<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 MARCH 31, 2004

                                       OR

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


                         Commission File Number 1-13953

                                W. R. GRACE & CO.

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


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


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

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

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

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

65,616,330 shares of Common Stock, $0.01 par value, were outstanding at April
30, 2004.


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

<PAGE>

                       W. R. GRACE & CO. AND SUBSIDIARIES

                                Table of Contents





                                                                      Page No.
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

        Report of Independent Accountants                              I - 1

        Consolidated Statements of Operations                          I - 2

        Consolidated Statements of Cash Flows                          I - 3

        Consolidated Balance Sheets                                    I - 4

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

        Consolidated Statements of Comprehensive Income                I - 5

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

Item 2. Management's Discussion and Analysis of Financial
           Condition and Results of Operations                  I - 22 to I - 31

Item 3. Quantitative and Qualitative Disclosures About
           Market Risk                                                I - 32

Item 4. Controls and Procedures                                       I - 32


PART II. OTHER INFORMATION

Item 1. Legal Proceedings                                             II - 1

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





<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 March 31, 2004, and the related consolidated
statements of operations, of comprehensive income and of cash flows for each of
the three-month periods ended March 31, 2004 and March 31, 2003 and the
consolidated statement of shareholders' equity (deficit) for the three-month
period ended March 31, 2004. These interim financial statements are the
responsibility of the Company's management.

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

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

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

We previously audited in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of December
31, 2003, and the related consolidated statements of operations, of cash flows,
of shareholders' equity (deficit) and of comprehensive 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 27, 2004. In our opinion, the information set forth
in the accompanying consolidated balance sheet as of December 31, 2003, 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
McLean, Virginia
April 27, 2004

                                      I-1
<PAGE>

<TABLE>
<CAPTION>
====================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES                                                                    THREE MONTHS ENDED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)                                                         MARCH 31,
====================================================================================================================================
In millions, except per share amounts                                                             2004                  2003
                                                                                       ---------------------------------------------
<S>                                                                                       <C>                   <C>
Net sales..........................................................................       $      518.5          $        444.8
                                                                                       ---------------------------------------------
Cost of goods sold, exclusive of depreciation and amortization shown separately
    below..........................................................................              331.7                   296.7
Selling, general and administrative expenses, exclusive of net pension expense
    shown separately below.........................................................              102.2                    91.7
Depreciation and amortization .....................................................               27.2                    24.7
Research and development expenses .................................................               12.7                    14.1
Net pension expense ...............................................................               12.3                    13.5
Interest expense and related financing costs ......................................                3.9                     4.2
Other expense (income) ............................................................               (3.2)                   (5.8)
Provision for environmental remediation ...........................................                 --                     2.0
                                                                                       ---------------------------------------------
                                                                                                 486.8                   441.1
                                                                                       ---------------------------------------------
Income before Chapter 11 expenses, income taxes, and minority interest.............               31.7                     3.7
Chapter 11 expenses, net ..........................................................               (4.5)                   (2.7)
Provision for income taxes.........................................................              (10.9)                   (3.1)
Minority interest in consolidated entities.........................................               (0.5)                   (0.2)
                                                                                       ---------------------------------------------
    NET INCOME (LOSS) .............................................................       $       15.8          $         (2.3)
====================================================================================================================================
BASIC EARNINGS (LOSS) PER COMMON SHARE:
    Net income (loss) ..............................................................      $       0.24          $        (0.04)

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

DILUTED EARNINGS (LOSS) PER COMMON SHARE:
    Net income (loss) ..............................................................      $       0.24          $        (0.04)

Average number of diluted shares ...................................................              65.8                    65.5
====================================================================================================================================
</TABLE>

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

                                      I-2
<PAGE>

<TABLE>
<CAPTION>
====================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES                                                                     THREE MONTHS ENDED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)                                                          MARCH 31,
====================================================================================================================================
In millions                                                                                         2004               2003
                                                                                             ---------------------------------------
<S>                                                                                          <C>                <C>
OPERATING ACTIVITIES
Income before Chapter 11 expenses, income taxes, and minority interest...................    $       31.7       $          3.7
Reconciliation to net cash provided by operating activities:
     Depreciation and amortization ......................................................            27.2                 24.7
     Interest accrued on pre-petition debt subject to compromise.........................             2.7                  2.9
     Loss on sales of investments and disposals of assets................................             0.2                  0.3
     Provision for environmental remediation.............................................              --                  2.0
     Income from life insurance policies, net............................................            (1.5)                (3.1)
     Changes in assets and liabilities, excluding effect of businesses
       acquired/divested and foreign currency translation:
         Working capital items...........................................................           (33.2)               (17.9)
         Contributions to defined benefit pension plans..................................            (2.4)                (1.1)
         Contributions to postretirement benefit plans...................................            (2.6)                (3.1)
         Expenditures for asbestos-related litigation ...................................            (1.9)                (2.3)
         Proceeds from asbestos-related insurance .......................................             1.6                  1.1
         Expenditures for environmental remediation .....................................            (2.9)                (3.1)
         Expenditures for retained obligations of divested businesses ...................            (0.4)                  --
         Changes in accruals and other non-cash items....................................            14.5                 13.7
                                                                                             ---------------------------------------
     NET CASH PROVIDED BY OPERATING ACTIVITIES BEFORE INCOME TAXES AND CHAPTER 11
         EXPENSES .......................................................................            33.0                 17.8
Chapter 11 expenses paid, net ...........................................................            (2.0)                (3.8)
Income taxes paid, net of refunds .......................................................           (10.3)                (4.3)
                                                                                             ---------------------------------------
     NET CASH PROVIDED BY OPERATING ACTIVITIES ..........................................            20.7                  9.7
                                                                                             ---------------------------------------

INVESTING ACTIVITIES
Capital expenditures ....................................................................            (9.1)               (18.0)
Investment in life insurance policies....................................................            (4.6)                (4.9)
Proceeds from life insurance policies....................................................             5.3                  3.6
Proceeds from sales of investments and disposals of assets...............................             0.1                  0.7
                                                                                             ---------------------------------------
     NET CASH USED FOR INVESTING ACTIVITIES .............................................            (8.3)               (18.6)
                                                                                             ---------------------------------------

FINANCING ACTIVITIES
Net change in loans secured by cash value of life insurance policies ....................            (1.3)                (0.9)
Borrowings under credit facilities, net of repayments....................................             8.9                 (0.6)
Borrowings under debtor-in-possession facility, net of fees .............................            (0.5)                (2.2)
Repayments of borrowings under debtor-in-possession facility.............................              --                   --
                                                                                             ---------------------------------------
     NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES ...............................             7.1                 (3.7)
                                                                                             ---------------------------------------
Effect of currency exchange rate changes on cash and cash equivalents ...................            (3.4)                 4.4
                                                                                             ---------------------------------------
     INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...................................            16.1                 (8.2)
Cash and cash equivalents, beginning of period ..........................................           309.2                283.6
                                                                                             ---------------------------------------
Cash and cash equivalents, end of period ................................................    $      325.3       $        275.4
====================================================================================================================================
</TABLE>

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

                                      I-3
<PAGE>

<TABLE>
<CAPTION>
============================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES                                                        MARCH 31,         DECEMBER 31,
CONSOLIDATED BALANCE SHEETS (UNAUDITED)                                                      2004               2003
============================================================================================================================
In millions, except par value and shares

ASSETS
CURRENT ASSETS
<S>                                                                                   <C>                <C>
Cash and cash equivalents .........................................................   $        325.3     $        309.2
Accounts and other receivables, net ...............................................            353.8              347.5
Inventories .......................................................................            226.2              214.6
Deferred income taxes .............................................................             29.4               29.8
Other current assets...............................................................             27.4               27.8
                                                                                      --------------------------------------
     TOTAL CURRENT ASSETS .........................................................            962.1              928.9

Properties and equipment, net of accumulated depreciation and
     amortization of $1,266.2 (2003 - $1,103.0)....................................            635.1              656.6
Goodwill ..........................................................................             84.2               85.2
Cash value of life insurance policies, net of policy loans.........................             92.9               90.8
Deferred income taxes .............................................................            591.8              587.1
Asbestos-related insurance expected to be realized after one year..................            267.8              269.4
Other assets ......................................................................            257.6              256.2
                                                                                      --------------------------------------
     TOTAL ASSETS .................................................................   $      2,891.5     $      2,874.2
                                                                                      ======================================

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE
CURRENT LIABILITIES
Debt payable within one year ......................................................   $         15.9     $          6.8
Accounts payable ..................................................................            110.1              101.8
Income taxes payable ..............................................................             19.9               16.6
Other current liabilities .........................................................            131.0              149.0
                                                                                      --------------------------------------
     TOTAL CURRENT LIABILITIES ....................................................            276.9              274.2

Deferred income taxes .............................................................             35.1               35.3
Other liabilities .................................................................            304.4              296.0
                                                                                      --------------------------------------
     TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE...................................            616.4              605.5

LIABILITIES SUBJECT TO COMPROMISE - NOTE 2.........................................          2,447.7            2,452.3
                                                                                      --------------------------------------
     TOTAL LIABILITIES.............................................................          3,064.1            3,057.8
                                                                                      --------------------------------------
COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY (DEFICIT)
Common stock issued, par value $0.01; 300,000,000 shares authorized;
     outstanding: 2004 - 65,616,330 (2003 - 65,558,510) ...........................              0.8                0.8
Paid-in capital ...................................................................            431.6              432.1
Accumulated deficit................................................................           (155.1)            (170.9)
Treasury stock, at cost:  shares: 2004 - 11,363,430 (2003 - 11,421,250)............           (135.2)            (135.9)
Accumulated other comprehensive loss...............................................           (314.7)            (309.7)
                                                                                      --------------------------------------
     TOTAL SHAREHOLDERS' EQUITY (DEFICIT) .........................................           (172.6)            (183.6)
                                                                                      --------------------------------------
     TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) .........................   $      2,891.5     $      2,874.2
============================================================================================================================
</TABLE>

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

                                      I-4
<PAGE>

<TABLE>
<CAPTION>
================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
================================================================================================================================
                                                                                           Accumulated           TOTAL
                                           Common Stock                                       Other          SHAREHOLDERS'
                                               and          Accumulated       Treasury    Comprehensive         EQUITY
In millions                               Paid-in Capital     Deficit          Stock           Loss            (DEFICIT)
--------------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>              <C>               <C>          <C>                <C>
BALANCE, DECEMBER 31, 2003............   $        432.9   $      (170.9)    $   (135.9)  $     (309.7)      $       (183.6)
Net income............................               --            15.8             --             --                 15.8
Stock plan activity ..................             (0.5)             --            0.7             --                  0.2
Other comprehensive income (loss).....               --              --             --           (5.0)                (5.0)
                                         ---------------------------------------------------------------------------------------
BALANCE, MARCH 31, 2004...............   $        432.4   $      (155.1)    $   (135.2)  $     (314.7)      $       (172.6)
================================================================================================================================
</TABLE>

<TABLE>
<CAPTION>
================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES                                                                  THREE MONTHS ENDED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)                                              MARCH 31,
================================================================================================================================
In millions                                                                                       2004               2003
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>                <C>
NET INCOME (LOSS).....................................................................      $      15.8        $     (2.3)

OTHER COMPREHENSIVE INCOME (LOSS):
   Foreign currency translation adjustments...........................................             (5.0)              9.4
                                                                                         ---------------------------------------
COMPREHENSIVE INCOME..................................................................      $      10.8        $      7.1
================================================================================================================================
</TABLE>

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

                                      I-5
<PAGE>

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

--------------------------------------------------------------------------------
1.   BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND FINANCIAL
     REPORTING POLICIES
--------------------------------------------------------------------------------
W. R. Grace & Co., through its subsidiaries, is engaged in specialty chemicals
and specialty materials businesses on a worldwide basis. These businesses
consist of catalyst and silica products ("Davison Chemicals") and construction
chemicals, building materials and sealants and coatings ("Performance
Chemicals").

