<PAGE>


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

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


                                    FORM 10-Q

(Mark One)

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

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001

                                       OR

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


                         Commission File Number 1-13953

                                W. R. GRACE & CO.

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

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

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

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

65,456,505 shares of Common Stock, $0.01 par value, were outstanding at October
31, 2001.

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

<PAGE>


                       W. R. GRACE & CO. AND SUBSIDIARIES

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

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

Item 1.             Financial Statements

                    Report of Independent Accountants                                            I - 1

                    Consolidated Statement of Operations                                         I - 2

                    Consolidated Statement of Cash Flows                                         I - 3

                    Consolidated Balance Sheet                                                   I - 4

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

                    Consolidated Statement of Comprehensive Income                               I - 5

                    Notes to Consolidated Financial Statements                              I - 6 to I - 17

Item 2.             Management's Discussion and Analysis of Results of Operations and
                    Financial Condition                                                    I - 18 to I - 27

Item 3.             Quantitative and Qualitative Disclosures About Market Risk                  I - 28

PART II.   OTHER INFORMATION

Item 1.             Legal Proceedings                                                           II - 1

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


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


<PAGE>

                          PART I. FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


                        REPORT OF INDEPENDENT ACCOUNTANTS

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

We have reviewed the accompanying consolidated balance sheet of W. R. Grace &
Co. and its subsidiaries as of September 30, 2001, and the related consolidated
statements of operations and of comprehensive income for each of the three-month
and nine-month periods ended September 30, 2001 and September 30, 2000, the
consolidated statement of shareholders' equity (deficit) for each of the
three-month and nine-month periods ended September 30, 2001, and the
consolidated statement of cash flows for the nine-month periods ended September
30, 2001 and September 30, 2000. These financial statements are the
responsibility of the Company's management.

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

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

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

We previously audited in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of December
31, 2000, and the related consolidated statements of operations, of cash flows,
of shareholders' equity (deficit) and of comprehensive income (loss) for the
year then ended (not presented herein). Our report, which was modified as to a
matter raising substantial doubt about the Company's ability to continue as a
going concern, was dated January 29, 2001, except for "Subsequent Event -
Voluntary Bankruptcy Filing" of Note 1 and the second paragraph under "Income
Taxes" of Note 15, as to which the date was April 2, 2001. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 2000, is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Baltimore, Maryland
November 14, 2001



                                      I-1

<PAGE>

<TABLE>
<CAPTION>
===================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES                                         THREE MONTHS ENDED              NINE MONTHS ENDED
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)                              SEPTEMBER 30,                  SEPTEMBER 30,
===================================================================================================================================
Amounts in millions, except per share amounts                              2001            2000           2001           2000
                                                                     --------------------------------------------------------------
<S>                                                                   <C>            <C>             <C>            <C>
Net sales.....................................................         $    448.1     $    415.7      $  1,294.1     $  1,205.5
Other income..................................................                5.3            7.0            30.4           33.0
                                                                     --------------------------------------------------------------
                                                                            453.4          422.7         1,324.5        1,238.5
                                                                     --------------------------------------------------------------


Cost of goods sold, exclusive of depreciation and                           283.7          252.3           821.9          724.0
    amortization shown separately below.......................
Selling, general and administrative expenses..................               87.2           76.4           257.7          250.1
Research and development expenses ............................               11.4           11.2            32.3           33.3
Depreciation and amortization ................................               21.8           21.6            64.4           65.9
Interest expense and related financing costs .................                8.3            8.0            30.0           20.2
                                                                     --------------------------------------------------------------
                                                                            412.4          369.5         1,206.3        1,093.5
                                                                     --------------------------------------------------------------

Income before Chapter 11 reorganization expenses, income
    taxes and minority interest...............................               41.0           53.2           118.2          145.0
Chapter 11 reorganization expenses, net ......................               (4.8)          --             (12.0)          --
(Provision for) income taxes..................................              (16.2)         (19.1)          (47.4)         (52.1)
Minority interest in income of subsidiary.....................               (0.2)          --              (1.4)          --
                                                                     --------------------------------------------------------------

    NET INCOME ...............................................         $     19.8     $     34.1      $     57.4     $     92.9
===================================================================================================================================


BASIC EARNINGS PER COMMON SHARE...............................         $     0.30     $     0.51      $     0.88     $     1.38

Average number of basic shares ...............................               65.3           66.7            65.3           67.3

DILUTED EARNINGS PER COMMON SHARE.............................         $     0.30     $     0.51      $     0.88     $     1.36

