<PAGE>

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



                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                   FORM 10-Q


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

                  For the Quarterly Period Ended June 30, 1998



                         Commission File Number 1-13953

                               W. R. GRACE & CO.


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

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





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



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

         74,998,383 shares of Common Stock, $.01 par value, were outstanding on
August 1, 1998.


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



<PAGE>


                       W. R. GRACE & CO. AND SUBSIDIARIES


                               Table of Contents



<TABLE>
<CAPTION>
                                                                                Page No.
Part I.  Financial Information
<S>                   <C>                                                       <C>

    Item 1.           Financial Statements

                      Consolidated Statement of Operations                       I - 1

                      Consolidated Statement of Cash Flows                       I - 2

                      Consolidated Balance Sheet                                 I - 3

                      Consolidated Statement of Shareholders' Equity             I - 4

                      Notes to Consolidated Financial Statements                 I - 5 to I - 15

    Item 2.           Management's Discussion and Analysis of Results of         I - 16 to I - 24
                      Operations and Financial Condition

Part II.  Other Information



    Item 1.           Legal Proceedings                                          II - 1
    Item 5.           Other Information                                          II - 1
    Item 6.           Exhibits and Reports on Form 8-K                           II - 1
</TABLE>



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



                                     
<PAGE>




                         PART I. FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
W. R. GRACE & CO. AND SUBSIDIARIES                                             Three Months Ended           Six Months Ended
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)                                    June 30,                    June 30,
---------------------------------------------------------------------------------------------------------------------------------
In millions, except per share amounts                                          1998        1997            1998          1997
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>           <C>            <C>           <C>     
Sales and revenues...................................................       $  369.9      $  378.6       $ 710.7       $  740.4
Other income.........................................................           13.4          25.9          21.2           31.7
                                                                          ----------    ----------     ---------     ----------
                                                                               383.3         404.5         731.9          772.1
                                                                          ----------    ----------     ---------     ----------

Cost of goods sold and operating expenses............................          224.2         235.2         433.8          458.2
Selling, general and administrative expenses.........................           78.7          98.3         159.3          184.9
Depreciation and amortization........................................           23.6          23.5          45.4           47.0
Interest expense and related financing costs.........................            4.4           4.4          11.2           10.8
Research and development expenses....................................           10.6          11.0          21.0           21.6
Restructuring costs..................................................             --           4.0            --            4.0
Gain on sale of business.............................................             --        (103.1)           --         (103.1)
                                                                          ----------    ----------     ---------     ----------

                                                                               341.5         273.3         670.7          623.4
                                                                          ----------    ----------     ---------     ----------

         INCOME FROM CONTINUING OPERATIONS BEFORE
                 INCOME TAXES........................................           41.8         131.2          61.2          148.7
Provision for income taxes...........................................           16.3          50.6          23.9           57.0
                                                                          ----------    ----------     ---------     ----------

         INCOME FROM CONTINUING OPERATIONS...........................           25.5          80.6          37.3           91.7
Income/(loss) from discontinued operations...........................             --          36.8          (2.6)          72.1
Extraordinary item - loss from extinguishment of debt,
       net of tax....................................................             --            --         (35.2)            --
                                                                          ----------    ----------     ---------     ----------

         NET INCOME/(LOSS)...........................................      $    25.5      $  117.4     $     (.5)      $  163.8
                                                                          ==========    ==========     =========     ==========
---------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share:
     Continuing operations.........................................        $     .34      $   1.11     $     .50       $   1.24
     Net income/(loss).............................................        $     .34      $   1.61     $    (.01)      $   2.21

Diluted earnings per share:
     Continuing operations.........................................        $     .32      $   1.08     $     .46       $   1.20
     Net income/(loss).............................................        $     .32      $   1.57     $    (.01)      $   2.15

Dividends declared per common share................................        $      --      $   .145     $      --       $    .27

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




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



                                     I - 1
<PAGE>


<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
W. R. GRACE & CO. AND SUBSIDIARIES                                                                  SIX MONTHS ENDED
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)                                                        JUNE 30,
---------------------------------------------------------------------------------------------------------------------------------
In millions                                                                                     1998                1997
---------------------------------------------------------------------------------------------------------------------------------


<S>                                                                                           <C>                  <C>    
OPERATING ACTIVITIES
Income from continuing operations before income taxes...................................      $   61.2             $ 148.7
Reconciliation to cash provided by operating activities:
     Depreciation and amortization......................................................          45.4                47.0
     Provision relating to restructuring costs..........................................            --                 4.0
     Gain on sale of business...........................................................            --              (103.1)
     Changes in assets and liabilities, excluding effect of businesses
        acquired/divested and foreign currency exchange:
        Increase in notes and accounts receivable, net..................................         (38.4)              (72.3)
        Increase in inventories.........................................................          (5.9)              (13.1)
        Proceeds from asbestos-related insurance settlements............................          50.8                42.5
        Payments for asbestos-related litigation .......................................        (192.2)              (49.9)
        Decrease in accounts payable....................................................           (.9)              (36.3)
        Decrease in accrued liabilities.................................................        (133.3)              (50.8)
        Other...........................................................................         (22.2)                3.6
                                                                                              --------           ---------
     NET PRETAX CASH USED FOR OPERATING ACTIVITIES
       OF CONTINUING OPERATIONS.........................................................        (235.5)              (79.7)
Net pretax cash (used for)/provided by operating activities of
       discontinued operations..........................................................         (51.3)              148.5
                                                                                              --------           ---------
     NET PRETAX CASH (USED FOR)/PROVIDED BY OPERATING ACTIVITIES........................        (286.8)               68.8
Income taxes paid.......................................................................         (27.8)              (28.0)
                                                                                              --------           ---------
     NET CASH (USED FOR)/PROVIDED BY OPERATING ACTIVITIES...............................        (314.6)               40.8
                                                                                              --------           ---------

INVESTING ACTIVITIES
Capital expenditures....................................................................         (40.7)             (113.6)
Net investing activities of discontinued operations.....................................         (14.3)              (70.7)
Net proceeds from divestments...........................................................           3.5               666.3
Businesses acquired in purchase transactions, net of
     cash acquired and debt assumed.....................................................            --               (15.9)
Other   ................................................................................            .5                14.9
                                                                                              --------           ---------
     NET CASH (USED FOR)/PROVIDED BY INVESTING ACTIVITIES...............................         (51.0)              481.0
                                                                                              --------           ---------

FINANCING ACTIVITIES
Dividends paid..........................................................................            --               (19.8)
Repayments of borrowings having original maturities in excess of
     three months.......................................................................        (696.1)              (75.7)
Net repayments of borrowings having original maturities of
     three months or less...............................................................        (195.2)             (137.0)
Stock options exercised.................................................................          42.9                24.3
Net financing activities of discontinued operations.....................................       1,256.6                  --
Purchase of treasury stock..............................................................         (15.5)             (335.9)
                                                                                              --------           ---------
     NET CASH PROVIDED BY/(USED FOR) FINANCING ACTIVITIES...............................         392.7              (544.1)
                                                                                              --------           ---------

Effect of exchange rate changes on cash and cash equivalents............................          (2.1)               (2.8)
                                                                                              --------           ---------
     INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS...................................      $   25.0             $ (25.1)
                                                                                              ========           ========= 
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

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


                                     I - 2
<PAGE>


W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
                                                                                                JUNE 30,         December 31,
In millions, except par value and common shares                                                  1998                1997
---------------------------------------------------------------------------------------------------------------------------------

ASSETS
CURRENT ASSETS
<S>                                                                                         <C>                 <C>       
Cash and cash equivalents...............................................................    $     72.6          $     47.6
Notes and accounts receivable, net......................................................         364.0               353.1
Inventories.............................................................................         132.4               129.6
Net assets of discontinued operations...................................................           8.2             1,424.0
Deferred income taxes...................................................................         238.6               209.6
Other current assets....................................................................          15.6                11.6
                                                                                            ----------         -----------
     TOTAL CURRENT ASSETS...............................................................         831.4             2,175.5


Properties and equipment, net of accumulated depreciation and
     amortization of $824.1 (1997 - $789.4).............................................         651.4               663.3
Goodwill, less accumulated amortization of $7.5 (1997 - $5.8)...........................          39.9                42.9
Asbestos-related insurance receivable...................................................         201.4               215.9
Deferred income taxes...................................................................         236.0               238.1
Other assets............................................................................         455.0               437.3
                                                                                            ----------          ----------
     TOTAL ASSETS.......................................................................      $2,415.1            $3,773.0
                                                                                              ========            ========


LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt.........................................................................     $   216.6           $   413.6
Accounts payable........................................................................         107.2               106.5
Income taxes............................................................................         134.9               175.6
Other current liabilities...............................................................         371.5               662.0
                                                                                            ----------          ----------
     TOTAL CURRENT LIABILITIES..........................................................         830.2             1,357.7

Long-term debt..........................................................................          32.8               658.7
Deferred income taxes...................................................................          32.5                20.2
Noncurrent liability for asbestos-related litigation....................................         566.7               619.4
Other liabilities.......................................................................         644.4               649.1
                                                                                            ----------          ----------

     TOTAL LIABILITIES..................................................................       2,106.6             3,305.1
                                                                                             ---------           ---------


COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY
Common stock issued, par value $.01.....................................................            .8                  .7
Paid in capital.........................................................................         395.3               563.4
Retained earnings.......................................................................          25.5               108.3
Deferred compensation trust.............................................................           (.4)               (5.7)
Accumulated other comprehensive loss....................................................         (96.1)             (198.8)
Treasury stock, at cost: 929,200 common shares..........................................         (16.6)                 --
                                                                                           -----------       -------------
     TOTAL SHAREHOLDERS' EQUITY.........................................................         308.5               467.9
                                                                                            ----------          ----------
     TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.........................................      $2,415.1            $3,773.0
                                                                                              ========            ========
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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



                                     I - 3
<PAGE>


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


<S>                                 <C>        <C>       <C>               <C>            <C>             <C>        <C>       
Balance, December 31, 1996..........$     .8   $  524.1  $  172.6   $   --     $    (.5)   $  (64.6)     $  632.4      $    --
Net income..........................      --        --      163.8       --          --          --          163.8         163.8
Dividends paid......................      --        --      (19.8)      --          --          --          (19.8)          --
Issuance/delivery of shares under
     stock plans....................      --       32.6       --      (3.9)         4.5         --           33.2           --
Purchase of common stock............      --        --        --        --       (335.9)        --         (335.9)          --
Foreign currency translation
     adjustment.....................      --        --        --        --          --        (51.8)        (51.8)        (51.8)
                                    --------   --------  --------   -------    --------    ---------     --------      --------
Balance, June 30, 1997..............$     .8   $  556.7  $  316.6   $ (3.9)    $ (331.9)   $ (116.4)     $  421.9      $  112.0
                                    ========   ========  ========   =======    ========    =========     ========      ========




Balance, December 31, 1997..........$     .7   $  563.4  $  108.3   $ (5.7)    $    --     $ (198.8)     $  467.9      $    --
Net loss............................      --        --        (.5)      --          --          --            (.5)          (.5)
Separation of Packaging Business....      --     (233.8)    (82.3)      .5          --        119.2        (196.4)          --
Issuance/delivery of shares under
     stock plans....................      .1       65.7       --        .1          --          --           65.9           --
Reclassification of assets in
     deferred compensation trust....      --        --        --       4.7          --          --            4.7           --
Purchase of common stock............      --        --        --        --        (16.6)         --          (16.6)          --
Foreign currency translation
     adjustment.....................      --        --        --        --         --         (21.9)        (21.9)        (21.9)
Unrealized gain on security.........      --        --        --        --         --          15.3          15.3          15.3
Minimum pension liability
     adjustment.....................      --        --        --        --         --          (9.9)         (9.9)         (9.9)
                                    --------   --------  --------   -------    --------    ---------     --------      --------
BALANCE, JUNE 30, 1998..............$     .8   $  395.3  $   25.5   $  (.4)    $  (16.6)   $  (96.1)     $  308.5      $  (17.0)
                                    ========   ======== =========   =======    ========    =========     ========      ======== 

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



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


                                     I - 4
<PAGE>


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

1.  CHANGE IN ORGANIZATION AND BASIS OF PRESENTATION

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

Packaging Business Transaction

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


For further information, see Old Grace's Joint Proxy Statement/Prospectus dated
February 13, 1998, the Company's Information Statement dated February 13, 1998,
Notes 1 and 3 to the Consolidated Financial Statements in Old Grace's Annual
Report on Form 10-K for 1997 (1997 10-K), and Note 4 below.


Basis of Presentation

The interim consolidated financial statements in this Report are unaudited and
should be read in conjunction with the Consolidated Financial Statements in the
1997 10-K. Such interim consolidated financial statements reflect all
adjustments that, in the opinion of management, are necessary for a fair
presentation of the results of the interim periods presented; all such
adjustments are of a normal recurring nature. Certain amounts in the
consolidated financial statements for prior periods have been reclassified to
conform to the current period's basis of presentation and as required with
respect to discontinued operations.


The results of operations for the three- and six-month interim periods ended
June 30, 1998 are not necessarily indicative of the results of operations for
the year ending December 31, 1998.

The Consolidated Balance Sheet is only adjusted prospectively for a business
that is classified as a discontinued operation and included under the caption
"Net assets of discontinued operations." Accordingly, "Net pretax cash (used
for)/provided by operating activities of discontinued operations" excludes the
effects of changes in working capital of discontinued operations prior to their
classification as such. Similarly, the net investing and financing activities
of discontinued operations represent cash flows of discontinued operations
subsequent to the respective dates of such classification.



                                     I - 5
<PAGE>

2.  ASBESTOS AND RELATED INSURANCE LITIGATION


Grace is a defendant in property damage and personal injury lawsuits relating
to previously sold asbestos-containing products and expects that it will be
named as a defendant in additional asbestos-related lawsuits in the future.
Grace was a defendant in approximately 42,400 asbestos-related lawsuits on June
30, 1998 (16 involving claims for property damage and the remainder involving
approximately 93,000 claims for personal injury), as compared to approximately
40,600 lawsuits on December 31, 1997 (18 involving claims for property damage
and the remainder involving approximately 96,900 claims for personal injury).


Property Damage Litigation


Through June 30, 1998, 140 asbestos property damage cases were dismissed
without payment of any damages or settlement amounts; judgments were entered in
favor of Grace in nine cases (excluding cases settled following appeals of
judgments in favor of Grace); judgments were entered in favor of the plaintiffs
in seven cases for a total of $60.3; and 197 property damage cases were settled
for a total of $574.2. Property damage case activity for the six months ended
June 30, 1998 was as follows:

-------------------------------------------------------------------------------
Cases outstanding, December 31, 1997....................................   18
New cases filed.........................................................    1
Settlements.............................................................   (2)
Dismissals..............................................................   (1)
                                                                        ----- 
     Cases outstanding, June 30, 1998...................................   16
                                                                        =====

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

Personal Injury Litigation


Through June 30, 1998, approximately 13,300 asbestos personal injury lawsuits
involving 30,200 claims were dismissed without payment of any damages or
settlement amounts (primarily on the basis that Grace products were not
involved), and approximately 42,600 lawsuits involving 103,900 claims were
disposed of (through settlements and judgments) for a total of $335.7. Personal
injury claim activity for the six months ended June 30, 1998 was as follows:


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

Claims outstanding, December 31, 1997................................ 96,933
New claims........................................................... 11,699
Settlements..........................................................(14,727)
Dismissals...........................................................   (877)
Judgments............................................................     (4)
                                                                     ------- 
     Claims outstanding, June 30, 1998............................... 93,024
                                                                     =======

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




                                     I - 6
<PAGE>


Asbestos-Related Liability


Based upon and subject to the factors discussed in Note 2 to the Consolidated
Financial Statements in the 1997 10-K, Grace estimates that its probable
liability with respect to the defense and disposition of asbestos property
damage and personal injury cases and claims was as follows on June 30, 1998 and
December 31, 1997:


<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
                                                                                              JUNE 30,           December 31,
                                                                                              1998 (1)            1997 (1)
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                           <C>                  <C>   
Current liability for asbestos-related litigation (2).................................        $  97.0              $236.5
Noncurrent liability for asbestos-related litigation..................................          566.7               619.4
                                                                                              -------             -------
     Total asbestos-related liability.................................................         $663.7              $855.9
                                                                                               ======              ======
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Reflects property damage and personal injury cases and claims pending on
    June 30, 1998 and December 31, 1997, as well as personal injury claims
    expected to be filed through 2002. See discussion below.
(2) Included in "Other current liabilities" in the Consolidated Balance Sheet.


