%)         143.3          140.3         2.1%
                                             -------------------------------------------------------------------------------------
PRE-TAX (LOSS) INCOME FROM NONCORE
  ACTIVITIES .............................        (11.3)        (5.8)       (94.8%)         (17.3)           2.7        NM
Interest expense .........................         (4.8)        (8.3)        42.2%          (15.2)         (30.0)       49.3%
Interest income ..........................          0.9          1.1        (18.2%)           2.5            3.8       (34.2%)
                                             -------------------------------------------------------------------------------------
INCOME BEFORE CHAPTER 11 REORGANIZATION
   EXPENSES AND INCOME TAXES .............         37.7         40.8         (7.6%)         113.3          116.8        (3.0%)
Chapter 11 reorganization expenses, net ..         (8.6)        (4.8)       (79.2%)         (21.4)         (12.0)      (78.3%)
Provision for income taxes ..............         (15.1)       (16.2)         6.8%          (44.3)         (47.4)        6.5%
                                             -------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS........    $     14.0   $     19.8        (29.3%)    $     47.6     $     57.4       (17.1%)
=================================================================================================================================
NET SALES BY REGION:
North America ............................   $    228.3   $    226.0          1.0%     $    662.0     $    662.4        (0.1%)
Europe ...................................        146.4        124.4         17.7%          409.8          351.2        16.7%
Asia Pacific .............................         77.0         69.9         10.2%          211.7          202.8         4.4%
Latin America ............................         27.0         27.8         (2.9%)          80.3           77.7         3.3%
                                             -------------------------------------------------------------------------------------
TOTAL.....................................   $    478.7   $    448.1          6.8%     $  1,363.8     $  1,294.1         5.4%
=================================================================================================================================
</TABLE>

   NM = Not meaningful.

NET SALES

The following tables identify the increase or decrease in sales attributable
to changes in product volume, product price and/or mix, and the impact of
foreign currency translation.

===============================================================
                     THREE MONTHS ENDED SEPTEMBER 30, 2002 AS
NET SALES              A PERCENTAGE INCREASE (DECREASE) FROM
VARIANCE ANALYSIS      THREE MONTHS ENDED SEPTEMBER 30, 2001
===============================================================
                      VOLUME   PRICE/MIX  TRANSLATION   TOTAL
                     ------------------------------------------

Davison Chemicals       5.6%       0.8%        3.8%      10.2%
Performance
  Chemicals ......      2.6%       0.3%        0.5%       3.4%
Net sales ........      4.1%       0.5%        2.2%       6.8%
---------------------------------------------------------------
By Region:
  North America ..      2.3%      (1.3%)      --          1.0%
  Europe .........      5.5%       1.0%       11.2%      17.7%
  Asia Pacific ...      6.7%       1.1%        2.4%      10.2%
  Latin America ..      5.8%      11.4%      (20.1%)     (2.9%)
===============================================================


===============================================================
                      NINE MONTHS ENDED SEPTEMBER 30, 2002 AS
NET SALES              A PERCENTAGE INCREASE (DECREASE) FROM
VARIANCE ANALYSIS      NINE MONTHS ENDED SEPTEMBER 30, 2001
===============================================================
                      VOLUME   PRICE/MIX  TRANSLATION   TOTAL
                     ------------------------------------------

Davison Chemicals       5.5%       1.8%        0.6%       7.9%
Performance
  Chemicals ......      4.4%      (0.4%)      (1.1%)      2.9%
Net sales ........      5.0%       0.7%       (0.3%)      5.4%
---------------------------------------------------------------
By Region:
  North America ..      1.1%      (1.1%)      (0.1%)     (0.1%)
  Europe .........     11.4%       2.8%        2.5%      16.7%
  Asia Pacific ...      5.4%      (0.7%)      (0.3%)      4.4%
  Latin America ..      8.0%       9.6%      (14.3%)      3.3%
===============================================================

Three Months Ended September 30, 2002

Grace's net sales increased 6.8% to $478.7 million in the three-month period
ended September 30, 2002 compared with the same period in 2001. Continued
strong demand for refining catalysts, and revenue from bolt-on acquisitions
in catalyst products and construction chemicals, favorably impacted third
quarter results. Acquisitions contributed $9.4 million or 2.1 percentage



                                    I-24
<PAGE>


points of the sales volume growth. The impact from foreign currency
translation occurred primarily in Europe where sales, reported in U.S.
dollars, were favorably affected by currency movements in the quarter. Silica
products and sealants and coatings experienced volume increases driven by
growth initiatives.

Nine Months Ended September 30, 2002

Grace's net sales increased 5.4% to $1,363.8 million during the nine-month
period ended September 30, 2002 compared with the same period in 2001. Sales
were favorably impacted by strong demand for refining catalysts, and by
revenue from bolt-on acquisitions in catalyst products, silica products and
construction chemicals. Acquisitions contributed $39.1 million or 3.0
percentage points of the sales volume growth. The impact from foreign
currency translation occurred primarily in Europe, where sales, reported in
U.S. dollars, were positively affected by 2.5%, partially offset by Latin
America, where sales, reported in U.S. dollars, were adversely affected by
14.3%.

During the nine months ended September 30, 2002, all product groups
experienced volume growth. Catalyst volumes were strong due to increased
refining catalyst demand. Silica products sales reflect the addition of two
acquisitions during the first quarter of 2001 and volume increases in
coatings. Construction chemical volume growth in Europe was driven by the
acquisition of Pieri S.A. in July 2001.