Average number of diluted shares..............................               65.4           67.4            65.4           68.4
===================================================================================================================================
</TABLE>


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



                                      I-2

<PAGE>

<TABLE>
<CAPTION>
====================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES                                                                      NINE MONTHS ENDED
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)                                                         SEPTEMBER 30,
====================================================================================================================================
Dollars in millions                                                                                 2001               2000
                                                                                             ---------------------------------------
<S>                                                                                          <C>                <C>
OPERATING ACTIVITIES
Income before Chapter 11 reorganization expenses, income taxes and minority interest.....    $      118.2       $       145.0
Reconciliation to net cash (used for) operating activities:
     Depreciation and amortization ......................................................            64.4                65.9
     Interest accrued on pre-petition debt subject to compromise.........................            16.5                --
     Gain on sales of investments........................................................            (7.9)               (7.9)
     Gain on disposals of assets.........................................................            (3.0)               (5.2)
     Changes in assets and liabilities, excluding effect of businesses
         acquired/divested and foreign currency exchange:
         Increase in notes and accounts receivable, net..................................           (47.5)              (24.1)
         Increase in accounts receivable due to termination of securitization program ...           (98.4)               --
         Decrease (increase) in subordinated interest of accounts receivable sold .......            33.1                (0.5)
         Increase in inventories ........................................................           (30.6)               (3.6)
         Increase (decrease) in accounts payable ........................................             9.9                (3.4)
         Increase (decrease) in accrued liabilities .....................................            24.8               (13.7)
         Expenditures for asbestos-related litigation ...................................          (107.2)             (196.2)
         Proceeds from asbestos-related insurance .......................................            72.7                55.9
         Expenditures for environmental remediation .....................................           (20.4)              (23.3)
         Expenditures for postretirement benefits .......................................           (14.8)              (15.1)
         Other ..........................................................................           (46.2)              (10.0)
                                                                                             ---------------------------------------
     NET CASH (USED FOR) OPERATING ACTIVITIES OF CONTINUING OPERATIONS BEFORE INCOME
       TAXES AND CHAPTER 11 REORGANIZATION EXPENSES......................................           (36.4)              (36.2)
Net cash (used for) retained obligations of discontinued operations......................            (8.6)              (26.3)
                                                                                             ---------------------------------------
     NET CASH (USED FOR) OPERATING ACTIVITIES BEFORE INCOME TAXES AND CHAPTER 11
       REORGANIZATION EXPENSES...........................................................           (45.0)              (62.5)
Chapter 11 reorganization expenses paid, net ............................................            (8.9)               --
Income taxes paid, net of refunds .......................................................           (22.5)              (20.0)
                                                                                             ---------------------------------------
     NET CASH (USED FOR) OPERATING ACTIVITIES ...........................................           (76.4)              (82.5)
                                                                                             ---------------------------------------
INVESTING ACTIVITIES
Capital expenditures ....................................................................           (36.3)              (41.4)
Businesses acquired in purchase transactions, net of cash acquired ......................           (84.4)              (48.1)
Investments in unconsolidated affiliates.................................................            --                  (3.7)
Short-term investment in unconsolidated affiliate .......................................            (6.3)               --
Net investment in life insurance policies ...............................................            (0.6)              (13.3)
Proceeds from sales of investments.......................................................             7.9                 7.9
Proceeds from disposals of assets .......................................................             5.8                 8.7
                                                                                             ---------------------------------------
     NET CASH (USED FOR) INVESTING ACTIVITIES ...........................................          (113.9)              (89.9)
                                                                                             ---------------------------------------

FINANCING ACTIVITIES
Proceeds from loans secured by cash value of life insurance policies, net of loan
     repayments..........................................................................            33.9                (4.7)
Borrowings under pre-petition credit facilities, net of repayments.......................            96.9               197.0
Borrowings under debtor-in-possession facility, net of fees..............................            46.5                --
Repayment of long-term debt..............................................................            --                 (24.7)
Exercise of stock options ...............................................................            --                   5.8
Purchase of treasury stock ..............................................................            --                 (43.0)
                                                                                             ---------------------------------------
     NET CASH PROVIDED BY FINANCING ACTIVITIES ..........................................           177.3               130.4
                                                                                             ---------------------------------------

Effect of currency exchange rate changes on cash and cash equivalents ...................            (3.1)              (12.1)
                                                                                             ---------------------------------------
     DECREASE IN CASH AND CASH EQUIVALENTS ..............................................           (16.1)              (54.1)
Cash and cash equivalents, beginning of period ..........................................           191.9               199.8
                                                                                             ---------------------------------------
Cash and cash equivalents, end of period ................................................    $      175.8       $       145.7
====================================================================================================================================
</TABLE>