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

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

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

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

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

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

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

Since the Filing, all motions necessary to conduct normal business activities
have been approved by the Bankruptcy Court.

Status of Chapter 11 Proceedings - 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

                                      I-6
<PAGE>

received extensions of their exclusivity period during which to file a plan of
reorganization through February 1, 2004, and extensions of the Debtors'
exclusive right to solicit acceptances of a reorganization plan through April 1,
2004. A motion is pending before the Bankruptcy Court to further extend these
exclusivity periods.

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 costs and expenses of the committees and of the future asbestos
claimants' representative, including those of their counsel and financial
advisors.

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

Claims Filings - The Bankruptcy Court established a bar date of March 31, 2003
for claims of general unsecured creditors, asbestos-related property damage
claims and medical monitoring claims related to asbestos. The bar date did not
apply to asbestos-related bodily injury claims or claims related to Zonolite(R)
attic insulation ("ZAI"), which will be dealt with separately.

Approximately 15,000 proofs of claim were filed by the bar date. Of these
claims, approximately 10,000 were non-asbestos related, approximately 4,000 were
for asbestos-related property damage, and approximately 1,000 were for medical
monitoring. In addition, approximately 450 proofs of claim were filed after the
bar date. The discussion below refers to claims filed before the bar date.

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

The Debtors' initial analysis indicated that many claims are duplicates,
represent the same claim filed against more than one of the Debtors, lack any
supporting documentation, or provide insufficient supporting documentation. As
of March 31, 2004, the Debtors had filed with the Bankruptcy Court approximately
1,100 objections with respect to such claims, most of which were non-substantive
(duplicates, no supporting documentation, late filed claims, etc.). The Debtors
expect to file a substantial number of additional objections, most of which will
be substantive, as analysis and evaluation of the claims progresses. However,
based on its initial claims analysis and other available information, Grace
increased its estimated liability for environmental remediation and
asbestos-related litigation as discussed in Notes 3 and 11. No other changes to
Filing Date liabilities are deemed warranted at this time.

The medical monitoring claims were made by individuals who allege exposure to
asbestos through Grace's products or operations. These claims, if sustained,
would require Grace to fund ongoing health monitoring costs for qualified
claimants. However, based on the number and expected cost of such claims, Grace
does not believe such claims will have a material effect on its Consolidated
Financial Statements. No specific liability has been established for these
claims.

Grace believes that its recorded liabilities represent a reasonable estimate of
the ultimate allowable amount for claims that are not in dispute or have been
submitted with sufficient information to both evaluate merit and estimate the
cost of the claim. However, because of the uncertainties of the Chapter 11 and
litigation process, the in-progress state of Grace's investigation of submitted
claims, and the lack of documentation in support of many claims, such recorded
liabilities may prove to be insufficient to satisfy all of such claims. As
claims are resolved, or where better information becomes available and is

                                      I-7
<PAGE>

evaluated, Grace will make adjustments to the liabilities recorded on its
financial statements as appropriate. Any such adjustments could be material to
its consolidated financial position and results of operations.

Litigation Proceedings in Bankruptcy Court - In July 2002, the Bankruptcy Court
approved special counsel to represent, at the Debtors' expense, the ZAI
claimants in a proceeding to determine certain threshold scientific issues
regarding ZAI. The Debtors expect the Bankruptcy Court to establish a schedule
for hearing pending motions following a status conference in May 2004. (See Note
3 for background information.)

In September 2000, Grace was named in a purported class action lawsuit filed in
California Superior Court for the County of San Francisco, alleging that the
1996 reorganization involving a predecessor of Grace and Fresenius Medical Care
Holdings, Inc. ("Fresenius") and the 1998 reorganization involving a predecessor
of Grace and Sealed Air Corporation ("Sealed Air") were fraudulent transfers.
The Bankruptcy Court authorized the Official Committee of Asbestos Personal
Injury Claimants and the Official Committee of Asbestos Property Damage
Claimants to proceed with claims against Fresenius and Sealed Air on behalf of
the Debtors' estates.

On November 29, 2002, Sealed Air and Fresenius each announced that they had
reached agreements in principle with such Committees to settle asbestos and
fraudulent conveyance claims related to such transactions. Under the terms of
the Fresenius settlement, as subsequently revised and subject to certain
conditions, Fresenius would contribute $115.0 million to the Debtors' estate as
directed by the Bankruptcy Court upon confirmation of the Debtors' plan of
reorganization. In July 2003, the Fresenius settlement was approved by the
Bankruptcy Court. Under the terms of the proposed Sealed Air settlement, Sealed
Air would make a payment of $512.5 million (plus interest at 5.5% per annum,
commencing on December 21, 2002) and nine million shares of Sealed Air common
stock (valued at $447.6 million as of March 31, 2004), as directed by the
Bankruptcy Court upon confirmation of the Debtors' plan of reorganization. The
Sealed Air settlement has not been agreed to by the Debtors and remains subject
to the approval of the Bankruptcy Court and the fulfillment of specified
conditions. The Debtors are unable to predict how these settlements may
ultimately affect their plan of reorganization.

Impact on Debt Capital - All of the Debtors' pre-petition debt is in default due
to the Filing. The accompanying Consolidated Balance Sheet as of March 31, 2004
reflects the classification of the Debtors' pre-petition debt within
"liabilities subject to compromise."

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

Accounting Impact - The accompanying Consolidated Financial Statements have been
prepared in accordance with Statement of Position 90-7 ("SOP 90-7"), "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code," promulgated
by the American Institute of Certified Public Accountants. SOP 90-7 requires
that financial statements of debtors-in-possession be prepared on a going
concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the Filing, the realization of certain of Debtors'
assets and the liquidation of certain of 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 March 31, 2004, such pre-petition liabilities include fixed obligations
(such as debt and contractual commitments), as well as estimates of costs
related to contingent liabilities (such as asbestos-related litigation,
environmental remediation, and other claims). The recorded amounts of such
liabilities generally reflect accounting measurements as of the Filing Date,
adjusted as warranted for changes in facts and circumstances, new information
obtained in the claims review process, 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

                                      I-8
<PAGE>

liabilities subject to compromise.) Obligations of Grace subsidiaries not
covered by the Filing continue to be classified on the Consolidated Balance
Sheets based upon maturity dates or the expected dates of payment. SOP 90-7 also
requires separate reporting of certain expenses, realized gains and losses, and
provisions for losses related to the Filing as reorganization items.

BASIS OF PRESENTATION: The interim Consolidated Financial Statements presented
herein are unaudited and should be read in conjunction with the Consolidated
Financial Statements presented in the Company's 2003 Annual Report on Form 10-K.
Such interim Consolidated Financial Statements reflect all adjustments that, in
the opinion of management, are necessary for a fair presentation of the results
of the interim periods presented; all such adjustments are of a normal recurring
nature. Potential accounting adjustments discovered during normal reporting and
accounting processes are evaluated on the basis of materiality, both
individually and in the aggregate, and are recorded in the accounting period
discovered, unless a restatement of a prior period is necessary. All significant
intercompany accounts and transactions have been eliminated.

The results of operations for the three-month interim period ended March 31,
2004 are not necessarily indicative of the results of operations for the year
ending December 31, 2004.

RECLASSIFICATIONS: Certain amounts in prior years' Consolidated Financial
Statements have been reclassified to conform to the 2004 presentation.

EFFECT OF NEW ACCOUNTING STANDARDS: In December 2003, the Financial Accounting
Standards Board ("FASB") revised Statement of Financial Accounting Standards
("SFAS") No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," to require additional disclosure about the assets,
obligations, cash flows, and net periodic benefit cost of defined benefit plans
and other postretirement plans. Grace adopted the provisions of SFAS No. 132 in
December 2003. (See Note 12.)

In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). Grace adopted the provisions of FIN 46
in 2002. The adoption of FIN 46 required Grace to consolidate Advanced Refining
Technologies LLC, a joint venture between Grace and Chevron Products Company.
The impact of this consolidation did not result in a material change to Grace's
Consolidated Financial Statements.

STOCK INCENTIVE PLANS: SFAS No. 123 permits the Company to follow the
measurement provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and not recognize compensation
expense for its stock-based incentive plans. Had compensation cost for the
Company's stock-based incentive compensation plans been determined based on the
fair value at the grant dates of awards under those plans, consistent with the
fair value methodology prescribed by SFAS No. 123, the Company's net income
(loss) and related earnings (loss) per share for the three-month periods ended
March 31, 2004 and 2003 would have been reduced to the pro forma amounts
indicated below:

================================================================================
PRO FORMA EARNINGS
    UNDER SFAS NO. 123
(In millions, except per share                       THREE MONTHS ENDED
amounts)                                                 MARCH 31,
================================================================================
                                                     2004          2003
                                            ------------------------------------
Net income (loss), as reported ...........       $    15.8      $    (2.3)
Deduct:
Total stock-based employee
  compensation expense determined
  under fair value based
  method for all awards,
  net of related tax effects..............            (0.1)          (0.4)
                                            ------------------------------------
Pro forma net income (loss) (1) ..........       $    15.7      $    (2.7)
                                            ====================================
Basic earnings (loss) per share:
As reported...............................       $    0.24      $   (0.04)
Pro forma net income (loss) (1) ..........            0.24          (0.04)
Diluted earnings (loss) per share:
As reported...............................       $    0.24      $   (0.04)
Pro forma net income (loss) (1) ..........            0.24          (0.04)
================================================================================
(1)  Due to Grace's Chapter 11 Filing, these pro forma amounts may not be
     indicative of future income (loss) and earnings (loss) per share.

To determine compensation cost under SFAS No. 123, the fair value of each option
is estimated on the date of grant using the Black-Scholes option pricing model.
There were no option grants in the first quarter of 2004 and the year ended
2003.

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

                                      I-9
<PAGE>

o  Contingent liabilities such as asbestos-related matters (see Note 3),
   environmental remediation (see Note 11), income taxes (see Note 11), and
   retained obligations of divested businesses.
o  Pension and postretirement liabilities that depend on assumptions regarding
   discount rates and/or total returns on invested funds.
o  Depreciation and amortization periods for long-lived assets, including
   property and equipment, intangible, and other assets.
o  Realization values of various assets such as net deferred tax assets, trade
   receivables, inventories, insurance receivables, income taxes, and goodwill.

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

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

As a result of the Filing, Grace's Consolidated Balance Sheets separately
identify the liabilities that are "subject to compromise" as a result of the
Chapter 11 proceedings. In Grace's case, "liabilities subject to compromise"
represent pre-petition liabilities as determined under U.S. generally accepted
accounting principles. Changes to the recorded amount of such liabilities will
be based on developments in the Chapter 11 Cases and management's assessment of
the claim amounts that will ultimately be allowed by the Bankruptcy Court.
Changes to pre-petition liabilities subsequent to the Filing Date reflect: 1)
cash payments under approved court orders; 2) the 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:

================================================================================
(In millions)                                    MARCH 31,     December 31,
(Unaudited)                                        2004            2003
================================================================================
Debt, pre-petition plus
  accrued interest................            $      555.2     $      552.7
Asbestos-related liability .......                   990.3            992.3
Income taxes......................                   218.6            217.9
Environmental remediation ........                   329.5            332.4
Postretirement benefits
  other than pension..............                   131.2            134.3
Special pension
  arrangements....................                    69.9             69.5
Retained obligations of
  divested businesses.............                    56.6             57.0
Accounts payable .................                    31.6             31.9
Other accrued liabilities ........                    64.8             64.3
                                        ----------------------------------------
TOTAL LIABILITIES SUBJECT
  TO COMPROMISE ..................            $    2,447.7     $    2,452.3
================================================================================

Set forth below is a reconciliation of the changes in pre-filing date liability
balances for the period from the Filing Date through March 31, 2004.