PRE-TAX INCOME FROM CORE OPERATIONS

Pre-tax income from core operations comprises the business segment results of
Davison Chemicals and Performance Chemicals offset by corporate operating
costs. Pre-tax income from core operations was $52.9 million for the third
quarter of 2002, compared with $53.8 million for the third quarter of 2001, a
1.7% decrease. Higher pension, medical and other employee costs of
approximately $10.3 million offset productivity gains and profit improvement
from added sales. Pre-tax income from core operations was $143.3 million for
the nine months ended September 30, 2002, compared with $140.3 million for
the same period in 2001, a 2.1% increase. Year-to-date pre-tax operating
margin was 10.5%, slightly lower than the prior year, and reflecting the
negative effects of facility rationalizations during the second quarter and
overall higher costs for pensions and employee benefits, offset by
productivity gains.


PRE-TAX INCOME (LOSS) FROM NONCORE ACTIVITIES

Pre-tax income (loss) from noncore activities comprises all events and
transactions not directly related to the generation of revenue or the support
of core operations. Expense from noncore activities totaled $11.3 million for
the third quarter of 2002, compared with expense of $5.8 million for the
prior year period. The expense in 2002 from noncore activities included a
pre-tax charge for Grace's current estimate of defense and other probable
costs to resolve pending environmental litigation as well as pension and
other postretirement benefits for former employees of divested businesses.
These expenses were offset by income from Grace's life insurance policies.
The recorded expense in 2001 was attributable to pension expenses related to
former employees of divested businesses offset by income from Grace's life
insurance policies.

Expense from noncore activities totaled $17.3 million for the nine months
ended September 30, 2002, compared with income of $2.7 million for the prior
year period. The expense from noncore activities for 2002 included pension
and other postretirement benefits for former employees of divested businesses
as well as a pre-tax charge for Grace's current estimate of defense and other
probable costs to resolve pending environmental litigation, offset by income
from Grace's life insurance policies. Income in 2001 included $7.7 million
from the sale of Grace's remaining interest in Cross Country Staffing and
income from Grace's life insurance policies, partially offset by pension
expenses related to former employees of divested businesses.

CHAPTER 11 EXPENSES

Net reorganization expenses of $8.6 million and $21.4 million, for the three
months and nine months ended September 30, 2002, consisted primarily of
legal, financial and consulting fees incurred by Grace and three creditors'
committees related to the Chapter 11 Filing. Grace believes that
reorganization expenses will continue between $8 to $10 million per quarter
for the foreseeable future.

INTEREST AND INCOME TAXES

Net interest expense for the three months ended September 30, 2002 was $3.9
million, down from $7.2 million in 2001. Net interest expense for the nine
months ended September 30, 2002 was $12.7 million, down from $26.2 million in
2001. These decreases are attributable to a declining interest rate
environment and lower borrowing levels. Grace is continuing to accrue
interest expense on its pre-petition debt at the pre-petition contractual
rate, which amounted to $3.6


                                    I-25
<PAGE>


million and $11.0 million in the three-month and nine-month periods ended
September 30, 2002.

Grace's provision for income taxes at the federal corporate rate of 35% was
$39.7 million for the nine months ended September 30, 2002. The primary
difference between this amount and the overall provision for income taxes of
$44.3 million is attributable to current period interest on tax contingencies
and the non-deductibility of certain Chapter 11 expenses.

DAVISON CHEMICALS

Business Description

The Davison Chemicals segment is a leading global supplier of catalyst and
silica products. Catalyst products represented approximately 38% of Grace's
2002 third quarter sales (36% - 2001). This segment includes fluid cracking
catalysts and additives used in petroleum refineries to convert distilled
crude oil into transportation fuels and other petroleum-based products;
hydroprocessing catalysts, which upgrade heavy oils and remove certain
impurities; polyolefin catalysts, which are essential components in the
manufacture of polyethylene and polypropylene used in products such as
plastic film, high-performance plastic pipe and other plastic parts; and
chemical catalysts, which are used in a variety of chemical processes. Silica
products, which represented 14% of Grace's 2002 and 2001 third quarter sales,
are used in a wide range of industrial and consumer applications, such as
coatings, food processing, plastics, adsorbents, personal care products and
biotechnology separations.

Recent Acquisitions and Joint Ventures

In August 2002, Grace's joint venture with Chevron Products Company, ART LLC,
acquired an exclusive license for the hydroprocessing catalyst technology of
Japan Energy Corporation and its subsidiary Orient Catalyst Company. The
joint venture will market and distribute catalysts based on this technology
worldwide.

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

Three Months Ended September 30, 2002

Sales for the Davison Chemicals segment during the three months ended
September 30, 2002 were $247.8 million, up 10.2% from the prior year period.
Acquisitions accounted for $5.3 million or 2.4 percentage points of the sales
growth. Operating income was $36.6 million, up 8.9% from the prior year
period, and operating margin of 14.8% was about even with the prior year
period. Operating income and margins in the third quarter were negatively
affected by inflation in certain raw materials and by higher employee benefit
and insurance costs, a portion of which was offset by productivity gains and
lower energy costs.

Sales in North America were up 7.1%, sales in Europe were up 16.8%, sales in
Asia Pacific were up 11.1% and sales in Latin America were down 9.3%. In
North America, the increase occurred primarily due to strong demand for
refining catalysts and favorable sales patterns of hydroprocessing catalysts.
In Europe, the increase was driven by added sales of refining catalysts and
additives and silica coatings applications, along with the Borealis
acquisition in polyolefin catalysts in the first quarter of 2002. The
increase in Asia Pacific was largely due to hydroprocessing catalyst order
patterns. The decrease in Latin America primarily reflected order patterns
for refining catalysts.