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

                                      I-3
<PAGE>

<TABLE>
<CAPTION>
============================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES                                                      SEPTEMBER 30,      DECEMBER 31,
CONSOLIDATED BALANCE SHEET (UNAUDITED)                                                       2001             2000
============================================================================================================================
Amounts in millions, except par value and shares
<S>                                                                                    <C>               <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ..........................................................   $       175.8     $        191.9
Notes and accounts receivable, net ................................................            346.7              197.2
Inventories .......................................................................            178.0              144.2
Deferred income taxes .............................................................             49.7               98.8
Asbestos-related insurance expected to be realized within one year ................              2.7               83.8
Other current assets...............................................................             69.2               58.0
                                                                                      --------------------------------------
     TOTAL CURRENT ASSETS .........................................................            822.1              773.9

Properties and equipment, net of accumulated depreciation and
     amortization of $985.0 (2000 - $935.4)........................................            584.6              601.7
Goodwill, net of accumulated amortization of $7.5 (2000 - $7.2)....................             73.4               34.1
Cash value of life insurance policies, net of policy loans.........................             76.8              104.3
Deferred income taxes .............................................................            418.9              388.4
Asbestos-related insurance expected to be realized after one year..................            296.8              288.2
Other assets ......................................................................            440.7              394.3
                                                                                      --------------------------------------
     TOTAL ASSETS .................................................................    $     2,713.3     $      2,584.9
                                                                                      ======================================

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE
CURRENT LIABILITIES
Short-term debt ...................................................................    $        14.0     $        421.9
Accounts payable ..................................................................             96.9              117.5
Income taxes payable ..............................................................             14.6              123.1
Asbestos-related liability expected to be satisfied within one year................             --                178.4
Other current liabilities .........................................................            140.5              252.0
                                                                                      --------------------------------------
     TOTAL CURRENT LIABILITIES ....................................................            266.0            1,092.9

Long-term debt .....................................................................            50.1               --
Deferred income taxes .............................................................             21.1               20.2
Asbestos-related liability expected to be satisfied after one year ................             --                927.5
Other liabilities .................................................................             70.8              615.6
                                                                                      --------------------------------------
     TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE...................................            408.0            2,656.2

LIABILITIES SUBJECT TO COMPROMISE..................................................          2,329.5               --
                                                                                      --------------------------------------
     TOTAL LIABILITIES.............................................................          2,737.5            2,656.2
                                                                                      --------------------------------------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY (DEFICIT)
Common stock issued, par value $.01; 300,000,000 shares authorized;
     outstanding: 2001 - 65,457,000 shares (2000 - 65,418,000)                                   0.8                0.8
Paid in capital ...................................................................            432.9              432.2
Accumulated deficit................................................................           (159.0)            (216.4)
Treasury stock, at cost:  11,443,900 common shares (2001 and 2000).................           (136.4)            (136.4)
Accumulated other comprehensive loss ..............................................           (162.5)            (151.5)
                                                                                      --------------------------------------
     TOTAL SHAREHOLDERS' EQUITY (DEFICIT) .........................................            (24.2)             (71.3)
                                                                                      --------------------------------------
     TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) .........................    $     2,713.3     $      2,584.9
============================================================================================================================
</TABLE>


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


                                      I-4

<PAGE>

<TABLE>
<CAPTION>
================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)  (UNAUDITED)
================================================================================================================================
                                                                                          Accumulated          TOTAL
                                         Common Stock                                        Other          SHAREHOLDERS'
                                             and          Accumulated       Treasury     Comprehensive         EQUITY
Dollars in millions                     Paid in Capital     Deficit          Stock            Loss            (DEFICIT)
--------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>              <C>                <C>          <C>                <C>
BALANCE, JUNE 30, 2001...............   $        433.6   $     (178.8)      $   (136.4)  $     (174.6)      $        (56.2)
Net income ..........................             --             19.8             --             --                   19.8
Stock plan activity .................              0.1           --               --             --                    0.1
Other comprehensive income...........             --             --               --             12.1                 12.1
                                        ----------------------------------------------------------------------------------------
   BALANCE, SEPTEMBER 30, 2001.......   $        433.7   $     (159.0)      $   (136.4)  $     (162.5)      $        (24.2)
--------------------------------------------------------------------------------------------------------------------------------