Asbestos-Related Insurance Receivable

Grace previously purchased insurance policies with respect to its
asbestos-related lawsuits and claims. Activity in Grace's notes receivable from
insurance carriers and asbestos-related insurance receivable during the six
months ended June 30, 1998 was as follows:


<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
NOTES RECEIVABLE

<S>                                                                                                             <C>      
Notes receivable from insurance carriers on December 31, 1997, net of discount of $4.8 (1)................       $   31.3
Proceeds received under asbestos-related insurance settlements............................................          (13.8)
Current year amortization of discount.....................................................................            1.3
                                                                                                                 --------
     Notes receivable from insurance carriers on June 30, 1998, net of discount of $3.5 (2)...............       $   18.8
                                                                                                                 --------


INSURANCE RECEIVABLE

Asbestos-related insurance receivable on December 31, 1997 (3)............................................       $  282.4
Proceeds received under asbestos-related insurance settlements............................................          (38.3)
                                                                                                                 -------- 
     Asbestos-related insurance receivable on June 30, 1998 (4)...........................................       $  244.1
                                                                                                                 --------

     Total amounts due from insurance carriers............................................................       $  262.9
                                                                                                                 ========
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  Classified in the December 31, 1997 Consolidated Balance Sheet as $13.3 in
     "Notes and accounts receivable, net" and $18.0 in "Other assets."
(2)  Classified in the June 30, 1998 Consolidated Balance Sheet as $12.2 in 
     "Notes and accounts receivable, net" and $6.6 in "Other assets."
(3)  $66.5 of the asbestos-related insurance receivable on December 31, 1997 is
     classified in "Notes and accounts receivable, net" in the December 31, 
     1997 Consolidated Balance Sheet.
(4)  $42.7 of the asbestos-related insurance receivable on June 30, 1998 is 
     classified in "Notes and accounts receivable, net" in the June 30, 1998 
     Consolidated Balance Sheet.


<PAGE>


Insurance Litigation


Grace's ultimate exposure with respect to its asbestos-related cases and claims
will depend on the extent to which its insurance will cover damages for which
it may be held liable, amounts paid in settlement and litigation costs. In
Grace's opinion, it is probable that recoveries from its insurance carriers
(including amounts reflected in the receivable discussed above), along with
other funds, will be available to satisfy the property damage and personal
injury cases and claims pending at June 30, 1998, as well as personal injury
claims expected to be filed in the foreseeable future. Consequently, Grace
believes that the resolution of its asbestos-related litigation will not have a
material adverse effect on its consolidated financial position.


For additional information, see Note 2 to the Consolidated Financial Statements
in the 1997 10-K.

                                     I - 7
<PAGE>



3.  ACQUISITIONS AND DIVESTMENTS

Acquisitions

In April 1998, Grace entered into a definitive agreement to acquire the
Crosfield business of Imperial Chemical Industries PLC for $455.0 in cash.
Crosfield is a major producer of various silica, silicate and zeolite products,
as well as hydroprocessing and specialty catalysts. Crosfield, which is to be
integrated with Grace Davison, had 1997 sales of approximately $270.0. The
completion of the acquisition is subject to various conditions, including
customary governmental approvals.

Divestments

In May 1998, Grace sold its can forming lubricants business to D. A. Stuart
Company for $3.5, subject to adjustment for changes in working capital. The
sales and revenues, financial position and results of operations of this
business were not significant to Grace. The sale resulted in a pretax gain of
$1.5, classified as "Other income" in the Consolidated Statement of Operations
in this Report.

In May 1997, Grace sold its specialty polymers business to National Starch and
Chemical Company for $148.0, subject to a purchase price adjustment. The sales
and revenues of this business for the three and six months ended June 30, 1997
were $6.8 and $24.9, respectively; its financial position and results of
operations were not significant to Grace. In October 1997, Grace paid National
Starch $1.9 in settlement of the purchase price adjustment. The sale of this
business resulted in a pretax gain of $103.1, and an after-tax gain of $63.0.

4.  DISCONTINUED OPERATIONS


Packaging Business Transaction


As discussed in Note 1 above, the Spin-off and the Merger were completed on
March 31, 1998. Prior to the Spin-off and the Merger, Old Grace and a Packaging
Business subsidiary borrowed $1,258.8 (inclusive of $2.2 of bank fees) and made
a cash transfer of $1,256.6 to Grace, which used the transferred funds to repay
substantially all of Grace's debt (see Note 6). The borrowed funds are shown as
a net financing activity of discontinued operations in the Consolidated
Statement of Cash Flows. In the Merger and a related recapitalization, for each
Old Grace common share outstanding at the close of trading on March 31, 1998,
each shareholder received .536 shares of New Sealed Air common stock and .475
shares of New Sealed Air convertible preferred stock. Upon the completion of
the Spin-off and the Merger, the shareholders of Old Grace owned (a) 100% of
the Specialty Chemicals Businesses (through their ownership of 100% of the
Company's outstanding shares) and (b) approximately 63% of New Sealed Air, on a
fully diluted basis.

The Packaging Business transaction resulted in an adjustment to shareholders'
equity of $196.4, representing Grace's investment in the Packaging Business
less the $1,258.8 of borrowings discussed above. See the Consolidated Statement
of Shareholders' Equity in this Report for a reconciliation of the changes in
shareholders' equity for the six-month period ended June 30, 1998.



                                     I - 8
<PAGE>


Financial Information for Discontinued Operations


Results of the Packaging Business for the three months and six months ended
June 30, 1998 and 1997 were as follows:


<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
                                                                                Three Months Ended            Six Months Ended
                                                                                     June 30,                     June 30,
---------------------------------------------------------------------------------------------------------------------------------
                                                                               1998           1997         1998            1997
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>               <C>           <C>            <C>   
Sales and revenues.........................................................$        --       $463.3        $431.2         $886.0
                                                                           -----------       ------        ------         ------
Income from operations before taxes (1)....................................$        --       $ 58.5        $  6.2         $114.7
Income tax provision.......................................................         --         21.7           8.8           42.6
                                                                           -----------       ------        ------         ------
     Income/(loss) from discontinued packaging operations (1)..............$        --       $ 36.8        $ (2.6)        $ 72.1
                                                                           -----------       ------        ------         ------

Basic earnings/(loss) per share from discontinued operations...............         --       $  .50        $ (.04)        $  .97
Diluted earnings/(loss) per share from discontinued operations.............         --       $  .49        $ (.03)        $  .95
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  Reflects allocated interest expense of $13.3 ($8.7 after-tax) through
     March 31, 1998, the date of the Spin-off and Merger, and $17.2 ($10.8
     after-tax) and $31.6 ($19.9 after-tax) for the three months and six months
     ended June 30, 1997, respectively, based on the ratio of the net assets of
     the Packaging Business compared to Grace's total capital. Results for the
     six months ended June 30, 1998 also include $32.6 ($28.3 after-tax) of
     costs related to the Packaging Business transaction through March 31, 1998
     and $8.4 ($5.5 after-tax) for a related pension plan curtailment loss.
-------------------------------------------------------------------------------
The operating results of Grace's other discontinued operations have been
charged against previously established reserves and therefore are not reflected
in the above results.


The net assets of Grace's discontinued operations (excluding intercompany
assets) on June 30, 1998 were as follows:


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
                                                                                                                 JUNE 30,
                                                                                                                   1998
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                              <C>   
Current assets...................................................................................                $  6.6
Properties and equipment, net....................................................................                   3.6
Other assets.....................................................................................                    .5
                                                                                                                --------
     Total assets................................................................................                $ 10.7
                                                                                                                --------
Current liabilities..............................................................................                $  2.2
Other liabilities................................................................................                    .3
                                                                                                                --------
     Total liabilities...........................................................................                $  2.5
                                                                                                                --------
     Net assets of discontinued operations.......................................................                $  8.2
                                                                                                                --------
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>


For further information, see Old Grace's Joint Proxy Statement/Prospectus dated
February 13, 1998, the Company's Information Statement dated February 13, 1998
and Notes 1 and 3 to the Consolidated Financial Statements in the 1997 10-K.