Sales of catalyst products, which include refining catalysts and additives,
polyolefin catalysts and other chemical catalysts, were up 12.1% compared
with 2001. This increase primarily reflected sales of refining catalysts to
meet strong gasoline demand and other refinery requirements, as well as
revenue from 2002 acquisitions to complement polyolefin and hydroprocessing
catalyst product offerings. Sales of silica products were up 5.4% for the
period, primarily from growth programs in coatings applications and increased
volume in Europe.

Nine Months Ended September 30, 2002

Sales for the Davison Chemicals segment during the nine months ended
September 30, 2002 were $707.5 million, up 7.9% from the prior year period.
Acquisitions accounted for $19.6 million or 3.0 percentage points of the
sales growth. Operating income was $103.0 million, up 8.6% from the prior
year period, and operating margin of 14.6% was about even with the prior year
period. Operating income was favorably impacted by lower energy costs and
improved productivity, offset by inflation in certain raw materials and by
higher employee benefit and insurance costs compared to the prior year
period.

Sales were up 3.6% in North America, 15.2% in Europe, 5.4% in Asia Pacific,
and 2.4% in Latin America. In North America the increase was primarily
attributable to order patterns of hydroprocessing catalysts and increased
sales of fluid cracking catalysts. In Europe, the increase was driven by
refining catalysts and silica coatings applications, along with the Borealis
acquisition in polyolefin catalysts completed in the first quarter of



                                    I-26
<PAGE>


2002. The increase in Asia Pacific and Latin America was primarily due to the
strong refining catalyst environment.

Sales of catalyst products were up 8.5% resulting from higher demand for
refining catalysts to meet increased gasoline usage and other refinery
requirements, and additional sales attributable to the Borealis acquisition.
Sales of silica products were up 6.1% for the period primarily from growth
programs in coatings applications and increased volume in Latin America,
Europe and Asia Pacific.

PERFORMANCE CHEMICALS

Business Description

The major product groups of the Performance Chemicals segment are (1) specialty
construction chemicals and specialty building materials, which are used
primarily by the nonresidential construction industry; and (2) container
sealants and coatings for food and beverage packaging, and other related
products. Specialty construction chemicals, which represented 22% of Grace's
2002 and 2001 third quarter sales, add strength, control corrosion, and enhance
the handling and application of concrete, and reduce the manufacturing cost and
improve the quality of cement. Specialty building materials, which represented
13% of Grace's 2002 third quarter sales (14% - 2001), prevent water damage to
structures and protect structural steel against collapse due to fire. Sealants
and coatings products, which represented 13% of Grace's 2002 third quarter sales
(14% - 2001), are used to seal beverage and food cans, glass and plastic bottles
and protect metal packaging from corrosion and the contents from the influences
of metal.

Recent Acquisitions and Joint Ventures

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

Three Months Ended September 30, 2002

Sales for the Performance Chemicals segment for the three months ended
September 30, 2002 were $230.9 million, up 3.4% from the prior year period.
Acquisitions accounted for $4.1 million, or 1.8 percentage points of the
sales growth. Operating income was $31.2 million, up 2.0% from $30.6 million
in the prior year period, and operating margin of 13.5% was 0.2 percentage
points unfavorable to the prior year period. Operating income, although
favorably impacted by currency translation, was adversely affected by higher
employee benefit and insurance costs.

Sales in North America were down 3.2%, sales in Europe were up 19.2%, sales
in Asia Pacific were up 9.2% and sales in Latin America were up 3.0%. In
North America the declines occurred primarily in construction chemicals and
building materials, reflecting the softness in North American construction
activity. In Europe, strong sales in construction chemicals were attributable
to the Pieri acquisition. This region also continues to experience higher
sales in both waterproofing and fireprotection products, and container
sealants. Sales increases in Asia Pacific and Latin America are attributable
to volume increases in construction chemicals, partially offset by small
declines in other product lines.

Sales of specialty construction chemicals, which include concrete admixtures,
cement additives and masonry products, were up 9.5%, despite reduced
commercial construction activity in North America. Sales were strong in all
other geographic regions, reflecting recovery of construction activity, the
success of new product programs and sales initiatives in key economies
worldwide. Sales of specialty building materials, which include waterproofing
and fire protection products, were down 6.2% reflecting softness in North
American construction and a decline in re-roofing activity due to dry weather
conditions. This business is largely based in the United States and most
directly affected by changes in U.S. commercial building activity. Sales of
sealants and coatings, which include container sealants, coatings, and
polymers, were up 4.1%, reflecting continued good results from growth
initiatives in coatings and closure compounds, particularly in Europe.

Nine Months Ended September 30, 2002

Sales for the Performance Chemicals segment for the nine months ended
September 30, 2002 were $656.3 million, up 2.9% from the prior year period.
Acquisitions accounted for $19.5 million, or 3.1 percentage points of the
sales growth. Operating income was $80.1 million, up 1.5% from the prior year
period, and operating margin of 12.2% was 0.2 percentage points unfavorable
to the prior year period. Operating margin was unfavorably impacted by
increased operating costs and costs associated with facility
rationalizations, partially offset by acquisition growth and productivity
gains.

Sales in North America were down 2.7%, sales in Europe were up 19.3%, sales
in Asia Pacific were up


                                    I-27
<PAGE>


3.0% and sales in Latin America were up 4.2%. Declining sales in North
America occurred primarily in construction chemicals and building materials,
reflecting the softness in North American construction activity. Sealants and
coatings sales remained consistent with the prior year. In Europe, the
increase in sales was primarily attributable to the Pieri acquisition, and
growth in building materials and sealants and coatings products. Asia Pacific
showed an increase in construction chemical sales with offsetting declines in
building materials and sealants and coatings. Latin America showed an overall
increase in sales of construction chemicals and building materials and a
slight decrease in sales of sealants and coatings.