================================================================================
(In millions)                                                Cumulative
(Unaudited)                                                 Since Filing
================================================================================
Balance, Filing Date..............................         $    2,366.0
Cash disbursements and/or reclassifications
  under Bankruptcy Court orders:
      Freight and distribution order..............                 (5.7)
      Trade accounts payable order................                 (9.1)
      Other court orders including employee
         wages and benefits, sales and use
         tax, and customer programs...............               (196.2)
Expense/(income) items:
   Interest on pre-petition debt..................                 49.4
   Employee-related accruals......................                 11.5
   Change in estimate of asbestos-related
     property damage contingencies................                 30.0
   Change in estimate of environmental
     contingencies................................                219.0
   Change in estimate of income tax
     contingencies................................                  8.5
  Balance sheet reclassifications.................                (25.7)
                                                       -------------------------
Balance, end of period............................         $    2,447.7
================================================================================

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-10
<PAGE>

The Debtors' Chapter 11 expenses for each of the three-month periods ended March
31, 2004 and March 31, 2003 consisted of:

================================================================================
                                                      THREE MONTHS ENDED
(In millions)                                             MARCH 31,
================================================================================
                                                      2004          2003
                                              ----------------------------------
Legal and financial advisory fees .........       $     4.8      $     2.8
Interest income ...........................            (0.3)          (0.1)
                                              ----------------------------------
Chapter 11 expenses, net...................       $     4.5      $     2.7
================================================================================

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

Condensed financial information of the Debtors is presented below:

================================================================================
W. R. GRACE & CO. - CHAPTER 11
  FILING ENTITIES
  DEBTOR-IN-POSSESSION STATEMENTS
  OF OPERATIONS                                      THREE MONTHS ENDED
(In millions) (Unaudited)                                 MARCH 31,
================================================================================
                                                      2004         2003
                                              ----------------------------------
Net sales, including intercompany .........       $    269.4   $    225.7
                                              ----------------------------------
Cost of goods sold, including
   intercompany, exclusive of
   depreciation and amortization
   shown separately below..................            194.4        158.5
Selling, general and
   administrative expenses,
   exclusive of net pension
   expense shown separately below .........             61.6         56.8
Research and development
    expenses...............................              8.6         10.9
Depreciation and amortization..............             14.5         15.5
Net pension expense........................             11.0         12.3
Interest expense and related
   financing costs.........................              3.8          4.2
Other expense (income).....................             (9.3)       (17.0)
Provision for environmental
  remediation..............................               --          2.0
                                              ----------------------------------
                                                       284.6        243.2
                                              ----------------------------------
Loss before Chapter 11 expenses,
   income taxes, and equity in
   net income of non-filing
   entities................................            (15.2)       (17.5)
Chapter 11 expenses, net...................             (4.5)        (2.7)
Benefit from income taxes..................              2.5          1.8
                                              ----------------------------------
Loss before equity in net income
  of non-filing entities...................            (17.2)       (18.4)
Equity in net income of
  non-filing entities......................             33.0         16.1
                                              ----------------------------------
NET INCOME (LOSS)..........................       $     15.8   $     (2.3)
================================================================================

<PAGE>

================================================================================
W. R. GRACE & CO. - CHAPTER 11 FILING
   ENTITIES DEBTOR-IN-POSSESSION
   CONDENSED STATEMENTS OF CASH FLOWS                  THREE MONTHS ENDED
(In millions) (Unaudited)                                   MARCH 31,
================================================================================
                                                       2004        2003
                                              ----------------------------------
OPERATING ACTIVITIES
Loss before Chapter 11 expenses,
  income taxes, and equity in net
  income of non-filing entities............         $  (15.2)   $  (17.5)
Reconciliation to net cash provided
  by (used for) operating activities:
   Non-cash items, net.....................             15.5        17.0
   Contributions to defined
     benefit pension plans.................             (1.1)       (3.1)
   Changes in other assets and
     liabilities, excluding the
     effect of businesses
     acquired/divested.....................             (8.6)      (13.5)
                                              ----------------------------------
NET CASH USED FOR OPERATING ACTIVITIES.....             (9.4)      (17.1)

NET CASH USED FOR INVESTING ACTIVITIES.....             (6.0)      (15.3)

NET CASH USED FOR FINANCING ACTIVITIES.....             (1.8)       (3.1)
                                              ----------------------------------

NET DECREASE IN CASH AND CASH
   EQUIVALENTS.............................            (17.2)      (35.5)
Cash and cash equivalents, beginning
   of period...............................            120.5        56.8
                                              ----------------------------------
Cash and cash equivalents, end of
   period..................................         $  103.3    $   21.3
================================================================================


================================================================================
W. R. GRACE & CO. -
   CHAPTER 11 FILING ENTITIES
   DEBTOR-IN-POSSESSION
   BALANCE SHEETS                                 MARCH 31,     DECEMBER 31,
(In millions) (Unaudited)                           2004           2003
================================================================================
ASSETS
CURRENT ASSETS
Cash and cash equivalents .................    $      103.3    $      120.5
Accounts and other
   receivables, net .......................           114.1           105.6
Receivables from non-filing
   entities, net...........................            35.5            46.2
Inventories................................            85.6            81.2
Other current assets.......................            45.2            47.9
                                               ------------------------------
TOTAL CURRENT ASSETS.......................           383.7           401.4

Properties and equipment, net..............           374.3           383.9
Cash value of life insurance
   policies, net of policy
   loans...................................            92.9            90.8
Deferred income taxes .....................           592.6           587.9
Asbestos-related insurance
   expected to be realized
   after one year..........................           267.8           269.4
Loans receivable from
   non-filing entities, net................           444.1           448.0
Investment in non-filing
   entities................................           320.4           283.8
Other assets...............................            94.3            92.7
                                               ------------------------------
TOTAL ASSETS...............................    $    2,570.1    $    2,557.9
================================================================================

                                      I-11
<PAGE>

================================================================================
                                               MARCH 31,     DECEMBER 31,
(In millions) (Unaudited)                        2004            2003
================================================================================
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
LIABILITIES NOT SUBJECT TO
  COMPROMISE
Current liabilities.........                  $     94.8     $     98.0
Other liabilities...........                       200.2          191.2
                                              ------------------------------
 TOTAL LIABILITIES NOT
  SUBJECT TO COMPROMISE.....                       295.0          289.2

LIABILITIES SUBJECT TO
  COMPROMISE................                     2,447.7        2,452.3
                                              ------------------------------
 TOTAL LIABILITIES..........                     2,742.7        2,741.5

 SHAREHOLDERS' EQUITY
  (DEFICIT) ................                      (172.6)        (183.6)
                                              ------------------------------
 TOTAL LIABILITIES AND
  SHAREHOLDERS'
  EQUITY (DEFICIT) .........                  $  2,570.1     $  2,557.9
================================================================================

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

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

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

PROPERTY DAMAGE LITIGATION

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

Out of 380 asbestos property damage cases filed prior to the Filing Date, 141
were dismissed without payment of any damages or settlement amounts; judgments
were entered in favor of Grace in nine cases (excluding cases settled following
appeals of judgments in favor of Grace); judgments were entered in favor of the
plaintiffs in eight cases (one of which is on appeal) for a total of $86.1
million; 207 property damage cases were settled for a total of $696.8 million;
and 16 cases remain outstanding (including the one on appeal). Of the 16
remaining cases, eight relate to ZAI and eight relate to a number of former
asbestos-containing products (two of which also involve ZAI).

Approximately 4,000 additional property damage claims were filed prior to the
March 31, 2003 claims bar date. Such claims were reviewed in detail by Grace,
categorized into claims with sufficient information to be evaluated or claims
that require additional information and, where sufficient information existed,
the cost of resolution was estimated. (Approximately 170 claims contained
insufficient information to permit an evaluation.) As a result of such review,
and after considering the factors described above, Grace recorded a $30.0
million liability as its estimated cost of recovery for such additional claims
in the fourth quarter of 2003.

                                      I-12
<PAGE>

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. As a
result of the Filing, these cases have been transferred to the U.S. Bankruptcy
Court. Based on Grace's investigation of the claims described in these lawsuits,
and testing and analysis of this product by Grace and others, Grace believes
that the product was and continues to be safe for its intended purpose and poses
little or no threat to human health. In July 2002, the Bankruptcy Court approved
special counsel to represent, at the Debtors' expense, the ZAI claimants in a
proceeding to determine certain threshold scientific issues regarding ZAI. The
parties have completed discovery with respect to these threshold issues and have
filed motions asking the Bankruptcy Court to resolve a number of important legal
and factual issues regarding the ZAI claims. The Debtors expect the Bankruptcy
Court to establish a schedule for hearing the pending motions following the next
status conference in May 2004. At this time, Grace is not able to assess the
extent of any possible liability related to this matter.

BODILY INJURY LITIGATION

Asbestos bodily injury claims are generally similar to each other (differing
primarily in the type of asbestos-related illness allegedly suffered by the
plaintiff). However, Grace's estimated liability for such claims has been
influenced by numerous variables, including the solvency of other former
producers of asbestos containing products, cross-claims by co-defendants, the
rate at which new claims are filed, the jurisdiction in which the claims are
filed, and the defense and disposition costs associated with these claims.
Grace's bodily injury liability reflects management's estimate, as of the Filing
Date (adjusted for post-Filing defense and claims administration costs), 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.

Cumulatively 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.

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

ASBESTOS-RELATED LIABILITY

The total asbestos-related liability balances as of March 31, 2004 and December
31, 2003 were $990.3 million and $992.3 million, respectively. The decrease in
the liability is due to the payment of ongoing post-Filing administrative costs
relating to claims management and defense costs permitted by the Bankruptcy
Court. The recorded liability is included in "liabilities subject to
compromise."

The liability covers indemnity and defense costs for pending and projected
future bodily injury claims as of the Filing Date, and pending property damage
claims for which sufficient information was available, including the new
property damage claims submitted prior to the March 31, 2003 bar date. Since the
Filing, Grace is aware that bodily injury claims have continued to be filed
against co-defendant companies, and at higher than historical rates. Grace
believes that had it not filed for Chapter 11 reorganization, it likely would
have received thousands more claims than it had previously projected. Grace has
no basis for reliably adjusting its asbestos-related liability for this trend.
It will adjust its recorded liability based on developments in the Chapter 11
Cases. Due to the Filing and the uncertainties of asbestos-related litigation,
the actual amount of Grace's asbestos-related liability could differ materially
from the recorded liability.

Recently, federal legislation has been proposed to address asbestos-related
bodily injury litigation. In addition, several states have enacted or proposed
legislation affecting asbestos-related bodily injury litigation. At this time,
Grace cannot predict what impact any such legislation would have on Grace's
asbestos-related bodily injury liability or its ultimate plan of reorganization.

                                      I-13
<PAGE>

ASBESTOS INSURANCE

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

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

--------------------------------------------------------------------------------
4. OTHER EXPENSE (INCOME)
--------------------------------------------------------------------------------

Components of other expense (income) are as follows:

================================================================================
OTHER EXPENSE (INCOME)                                  THREE MONTHS ENDED
(In millions)                                                MARCH 31,
================================================================================
                                                         2004        2003
                                                --------------------------------
Investment income .....................               $   (1.5)   $   (3.1)
Interest income .......................                   (0.9)       (1.2)
Net loss on sale of investments and
  disposals of assets..................                    0.2         0.3
Tolling revenue........................                   (0.3)       (0.5)
Foreign currency.......................                    1.4         1.3
Other miscellaneous income ............                   (2.1)       (2.6)
                                                --------------------------------
Total other expense (income)...........               $   (3.2)   $   (5.8)
================================================================================

In March 2004, Grace began accounting for currency fluctuations on a Euro 293
million intercompany loan between Grace's subsidiaries in the United States and
Germany as a component of operating results instead of as a component of other
comprehensive income. The change was prompted by new tax laws in Germany and
Grace's cash flow planning for its Chapter 11 reorganization, which indicated
that it is no longer reasonable to consider this loan as part of the permanent
capital structure in Germany. The effect of the change in exchange rates related
to this loan over the first quarter was $9.8 million unfavorable, $8.5 million
of which is reflected in other comprehensive income and $1.3 million of which is
reflected in the Consolidated Statements of Operations as part of other expense
(income).