                                     I - 9
<PAGE>



5.  OTHER BALANCE SHEET ITEMS

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
                                                                                              JUNE 30,          December 31,
                                                                                                1998               1997
---------------------------------------------------------------------------------------------------------------------------------
INVENTORIES
<S>                                                                                         <C>                 <C>      
Raw materials.........................................................................      $    48.2           $    47.9
In process............................................................................           10.5                10.3
Finished products.....................................................................           79.5                78.8
General merchandise...................................................................           21.5                20.2

Less: Adjustment of certain inventories to a
     last-in/first-out (LIFO) basis...................................................          (27.3)              (27.6)
                                                                                           ----------          ----------
                                                                                             $  132.4            $  129.6
                                                                                             ========            ========
---------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Prepaid pension costs.................................................................       $  232.4            $  245.2
Intangible asset - pension............................................................           18.5                  --
Deferred charges......................................................................           50.6                60.4
Long-term receivables, less allowance of $23.2 (1997 - $16.1).........................           47.7                48.4
Long-term investments.................................................................           85.8                56.4
Notes receivable from insurance carriers, net of discount of
     $1.5 (1997 - $2.3)...............................................................            6.6                18.0
Other.................................................................................           13.4                 8.9
                                                                                           ----------         -----------
                                                                                             $  455.0            $  437.3
                                                                                             ========            ========
---------------------------------------------------------------------------------------------------------------------------------
OTHER CURRENT LIABILITIES
Reserves for divested businesses......................................................        $  83.8            $  123.5
Liability for asbestos-related litigation.............................................           97.0               236.5
Accrued compensation..................................................................           24.6               121.9
Restructuring reserves................................................................           28.1                35.6
Environmental reserves................................................................           29.7                38.8
Accrued interest......................................................................            3.7                22.5
Other.................................................................................          104.6                83.2
                                                                                            ---------          ----------
                                                                                             $  371.5            $  662.0
                                                                                             ========            ========

---------------------------------------------------------------------------------------------------------------------------------
OTHER LIABILITIES

Other postretirement benefits.........................................................       $  215.0            $  214.8
Environmental reserves................................................................          172.3               191.4
Pension benefits......................................................................          125.1                91.0
Deferred compensation.................................................................           32.5                58.4
Long-term self-insurance reserves.....................................................           24.9                31.6
Other.................................................................................           74.6                61.9
                                                                                           ----------          ----------
                                                                                             $  644.4            $  649.1
                                                                                             ========            ========

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


                                    I - 10
<PAGE>



6.  EXTRAORDINARY ITEM

As discussed in Notes 1 and 4 above, Grace received a cash transfer of $1,256.6
in connection with the Spin-off and Merger. Grace used the transferred funds to
repay substantially all of its debt. On March 31, 1998, Grace used $600 of the
cash transfer to repay bank borrowings. On April 1, 1998, Grace repaid $611.3
principal amount of 8.0% Notes Due 2004, 7.4% Notes Due 2000, and 7.75% Notes
Due 2002 (collectively, Notes), pursuant to a tender offer that expired on
March 27, 1998. On April 1, 1998, Grace also repaid $3.5 principal amount of
the Medium-Term Notes, Series A (MTNs) and $6.0 of sundry indebtedness. As a
result of this extinguishment of debt, Grace incurred a pretax charge of $56.3
($35.2 after-tax, or a basic loss per share of $.47 or a diluted loss per share
of $.43) for premiums paid in excess of the Notes' principal amounts and other
costs incurred in connection with the purchase of the Notes and MTNs (including
the costs of settling related interest rate swap agreements). These costs are
presented as an extraordinary item in the Consolidated Statement of Operations
in this Report.

On June 30, 1998 and December 31, 1997, the Company's short-term and long-term
debt was as follows:


<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
                                                                                                  JUNE 30,        December 31,
                                                                                                   1998               1997
---------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM DEBT

<S>                                                                                              <C>                 <C>     
Bank borrowings....................................................................              $  207.0            $  370.2
Commercial paper...................................................................                   5.0                34.0
Current maturities of long-term debt...............................................                    --                  .5
Other short-term borrowings........................................................                   4.6                 8.9
                                                                                                 --------            --------
                                                                                                 $  216.6            $  413.6
                                                                                                 ========            ========


LONG-TERM DEBT

8.0% Notes Due 2004................................................................            $      5.7            $  276.0
7.4% Notes Due 2000................................................................                  24.7               248.7
7.75% Notes Due 2002...............................................................                   2.0               119.0
Medium-Term Notes, Series A........................................................                    --                 8.5
Sundry indebtedness................................................................                    .4                 6.5
                                                                                                 --------            --------
                                                                                                $    32.8            $  658.7
                                                                                                =========            ========

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


7.  SHAREHOLDERS' EQUITY

The Company is authorized to issue 300,000,000 shares of common stock. Of the
common stock unissued on June 30, 1998, approximately 18,607,000 shares were
reserved for issuance pursuant to stock options and other stock incentives.


The Certificate of Incorporation also authorizes 53,000,000 shares of preferred
stock, $.01 par value, none of which has been issued. 3,000,000 of such shares
have been designated as Series A Junior Participating Preferred Stock and are
reserved for issuance in connection with the Company's Preferred Stock Purchase
Rights (Rights). A Right trades together with each outstanding share of common
stock and entitles the holder to purchase one-hundredth of a share of Series A
Junior Participating Preferred Stock under certain circumstances and subject to
certain conditions. The Rights are not and will not become exercisable unless
and until certain events occur, and at no time will the Rights have any voting
power.



                                    I - 11
<PAGE>

In April 1998, the Company's Board of Directors approved a new program to
repurchase up to 20% of the Company's outstanding shares in the open market.
Through June 30, 1998, the Company had acquired 929,200 shares of common stock
for a total of $16.6 under the program (an average price per share of $17.89).
Cash payments for settled share repurchases were $15.5 through June 30, 1998.
This program is expected to be executed over time, depending on market
conditions and other factors.

During the first quarter of 1997, Old Grace substantially completed the share
repurchase program initiated in 1996 by acquiring 6,306,300 additional shares
of common stock for $335.9. Prior to year-end 1997, Old Grace retired all of
its treasury stock using the cost method.

In 1997, Old Grace established a trust to fund certain deferred employee
incentive compensation and nonemployee director compensation and benefits; the
trust has been continued by the Company. Prior to the Packaging Business
transaction discussed in Notes 1 and 4, the trust held only shares of Old
Grace. Subsequent to the transaction, the trust held shares of common stock of
the Company (classified as a component of Shareholders' Equity in the
Consolidated Balance Sheet) and New Sealed Air common and convertible preferred
stock (classified as a component of "Other assets" in the Consolidated Balance
Sheet). The trust held 69,652 shares of the Company's common stock, 37,159
shares of New Sealed Air common stock and 32,930 shares of New Sealed Air
convertible preferred stock on June 30, 1998 and 71,476 shares of Old Grace
common stock on December 31, 1997.


For additional information, see Note 12 to the Consolidated Financial
Statements in the 1997 10-K.


8.  STOCK INCENTIVE PLANS


As described in Note 14 to the Consolidated Financial Statements in the 1997
10-K, stock options have been granted under the Company's stock incentive
plans. In connection with the Packaging Business transaction described in Notes
1 and 4 above, all outstanding options (other than those held by employees of
the Packaging Business) became options to purchase the Company's common stock,
and the number of shares covered by and purchase prices of such options were
adjusted to preserve their economic value; the options held by employees of the
Packaging Business became options to purchase common stock of New Sealed Air
and were similarly adjusted.

In April and May 1998, the Company granted a total of 76,200 shares of the
Company's common stock to certain executives, subject to various restrictions.
For more information, see the Form of Restricted Share Award Agreements filed
with the Company's Form 10-Q for the quarter ended March 31, 1998.

9.  PENSION PLANS

The Packaging Business transaction described in Notes 1 and 4 above required
the Company to split certain pension plans and recognize a net curtailment loss
for other plans. In accordance with Statement of Financial Accounting Standards
(SFAS) No. 88, "Employers' Accounting for Settlements and Curtailments of
Defined Benefit Plans and for Termination Benefits," the Company recognized a
net pretax loss of $8.4 for the three months ended March 31, 1998 in connection
with these actions. The loss is comprised of the following in relation to
active employees of the Packaging Business: (a) a $9.8 curtailment loss from
the immediate recognition 



                                    I - 12
<PAGE>

of prior service costs, (b) an $11.6 loss related to a contractual termination
benefit and (c) a $13.0 curtailment gain from the decrease in the projected
benefit obligation. This net loss is included in "Income/(loss) from
discontinued operations" in the Consolidated Statement of Operations in this
Report.