Sales of construction chemicals were up 8.8%, driven primarily by
acquisitions. Sales of building materials were down 3.6%, with lower sales in
waterproofing and fireproofing due to timing of projects and unfavorable
weather conditions. Sales of sealants and coatings were adversely affected by
the impact of currency translation in Latin America, which negatively
impacted sales by 3.3%. Excluding the impact of currency translation, sales
were up 3.9% reflecting higher sales of coatings and closure products.

CORPORATE OPERATING COSTS

Corporate operating costs include expenses incurred by corporate headquarters
functions in support of core operations. Corporate operating costs in the
third quarter of 2002 were $14.9 million, up from $10.4 million in the third
quarter of 2001. This increase was primarily attributable to an increase in
pension expenses due to the poor performance of the global equity markets.
Corporate operating costs for the nine-month period were $39.8 million, up
from $33.4 million in 2001, also primarily attributable to an increase in
pension expense.

The decline in value of the U.S. and global equity markets coupled with a
decline in interest rates created a shortfall between accounting measurements
of Grace's U.S. salaried qualified pension obligations and the market value
of dedicated pension assets at December 31, 2001. This condition required a
balance sheet adjustment in shareholders' equity (deficit) of $124.4 million
at December 31, 2001, and increased Grace's pension expense charged to core
operations by approximately $5.3 million and $12.3 million in the third
quarter and first nine months of 2002, respectively. If there is no recovery
in the equity markets by year-end 2002, Grace may need to recognize an
additional reduction to shareholders' equity of approximately $140 million,
which would result from a year-to-date loss of approximately 15% in pension
asset value. (During the same period, the overall U.S. equities market
declined more than 25%). An adjustment, if necessary, would only be made at
year-end 2002 and will not affect 2002 operating results. However, 2003
operating results and cash funding requirements could be adversely affected.

FINANCIAL POSITION AND CASH FLOWS

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

================================================================
CORE OPERATIONS                    SEPTEMBER 30,  December 31,
(Dollars in millions)                   2002           2001
----------------------------------------------------------------

BOOK VALUE OF INVESTED CAPITAL
Receivables.....................  $   331.9       $   296.3
Inventory.......................      176.7           174.8
Properties and equipment, net...      597.6           582.9
Intangible assets and other.....      594.8           616.8
                                  ------------------------------
ASSETS SUPPORTING CORE
  OPERATIONS ...................    1,701.0         1,670.8
Accounts payable and accruals...     (329.6)         (304.1)
                                  ------------------------------
CAPITAL INVESTED IN CORE
  OPERATIONS ...................  $ 1,371.4      $  1,366.7
After-tax return on average
 invested capital (trailing
 twelve months) ................        8.8%            9.2%
                                  ==============================
                                       NINE MONTHS ENDED
                                          SEPTEMBER 30,
                                  ------------------------------
CASH FLOWS:                            2002           2001
                                  ------------------------------
Pre-tax operating income......... $   143.3       $   140.3
Depreciation and amortization....      70.6            68.7
                                  ------------------------------
PRE-TAX EARNINGS BEFORE
 DEPRECIATION AND AMORTIZATION ..     213.9           209.0
Working capital and other
  changes .......................      (3.5)         (106.2)
                                  ------------------------------
CASH FLOW BEFORE INVESTING ......     210.4           102.8
Capital expenditures ............     (55.4)          (36.3)
Businesses acquired .............     (25.0)          (84.4)
                                  ------------------------------
NET CASH FLOW FROM CORE
  OPERATIONS .................... $   130.0       $   (17.9)
================================================================

Grace had a net asset position supporting its core operations of $1,371.4
million at September 30, 2002, compared with $1,366.7 million at December 31,
2001 (including the cumulative translation account reflected in Shareholders'
Equity (Deficit) of $141.8 million for 2002 and $164.7 million for 2001). The
increase in invested capital supporting core operations was primarily due to
an increase of $35.6 million in receivables reflecting Grace's business cycle
and the weaker dollar, offset by employment-related accruals.

After-tax return on capital invested in core operations decreased by 0.4
percentage points in the nine-month period of 2002, due to relatively flat
earnings compared to a proportionately higher investment base. Net cash flows
from core operations increased primarily from the easing of working capital
pressures that began prior to the Filing. In addition, a 2.1% increase in
pre-tax income from core operations, and lower cash spending on businesses
acquired, added to net cash flow.



                                    I-28
<PAGE>


-----------------------------------------------------------------------------
FINANCIAL CONDITION
=============================================================================

EFFECT OF CHAPTER 11

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

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

NONCORE LIABILITIES AND CONTINGENCIES

Grace has a number of financial exposures originating from past businesses,
products and events. These obligations arose from transactions and/or
business practices that date back to when Grace was a much larger company,
when it produced products or operated businesses that are no longer part of
its revenue base, and when government regulations and scientific knowledge
were much less advanced than today. The table below summarizes the net
noncore liability at September 30, 2002 and December 31, 2001 and the net
cash flow from noncore activities for the nine months ended September 30,
2002 and 2001:

===============================================================
NONCORE ACTIVITIES
(Dollars in millions)
-------------------------------- SEPTEMBER 30,   December 31,
NET NONCORE LIABILITY               2002             2001
===============================================================
Asbestos-related litigation..     $  (978.2)     $  (996.3)
Asbestos-related insurance
receivable ..................         282.6          293.4
                                -------------------------------
Asbestos-related liability,
  net........................        (695.6)        (702.9)
Environmental remediation....        (156.4)        (153.1)
Postretirement benefits......        (152.6)        (169.1)
Retained obligations and
  other......................         (57.8)         (80.6)
---------------------------------------------------------------
NET NONCORE LIABILITIES......     $(1,062.4)     $(1,105.7)
===============================================================