--------------------------------------------------------------------------------
5. OTHER BALANCE SHEET ACCOUNTS
--------------------------------------------------------------------------------

================================================================================
                                                     MARCH 31,  December 31,
(In millions)                                          2004         2003
================================================================================
ACCOUNTS AND OTHER RECEIVABLES, NET
Trade receivables, less allowance of
  $4.8 (2003 - $4.6)...................            $   339.1    $   331.5
Other receivables, less allowances
  of $1.7 (2003 - $1.7)................                 14.7         16.0
                                              ----------------------------------
                                                   $   353.8    $   347.5
================================================================================
INVENTORIES
Raw materials..........................            $    54.7    $    53.5
In process.............................                 38.2         35.8
Finished products......................                145.9        134.0
General merchandise....................                 28.0         29.4
Less:  Adjustment of certain
  inventories to a last-in/first-out
  (LIFO) basis.........................                (40.6)       (38.1)
                                              ----------------------------------
                                                   $   226.2    $   214.6
================================================================================

                                      I-14
<PAGE>

================================================================================
                                                     MARCH 31,  December 31,
(In millions)                                          2004         2003
================================================================================
OTHER ASSETS
Deferred pension costs.................             $   118.6    $   115.9
Deferred charges ......................                  46.8         45.7
Long-term receivables, less
  allowances of $0.7 (2003 - $0.7).....                   9.1          9.2
Patents, licenses and other
  intangible assets, net...............                  62.7         65.1
Pension-unamortized prior service
   cost................................                  19.8         19.8
Investments in unconsolidated
   affiliates and other................                   0.6          0.5
                                                --------------------------------
                                                    $   257.6    $   256.2
================================================================================
OTHER CURRENT LIABILITIES
Accrued compensation...................             $    40.8    $    44.8
Deferred tax liability.................                   0.4          0.5
Customer volume rebates................                  16.7         28.1
Accrued commissions....................                   6.1          9.8
Accrued reorganization fees............                   9.4          6.9
Other accrued liabilities .............                  57.6         58.9
                                                --------------------------------
                                                    $   131.0    $   149.0
================================================================================
OTHER LIABILITIES
Pension-underfunded plans .............             $   286.7    $   278.5
Other accrued liabilities .............                  17.7         17.5
                                                --------------------------------
                                                    $   304.4    $   296.0
================================================================================

--------------------------------------------------------------------------------
6. LIFE INSURANCE
--------------------------------------------------------------------------------

Grace is the beneficiary of life insurance policies on certain current and
former employees with a net cash surrender value of $92.9 million and $90.8
million at March 31, 2004 and December 31, 2003, respectively. The policies were
acquired to fund various employee benefit programs and other long-term
liabilities and are structured to provide cash flow (primarily tax-free) over an
extended number of years. The following table summarizes activity in these
policies for the three months ended March 31, 2004 and 2003, and components of
the net cash value at March 31, 2004 and December 31, 2003:

================================================================================
LIFE INSURANCE -
   ACTIVITY SUMMARY                                 THREE MONTHS ENDED
(In millions)                                           MARCH 31,
================================================================================
                                                   2004            2003
                                        ----------------------------------------
Earnings on policy assets..............       $       9.1     $       11.8
Interest on policy loans...............              (7.6)            (8.7)
Premiums...............................                --               --
Policy loan repayments.................               1.3              0.9
Net investing activity.................              (0.7)             1.3
                                        ----------------------------------------
Change in net cash value...............       $       2.1     $        5.3
================================================================================
Tax-free proceeds received                    $       5.3     $        3.6
================================================================================
COMPONENTS OF                                   MARCH 31,      December 31,
  NET CASH VALUE                                   2004            2003
================================================================================
Gross cash value.......................       $     482.4     $      478.5
Principal - policy loans...............            (373.9)          (365.3)
Accrued interest - policy
  loans................................             (15.6)           (22.4)
                                        ----------------------------------------
Net cash value.........................       $      92.9     $       90.8
================================================================================
Insurance benefits in force                   $   2,208.5     $    2,213.1
================================================================================

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. See Note 11 for tax contingencies regarding certain of
these life insurance policies.

<PAGE>

--------------------------------------------------------------------------------
7. DEBT
--------------------------------------------------------------------------------

================================================================================
COMPONENTS OF DEBT                                 MARCH 31,    December 31,
(In millions)                                        2004           2003
================================================================================
DEBT PAYABLE WITHIN ONE YEAR
DIP facility...........................          $        --    $        --
Other short-term borrowings............                 15.9            6.8
                                             -----------------------------------
                                                 $      15.9    $       6.8
                                             ===================================
DEBT PAYABLE AFTER ONE YEAR
DIP facility ..........................          $        --    $        --

DEBT SUBJECT TO COMPROMISE
Bank borrowings........................          $     500.0    $     500.0
Other borrowings.......................                  3.5            3.7
Accrued interest.......................                 51.7           49.0
                                             -----------------------------------
                                                 $     555.2    $     552.7
                                             ===================================
Annualized weighted average
  interest rates on total debt.........                  1.9%           2.1%
================================================================================

In April 2001, the Debtors entered into the DIP facility for a two-year term in
the aggregate amount of $250 million. The DIP facility is secured by a priority
lien on substantially all assets of the Debtors, and bears interest based on
LIBOR. The Debtors have extended the term of the DIP facility through April 1,
2006. Grace had no outstanding borrowings under the DIP facility as of March 31,
2004; however, $25.4 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, and certain insurance and environmental matters.

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

The Company is authorized to issue 300,000,000 shares of common stock. Of the
common stock unissued on March 31, 2004, approximately 9,174,968 shares were
reserved for issuance pursuant to stock option and other stock incentive plans.
In the first three months of 2004 and the year ended December 31, 2003, Grace
did not grant any stock options.

For additional information, see Notes 15 and 17 to the Consolidated Financial
Statements in Grace's 2003 Form 10-K.

                                      I-15
<PAGE>

--------------------------------------------------------------------------------
9. EARNINGS (LOSS) PER SHARE
--------------------------------------------------------------------------------

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

================================================================================
EARNINGS (LOSS) PER SHARE                               THREE MONTHS ENDED
(In millions, except per share amounts)                      MARCH 31,
================================================================================
                                                         2004       2003
                                                    ----------------------------
NUMERATORS
  Net income (loss)....................                $   15.8   $   (2.3)
                                                    ============================
DENOMINATORS
  Weighted average common shares -
    basic calculation..................                    65.6       65.5
  Dilutive effect of employee stock
    options............................                     0.2         --
                                                    ----------------------------
  Weighted average common shares
    diluted calculation................                    65.8       65.5
                                                    ============================
BASIC EARNINGS (LOSS) PER SHARE........                $   0.24   $  (0.04)
                                                    ============================
DILUTED EARNINGS (LOSS) PER SHARE......                $   0.24   $  (0.04)
================================================================================

As a result of the loss incurred during the three months ended March 31, 2003,
employee compensation shares of approximately 500,000 were excluded from the
diluted loss per share calculation because their effect would have been
antidilutive.

--------------------------------------------------------------------------------
10. COMPREHENSIVE (LOSS) INCOME
--------------------------------------------------------------------------------

Grace's other comprehensive (loss) income consists entirely of foreign currency
translation adjustments. The table below presents the pre-tax, tax and after tax
amounts of Grace's other comprehensive (loss) income for the three months ended
March 31, 2004 and 2003:

================================================================================
                                                                 After
                                         Pre-Tax       Tax        Tax
(In millions)                             Amount     Benefit     Amount
================================================================================
THREE MONTHS ENDED:
  March 31, 2004...................     $   (5.0)  $   --      $   (5.0)
  March 31, 2003...................     $    9.4   $   --      $    9.4
================================================================================

The table below presents the components of Grace's accumulated other
comprehensive loss at March 31, 2004 and December 31, 2003:

================================================================================
COMPONENTS OF ACCUMULATED
  OTHER COMPREHENSIVE LOSS                         MARCH 31,      December 31,
(In millions)                                         2004            2003
================================================================================
Foreign currency
  translation .....................              $    (49.3)     $    (44.3)
Minimum pension liability..........                  (265.4)         (265.4)
                                            ------------------------------------
Accumulated other
  comprehensive loss...............              $   (314.7)     $   (309.7)
================================================================================

Grace is a global enterprise, which operates in over 40 countries with local
currency generally deemed to be the functional currency for accounting purposes.
The foreign currency translation amount represents the adjustment necessary to
translate the balance sheets valued in local currencies to the U.S. dollar as of
the end of each period presented. The decline in foreign currency translation at
March 31, 2004 compared with December 31, 2003 is due to the strengthening of
the U.S. dollar against most other reporting currencies.

--------------------------------------------------------------------------------
11. COMMITMENTS AND CONTINGENT LIABILITIES
--------------------------------------------------------------------------------

ASBESTOS-RELATED LITIGATION - SEE NOTE 3

ENVIRONMENTAL REMEDIATION

General Matters and Discussion

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

<PAGE>

Grace's environmental liabilities are reassessed whenever circumstances become
better defined or remediation efforts and their costs can be better estimated.
These liabilities are evaluated based on currently available information,
including the progress of remedial investigation at each site, the current
status of discussions with regulatory authorities regarding the method and
extent of remediation at each site, existing technology, prior experience in
contaminated site remediation and the apportionment of costs among potentially
responsible parties. Grace expects that the funding of environmental remediation
activities will be affected by the Chapter 11 proceedings; any such effect could
be material. Grace's environmental liabilities are included in "liabilities
subject to compromise" as of March 31, 2004.

At March 31, 2004, Grace's estimated liability for environmental investigative
and remediation costs totaled $329.5 million, compared with $332.4 million at
December 31, 2003. This liability covers both vermiculite and non-vermiculite
related matters. The amount is based on funding and/or remediation

                                      I-16
<PAGE>

agreements in place and Grace's best estimate of its cost for sites not subject
to a formal remediation plan.

Cash expenditures charged against previously established reserves for the three
months ended March 31, 2004 and 2003 were $2.9 million and $3.1 million,
respectively.

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

In connection with its defense, Grace conducted its own investigation to
determine whether the EPA's actions and cost claims were justified and
reasonable. However, in December 2002, the District Court granted the United
States' motion for partial summary judgment on a number of issues that limited
Grace's ability to challenge the EPA's response actions. In January 2003, a
trial was held on the remainder of the issues, which primarily involved the
reasonableness and adequacy of documentation of the EPA's cost recovery claims
through December 31, 2001. On August 28, 2003, the District Court issued a
ruling in favor of the United States that requires Grace to reimburse the
government for $54.5 million in costs expended through December 2001, and for
all appropriate future costs to complete the clean-up. Grace has appealed the
court's ruling.

As a result of such ruling and Grace's analysis of estimated remediation costs
at vermiculite processing sites currently or formerly operated by Grace, Grace
estimates its total liability for vermiculite-related matters at March 31, 2004
at $181.0 million. Grace's estimate of expected costs is based on public
comments regarding the EPA's spending plans, discussions of spending forecasts
with EPA representatives, and analysis of other information made available from
the EPA. The EPA's cost estimates have changed regularly and increased
substantially over time. Consequently, Grace's estimate may change materially as
more information becomes available. Grace's liability for this matter is
included in "liabilities subject to compromise" as of March 31, 2004.