10.  EARNINGS PER SHARE

The following table reconciles the numerators and denominators used in
calculating basic and diluted earnings per share from continuing operations for
the three-month and six-month periods ended June 30, 1998 and 1997:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
                                                                                   Three Months Ended       Six Months Ended
                                                                                         June 30,                 June 30,
--------------------------------------------------------------------------------------------------------------------------------
                                                                                      1998       1997         1998        1997
--------------------------------------------------------------------------------------------------------------------------------
NUMERATOR:

<S>                                                                                 <C>         <C>         <C>          <C>   
Income from continuing operations...................................................$  25.5     $ 80.6      $ 37.3       $ 91.7
                                                                                     ------      ------     ------       ------
DENOMINATOR:
Weighted average common shares - basic calculation..................................   75.7       72.8        75.4         74.0

Effect of dilutive securities:
     Employee stock options and restricted stock awards.............................    4.8        2.0         5.7          2.3
                                                                                     ------      ------     ------       ------

Weighted average common shares - diluted calculation................................   80.5       74.8        81.1         76.3
                                                                                    =======      ======     ======       ======

BASIC EARNINGS PER SHARE............................................................$   .34     $ 1.11      $  .50       $ 1.24
                                                                                    =======      ======     ======       ======

DILUTED EARNINGS PER SHARE..........................................................$   .32     $ 1.08      $  .46       $ 1.20
                                                                                    =======      ======     ======       ======
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>


11.  BUSINESS SEGMENT INFORMATION

The table below presents information related to Grace's operating business
segments for the three-month and six-month periods ended June 30, 1998 and
1997. Grace has restated pretax operating results for all periods presented to
exclude previously allocated corporate expenses from the results of each
business segment.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
                                                                                Three Months Ended           Six Months Ended
                                                                                      June 30,                   June 30,
---------------------------------------------------------------------------------------------------------------------------------
                                                                                1998          1997          1998           1997
---------------------------------------------------------------------------------------------------------------------------------
SALES AND REVENUES
<S>                                                                            <C>           <C>           <C>            <C>   
   Grace Davison..........................................................    $ 180.2       $ 175.5       $ 356.4        $ 350.1
   Grace Construction Products.............................................     127.7         127.8         231.0          230.8
   Darex Container Products................................................      62.0          68.5         123.3          134.6
                                                                             --------      --------       -------        -------
TOTAL......................................................................   $ 369.9       $ 371.8       $ 710.7        $ 715.5
                                                                             --------      --------       -------        -------

PRETAX OPERATING INCOME
   Grace Davison...........................................................   $  28.3       $  26.4       $  52.7        $  48.3
   Grace Construction Products.............................................      19.0          16.4          23.8           21.5
   Darex Container Products................................................       7.6           8.1          14.3           14.7
                                                                             --------      --------       -------        -------
TOTAL......................................................................   $  54.9       $  50.9       $  90.8        $  84.5
                                                                             --------      --------       -------        -------
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>




                                    I - 13
<PAGE>



The sales and revenues and pretax operating income of Grace's business segments
for the three-month and six-month periods ended June 30, 1998 and 1997 are
reconciled below to amounts presented in the Consolidated Statement of
Operations.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
                                                                                Three Months Ended           Six Months Ended
                                                                                     June 30,                    June 30,
---------------------------------------------------------------------------------------------------------------------------------
                                                                               1998          1997           1998           1997
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>           <C>           <C>            <C>   
Sales and revenues - operating segments....................................    $369.9        $371.8        $710.7         $715.5
Other (1)..................................................................       --            6.8           --            24.9
                                                                               ------        ------        ------         ------
     Total sales and revenues..............................................    $369.9        $378.6        $710.7         $740.4
                                                                               ======        ======        ======         ======
---------------------------------------------------------------------------------------------------------------------------------

Pretax operating income - operating segments...............................    $ 54.9        $ 50.9        $ 90.8         $ 84.5
Pretax operating income - divested business (1)............................       --            1.2           --             3.8
Interest expense and related financing costs...............................      (4.4)         (4.4)        (11.2)         (10.8)
Interest income............................................................       1.2           1.3           2.3            6.0
Corporate expenses.........................................................     (10.8)        (21.9)        (20.8)         (37.7)
Provision for restructuring................................................       --           (4.0)          --            (4.0)
Gain on sale of business...................................................       --          103.1           --           103.1
Other, net.................................................................        .9           5.0            .1            3.8
                                                                               ------        ------        ------         ------
     Income from continuing operations before income taxes.................    $ 41.8        $131.2        $ 61.2         $148.7
                                                                               ======        ======        ======         ======
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Consists of Grace's specialty polymers business, divested in May 1997.



12.  COMPREHENSIVE INCOME/(LOSS)

In the first quarter of 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which requires the reporting of changes in equity
resulting from certain transactions and economic events, other than changes
reflected in the Consolidated Statement of Operations; the measure of these
changes is referred to as "Other comprehensive income/(loss)." The tables below
present the pretax, tax and after-tax components of the Company's other
comprehensive income/(loss) for the six months ended June 30, 1998 and the
components of the accumulated other comprehensive loss at June 30, 1998:


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
                                                                                                       Tax
                                                                                Pretax             (Expense)/           After-
                                                                                Amount               Benefit          Tax Amount
                                                                                ------             ---------          ----------
<S>                                                                            <C>              <C>                    <C>      
Foreign currency translation adjustments...................................    $  (21.9)          $     --             $  (21.9)
Unrealized gain on security................................................        23.5               (8.2)                15.3
Minimum pension liability adjustments......................................       (15.2)               5.3                 (9.9)
                                                                              ---------           --------           ----------
Other comprehensive loss...................................................    $  (13.6)          $   (2.9)            $  (16.5)
                                                                               ========           ========             ========
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>
                                                                             Minimum                                 Accumulated
                                                                 Foreign     Pension          Unrealized                Other
                                                                 Currency    Liability         Gain on              Comprehensive
                                                               Translation   Adjustment        Security             Income/(Loss)
                                                               -----------   ----------       ----------            -------------
<S>                                                              <C>       <C>                <C>                    <C>        
Balance, December 31, 1997..................................     $(198.8)  $        --        $        --            $   (198.8)
Current period change........................................       97.3          (9.9)              15.3                 102.7
                                                               ---------  ------------       ------------            ----------
Balance, June 30, 1998.........................................  $(101.5)  $      (9.9)       $      15.3            $    (96.1)
                                                                 =======   ===========        ===========            ==========
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>



                                    I - 14
<PAGE>

Grace holds certain restricted equity securities that are listed on a foreign
stock exchange and have limited trading activity. A portion of these
securities, which had a zero book basis, have become free of restrictions, and
the remaining portion will become free of restrictions in the 1999 second
quarter. As a result, Grace recognized an unrealized gain on security of $23.5
($15.3 after-tax) on June 30, 1998, which is included in "Accumulated other
comprehensive income/(loss)" on the Consolidated Statement of Shareholders'
Equity.
























                                    I - 15
<PAGE>


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

REVIEW OF OPERATIONS

OVERVIEW


Sales and revenues of Grace's operating business segments (Grace Davison, Grace
Construction Products and Darex Container Products) decreased slightly for the
1998 second quarter and the six months ended June 30, 1998 versus the
comparable periods in 1997. Excluding currency translation, sales and revenues
of Grace's operating business segments increased 3.6% for the 1998 second
quarter and 4.3% for the six months ended June 30, 1998 over the comparable
periods in 1997.

Pretax income for the quarter from continuing operations was $41.8 million, a
decrease of 68.1% versus the 1997 second quarter. Year-to-date earnings were
$61.2 million, representing a 58.9% decline compared to the same period in
1997. Pretax income for the second quarter of 1997 included a gain of $103.1
million on the sale of the specialty polymers business divested in May 1997 and
a restructuring charge of $4.0 million; excluding these items, pretax income
increased 30.3% versus the 1997 second quarter.

Net income for the second quarter of 1997 included income from discontinued
operations of $36.8 million ($0.49 per share). For the six months ended June
30, 1998, the Company reported a net loss of $0.5 million (1 cent per share);
this net loss included the extraordinary loss from the early extinguishment of
debt as described in Note 6 in this Report.


The following discussion includes projections and/or other "forward-looking"
information. Grace is subject to risks and other uncertainties that could cause
its actual results to differ materially from any such projections or that could
cause other forward-looking information to prove incorrect. For a discussion of
such risks and uncertainties, see "Introduction and Overview -- Projections and
Other Forward-Looking Information" in Item 1 of the 1997 10-K.