===============================================================
                                         NINE MONTHS ENDED
                                           SEPTEMBER 30,
NET CASH FLOW FOR NONCORE          ----------------------------
ACTIVITIES                            2002           2001
===============================================================
Pre-tax (loss) income from
noncore activities.............   $   (17.3)     $     2.7
Non-cash changes...............        18.3            2.1
Cash spending for:
Asbestos-related litigation, net
of insurance recovery..........         2.6          (34.5)
Environmental remediation......       (14.5)         (23.9)
Postretirement benefits........       (17.7)         (14.8)
Retained obligations and other.        (3.2)          (5.1)
---------------------------------------------------------------
NET CASH FLOW FOR NONCORE
ACTIVITIES .....................  $   (31.8)     $   (73.5)
===============================================================

As described under "Voluntary Bankruptcy Filing," the resolution of most of
these noncore recorded and contingent liabilities will be determined through
the Chapter 11 proceedings. Grace cannot predict with any certainty how, and
for what amounts, any of such estimates will be resolved. The amounts of
these liabilities as ultimately determined through the Chapter 11 proceedings
could be materially different from amounts recorded by Grace at September 30,
2002.

ASBESTOS-RELATED MATTERS

Grace is a defendant in lawsuits relating to previously sold
asbestos-containing products. During the third quarter and nine months ended
September 30, 2002, Grace had net payments of $1.3 million and net receipts
of $2.6 million, respectively, for the defense and disposition of
asbestos-related property damage and bodily injury litigation (including
amounts received under settlements with insurance carriers). This compared to
net receipts of $33.2 million and net expenditures of $34.5 million during
the third quarter and nine months ended September 30, 2001, respectively. At
September 30, 2002, Grace's balance sheet reflected a gross asbestos-related
liability of $978.2 million ($695.6 million net of insurance). This liability
represents management's estimate, based on facts and circumstances existing
prior to the Filing, of the undiscounted net cash outflows necessary to
satisfy Grace's current and expected asbestos-related claims. Changes to the
recorded amount of such liability will be based on Chapter 11 developments
and management's assessment of the claim amounts that will ultimately be
allowed by the Bankruptcy Court.

The Consolidated Balance Sheet at September 30, 2002 includes total amounts
due from insurance carriers of $282.6 million pursuant to settlement
agreements with insurance carriers. The recovery of amounts due from
insurance carriers is dependent upon the timing, character and exposure
periods of asbestos-related claims. Grace's Chapter 11 proceedings could also
affect recovery timing and amounts.



                                    I-29
<PAGE>


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

ENVIRONMENTAL MATTERS

Grace is subject to loss contingencies resulting from extensive and evolving
federal, state, local and foreign environmental laws and regulations relating
to the generation, storage, handling, discharge and disposition of hazardous
wastes and other materials. At September 30, 2002, Grace's recorded liability
for environmental investigative and remediation costs related to both
continuing and discontinued operations totaled $156.4 million, as compared
with $153.1 million at December 31, 2001. These amounts are based on funding
and/or remediation agreements in place, together with Grace's best estimate
of its cost for sites not subject to a formal remediation plan.

Grace is facing environmental lawsuits related to previously operated
vermiculite mining and processing sites. These lawsuits allege damages arising
out of the presence of asbestos as a contaminant in vermiculite ore formerly
mined by Grace near Libby, Montana.

On March 30, 2001, the EPA filed a lawsuit for the recovery of costs allegedly
incurred by the U.S. in response to the release or threatened release of
asbestos in the Libby area relating to such former mining activities. Based upon
a review of the EPA's cost invoices and related documents, Libby-related cost
claims through December 31, 2001 totaled approximately $57 million (including
the EPA's "indirect" cost claims). The EPA has prepared an amended action plan
that could result in total response costs of $100 million or more (including the
$57 million referenced above), which costs it is seeking to recover from Grace.
Grace has conducted its own investigation to determine whether the EPA's actions
and cost claims are justified and reasonable. Based on its initial findings,
Grace believes that most of the EPA's actions and spending have been unwarranted
and excessive. Nonetheless, Grace recognizes a liability for the costs to defend
this lawsuit as well as probable and estimable damages as relevant information
becomes known. Grace's third quarter results reflect a charge of $13.0 million,
which is based on information developed by Grace's experts in the litigation and
is intended to recognize Grace's most current estimate of probable costs to
address Libby-related matters. However, Grace's total liability exposure could
be substantially greater as remediation costs incurred by the government could
exceed $100 million. A trial is expected in early 2003 to address Grace's legal
obligations in this matter.

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

POSTRETIREMENT BENEFITS

Grace voluntarily provides certain postretirement health care and life
insurance benefits for retired employees, a large majority of which pertain
to retirees of previously divested businesses. These plans are unfunded, and
Grace pays the costs of benefits under these plans as they are incurred.
Spending under this program during the nine months ended September 30, 2002
was $17.7 million. Grace's recorded liability for postretirement benefits of
$152.6 million at September 30, 2002 is stated at net present value
discounted at 7.25%. The continuing payment of these benefits has been
approved by the Bankruptcy Court, however, the program would still be subject
to the terms of a Chapter 11 reorganization plan.

RETAINED OBLIGATIONS OF DIVESTED BUSINESSES

The principal retained obligations of divested businesses relate to
contractual indemnification and to contingent liabilities not passed on to
the new owner. At September 30, 2002, Grace had recorded $57.8 million to
satisfy such obligations. Prior to Grace's Chapter 11 Filing, $43.5 million
of this amount was expected to be paid over periods ranging from 2 to 10
years. The remainder represents estimates of probable cost to satisfy
specific contingencies that were expected to be resolved over the next few
years. However, most of these matters are now subject to the automatic stay
of the Bankruptcy Court and will be resolved as part of Grace's Chapter 11
proceedings.