Non-Vermiculite Related Matters

At March 31, 2004 and December 31, 2003, Grace's estimated liability for
remediation of sites not related to its former vermiculite mining and processing
activities was $148.5 million and $151.4 million, respectively. This liability
relates to Grace's current and former operations, including its share of
liability for off-site disposal at facilities where it has been identified as a
potentially responsible party. This liability also reflects Grace's evaluation
of environmental-related claims submitted as part of the Chapter 11 process for
which sufficient information was available. As Grace receives new information
and continues its claims evaluation process, its estimated liability may change
materially. Grace's liability for this matter is included in "liabilities
subject to compromise" as of March 31, 2004.

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.


                                      I-17
<PAGE>

TAX MATTERS

Grace has received the examination report from the Internal Revenue Service (the
"IRS") for tax periods 1993 through 1996 asserting, in the aggregate,
approximately $114.0 million of proposed tax adjustments, including accrued
interest. The most significant contested issue addressed in such report concerns
corporate-owned life insurance ("COLI") policies and is discussed below. Other
proposed IRS tax adjustments include Grace's tax position regarding research and
development credits, the reporting of certain divestitures and other
miscellaneous proposed adjustments. The tax audit for the 1993 through 1996 tax
period was under the jurisdiction of the IRS Office of Appeals, where Grace
filed a protest. The IRS Office of Appeals has returned the audit to the
examination team for further review of the proposed adjustments as well as
several affirmative tax claims raised by Grace. Grace's federal tax returns
covering periods 1997 and forward are either under examination by the IRS or
open for future examination. In addition, Grace will be required to report to
state and local tax jurisdictions the additional taxable income (and the related
accrued interest) resulting from IRS adjustments upon resolution of the Federal
tax audits. Grace believes that the impact of probable tax return adjustments
are adequately recognized as liabilities at March 31, 2004. Any cash payment as
a result of such adjustment would be subject to Grace's Chapter 11 proceedings.

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

On September 23, 2002, Grace filed a motion in its Chapter 11 proceeding
requesting that the Bankruptcy Court authorize Grace to enter into a settlement
agreement with the IRS with respect to Grace's COLI interest deductions. The tax
years at issue are 1989 through 1998. Under the terms of the proposed
settlement, the government would allow 20% of the aggregate amount of the COLI
interest deductions and Grace would owe federal income tax and interest on the
remaining 80%. Grace has accrued for the potential tax and interest liability
related to the disallowance of all COLI interest deductions and continues to
accrue interest. On October 22, 2002, the Bankruptcy Court issued an order
authorizing Grace to enter into settlement discussions with the IRS consistent
with the aforementioned terms and further ordered that any final agreement would
be subject to Bankruptcy Court approval. Grace has reached a tentative agreement
with the IRS on such settlement and intends to submit it for 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 health care
personnel. The assessments, aggregating $21.8 million, were made in connection
with a meal and incidental expense per diem plan for traveling health care
personnel that was in effect through 1999, the year in which Grace sold the
business. The IRS contends that certain per diem reimbursements should have been
treated as wages subject to employment taxes and federal income tax withholding.
Grace contends that its per diem and expense allowance plans were in accordance
with statutory and regulatory requirements, as well as other published guidance
from the IRS. The IRS has issued additional assessments aggregating $40.1
million for the 1996 through 1998 tax periods. The statute of limitations has
expired with respect to the 1999 tax year. Grace has a right to indemnification
for approximately 36% of any tax liability (including interest thereon) for the
period from July, 1996 through December, 1998 from its former partner in the
business. The matter is currently pending in the United States Court of Claims.
Grace is currently in discussions with the Department of Justice concerning
possible settlement options. Grace does not expect the resolution of this matter
to have significant adverse impact on its Consolidated Financial Statements.

                                      I-18
<PAGE>

PURCHASE COMMITMENTS

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

GUARANTEES AND INDEMNIFICATION OBLIGATIONS

Grace is a party to many contracts containing guarantees and indemnification
obligations. These contracts primarily consist of:

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

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

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

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

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

FINANCIAL ASSURANCES

At March 31, 2004, Grace had gross financial assurances issued and outstanding
of $252.2 million, comprised of $136.8 million of gross surety bonds issued by
various insurance companies and $115.4 million of standby letters of credit and
other financial assurances issued by various banks. Of the standby letters of
credit, $19.0 million act as collateral for surety bonds, thereby reducing
Grace's overall obligations under its financial assurances to a net amount of
$233.2 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
$233.2 million of financial assurances, approximately $12.2 million were issued
by non-Debtor entities and $221.0 million were issued by the Debtors. Of the
amounts issued by the Debtors, approximately $191.1 million were issued before
the Filing Date, with the remaining $29.9 million being subsequent to the
Filing, of which $25.4 million was issued under the DIP facility.

ACCOUNTING FOR CONTINGENCIES

Although the outcome of each of the matters discussed above cannot be predicted
with certainty, Grace has assessed its risk and has made accounting estimates as
required under U.S. generally accepted accounting principles. As a result of the
Filing, claims related to certain of the items discussed above will be addressed
as part of Grace's Chapter 11 proceedings. Accruals recorded for such
contingencies have been included in "liabilities subject to compromise" on the
accompanying Consolidated Balance Sheets. The amounts of these liabilities as
ultimately determined through the Chapter 11 proceedings could be materially
different from amounts recorded by Grace at March 31, 2004.

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

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

                                      I-19
<PAGE>

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

Grace provides postretirement health care and life insurance benefits for
retired employees of certain U.S. business units and certain divested units. The
postretirement medical plan provides various levels of benefits to employees
(depending on their dates of hire) who retire from Grace after age 55 with at
least 10 years of service. These plans are unfunded, and Grace pays the costs of
benefits under these plans as they are incurred. Grace applies SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," which
requires that the future costs of postretirement health care and life insurance
benefits be accrued over the employees' years of service.

The components of net periodic benefit cost for the three months ended March 31,
2004 and 2003 are as follows:


================================================================================
COMPONENTS OF NET
  PERIODIC BENEFIT
  COST                                          THREE MONTHS ENDED
(In millions)                                        MARCH 31,
================================================================================
                                         2004                     2003
                                ------------------------------------------------
                                    U.S.        OTHER        U.S.       Other
                                ------------------------------------------------
Service cost................      $    2.9     $   0.2     $   2.5     $   0.2
Interest cost...............          13.9         1.7        14.0         2.2
Expected return on plan
  assets........... ........         (12.6)         --       (11.0)         --
Amortization of prior
  service cost..............           1.4        (3.2)        1.4        (3.2)
Amortization of
  unrecognized
  actuarial loss............           4.6         0.7         4.7         1.0
                                ------------------------------------------------
NET PERIODIC BENEFIT
  COST......................       $  10.2      $ (0.6)     $ 11.6      $  0.2
================================================================================

Grace previously disclosed in its financial statements for the year ended
December 31, 2003 that it expected to contribute $40 million to its domestic
qualified defined benefit pension plans in 2004, $33 million to satisfy minimum
funding requirements under the Employee Retirement Income Security Act of 1974
("ERISA") and $7 million to help fund the shortfall between Grace's U.S.
qualified pension obligations and the market value of dedicated pension assets.
In April 2004, a Federal law was passed that provides for a two-year
modification to the regulatory framework that governs pension funding. Under the
new law, the interest rate to be used to determine the level of underfunding in
a defined benefit pension plan is based on interest rates on long-term corporate
bonds instead of interest rates on 30-year U.S. Treasury bonds. As a result of
the new law, Grace is required to contribute $44.5 million to its domestic
qualified defined benefit pension plans for the 2004 plan year ($0.1 million of
which is payable in 2004 and $44.4 million of which is payable by September
2005) to satisfy its minimum funding requirements under ERISA. Grace may seek to
contribute more than the minimum amount in 2004 to more effectively manage its
longer term funding obligations. Contributions to the U.S. qualified pension
plans are subject to the approval of the Bankruptcy Court. Grace expects to
contribute approximately $4.4 million to its domestic nonqualified pension plans
and approximately $12.0 million to its other postretirement plans in 2004.

Contributions to fund the postretirement health care and life insurance plans
are discretionary, as the plans are not subject to any minimum regulatory
funding requirements. For the three months ended March 31, 2004 and 2003, Grace
has contributed $2.6 million and $3.1 million to the plan, respectively.

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

Grace is a global producer of specialty chemicals and specialty materials. It
generates revenues from two business segments: Davison Chemicals and Performance
Chemicals. Davison Chemicals produces a variety of catalyst and silica products.
Performance Chemicals produces specialty construction chemicals, building
materials and sealants and coatings. Intersegment sales, eliminated in
consolidation, are not material. The table below presents information related to
Grace's business segments for the three-month periods ended March 31, 2004 and
2003. 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.

                                      I-20
<PAGE>

=============================================================================
                                                         THREE MONTHS
BUSINESS SEGMENT DATA                                        ENDED
(In millions)                                              MARCH 31,
=============================================================================
                                                         2004     2003
                                                    -------------------------
NET SALES
Davison Chemicals...............................       $  270.9  $  239.1
Performance Chemicals...........................          247.6     205.7
                                                    -------------------------
TOTAL...........................................       $  518.5  $  444.8
                                                    =========================
PRE-TAX OPERATING INCOME
Davison Chemicals...............................       $   32.0  $   20.3
Performance Chemicals...........................           27.6      12.1
                                                    -------------------------
TOTAL...........................................       $   59.6  $   32.4
=============================================================================

The table below presents information related to the geographic areas in which
Grace operated for the three months ended March 31, 2004 and 2003.

=============================================================================
                                                           THREE MONTHS
GEOGRAPHIC AREA DATA                                           ENDED
(In millions)                                                MARCH 31,
=============================================================================
                                                          2004      2003
                                                    -------------------------
NET SALES
  United States.................................        $  202.3  $  188.6
  Canada and Puerto Rico........................            22.9      15.6
  Europe, other than Germany....................           165.2     134.7
  Germany.......................................            28.2      20.1
  Asia Pacific..................................            72.7      61.4
  Latin America.................................            27.2      24.4
                                                    -------------------------
TOTAL...........................................         $ 518.5   $ 444.8
=============================================================================

The pre-tax operating income for Grace's business segments for the three-month
periods ended March 31, 2004 and 2003 is reconciled below to income before
Chapter 11 expenses, income taxes, and minority interest presented in the
accompanying Consolidated Statements of Operations.

=============================================================================
RECONCILIATION OF BUSINESS SEGMENT DATA TO                   THREE MONTHS
  FINANCIAL STATEMENTS                                          ENDED
(In millions)                                                 MARCH 31,
=============================================================================
                                                            2004     2003
                                                    -------------------------
Pre-tax operating income - business segments ...          $  59.6  $  32.4
Minority interest ..............................              0.5      0.2
Loss on sale of investments and disposals
  of assets.....................................             (0.2)    (0.3)
Provision for environmental remediation.........               --     (2.0)
Interest expense and related financing costs ...             (3.9)    (4.2)
Corporate costs.................................            (21.1)   (18.9)
Other, net......................................             (3.2)    (3.5)
                                                    -------------------------
Income before Chapter 11 expenses,
  income taxes, and minority interest  .........          $  31.7  $   3.7
=============================================================================

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


                                      I-21
<PAGE>

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

--------------------------------------------------------------------------------
DESCRIPTION OF CORE 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 specialty construction chemicals, building materials
and sealants and coatings.