SALES AND REVENUES

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
OPERATING BUSINESS SEGMENTS                        THREE MONTHS ENDED JUNE 30                 SIX MONTHS ENDED JUNE 30
                                                   --------------------------                 ------------------------
(IN MILLIONS)                                      1998               % CHANGE              1998                % CHANGE
--------------------------------------------------------------------------------------------------------------------------------

<S>                                                <C>                   <C>                <C>                   <C> 
Grace Davison ................................     $180.2                2.7%               $356.4                1.8%
Grace Construction Products...........              127.7                (.1)%               231.0                 .1%
Darex Container Products................             62.0               (9.3)%               123.3               (8.3)%
                                                    -----                                   ------                     
                                                   $369.9                (.5)%              $710.7                (.7)%
                                                   ======                                   ======                     
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>



GRACE DAVISON

Grace Davison sales increased 2.7% in the second quarter and 1.8% in the first
six months of 1998 compared to the same periods in 1997. This increase was
primarily due to volume growth estimated at 8.4% and 8.9% in the second quarter
and first six months of 1998, respectively, versus the comparable 1997 periods.
Offsetting this increase was unfavorable currency translation, estimated at
3.9% and 5.1%, and unfavorable price/mix estimated at 1.9% and 2.0% 


                                    I - 16
<PAGE>

for the second quarter and first six months of 1998, respectively. The
following discussion of Grace Davison sales excludes the effect of currency
translation.

Fluid cracking catalyst (FCC) sales improved by 11.8% in the second quarter and
12.4% in the first six months of 1998 versus the comparable 1997 periods
primarily due to volume growth in North America and Asia Pacific. Increased
North American volumes were driven by high refinery utilization rates and a
strong demand for refined products. Additive sales were also higher versus 1997
due to increased Desox (sulfur oxide reduction additives) volumes and strong
light olefins volumes. Increased volumes in Asia Pacific were a result of
market share gains in China, India and Taiwan, based on the strong technical
performance of Grace Davison FCCs. Volumes increased in Europe for additives
for light olefins. In addition, refineries on turnaround earlier in the year
came back on-stream in June. These volume increases were offset by unfavorable
price/mix variances due to price competition worldwide (prices bottomed out in
late 1997).

Silicas/adsorbents sales were lower by 2.8% in the second quarter of 1998 and
relatively flat for the first six months of 1998 compared to 1997. The second
quarter decline was due primarily to lower North American volumes of dentifrice
products and molecular sieves combined with an unfavorable price/mix variance
in the European insulated glass (IG) sieves business. These second quarter
declines were offset by first quarter volume increases in most market segments
in Europe when compared to the first six months of the prior year.
Silicas/adsorbents have been impacted in 1998 by tough market conditions in the
global IG sieves business due to new competitive capacity.

Polyolefin catalyst sales increased 17.6% in the second quarter and 21.6% in
the first six months of 1998 versus the comparable 1997 periods as a result of
volume increases in all geographic regions, especially Asia Pacific. The
improvement was due primarily to the continued strength of the plastics
industry. While the strength of the resin market has been holding, potential
signs of weakness in the Asia Pacific region could emerge with the region's
currency crisis.

Hydroprocessing sales improved 23.3% in the second quarter and 6.2% for the
first six months of 1998 compared to the 1997 periods as a result of volume
growth of approximately 24.3% and 13.0%, respectively. The volume improvements
resulted from increased shipments to both existing and new customers in North
America and Europe.


GRACE CONSTRUCTION PRODUCTS

Grace Construction Products sales and revenues were relatively flat for the
second quarter and first six months of 1998, compared to the same periods in
1997. Volume increases estimated at 2.4% and 3.8% for the second quarter and
first six months of 1998, respectively, were offset by unfavorable currency
translation fluctuations estimated at 3.2% and 3.6%, respectively. Price/mix
improved slightly (by .7%) in the second quarter compared to the prior year.
The following discussion of Grace Construction Products sales excludes the
effect of currency translation.

Sales of specialty construction chemicals increased 4.1% in the second quarter
and 7.7% in the first six months of 1998 over the 1997 comparable periods,
mainly as a result of volume increases in North America and Europe. In North
America, volumes benefited from market penetration of value-added concrete and
masonry products, masonry market growth and continued economic strength in the
region. In Europe, volumes increased in the second quarter and first six months
of 


                                    I - 17
<PAGE>

1998 as a result of greater market acceptance of value-added concrete
admixtures and milder weather compared to the first six months of 1997. In Asia
Pacific, volumes decreased in the 1998 second quarter and first six months as a
result of economic weakness in Southeast Asia. Construction projects have been
canceled or delayed, and intensified competition for active projects has left
little opportunity for price increases. To lessen the effect of the economic
disruption in the region, Grace Construction Products intends to continue its
marketing focus on the area's stronger economies.

Sales of specialty building materials increased 1.5% in the second quarter of
1998, but reflected a decrease of 1.5% for the first six months of 1998, when
compared to the same periods in 1997. In the 1998 second quarter, favorable
volume and price/mix variances were driven by strong construction activity in
North America, where sales of fireproofing products reached record levels, and
waterproofing sales benefited from a sales promotion of roof underlayments. In
Europe, waterproofing sales decreased in the second quarter and first six
months of 1998 versus the 1997 periods, mainly due to a regional strategy to
focus efforts on the introduction of new growth products and exit certain
geographic markets. For the second quarter and first six months of 1998, an
unfavorable volume variance in waterproofing products in Asia Pacific was due
to economic weakness in the region.


DAREX CONTAINER PRODUCTS

Darex Container Products sales decreased 9.3% in the second quarter and 8.3% in
the first six months of 1998 versus the 1997 comparable periods. These
decreases were primarily attributable to the negative effect of currency
translation, estimated at 6.6% in the second quarter and 7.1% in the first six
months. Excluding currency translation, sales decreased 2.7% in the second
quarter and 1.2% in the first six months of 1998. The following discussion of
Darex Container Products sales excludes the effect of currency translation.

Can sealant sales decreased 5.4% in the second quarter and 1.8% in the first
six months of 1998 as compared to the same periods in 1997, primarily due to
worldwide volume decreases, especially in the Asia Pacific region. Asia Pacific
volumes were down due to decreased beer/beverage consumption in Japan, the
continuing trend of conversion to two-piece cans which use less sealants, and
the increased use of plastic bottles in lieu of cans. This negative volume
variance was partially offset by the impact of a price increase implemented to
offset the increasing costs of imported raw materials, and a favorable product
mix variance. Latin American volumes were lower due to poor economic conditions
in Brazil and Argentina which reduced demand in the canned food and
beer/beverage markets. European volumes were also negatively impacted by the
increased use of plastic bottles and unseasonably cool weather. In North
America, inflationary price increases initiated at the beginning of 1998 and
fully implemented by the second quarter, more than offset a negative volume
variance.

Closure sealant sales increased 18.2% in the second quarter and 5.7% in the
first six months of 1998 as compared to the same periods in 1997, primarily due
to volume increases. Improved market penetration in Europe and Asia Pacific
resulted from greater demand for beer/beverage and food closure compounds.

Coatings sales increased 4.5% in the second quarter and 3.0% in the first six
months of 1998 over the 1997 comparable periods. Higher volumes in Latin
America were due to gains in market share 


                                    I - 18
<PAGE>

throughout the region, most notably in Venezuela and Colombia. Lower volumes in
Europe were due to the April 1997 divestment of a small niche segment of the
coatings business and the loss of market share as a result of price
competition.

Also contributing to Darex Container Products' sales decline in the second
quarter and first six months of 1998 was the loss of sales resulting from the
May 1998 divestment of the can forming lubricants business and the termination
of an alliance in Brazil (May 1997). The impact of these decisions on sales
growth was $1.0 million in the second quarter and $2.2 million for the first
six months of 1998.



OPERATING RESULTS

For operating business segment disclosure, Grace has charged each operating
business segment with only those expenses that are directly attributable to its
businesses.