BALANCE, DECEMBER 31, 2000...........   $        433.0   $     (216.4)      $   (136.4)  $     (151.5)      $        (71.3)
Net income ..........................             --             57.4             --             --                   57.4
Stock plan activity .................              0.7           --               --             --                    0.7
Other comprehensive loss.............             --             --               --            (11.0)               (11.0)
                                        ----------------------------------------------------------------------------------------
   BALANCE, SEPTEMBER 30, 2001.......   $        433.7   $     (159.0)      $   (136.4)  $     (162.5)      $        (24.2)
================================================================================================================================
</TABLE>

<TABLE>
<CAPTION>
================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME                              THREE MONTHS ENDED            NINE MONTHS ENDED
(UNAUDITED)                                                                   SEPTEMBER 30,                SEPTEMBER 30,
================================================================================================================================
Dollars in millions                                                        2001           2000          2001           2000
                                                                        --------------------------------------------------------
<S>                                                                     <C>           <C>            <C>           <C>
NET INCOME.........................................................     $    19.8     $    34.1      $   57.4      $    92.9
                                                                        --------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS):

Foreign currency translation adjustments...........................          12.1         (19.2)        (10.8)         (42.2)
Net unrealized gain (loss) on investment...........................          --             0.4          (0.2)         (10.0)
                                                                        --------------------------------------------------------
   Total other comprehensive income (loss).........................          12.1         (18.8)        (11.0)         (52.2)
                                                                        --------------------------------------------------------
COMPREHENSIVE INCOME ..............................................     $    31.9     $    15.3      $   46.4      $    40.7
================================================================================================================================
</TABLE>







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



                                      I-5
<PAGE>


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

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

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

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

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

VOLUNTARY BANKRUPTCY FILING

On April 2, 2001 (the "Filing Date"), W. R. Grace & Co. and 61 of its United
States subsidiaries and affiliates, including Grace-Conn. (collectively, the
"Debtors"), filed voluntary petitions for reorganization (the "Filing") under
Chapter 11 of the United States Bankruptcy Code ("Chapter 11" or the "Bankruptcy
Code") in the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"). The cases were consolidated and are being jointly
administered under case number 01-1139 (the "Chapter 11 Cases"). Grace's
non-U.S. subsidiaries and certain of its U.S. subsidiaries were not a part of
the Filing.

The Filing was made in response to a sharply increasing number of
asbestos-related bodily injury claims. These claims are discussed in more detail
in Note 3 to the Consolidated Financial Statements. Under Chapter 11, the
Debtors expect to continue to operate their businesses as debtors-in-possession
under court protection from their creditors and claimants, while using the
Chapter 11 process to develop and implement a plan for addressing the
asbestos-related claims against them.

Background of Filing - On January 29, 2001, Grace announced that recent
developments in asbestos-related litigation had led to a fourth quarter 2000
charge of $208.0 million (net of expected insurance recovery). The charge was
made to account for probable and estimable costs related to several adverse
developments in Grace's asbestos litigation during 2000, including: a
significant increase in bodily injury claims; higher than expected costs to
resolve bodily injury and certain property damage claims; and new class-action
lawsuits alleging damages from a former attic insulation product not previously
subject to property damage litigation. These adverse developments continued
during the first quarter of 2001.

Grace also announced on January 29, 2001 that it was reviewing the strategic and
operating issues associated with continuing to defend asbestos litigation
through the state court system versus voluntarily seeking a resolution of such
litigation through reorganization under Chapter 11. As a result of that review,
the Board of Directors of Grace concluded on April 2, 2001 that a federal
court-supervised Chapter 11 filing provides the best forum available to achieve
predictability and fairness in the claims settlement process. By filing under
Chapter 11, Grace expects to be able to both obtain a comprehensive resolution
of the claims against it and preserve the inherent value of its businesses.

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

It is the Debtors' intention to address all of their pending and future
asbestos-related claims and all other pre-petition claims in a plan of
reorganization. However, it is currently impossible to predict with any degree
of certainty how the plan will treat asbestos and other pre-petition claims or
what impact any reorganization plan may have on the shares of common stock of
Grace. The formulation and implementation of a plan of reorganization could take
a significant period of time.