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

============================================================================
                                                       THREE MONTHS ENDED
                                                           MARCH 31,
----------------------------------------------------------------------------
                                                        2004        2003
                                                    ------------------------
Catalyst products...........................            36.1%       37.8%
Silica products.............................            16.1%       16.0%
                                                    ------------------------
DAVISON CHEMICALS...........................            52.2%       53.8%
                                                    ------------------------
Construction chemicals......................            22.5%       20.4%
Building materials..........................            11.5%       12.0%
Sealants and coatings.......................            13.8%       13.8%
                                                    ------------------------
PERFORMANCE CHEMICALS.......................            47.8%       46.2%
                                                    ------------------------
TOTAL.......................................           100.0%      100.0%
============================================================================

Catalyst products includes: fluid cracking catalysts ("FCC") and additives used
in petroleum refineries to convert distilled crude oil into transportation fuels
and other petroleum-based products; hydroprocessing catalysts, also used in
refining, to upgrade heavy oils and remove certain impurities; polyolefin
catalysts, which are essential components in the manufacture of polyethylene and
polypropylene resins used in products such as plastic film, high-performance
plastic pipe and other plastic parts; and chemical catalysts, which are used in
a variety of chemical processes. Key external drivers for catalysts are the
refining industry, specifically the impacts of fuel and petrochemical demand and
crude oil supply, and the plastics industry, where demand generally correlates
with general economic factors such as consumer confidence.

Silica products are used in a wide range of industrial and consumer applications
such as paper, wood and coil coatings, food processing, plastics, adsorbents,
personal care products and biotechnology separations. Apart from high growth
segments such as coatings used for ink jet printing applications and
biotechnology, silica products' performance is largely affected by general
economic conditions.

Construction chemicals and building materials are used primarily by the
non-residential construction industry. Construction chemicals add strength,
control corrosion, and enhance the handling and application of concrete, and
reduce the manufacturing cost and improve the quality of cement. Performance for
this product group is driven by non-residential construction activity and, to a
lesser extent, residential construction activity, which tend to lag the general
economy in both decline and recovery. Building materials prevent water damage to
structures and protect structural steel against collapse due to fire. Building
materials performance is also driven by non-residential construction activity,
with greater lags than construction chemicals, reflecting longer lead times for
large projects. Other important external factors affecting business performance
include residential re-roofing activity and a decline in fire protection demand
due to changes in building codes. Since building materials is largely a North
American product group, it is most strongly affected by U.S. construction
activity.

Sealants and coatings are used to seal beverage and food cans, and glass and
plastic bottles, and to protect metal packaging from corrosion and the contents
from the influences of metal. Although this product group is affected by general
economic conditions, there is an ongoing shift in demand from metal and glass to
plastic packaging for foods and beverages. This shift is driving a decline in
can sealant usage and providing some opportunities to closure sealants and other
products for plastic packaging.

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

See Note 1 to the Consolidated Financial Statements for a discussion of Grace's
Voluntary Bankruptcy Filing.

<PAGE>

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

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

o   Contingent liabilities such as asbestos-related matters (see Note 3 to the
    Consolidated Financial Statements), environmental remediation (see Note 11
    to the Consolidated Financial Statements), income taxes (see Note 11 to the
    Consolidated Financial

                                      I-22
<PAGE>

    Statements), and retained obligations of divested businesses.
o   Pension and postretirement liabilities that depend on assumptions regarding
    discount rates and/or total returns on invested funds.
o   Depreciation and amortization periods for long-lived assets, including
    property and equipment, intangible, and other assets.
o   Realization values of various assets such as net deferred tax assets, trade
    receivables, inventories, insurance receivables, income taxes, and goodwill.

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

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

Set forth below is a chart that lists key operating statistics, and dollar and
percentage changes for the three-month periods ended March 31, 2004 and 2003.
The chart should be referenced when reading management's discussion and analysis
of financial condition and results of operations. The chart, as well as the
financial information presented throughout this discussion divides Grace's
financial results between "core operations" and "noncore activities." Core
operations comprise the financial results of Davison Chemicals, Performance
Chemicals and the costs of corporate activities that directly or indirectly
support business operations. In contrast, noncore activities comprise all other
events and transactions not directly related to the generation of operating
revenue or the support of core operations and generally relate to Grace's former
operations and products.

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




                                      I-23
<PAGE>

<TABLE>
<CAPTION>
====================================================================================================================================
ANALYSIS OF CONTINUING OPERATIONS                                                             THREE MONTHS ENDED
 (In millions)                                                                                     MARCH 31,
====================================================================================================================================
                                                                                                            $ Change      % Change
                                                                                 2004           2003      Fav (Unfav)   Fav (Unfav)
                                                                            --------------------------------------------------------
<S>                                                                         <C>            <C>           <C>               <C>
NET SALES
    Davison Chemicals.................................................      $    270.9     $    239.1    $     31.8        13.3%
    Performance Chemicals.............................................           247.6          205.7          41.9        20.4%
                                                                            --------------------------------------------------------
TOTAL GRACE SALES - CORE OPERATIONS...................................      $    518.5     $    444.8    $     73.7        16.6%
====================================================================================================================================
PRE-TAX OPERATING INCOME
    Davison Chemicals (1).............................................      $     32.0     $     20.3    $     11.7        57.6%
    Performance Chemicals.............................................            27.6           12.1          15.5       128.1%
    Corporate costs:
       Support functions..............................................            (8.0)          (8.1)          0.1         1.2%
       Pension, performance-related compensation, and other...........           (13.1)         (10.8)         (2.3)      (21.3%)
                                                                            --------------------------------------------------------
    Total Corporate costs.............................................           (21.1)         (18.9)         (2.2)      (11.6%)
                                                                            --------------------------------------------------------
PRE-TAX INCOME FROM CORE OPERATIONS...................................            38.5           13.5          25.0       185.2%
PRE-TAX LOSS FROM NONCORE ACTIVITIES..................................            (4.3)          (7.0)          2.7        38.6%
Interest expense......................................................            (3.9)          (4.2)          0.3         7.1%
Interest income.......................................................             0.9            1.2          (0.3)      (25.0%)
                                                                            --------------------------------------------------------
INCOME BEFORE CHAPTER 11 EXPENSES AND INCOME TAXES....................            31.2            3.5          27.7       791.4%
Chapter 11 expenses, net..............................................            (4.5)          (2.7)         (1.8)      (66.7%)
Provision for income taxes............................................           (10.9)          (3.1)         (7.8)     (251.6%)
                                                                            --------------------------------------------------------
Net income (loss).....................................................      $     15.8     $     (2.3)   $     18.1          NM
====================================================================================================================================
KEY FINANCIAL MEASURES:
   PRE-TAX INCOME FROM CORE OPERATIONS AS PERCENTAGE OF SALES:
    Davison Chemicals (1).............................................            11.8%           8.5%          NM          3.3pts
    Performance Chemicals.............................................            11.1%           5.9%          NM          5.2pts
    Total Core Operations.............................................             7.4%           3.0%          NM          4.4pts
   PRE-TAX INCOME FROM CORE OPERATIONS BEFORE DEPRECIATION AND
     AMORTIZATION ....................................................      $     65.7     $     38.2    $     27.5        72.0%
      As a percentage of sales........................................            12.7%           8.6%          NM          4.1pts
====================================================================================================================================
NET CONSOLIDATED SALES BY REGION:
   North America......................................................      $    225.2     $    204.2    $     21.0        10.3%
   Europe.............................................................           193.4          154.8          38.6        24.9%
   Asia Pacific.......................................................            72.7           61.4          11.3        18.4%
   Latin America......................................................            27.2           24.4           2.8        11.5%
                                                                            --------------------------------------------------------
TOTAL.................................................................      $    518.5     $    444.8    $     73.7        16.6%
====================================================================================================================================
</TABLE>

  NM = Not meaningful (1) Pre-tax operating income for Davison Chemicals
                          excludes minority interest related to the Advanced
                          Refining Technologies joint venture.

                                      I-24
<PAGE>

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

NET SALES

The following table identifies the year-over-year increase or decrease in sales
attributable to changes in product volume, product price and/or mix, and the
impact of foreign currency translation for the three months ended March 31, 2004
and 2003, respectively.

============================================================================
NET SALES                       THREE MONTHS ENDED MARCH 31, 2004 AS A
  VARIANCE                        PERCENTAGE INCREASE (DECREASE) FROM
  ANALYSIS                         THREE MONTHS ENDED MARCH 31, 2003
============================================================================
                                VOLUME   PRICE/MIX  TRANSLATION   TOTAL
                             -----------------------------------------------
Davison Chemicals........         0.1%       6.6%        6.6%      13.3%
Performance
  Chemicals..............        14.1%      (0.6%)       6.9%      20.4%
Net sales................         6.6%       3.3%        6.7%      16.6%
----------------------------------------------------------------------------
BY REGION:
  North America..........         5.3%       4.5%        0.5%      10.3%
  Europe.................         9.0%       0.1%       15.8%      24.9%
  Asia Pacific...........         7.8%       5.5%        5.1%      18.4%
  Latin America..........         2.9%       2.9%        5.7%      11.5%
============================================================================

Grace's sales in the three-month period ended March 31, 2004 were favorably
impacted by improved volume in construction chemicals and product mix in
catalysts, and favorable currency translation from a weaker U.S. dollar. Foreign
currency translation contributed $29.9 million or 6.7 percentage points of the
sales growth, mainly due to the strengthening of the Euro against the U.S.
dollar. In addition, acquisitions contributed $5.8 million or 1.3 percentage
points of the sales volume growth.

PRE-TAX INCOME FROM CORE OPERATIONS

Operating profit and margins for the three months ended March 31, 2004 were
higher as compared with the prior year period due to higher sales from improved
economic conditions, including stronger construction activity in the U.S., cost
structure improvements from successful productivity initiatives, and foreign
currency translation effects.

Corporate costs include corporate functional costs (such as financial and legal
services, human resources, communications and information technology), the cost
of corporate governance (including directors and officers ("D&O") liability
insurance, a portion of which is allocated to noncore activities) and pension
costs related to both corporate employees and to the effects of changes in
assets and liabilities for all Grace pension plans. Corporate costs for the
three months ended March 31, 2004 increased over the prior year period primarily
due to performance-related compensation to reflect the year-over-year increase
in business performance, professional fees for Sarbanes-Oxley compliance, and
higher insurance premiums.

PRE-TAX LOSS FROM NONCORE ACTIVITIES

============================================================================
                                                          THREE MONTHS
                                                              ENDED
(In millions)                                               MARCH 31,
----------------------------------------------------------------------------
                                                        2004        2003
                                                    ------------------------
Environmental provision - vermiculite
  mining......................................        $    --      $ (2.0)
Environmental provision - all other sites.....             --          --
Provision for asbestos-related litigation.....             --          --
COLI income, net..............................            1.5         3.1
D&O insurance cost ...........................           (1.3)       (1.7)
Pension and postretirement benefit costs......           (2.2)       (2.9)
Foreign currency..............................           (1.4)       (1.3)
Other.........................................           (0.9)       (2.2)
                                                    ------------------------
                                                      $  (4.3)     $ (7.0)
============================================================================

Pre-tax loss from noncore activities for the three months ended March 31, 2004
was comparable to 2003 except for a pre-tax charge of $2.0 million in the first
quarter of 2003 to adjust Grace's then current estimate of 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.

<PAGE>

In March 2004, Grace began accounting for currency fluctuations on a Euro 293
million intercompany loan between Grace's subsidiaries in the United States and
Germany as a component of operating results instead of as a component of other
comprehensive income. The change was prompted by new tax laws in Germany and
Grace's cash flow planning for its Chapter 11 reorganization, which indicated
that it is no longer reasonable to consider this loan as part of the permanent
capital structure in Germany. The effect of the change in exchange rate related
to this loan over the first quarter was $9.8 million unfavorable; $8.5 million
of which is reflected in other comprehensive income and $1.3 million of which is
reflected in the Consolidated Statements of Operations as part of other expense
(income).

CHAPTER 11 EXPENSES

Although it is difficult to measure precisely how Chapter 11 has impacted
Grace's overall financial performance, there are certain added costs that are
directly attributable to operating under the Bankruptcy Code. Net Chapter 11
expenses consist primarily of legal, financial and consulting fees incurred by
Grace and three creditors' committees. Chapter 11 expenses for the three-month
period ended March 31, 2004 are comparable to recent quarters and reflect normal
and expected activity. Grace believes that Chapter 11

                                      I-25
<PAGE>

expenses will range between $2 million and $6 million per quarter for the
foreseeable future.