<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
OPERATING BUSINESS SEGMENTS                        THREE MONTHS ENDED JUNE 30                 SIX MONTHS ENDED JUNE 30
                                                   --------------------------                 ------------------------
(IN MILLIONS)                                      1998               % CHANGE              1998                % CHANGE
-------------------------------------------------------------------------------------------------------------------------------

<S>                                                 <C>                  <C>                 <C>                  <C> 
Grace Davison ................................      $28.3                7.0%                $52.7                8.9%
Grace Construction Products...................       19.0               16.1%                 23.8               10.6%
Darex Container Products......................        7.6               (6.0)%                14.3               (2.4)%
                                                     ----                                    -----                     
                                                    $54.9                7.9%                $90.8                7.3%
                                                    =====                                    =====                    
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>


GRACE DAVISON

Grace Davison's pretax operating income for the second quarter and first six
months of 1998 grew 7.0% and 8.9%, respectively, compared to the same periods
in 1997 (13.3% and 17.4%, respectively, excluding the effects of currency
translation). Gross margin percentage was flat in the second quarter, but
improved 0.7 percentage points in the first six months of 1998. The impacts of
strong FCC additive sales, increased volumes of higher margin polyolefin
catalysts, lower production costs for Kuantan-sourced silica products, and
benefits of various cost reduction programs in the first six months of 1998
were partially offset by increased maintenance activity (in the second quarter
of 1998), continued price declines in IG sieves, and lower hydroprocessing
prices. Selling and general and administrative expenses declined as a result of
cost controls and the elimination of the long-term incentive compensation
program.


GRACE CONSTRUCTION PRODUCTS

Grace Construction Products' pretax operating income increased 16.1% in the
second quarter and 10.6% in the first six months of 1998 compared to the same
periods in 1997. The effect of currency translation was negligible in both
periods. Improvements in manufacturing processes, production rates and material
costs, as well as market penetration of higher-margin value-added products,
have combined to improve gross margin percentages, primarily in building
materials. Factory administration expenses in North America increased 11.1% for
the second quarter and 4.6% for the first six months of 1998 due to investments
in sales growth, including a new calcium nitrite plant. General and
administrative expenses declined as a result of the decision to eliminate the
long-term incentive compensation program. Pretax operating income for the first
six months of 1998 included a $1 million charge for workforce reductions in the
European organization for 


                                    I - 19
<PAGE>

waterproofing products, the majority of which was paid during the first
quarter. The benefits of this program are expected to offset this charge by
year-end. In an effort to minimize the impact of the weakened economies in Asia
Pacific, Grace Construction Products continues to search for local raw material
sources, maintain emphasis on cost controls, and focus marketing efforts on the
region's stronger economies.


DAREX CONTAINER PRODUCTS

Darex Container Products' pretax operating income decreased 6.0% in the second
quarter and 2.4% in the first six months of 1998 versus 1997 comparable periods
(a 1.7% decrease and a 4.0% increase, respectively, excluding currency
translation). Second quarter 1998 operating income included a $1.5 million gain
from the sale of the can forming lubricants business in May 1998. Excluding
currency translation and the gain on sale of this business, operating income
decreased 20.2% and 6.2% versus the second quarter and first six months of
1997. Total gross margin experienced declines of 0.8 percentage points and 0.6
percentage points in the second quarter and first six months of 1998,
respectively, versus the 1997 comparable periods, due to lower sales of
high-margin products, lower prices and higher raw material costs. Partially
offsetting these declines were lower operating expenses resulting from cost
reduction actions implemented in late 1997, and the consolidation of R&D sites.


CORPORATE ACTIVITIES

Corporate expenses of $10.8 million for the second quarter of 1998 and $20.8
million for the first six months of 1998 decreased 50.9% and 44.8%,
respectively, compared to the same periods of 1997, primarily due to the
restructuring activities undertaken in connection with the Packaging Business
transaction (see Notes 1 and 4 to this Report), ongoing cost containment
efforts initiated in 1997, charges in 1997 for legal defense costs, and the
decision to terminate, on a prospective basis, the long-term incentive
compensation program (LTIP). In the future, stock incentives are expected to be
the primary component of long-term incentive compensation.



INTEREST EXPENSE AND RELATED FINANCING COSTS


Interest expense and related financing costs for continuing operations of $4.4
million for the three months and $11.2 million for the six months ended June
30, 1998 were flat and increased 3.8%, respectively, compared to the 1997
periods. Including amounts allocated to discontinued operations, interest
expense and related financing costs during the three months and six months
ended June 30, 1998 decreased 79.6% and 42.2%, respectively, compared to 1997
due to lower average debt levels.


See "Financial Condition: Liquidity and Capital Resources" below for further
information on borrowings.



                                    I - 20
<PAGE>



INCOME TAXES

Grace's effective tax rate was 39.0% for the second quarter and first six
months of 1998 and 37.4% and 37.1%, respectively, for the comparable 1997
periods. The higher effective tax rate in the 1998 periods resulted primarily
from higher taxes on foreign operations.


RESTRUCTURING COSTS

In the second quarter of 1997 Grace recorded a pretax restructuring charge of
$4.0 million ($2.6 million after-tax) in continuing operations. This charge
primarily consisted of costs incurred by Darex Container Products and corporate
costs resulting from the restructuring of the Packaging Business. This charge
was primarily related to the costs of employee terminations (expected to be
completed in 1998) and asset write-downs for certain corporate research
facilities.


DIVESTMENTS

In May 1998, Grace sold its can forming lubricants business to D. A. Stuart
Company for $3.5 million, subject to adjustment for changes in working capital.
The sales and revenues, financial position and results of operations of this
business were not significant to Grace. The sale resulted in a pretax gain of
$1.5 million, classified as "Other income" in the Consolidated Statement of
Operations in this Report.

In May 1997, Grace completed the sale of its specialty polymers business to
National Starch and Chemical Company for $148.0 million, subject to a purchase
price adjustment. The sales and revenues of this business for the three and six
months ended June 30, 1997 were $6.8 million and $24.9 million, respectively;
its financial position and results of operations were not significant to Grace.
The sale of this business resulted in a pretax gain of $103.1 million, and an
after-tax gain of $63.0 million.



DISCONTINUED OPERATIONS


PACKAGING BUSINESS

As discussed in Notes 1 and 4 to this Report, the Spin-off and Merger were
completed on March 31, 1998. There was no activity for the Packaging Business
in the second quarter of 1998 and a $2.6 million loss for the first quarter of
1998 compared to income of $36.8 million in the second quarter of 1997 and
$72.1 million for the six months ended June 30, 1997. Results for the first six
months of 1998 included $32.6 million ($28.3 million after-tax) of costs
related to the Packaging Business transaction and $8.4 million ($5.5 million
after-tax) for a related pension plan curtailment loss.




                                    I - 21
<PAGE>


FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES


Grace's continuing operating activities used net pretax cash of $235.5 million
in the first half of 1998, compared to $79.7 million in the first half of 1997.
After giving effect to the net pretax cash provided by operating activities of
discontinued operations and payments of income taxes, operating activities used
$314.6 million in the first half of 1998, compared to providing $40.8 million
for the same period in 1997. The increase from the first half of 1997 was
primarily due to the expenditure of $141.4 million for the defense and
disposition of asbestos-related litigation, net of amounts received from
settlements with certain insurance carriers in connection with such litigation,
as compared to the net cash outflow of $7.4 million for asbestos-related
litigation in the first half of 1997, and an increase in long-term incentive
compensation disbursements of approximately $60.0 million in 1998 compared to
the first half of 1997.

Investing activities used $51.0 million of cash in the first half of 1998 as
compared to cash provided by investing activities of $481.0 million in the
first half of 1997. The decrease in cash from investing activities was
primarily due to the receipt of net proceeds from divestments in the first half
of 1997 (most of which related to the divestment of the cocoa business),
partially offset by a reduction in net investing activities of discontinued
operations. Grace made capital expenditures of $40.7 million in the six months
ended June 30, 1998, primarily related to the Grace Davison business which is
increasing capacity for hydroprocessing and other catalysts. Grace anticipates
that total 1998 capital expenditures will not exceed $110.0 million, all of
which will be directed towards its operating business segments.

Net cash provided by financing activities in the first half of 1998 was $392.7
million, primarily reflecting the cash transfer of $1,256.6 million received in
connection with the Packaging Business transaction (as discussed in Notes 1 and
4 to this Report) and proceeds from the exercise of employee stock options,
partially offset by net repayments of borrowings.