TAX MATTERS

Grace's federal tax returns covering tax periods from 1993 and forward are
either under examination by the Internal Revenue Service ("IRS") or open for
future examination. Grace has received the IRS examination report on tax periods
1993 through 1996. The most significant contested issue addressed in such report
is discussed in the next paragraph. Grace believes that previously established
reserves for tax matters will be sufficient to cover the



                                    I-30
<PAGE>


expected net cost of probable tax return adjustments. Any cash payment to
satisfy tax adjustments would be subject to Grace's Chapter 11 proceedings.

The IRS is challenging deductions of interest on loans secured by corporate
owned life insurance ("COLI") policies for years prior to January 1, 1999. In
2000 Grace paid $21.2 million of tax and interest related to this issue for tax
years 1990 through 1992. Subsequent to 1992, Grace deducted approximately $163.2
million in interest attributable to COLI policy loans. Although Grace continues
to believe in the merits of its case, the IRS has successfully challenged
interest deductions claimed by other corporations with respect to broad-based
COLI policies in all of the three litigated cases to date. Grace requested and
was granted early referral to the IRS Office of Appeals for consideration of
possible settlement alternatives of the COLI interest deduction issue in its
entirety.

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

The IRS has assessed additional federal income tax withholding and Federal
Insurance Contributions Act taxes plus interest and related penalties for
calendar years 1993 through 1995 against a Grace subsidiary that formerly
operated a temporary staffing business for nurses and other healthcare
personnel. The assessments, aggregating $21.8 million, were made in connection
with a meal and incidental expense per diem plan for traveling healthcare
personnel which was in effect through 1999. The IRS contends that certain per
diem reimbursements should have been treated as wages subject to employment
taxes and federal income tax withholding. Grace contends that its per diem and
expense allowance plans were in accordance with statutory and regulatory
requirements, as well as other published guidance from the IRS. Grace expects
that the IRS will make additional assessments for the 1996 through 1999 periods
as well. The matter is currently pending in the United States Court of Claims.

Grace has received notification from a foreign taxing authority assessing tax
deficiencies plus interest relating to the purchase and sale of foreign bonds in
1989 and 1990. This assessment, totaling approximately 463 million Belgium
francs (currently equivalent to approximately $11.2 million United States
dollars), is related to the Bekaert Group, which Grace sold in 1991, but as to
which Grace retained liability for tax deficiencies attributable to tax periods
prior to the sale. The matter is currently before the foreign authorities; no
decision has been rendered.

As a result of Grace's Chapter 11 filing, certain tax matters related to open
tax years, including COLI interest deductions, could become the direct
obligations of predecessor companies that now own Grace's former healthcare
and packaging businesses. One or both of these companies could be directly
liable to tax authorities for Grace's tax deficiencies. Pursuant to
agreements relating to each transaction, Grace is generally required to
indemnify both parties for taxes relating to periods prior to the closing of
such transactions. Any indemnification obligation that arises as a result of
these matters would be classified as a liability subject to compromise and
subject to the Chapter 11 proceedings.

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

CASH RESOURCES AND AVAILABLE CREDIT FACILITIES

At September 30, 2002 Grace had $339.1 million in cash and cash-like assets on
hand ($251.6 million in cash and cash equivalents and $87.5 million in cash
value of life insurance). In addition, Grace had access to unused, committed
credit facilities aggregating $230.0 million under the DIP facility ($250.0
million net of letters of credit and holdback provisions). Although the DIP
facility is subject to renewal, Grace expects that the availability of credit
will continue beyond that date. Any renewal would be subject to Bankruptcy Court
approval. Grace believes that these funds and credit facilities will be
sufficient to finance its business strategy while in Chapter 11.

CASH FLOW

Grace's net cash flow provided by core operations before investing for the
nine months ended September 30, 2002 was $210.4 million, compared with net
cash provided by core operations of $102.8 million for the nine months ended
September 30, 2001. Expenditures



                                    I-31
<PAGE>


for acquisitions aggregated $25.0 million in the first nine months of 2002
compared with $84.4 million in the comparable period of 2001. Total capital
expenditures for the nine months ended September 30, 2002 and 2001 were $55.4
million and $36.3 million, respectively. A substantial portion of these
expenditures was directed towards the business segments for routine
maintenance capital and capacity expansion at a major Davison facility.

Grace's pre-tax operating earnings before depreciation and amortization in
2002 is expected to be relatively stable and consistent with recent years.
For the nine months ended September 30, 2002 and 2001, such amounts were
$213.9 million and $209.0 million, respectively. Grace expects to continue to
invest excess cash flow and/or other available capital resources in its core
business base. These investments are likely to be in the form of added plant
capacity, product line extensions, geographic market expansions and
acquisitions. Investments that are outside the ordinary course of business
may be subject to Bankruptcy Court approval and Chapter 11 creditor committee
review.

The pre-tax cash outflow for noncore activities for the nine months ended
September 30, 2002 and 2001 was $31.8 million and $73.5 million,
respectively. Decreased cash outflow in the current year was primarily due to
lower asbestos-related payments in 2002 as compared with 2001. This reduction
was the result of the Bankruptcy Court automatic stay on payments for
asbestos-related claims on and after the Filing Date. Expenditures for
environmental remediation were lower in the first nine months of 2002 due in
part to Grace's Chapter 11 proceedings and the completion of remediation work
at certain sites. The payments for retained obligations of divested
businesses and other contingencies were lower in the first nine months of
2002 due to the automatic stay and to the one-time nature of these matters.