In addition, for the quarters ended March 31, 2004 and 2003, Grace's pre-tax
income from core operations included expenses of $4.0 million and $3.8 million,
respectively, for Chapter 11-related compensation charges. Poor stock price
performance in the period leading up to and after the Filing diminished the
value of Grace's stock option program to current and prospective employees,
which caused Grace to change its long-term incentive compensation program into a
cash-based program. Grace has also sought to address employee retention issues
by providing added compensation to certain employees and increasing Grace's
contribution to its retirement savings and investment plan.

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

INTEREST

Net interest expense in the three-month period ended March 31, 2004 was
consistent with the prior year period. The payment of interest accrued on
pre-petition debt is subject to the outcome of Grace's Chapter 11 proceedings.

INCOME TAXES

Grace's provision for income taxes at the federal corporate rate of 35.0% was
$9.3 million and $0.3 million for the three months ended March 31, 2004 and
2003, respectively. The primary differences between these amounts and the
overall provision for income taxes is attributable to current period interest on
tax contingencies and the non-deductibility of certain Chapter 11 expenses.

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

DAVISON CHEMICALS

================================================================================
                                       THREE MONTHS ENDED MARCH 31,
                         -------------------------------------------------------
NET SALES BY                                            $ Change     % Change
 PRODUCT LINE                                              Fav          Fav
(In millions)                 2004          2003         (Unfav)      (Unfav)
--------------------------------------------------------------------------------
Catalyst products.         $   187.3     $   168.0     $    19.3        11.5%
Silica products...              83.6          71.1          12.5        17.6%
                        --------------------------------------------------------
TOTAL DAVISON
 CHEMICALS........         $   270.9     $   239.1     $    31.8        13.3%
================================================================================

================================================================================
                                     THREE MONTHS ENDED MARCH 31,
                         -------------------------------------------------------
                                                       $ Change       % Change
NET SALES BY REGION                                       Fav            Fav
(In millions)                 2004          2003        (Unfav)        (Unfav)
--------------------------------------------------------------------------------
North America.....         $   105.1     $    96.2     $     8.9         9.3%
Europe............             117.5          99.8          17.7        17.7%
Asia Pacific......              37.7          31.5           6.2        19.7%
Latin America.....              10.6          11.6          (1.0)       (8.6%)
                         -------------------------------------------------------
TOTAL DAVISON
 CHEMICALS........         $   270.9     $   239.1     $    31.8        13.3%
================================================================================

Sales

The increase in sales for the Davison Chemicals segment for the quarter ended
March 31, 2004 compared with the prior year period was attributable to the
favorable impact of currency translation, product mix, and volume growth in the
silica products business. Excluding the effects of favorable currency
translation, sales were up 6.7% for the quarter. Sales of catalyst products were
$187.3 million, up 11.5% compared with the prior year quarter. Most of the
increase resulted from favorable product mix factors including added revenue to
cover higher metals costs, with the remainder attributable to favorable currency
effects. Sales of silica products were $83.6 million, up 17.6% compared with the
first quarter of 2003, with currency effects of the stronger Euro contributing
about 11.7 percentage points of the increase. Improvement was also attributable
to growth programs in separations applications and from higher volumes in most
consumer segments, reflecting evidence of a stronger economy in the United
States and Asia Pacific. In Europe, the increase in sales was primarily due to
favorable currency translation, as well as volume growth in silica products. The
increase in Asia Pacific reflects volume growth from increased share in an
expanding market place.

Operating Income

Operating income of the Davison Chemicals segment for the first quarter was
$32.0 million, 57.6% higher than the 2003 first quarter; operating margin was
11.8%, higher than the prior year quarter by 3.3 percentage points. The increase
in operating income was driven

                                      I-26
<PAGE>

primarily by higher sales in North America and in the Asia Pacific region, as
well as foreign currency translation effects on Euro-based sales. The
improvement in first quarter operating margin was attributable to favorable
product mix, improved manufacturing costs and positive results from productivity
initiatives. Operating income and margins in the first quarter of 2003 were
negatively affected by manufacturing costs, primarily due to production
difficulties and unusual maintenance requirements at certain facilities,
exacerbated by severe weather in the mid-Atlantic region of the United States.

PERFORMANCE CHEMICALS

================================================================================
                                           THREE MONTHS ENDED MARCH 31,
                             ---------------------------------------------------
NET SALES BY                                               $ Change   % Change
  PRODUCT LINE                                                Fav        Fav
(In millions)                     2004         2003         (Unfav)    (Unfav)
--------------------------------------------------------------------------------
Construction chemicals.....     $  116.4     $   90.8     $   25.6       28.2%
Building materials.........         59.8         53.5          6.3       11.8%
Sealants and coatings......         71.4         61.4         10.0       16.3%
                             ---------------------------------------------------
TOTAL PERFORMANCE
 CHEMICALS.................     $  247.6     $  205.7     $   41.9       20.4%
================================================================================

================================================================================
                                           THREE MONTHS ENDED MARCH 31,
                             ---------------------------------------------------
                                                          $ Change     % Change
NET SALES BY REGION                                          Fav          Fav
(In millions)                    2004         2003         (Unfav)      (Unfav)
--------------------------------------------------------------------------------
North America..............     $ 120.1      $  108.0     $   12.1        11.2%
Europe.....................        75.9          55.0         20.9        38.0%
Asia Pacific...............        35.0          29.9          5.1        17.1%
Latin America..............        16.6          12.8          3.8        29.7%
                             ---------------------------------------------------
TOTAL PERFORMANCE
 CHEMICALS.................     $  247.6     $  205.7     $   41.9        20.4%
================================================================================

Sales

The increase in sales for the Performance Chemicals segment in the first quarter
of 2004 compared with the first quarter of 2003 was primarily attributable to
volume growth in all product lines, a recent acquisition, and favorable foreign
currency translation. The October 2003 acquisition of certain assets of Tricosal
Beton-Chemie GmbH & Co. KG by a German subsidiary accounted for $5.2 million, or
2.5 percentage points of the sales growth, while currency translation accounted
for 6.9 percentage points of the sales growth. The sales increase in
construction chemicals primarily reflected the success of sales growth
initiatives and new product programs worldwide, as well as stronger U.S.
construction activity. The increase in sales of building materials was mainly
due to increases in waterproofing products, especially roofing underlayments,
driven by a high level of residential re-roofing activity, and the impact of
favorable foreign currency translation. The increase was partially offset by
continued declines in sales of fire protection products resulting from the
effects of new building codes that permit the use of less material for
structural steel applications. Sales increases in sealants and coatings
reflected favorable foreign currency translation (8.8 percentage points) and
growth initiatives in coatings and closure sealants; sales of can sealants and
other products were about even with the same period last year.

Sales increases in North America reflected increased U.S. construction activity
from good construction weather and leveling in the cyclical declines of recent
years. In Europe, higher sales were due to favorable foreign currency
translation (17.8 percentage points), the German acquisition (9.5 percentage
points) and volume growth in all product groups, particularly construction
chemicals. Sales in Asia Pacific increased from the effects of favorable foreign
currency translation (9.0 percentage points), as well as volume growth,
primarily in construction chemicals. Increased sales in Latin America reflected
currency translation (6.3 percentage points) and volume increases in
construction chemicals, closure sealants and coatings.

Operating Income

Pre-tax operating income and operating margin were substantially higher in the
first quarter of 2004 compared with the prior year period, and was a record for
a first quarter, reflecting sales increases, successful productivity programs,
discretionary expense management and favorable foreign currency translation. The
first quarter of 2003 was a particularly weak quarter, mainly reflecting
depressed construction activity and weather-delayed projects in the U.S.;
however, the first quarter of 2004 also exceeded 2002, the previous first
quarter record for Performance Chemicals, by more than 30% at constant exchange
rates.

                                      I-27
<PAGE>

FINANCIAL POSITION

The following charts set forth the Davison Chemicals and Performance Chemicals
total asset position and pre-tax return on average total assets at March 31,
2004 and December 31, 2003.

================================================================================
                                                      $ Change        % Change
                                                     (excluding      (excluding
                                                      currency        currency)
DAVISON                                              translation     translation
  CHEMICALS             MARCH 31,     December 31,       Fav             Fav
 (In millions)            2004           2003          (Unfav)         (Unfav)
--------------------------------------------------------------------------------
Receivables.........    $  146.2      $  146.3        $    1.4           1.0%
Inventory...........       143.5         133.6            11.3           8.5%
Other current
 assets.............         2.5           2.1             0.4          19.0%
                     ----------------------------------------------
Total current
 assets.............       292.2         282.0            13.1           4.6%
Properties and
 equipment,
 net................       429.1         444.0           (11.7)         (2.6%)
Goodwill and
 other intangible
 assets.............        64.0          65.8            (0.8)         (1.2%)
Other assets........         4.7           5.3            (0.2)         (3.8%)
                     ----------------------------------------------
Total assets........    $  790.0      $  797.1        $    0.4           0.1%
                     ==============================================
Pre-tax return
 on average
 total assets
 (trailing 12
 months)............        16.6%         15.4%                          1.2 pts
================================================================================

Davison Chemicals' total assets decreased by $7.1 million, of which $7.5 million
of the decline was attributable to a stronger U.S. dollar at March 31, 2004. The
increase in inventory was primarily in North America and was due to a build-up
for 2004 sales, increased inventory costs and acquisitions. The decline in
properties and equipment was caused by first quarter net depreciation.

The pre-tax return on average total assets increased by 1.2 percentage points,
primarily due to a 57.6% increase in pre-tax operating income.

================================================================================
                                                   $ Change       % Change
                                                  (excluding     (excluding
                                                   currency       currency
PERFORMANCE                                       translation)   translation)
  CHEMICALS           MARCH 31,    December 31,       Fav            Fav
(In millions)           2004          2003          (Unfav)        (Unfav)
--------------------------------------------------------------------------------
Receivables.........  $  202.3     $  196.2       $    7.4          3.8%
Inventory...........      82.8         80.9            2.4          3.0%
Other current
 assets.............       5.2          5.9           (0.7)       (11.9%)
                    ------------------------------------------
Total current
 assets.............     290.3        283.0            9.1          3.2%
Properties and
 equipment,
 net................     197.5        203.2           (5.1)        (2.5%)
Goodwill and
 other intangible
 assets.............      82.9         84.5           (0.4)        (0.5%)
Other assets........      40.2         38.5            1.7          4.4%
                    ------------------------------------------
Total assets........  $  610.9     $  609.2       $    5.3          0.9%
                    ==========================================
Pre-tax return on
 average total
 assets (trailing
 12 months).........      20.8%        18.7%                        2.1 pts
================================================================================

Performance Chemicals' total assets increased by $5.3 million, excluding $3.6
million of foreign currency translation, primarily due to an increase in
receivables, offset by a decrease in properties and equipment due to first
quarter net depreciation. The increase in receivables was caused primarily by a
shift in the regional sales mix toward regions outside North America where, on
average, the standard terms of sale are longer.

The pre-tax return on average total assets increased by 2.1 percentage points,
due to a 128.1% increase in pre-tax operating income.