In connection with the Packaging Business transaction, Grace received $1,256.6
million in cash, which was used to repay substantially all of its debt. On
March 31, 1998, Grace used $600 million of the cash transfer to repay bank
borrowings. On April 1, 1998, Grace repaid $611.3 million principal amount of
Notes pursuant to a tender offer that expired on March 27, 1998. On April 1,
1998, Grace also repaid $3.5 million principal amount of MTNs and $6.0 million
of sundry indebtedness. As a result of this extinguishment of debt, Grace
incurred an after-tax charge of $35.2 million for premiums paid in excess of
the Notes' principal amounts and other costs related to the purchase of the
Notes and MTNs (including the costs of settling related interest rate swap
agreements). These costs are presented as an extraordinary item in the
Consolidated Statement of Operations in this Report.


On June 30, 1998, Grace had committed borrowing facilities totaling $850.0
million, consisting of $600.0 million under a 364-day facility expiring in May
1999 (extendible for successive 364-day periods at the discretion of Grace and
the lenders) and $250.0 million under a long-term facility expiring in May
2003. These facilities also supported the issuance of commercial paper and bank
borrowings, of which $212.0 million was outstanding on June 30, 1998.

Grace has targeted a ratio of debt to EBITDA (earnings before interest, taxes
and depreciation and amortization) of less than 1.0, although Grace will
continue to have the flexibility to exceed 


                                    I - 22
<PAGE>

this target as business needs dictate. The debt to EBITDA ratio for the twelve
months ended June 30, 1998 was estimated at 1.15.


During the first quarter of 1997, Grace substantially completed the share
repurchase program initiated in 1996 by acquiring 6,306,300 additional shares
of its common stock for $335.9 million. Prior to year-end 1997, Grace retired
all of its treasury stock using the cost method.


In April 1998, the Company's Board of Directors approved a new program to
repurchase up to 20% of the Company's outstanding shares in the open market.
Through June 30, 1998, the Company had acquired 929,200 shares of common stock
for a total of $16.6 million under the program (an average price per share of
$17.89). Cash payments for settled share repurchases were $15.5 million through
June 30, 1998. This program is expected to be executed over time, depending on
market conditions and other factors.

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


CROSFIELD ACQUISITION

On April 2, 1998, Grace entered into a definitive agreement to acquire the
Crosfield business of Imperial Chemical Industries PLC for $455.0 million in
cash. Crosfield is a major producer of various silica, silicate and zeolite
products, as well as hydroprocessing and specialty catalysts. Crosfield, which
is to be integrated with Grace Davison, had 1997 sales of approximately $270.0
million. The completion of the acquisition is subject to various conditions,
including customary governmental approvals. Grace expects to finance the
acquisition with borrowings.


ASBESTOS-RELATED MATTERS


In the first half of 1998, Grace paid $141.4 million for the defense and
disposition of asbestos-related property damage and personal injury litigation
(including payments made under a property damage settlement and a block
settlement of personal injury claims effected in 1997), net of amounts received
under settlements with insurance carriers. Although the total amount to be paid
in 1998 with respect to asbestos-related claims (after giving effect to
payments to be received from insurance carriers) cannot be precisely estimated,
Grace expects that it will be required to expend approximately $170 million
(pretax) in 1998 to defend against and dispose of such claims (after giving
effect to anticipated insurance recoveries). The amounts with respect to the
probable cost of defending against and disposing of asbestos-related claims and
probable recoveries from insurance carriers represent estimates and are on an
undiscounted basis; the outcomes of such claims cannot be predicted with
certainty.


In December 1997, Grace and the U.S. Department of Energy's Brookhaven National
Laboratory announced the development of a new product capable of dissolving
asbestos in installed fireproofing material previously produced by Grace
without diminishing the existing fire-resistive performance of the fireproofing
material on columns and beams. It is anticipated that the new product will
create significant cost savings in comparison to current asbestos abatement
techniques. The new product is expected to be commercially available in 1998.
Grace is not yet able to determine the effect of the new product on Grace's
exposure with respect to its property damage litigation cases.



                                    I - 23
<PAGE>

See Note 2 to this Report for further information concerning asbestos-related
lawsuits and claims.



ENVIRONMENTAL MATTERS

In April 1998, Grace reached a settlement with the federal government relating
to a site in Wayne, New Jersey. Under the terms of the settlement, which
remains subject to court approval, Grace will pay approximately $32 million in
settlement of claims by the U.S. Army Corps of Engineers, the U.S.
Environmental Protection Agency and the U.S. Departments of Energy and the
Interior. Grace has paid $19 million of this amount into an escrow account and
will pay the remaining $13 million over the next two years. All amounts paid
and to be paid in the settlement are being charged against previously
established reserves.

There were no other significant developments relating to environmental
liabilities for the first half of 1998.

For additional information relating to environmental liabilities, see Note 11
to the Consolidated Financial Statements in the 1997 10-K.



YEAR 2000 COMPUTER SYSTEMS COMPLIANCE


There were no significant developments relating to Year 2000 computer systems
compliance in the first half of 1998.


For additional information relating to Year 2000 computer systems compliance,
see "Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Year 2000 Computer Systems Compliance" and Note 17 to
the Consolidated Financial Statements in the 1997 10-K.




                                    I - 24

<PAGE>


                          PART II - OTHER INFORMATION

Item 1.  Legal Proceedings.

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

Item 5.  Other Information.

         The Company's By-laws require that shareholders give advance notice
and furnish certain information to the Company in order to bring a matter of
business before an annual meeting of shareholders or to nominate a person for
election as a director. For the 1999 annual meeting of shareholders, scheduled
to be held on May 10, 1999, the Company must receive such notice and
information by no later than March 11, 1999 (sixty days prior to the meeting)
and no earlier than February 9, 1999 (ninety days prior to the meeting). Any
such notice should be delivered to the Company's Secretary at the Company's
principal executive offices.

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

         (a)  Exhibits. The following are being filed as exhibits to this
Report:

              --   Credit Agreement, dated as of May 14, 1998, among W. R.
                   Grace & Co.-Conn.; W. R. Grace & Co.; the several banks
                   parties thereto; the co-agents signatories thereto; The
                   Chase Manhattan Bank, as administrative agent for such
                   banks; and Chase Securities, Inc., as arranger

                                      II-1

<PAGE>

              --   364-Day Credit Agreement, dated as of May 14, 1998, among W.
                   R. Grace & Co.-Conn.; W. R. Grace & Co.; the several banks
                   parties thereto; the co-agents signatories thereto; Bank of
                   America National Trust and Savings Association and
                   Nationsbank, N.A., as co-documentation agents; The Chase
                   Manhattan Bank, as administrative agent for such banks; and
                   Chase Securities Inc., as arranger

              --   computation of ratio of earnings to fixed charges and
                   combined fixed charges and preferred stock dividends

              --   financial data schedule

         (b) Reports on Form 8-K. The following Reports on Form 8-K were filed
during the second quarter and to date during the third quarter of 1998:

Date of Filing                          Disclosure(s)
--------------                          -------------

May 11, 1998       Announcement of 1998 first quarter results

May 21, 1998       Announcements that Grace is considering purchasing supple-
                   mental insurance that would limit its liability for
                   asbestos-related litigation and that Albert J. Costello,
                   the Company's Chairman, President and Chief Executive
                   Officer, plans to retire around year-end 1998

July 14, 1998      Restatement of Financial Data Schedules

July 28, 1998      Announcement of 1998 second quarter results

                                      II-2
<PAGE>

                                   SIGNATURE

         Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

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

Date: August 14, 1998                       By /s/ Kathleen A. Browne
                                               ----------------------
                                                 Kathleen A. Browne
                                            Vice President and Controller
                                            (Principal Accounting Officer)

                                      II-3

<PAGE>

                               W. R. Grace & Co.

                         Quarterly Report on Form 10-Q
                      for the quarter ended June 30, 1998

                                 EXHIBIT INDEX

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

    4.1       Credit Agreement, dated as of May 14, 1998, among W. R. Grace &
              Co.-Conn.; W. R. Grace & Co.; the several banks parties thereto;
              the co-agents signatories thereto; The Chase Manhattan Bank, as
              administrative agent for such banks; and Chase Securities, Inc.,
              as arranger

    4.2       364-Day Credit Agreement, dated as of May 14, 1998, among W. R.
              Grace & Co.-Conn.; W. R. Grace & Co.; the several banks parties
              thereto; the co-agents signatories thereto; Bank of America
              National Trust and Savings Association and Nationsbank, N.A., as
              co-documentation agents; The Chase Manhattan Bank, as
              administrative agent for such banks; and Chase Securities Inc.,
              as arranger

    12        Computation of ratio of earnings to fixed charges and combined
              fixed charges and preferred stock dividends

    27        Financial Data Schedule