Cash flows used for investing activities for the nine months ended September
30, 2002 and 2001 were $77.3 and $107.6 million, respectively. Net cash
outflows for investing activities in the first nine months of 2002 consisted
primarily of $25.0 million for acquisitions, $55.4 million for capital
expenditures, and net investment in life insurance policies of $2.4 million.
Net cash outflows for investing activities in the first nine months of 2001
consisted of $84.4 million for acquisitions, $36.3 million for capital
expenditures, and net investments in life insurance policies of $0.6 million.
In addition, cash flows from investing activities in 2001 included $13.7
million in cash proceeds from the sale of assets and investments.

Net cash used for financing activities in the nine-month period ended
September 30, 2002 was $4.9 million as compared with net cash provided by
financing activities of $178.2 million for the nine months ended September
30, 2001. In the first nine months of 2002, cash outflow principally
consisted of net repayments for loans secured by the cash value of life
insurance policies. In the first nine months of 2001, cash inflows were
composed of $33.9 million in proceeds from loans secured by the cash value of
life insurance policies and $144.3 million in borrowings.

DEBT AND OTHER CONTRACTUAL OBLIGATIONS

Total debt outstanding at September 30, 2002 was $535.2 million, including $34.2
million of accrued interest. As a result of the Filing, Grace is now in default
on $501.0 million of pre-petition debt, which has been included in "liabilities
subject to compromise" as of September 30, 2002. The automatic stay provided
under the Bankruptcy Code prevents Grace's lenders from taking any action to
collect the principal amounts as well as related accrued interest. However,
Grace will continue to accrue and report interest on such debt during the
Chapter 11 proceedings (unless further developments lead management to conclude
that it is probable that such interest will be compromised).

At September 30, 2002, Grace had gross financial assurances issued and
outstanding of $234.2 million, comprised of $135.2 million of gross surety
bonds issued by various insurance companies and $99.0 million of standby
letters of credit issued by various banks. Of the standby letters of credit,
$19.7 million act as collateral for surety bonds, thereby reducing Grace's
overall obligations under its financial assurances to a net amount of $214.5
million. These financial assurances were established for a variety of
purposes, including insurance and environmental matters, asbestos settlements
and appeals, trade-related commitments and other matters. Of the net amount
of $214.5 million of financial assurances, approximately $5.0 million was
issued on behalf of non-Debtor entities and $209.5 million was issued on
behalf of the Debtors. Of the amounts issued by the Debtors, approximately
$195.5 million was issued before the Filing Date, with the remaining $14.0
million issued subsequent to the Filing, of which $13.5 million was issued
under the DIP facility.



                                    I-32
<PAGE>


FORWARD-LOOKING STATEMENTS

The forward-looking statements contained in this document are based on
current expectations regarding important risk factors. Actual results may
differ materially from those expressed. In addition to the uncertainties
referred to in Management's Discussion and Analysis of Results of Operations
and Financial Condition, other uncertainties include the impact of worldwide
economic conditions; pricing of both Grace's products and raw materials;
customer outages and customer demand; factors resulting from fluctuations in
interest rates, foreign currencies and commodities; the impact of competitive
products and pricing; the continued success of Grace's process improvement
initiatives; the impact of tax and legislation and other regulations in the
jurisdictions in which Grace operates; and developments in and the outcome of
the Chapter 11 proceedings discussed above. Also, see "Introduction and
Overview - Projections and Other Forward-Looking Information" in Item 1 of
Grace's current Annual Report on Form 10-K.



                                    I-33
<PAGE>




ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Grace had no outstanding derivative financial instruments on September 30,
2002. For further information concerning Grace's quantitative and qualitative
disclosures about market risk, refer to Notes 13 and 15 in the Consolidated
Financial Statements in Grace's 2001 Form 10-K.

ITEM 4.

GENERAL STATEMENT OF RESPONSIBILITY

The management of Grace is responsible for the preparation, integrity and
objectivity of the Consolidated Financial Statements and the other
information included in this report. The financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America and accordingly include certain amounts that
represent management's best estimates and judgments. Actual amounts could
differ from those estimates.

Management maintains internal control systems to assist it in fulfilling its
responsibility for financial reporting. These systems include business,
accounting and reporting policies and procedures, selection of personnel,
segregation of duties and an internal audit function. While no system can
ensure elimination of all errors and irregularities, Grace's systems, which
are reviewed and modified in response to changing conditions, have been
designed to provide reasonable assurance that assets are safeguarded,
policies and procedures are followed, transactions are properly executed and
reported and appropriate disclosures are made. The concept of reasonable
assurance is based on the recognition that there are limitations in all systems
of internal control and that the costs of such systems should not exceed their
benefits.


EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this report, Grace carried out an
evaluation of the effectiveness of the design and operation of its disclosure
controls and procedures pursuant to Rule 13a-14 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). Based upon that evaluation,
Grace's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in ensuring that
information required to be disclosed in the Company's periodic filings under the
Exchange Act is accumulated and communicated to such officers to allow timely
decisions regarding required disclosures. There have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect internal controls subsequent to the date the Company completed its
evaluation.



                                    I-34
<PAGE>


                           PART II. OTHER INFORMATION


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

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



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

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

          15   Accountants' Awareness Letter

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

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


     (b)  Reports on Form 8-K. The following reports on Form 8-K were filed
          during the third quarter of 2002:

          August 13, 2002 - Statements under oath submitted by the principal
          executive officer and principal financial officer of W. R. Grace & Co.