<PAGE>

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

EFFECT OF CHAPTER 11

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

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

LIABILITIES AND CONTINGENCIES

Grace has a number of financial exposures originating from past businesses,
products and events. These obligations arose from transactions and/or business
practices that date back to when Grace was a much larger company, when it
produced products or operated businesses that are no longer part of its revenue
base, and when government regulations and scientific knowledge were much less
advanced than today. The following table summarizes the net noncore liability at
March 31, 2004 and December 31, 2003:

                                      I-28
<PAGE>

==========================================================================
NET NONCORE LIABILITIES                   MARCH 31,       December 31,
(In millions)                               2004              2003
--------------------------------------------------------------------------
Asbestos-related liabilities ....        $   (990.3)      $   (992.3)
Asbestos-related insurance
   receivable ...................             267.8            269.4
                                       -----------------------------------
Asbestos-related liability, net..            (722.5)          (722.9)
Environmental remediation .......            (329.5)          (332.4)
Postretirement benefits .........            (131.2)          (134.3)
Retained obligations and other ..             (56.6)           (57.0)
                                       -----------------------------------
NET NONCORE LIABILITY ...........        $ (1,239.8)      $ (1,246.6)
==========================================================================

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 liabilities 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
March 31, 2004.

ASBESTOS-RELATED MATTERS

Grace is a defendant in lawsuits relating to previously sold asbestos-containing
products. During the three months ended March 31, 2004, Grace had net
expenditures of $0.3 million for the defense and disposition of asbestos-related
property damage and bodily injury litigation, including amounts received under
settlements with insurance carriers, compared with net expenditures in the first
quarter of 2003 of $1.2 million. At March 31, 2004, Grace's balance sheet
reflected a gross asbestos-related liability of $990.3 million ($722.5 million
net of insurance). This liability represents management's estimate, based on
facts and circumstances existing prior to the Filing and an analysis of new
property damage claims received after the Filing, of the undiscounted net cash
outflows necessary to satisfy Grace's pending property damage claims for which
sufficient information is available, and its pending and projected future bodily
injury claims. Any further changes to the recorded liability will be based on
additional Chapter 11 developments and management's assessment of the claim
amounts that will ultimately be allowed by the Bankruptcy Court.

Recently, federal legislation has been proposed to address asbestos bodily
injury claims. In addition, several states have enacted or proposed legislation
affecting asbestos bodily injury claims. At this time, Grace cannot predict what
impact any such legislation would have on Grace's asbestos bodily injury
liability, related insurance coverage, or its ultimate plan of reorganization.

The Consolidated Balance Sheet at March 31, 2004 includes total amounts due from
insurance carriers of $267.8 million pursuant to settlement agreements with
those insurance carriers. The recovery of amounts due from insurance carriers is
dependent upon the timing, character and exposure periods of asbestos-related
claims. Grace's Chapter 11 proceedings and proposed federal legislation could
also affect the timing and amount of Grace's recovery.

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

ENVIRONMENTAL MATTERS

Grace is subject to loss contingencies resulting from extensive and evolving
federal, state, local and foreign environmental laws and regulations. Grace has
expended substantial funds to comply with such laws and regulations and expects
to continue to do so in the future. At March 31, 2004, Grace's recorded
liability for environmental investigation and remediation costs totaled $329.5
million, as compared with $332.4 million at December 31, 2003. This liability
covers both vermiculite and non-vermiculite related matters. The amount is based
on funding and/or remediation agreements in place, together with Grace's best
estimate of its cost for sites not subject to a formal remediation plan. The
decrease in the liability is primarily attributable to ongoing remedial efforts
at Grace owned sites.

Grace's estimated liability for vermiculite-related remediation at March 31,
2004 was $181.0 million. This liability represents Grace's estimated cost to
reimburse the EPA for clean-up activities in and around Libby, Montana related
to its former mining activities, and for clean-up of vermiculite processing
sites currently or formerly operated by Grace. There have been no changes or
developments during the first quarter 2004, therefore no additional charges were
deemed warranted at this time. However, the EPA's cost estimates have changed
regularly and increased substantially over time. Consequently, Grace's estimated
liability may change materially as more information becomes available. Grace's
liability for this matter is included in "liabilities subject to compromise" as
of March 31, 2004.

At March 31, 2004 and December 31, 2003, Grace's estimated liability for
remediation of sites not related to its former vermiculite mining and processing
activities was $148.5 million and $151.4 million, respectively. This liability
relates to Grace's current and former

                                      I-29
<PAGE>

operations, including its share of liability for off-site disposal at facilities
where it has been identified as a potentially responsible party. This liability
also reflects Grace's evaluation of environmental-related claims submitted as
part of the Chapter 11 process for which sufficient information was available.
As Grace receives new information and continues its claims evaluation process,
its estimated liability may change materially. Grace's liability for this matter
is included in "liabilities subject to compromise" as of March 31, 2004.

See Note 11 to the Consolidated Financial Statements for a background
description of Grace's Vermiculite and Non-Vermiculite Related Matters.

POSTRETIREMENT BENEFITS

Grace provides certain health care and life insurance benefits for retired
employees, a large majority of which pertain to retirees of previously divested
businesses. These plans are unfunded and Grace pays the costs of benefits under
these plans as they are incurred. Spending under this program was $2.6 million
during the first quarter of 2004, compared with $3.1 million in the prior year
period. Grace's recorded liability for postretirement benefits of $131.2 million
at March 31, 2004 is stated at net present value discounted at 6.25%. 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.

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

CASH RESOURCES AND AVAILABLE CREDIT FACILITIES

At March 31, 2004, Grace had $418.2 million in cash and cash-like assets on hand
($325.3 million in cash and cash equivalents and $92.9 million in net cash value
of life insurance). In addition, Grace had access to committed credit facilities
aggregating $250.0 million under the DIP facility, of which $216.1 million (net
of borrowings, letters of credit, and holdback provisions) was available at
March 31, 2004. The term of the DIP facility expires April 1, 2006. Grace
believes that these funds and credit facilities will be sufficient to finance
its business strategy while in Chapter 11.

CASH FLOW

============================================================================
                                                        THREE MONTHS
CORE OPERATIONS                                             ENDED
(In millions)                                             MARCH 31,
----------------------------------------------------------------------------
                                                      2004        2003
                                                ----------------------------
CASH FLOWS:
Pre-tax operating income...............            $    38.5   $    13.5
Depreciation and amortization..........                 27.2        24.7
                                                ----------------------------
PRE-TAX EARNINGS BEFORE DEPRECIATION
    AND AMORTIZATION...................                 65.7        38.2
Working capital and other changes......                (26.4)       (9.9)
                                                ----------------------------
CASH FLOW BEFORE INVESTING.............                 39.3        28.3
Capital expenditures...................                 (9.1)      (18.0)
Businesses acquired....................                   --          --
                                                ----------------------------
NET CASH FLOW FROM CORE OPERATIONS.....            $    30.2   $    10.3
============================================================================

Grace's net cash flow from core operations before investing increased due to
higher pre-tax operating income, partially offset by increased investment in
working capital and other items. The increased investment in working capital and
other items was primarily due to increased accounts receivable reflecting
significant sales in March 2004. Capital expenditures were down as compared with
the prior year period and principally represented spending for routine equipment
replacements. A substantial portion of 2003 first quarter expenditures was
directed toward the construction of new catalyst production capacity at Grace's
Lake Charles, Louisiana site.

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

<PAGE>

==========================================================================
                                                        THREE MONTHS
NONCORE ACTIVITIES                                          ENDED
(In millions)                                             MARCH 31,
--------------------------------------------------------------------------
                                                   2004            2003
                                              ----------------------------
CASH FLOWS:
Pre-tax loss from noncore activities            $     (4.3)    $     (7.0)
Non-cash charges.......................                3.5            5.9
Cash spending for:
  Asbestos-related litigation, net of
   insurance recovery..................               (0.3)          (1.2)
  Environmental remediation............               (2.9)          (3.1)
  Postretirement benefits..............               (2.6)          (3.1)
  Retained obligations and other.......               (0.4)            --
                                              ----------------------------
NET CASH OUTFLOW FOR NONCORE
  ACTIVITIES ..........................         $     (7.0)    $     (8.5)
==========================================================================

See the Consolidated Statements of Cash Flows included in the Consolidated
Financial Statements for

                                      I-30
<PAGE>

investing and financing activities for the three months ended March 31, 2004 and
2003.

DEBT AND OTHER CONTRACTUAL OBLIGATIONS

Total debt outstanding at March 31, 2004 was $571.1 million, including $51.7
million of accrued interest on pre-petition debt. As a result of the Filing,
Grace is now in default on $503.5 million of pre-petition debt which, together
with accrued interest thereon, has been included in "liabilities subject to
compromise" as of March 31, 2004. The automatic stay provided under the
Bankruptcy Code prevents Grace's lenders from taking any action to collect the
principal amounts as well as related accrued interest. However, Grace will
continue to accrue and report interest on such debt during the Chapter 11
proceedings unless further developments lead management to conclude that it is
probable that such interest will be compromised.

See Note 11 to the Consolidated Financial Statements for a discussion of
financial assurances.

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 Financial Condition and Results of
Operations, other uncertainties include: the impact of worldwide economic
conditions; pricing of both Grace's products and raw materials; customer outages
and customer demand; factors resulting from fluctuations in interest rates and
foreign currencies; the impact of competitive products and pricing; the
continued success of Grace's process improvement initiatives; the impact of tax,
legislation and other regulations in the jurisdictions in which Grace operates;
and developments in and the outcome of the Chapter 11 proceedings discussed
above. Also, see "Introduction and Overview - Projections and Other
Forward-Looking Information" in Item 1 of Grace's current Annual Report on Form
10-K.


                                      I-31
<PAGE>

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Grace had no outstanding derivative financial instruments on March 31, 2004. 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 2003 Annual Report on Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

GENERAL STATEMENT OF RESPONSIBILITY

The management of Grace is responsible for the preparation, integrity and
objectivity of the Consolidated Financial Statements and the other information
included in this report. The financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America and accordingly include certain amounts that represent management's best
estimates and judgments. Actual amounts could differ from those estimates.
Management maintains internal controls to assist it in fulfilling its
responsibility for financial reporting. These internal controls consist of the
control environment, risk assessment, control activities, information and
communication, and monitoring. A chartered Disclosure Committee oversees Grace's
public financial reporting process and key managers are required to confirm
their compliance with Grace's policies and internal controls. While no system of
internal controls can ensure elimination of all errors and irregularities,
Grace's internal controls, which are reviewed and modified in response to
changing conditions, have been designed to provide reasonable assurance that
assets are safeguarded, policies and procedures are followed, transactions are
properly executed and reported, and appropriate disclosures are made. The
concept of reasonable assurance is based on the recognition that there are
limitations in all systems of internal control and that the costs of such
systems should not exceed their benefits.


EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As of March 31, 2004, Grace carried out an evaluation of the effectiveness of
the design and operation of its disclosure controls and procedures pursuant to
Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Based upon that evaluation, Grace's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in ensuring that information required to be disclosed
in the Company's periodic filings under the Exchange Act is accumulated and
communicated to such officers to allow timely decisions regarding required
disclosures. There was no significant change in the Company's internal control
over financial reporting that has materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial reporting.


                                      I-32
<PAGE>

                           PART II. OTHER INFORMATION

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

Notes 1, 3 and 11 to the interim consolidated financial statements in Part I of
this Report are incorporated herein by reference.

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

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


         15         Accountants' Awareness Letter

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

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

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

    (b)  Reports on Form 8-K.  The following reports on Form 8-K were filed
         during the first quarter of 2004:

         January 29, 2004 - Press release announcing Grace's financial results
         for the quarter and full year ended December 31, 2003.



                                      II-1
<PAGE>

                                    SIGNATURE

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

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

Date:  May 7, 2004                             By /s/ Paul J. Norris
                                                  ------------------
                                                  Paul J. Norris
                                                  Chairman and
                                                  Chief Executive Officer

Date:  May 7, 2004                             By /s/ Robert M. Tarola
                                                  --------------------
                                                  Robert M. Tarola
                                                  Senior Vice President and
                                                  Chief Financial Officer
                                                  (Principal Accounting Officer)




                                      II-2
<PAGE>

                                  EXHIBIT INDEX


 EXHIBIT NO.       DESCRIPTION OF EXHIBIT
 -----------       ----------------------

     15            Accountants' Awareness Letter

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

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

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



                                      II-3