          September 23, 2002 - Motion requesting that the Delaware bankruptcy
          court authorize Grace to enter into a settlement agreement with the
          Internal Revenue Service in connection with deductions of interest on
          loans secured by corporate owned life insurance policies.





                                    II-1
<PAGE>



                                    SIGNATURE
                                    ---------

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

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


Date:  November 13, 2002                         By  /s/  Robert M. Tarola
                                                 -------------------------
                                                       Robert M. Tarola
                                                  Senior Vice President and
                                                   Chief Financial Officer
                                               (Principal Accounting Officer)





                                    II-2
<PAGE>


                 CERTIFICATIONS UNDER RULES 13a-14 AND 15d-14 OF
                       THE SECURITIES EXCHANGE ACT OF 1934


I, Paul J. Norris, certify that:

    1.  I have reviewed this quarterly report on Form 10-Q of W. R. Grace &
        Co.;

    2.  Based on my knowledge, this quarterly report does not contain any
        untrue statement of a material fact or omit to state a material fact
        necessary to make the statements made, in light of the circumstances
        under which such statements were made, not misleading with respect to
        the period covered by this quarterly report;

    3.  Based on my knowledge, the financial statements, and other financial
        information included in this quarterly report, fairly present in all
        material respects the financial condition, results of operations and
        cash flows of the registrant as of, and for, the periods presented in
        this quarterly report;

    4.  The registrant's other certifying officers and I are responsible for
        establishing and maintaining disclosure controls and procedures (as
        defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
        and we have:

              (a) designed such disclosure controls and procedures to ensure
                  that material information relating to the registrant,
                  including its consolidated subsidiaries, is made known to us
                  by others within those entities, particularly during the
                  period in which this quarterly report is being prepared;

              (b) evaluated the effectiveness of the registrant's disclosure
                  controls and procedures as of a date within 90 days prior to
                  the filing date of this quarterly report (the "Evaluation
                  Date"); and

              (c) presented in this quarterly report our conclusions about the
                  effectiveness of the disclosure controls and procedures based
                  on our evaluation as of the Evaluation Date;

    5.  The registrant's other certifying officers and I have disclosed,
        based on our most recent evaluation, to the registrant's auditors and
        the audit committee of registrant's board of directors (or persons
        performing the equivalent function):

              (a) all significant deficiencies in the design or operation of
                  internal controls which could adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial data and have identified for the registrant's
                  auditors any material weaknesses in internal controls; and

              (b) any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal controls; and

    6.  The registrant's other certifying officers and I have indicated in
        this quarterly report whether or not there were significant changes
        in internal controls or in other factors that could significantly
        affect internal controls subsequent to the date of our most recent
        evaluation, including any corrective actions with regard to
        significant deficiencies and material weaknesses.

        Date:  November 13, 2002
                                                        /s/ Paul J. Norris
                                                        ------------------------
                                                        Paul J. Norris
                                                        Chairman, President and
                                                        Executive Officer



                                    II-3
<PAGE>


               CERTIFICATIONS UNDER RULES 13a-14 AND 15d-14 OF
                     THE SECURITIES EXCHANGE ACT OF 1934

I, Robert M. Tarola, certify that:

    1.  I have reviewed this quarterly report on Form 10-Q of W. R. Grace &
        Co.;

    2.  Based on my knowledge, this quarterly report does not contain any
        untrue statement of a material fact or omit to state a material fact
        necessary to make the statements made, in light of the circumstances
        under which such statements were made, not misleading with respect to
        the period covered by this quarterly report;

    3.  Based on my knowledge, the financial statements, and other financial
        information included in this quarterly report, fairly present in all
        material respects the financial condition, results of operations and
        cash flows of the registrant as of, and for, the periods presented in
        this quarterly report;

    4.  The registrant's other certifying officers and I are responsible for
        establishing and maintaining disclosure controls and procedures (as
        defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
        and we have:

              (a) designed such disclosure controls and procedures to ensure
                  that material information relating to the registrant,
                  including its consolidated subsidiaries, is made known to us
                  by others within those entities, particularly during the
                  period in which this quarterly report is being prepared;

              (b) evaluated the effectiveness of the registrant's disclosure
                  controls and procedures as of a date within 90 days prior to
                  the filing date of this quarterly report (the "Evaluation
                  Date"); and

              (c) presented in this quarterly report our conclusions about the
                  effectiveness of the disclosure controls and procedures based
                  on our evaluation as of the Evaluation Date;

    5.  The registrant's other certifying officers and I have disclosed,
        based on our most recent evaluation, to the registrant's auditors and
        the audit committee of registrant's board of directors (or persons
        performing the equivalent function):

              (a) all significant deficiencies in the design or operation of
                  internal controls which could adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial data and have identified for the registrant's
                  auditors any material weaknesses in internal controls; and

              (b) any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal controls; and

    6.  The registrant's other certifying officers and I have indicated in
        this quarterly report whether or not there were significant changes
        in internal controls or in other factors that could significantly
        affect internal controls subsequent to the date of our most recent
        evaluation, including any corrective actions with regard to
        significant deficiencies and material weaknesses.


        Date:  November 13, 2002
                                                      /s/ Robert M. Tarola
                                                      -------------------------
                                                      Robert M Tarola
                                                      Senior Vice President and
                                                      Chief Financial Officer




                                    II-4
<PAGE>



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


<TABLE>
<CAPTION>
EXHIBIT NO.       DESCRIPTION OF EXHIBIT
-----------       ----------------------
<S>               <C>
    15            Accountants' Awareness Letter

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

    99.2          Certification of Periodic Report by Chief Financial Officer under Section 906 of the Sarbanes-Oxley
                  Act of 2002
</TABLE>



                                    II-5