The accompanying Consolidated Financial Statements have been prepared in
accordance with AICPA Statement of Position 90-7 ("SOP 90-7"), "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code," on a going
concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary



                                      I-6
<PAGE>

course of business. However, as a result of the Filing, such realization of
certain of Debtors' assets and liquidation of certain of Debtors' liabilities
are subject to significant uncertainty. While operating as
debtors-in-possession, the Debtors may sell or otherwise dispose of assets and
liquidate or settle liabilities for amounts other than those reflected in the
Consolidated Financial Statements. Further, a plan of reorganization could
materially change the amounts and classifications reported in the consolidated
financial statements, which do not give effect to any adjustments to the
carrying value or classification of assets or liabilities that might be
necessary as a consequence of a plan of reorganization.

All of the Debtors' outstanding pre-petition debt is now in default due to the
Filing. The accompanying Consolidated Balance Sheet as of September 30, 2001
reflects the classification of the Debtors' pre-petition debt within liabilities
subject to compromise, as described in Note 2.

The Debtors have negotiated a debtor-in-possession post-petition loan and
security agreement with Bank of America, N.A. (the "DIP facility") in the
aggregate amount of $250 million. The DIP facility has a term of two years and
bears interest at either Bank of America's prime rate or a formula based on the
London Inter-Bank Offered Rate ("LIBOR") plus 2.00 to 2.25 percentage points.
The Bankruptcy Court issued a final order approving the DIP facility on May 3,
2001. As of September 30, 2001, the Debtors had borrowed a total of $50.0
million against the DIP facility.

The Debtors have received approval from the Bankruptcy Court to pay or otherwise
honor certain of their pre-petition obligations in the ordinary course of
business, including employee wages and benefits, customer programs, shipping
charges and a limited amount of claims of essential trade creditors.

As provided by the Bankruptcy Code, the Debtors had the exclusive right to
propose a plan of reorganization for a 120-day period following the Filing Date.
The Debtors requested an extension of their exclusive period during which to
file a plan of reorganization through August 1, 2002, and similarly requested an
extension of the Debtors' exclusive rights to solicit acceptances of a
reorganization plan through October 1, 2002. The Bankruptcy Court approved the
Debtors' extension request on September 18, 2001.

Three creditors' committees, two representing asbestos claimants and the third
representing other unsecured creditors, and an equity committee have been
appointed in the Chapter 11 Cases. In accordance with the provisions of the
Bankruptcy Code, these committees will have the right to be heard on all matters
that come before the Bankruptcy Court. The Debtors are required to bear certain
of the committees' costs and expenses, including those of their counsel and
other advisors.

Accounting Impact - Pursuant to SOP 90-7, Grace's pre-petition liabilities that
are subject to compromise are reported separately on the balance sheet at an
estimate of the amount that will ultimately be allowed by the Bankruptcy Court.
See Note 2 for detail of the liabilities subject to compromise as of September
30, 2001, and as of the Filing Date. Obligations of Grace subsidiaries not
covered by the Filing will remain classified on the Consolidated Balance Sheet
based upon maturity dates or the expected dates of payment. SOP 90-7 also
requires separate reporting of certain expenses, realized gains and losses, and
provisions for losses related to the Filing as reorganization items.
Accordingly, the Debtors recorded Chapter 11 reorganization expenses of $4.8
million and $12.0 million for the three month and nine month periods ended
September 30, 2001, respectively, consisting of:

===============================================================
                                  THREE MONTHS    NINE MONTHS
                                     ENDED           ENDED
                                 SEPTEMBER 30,   SEPTEMBER 30,
(Dollars in millions)                2001            2001
===============================================================
Legal and financial
  advisory fees..............   $       5.2     $      12.6
Interest income..............          (0.4)           (0.6)
                                -------------------------------
  Chapter 11 reorganization
   expenses, net.............   $       4.8     $      12.0
===============================================================



                                      I-7
<PAGE>

Condensed financial information of the Debtors since the Filing Date is
presented below:

===============================================================
                                                 APRIL 2, 2001
W. R. GRACE & CO. - CHAPTER 11 FILING ENTITIES         TO
DEBTOR-IN-POSSESSION STATEMENT OF OPERATIONS     SEPTEMBER 30,
(UNAUDITED)                                           2001
===============================================================
Amounts in millions

Net sales, including intercompany..............  $     519.8
Other income...................................         28.9
                                                 --------------
                                                       548.7
                                                 --------------
Cost of goods, including intercompany,
   exclusive of depreciation and amortization
   shown separately below......................        320.2
Selling, general and administrative expenses...        111.3
Research and development expenses..............         18.3
Depreciation and amortization .................         26.6
Interest expense and related financing costs...         20.0
                                                 --------------
                                                       496.4
                                                 --------------
Income before Chapter 11 reorganization
   expenses, income taxes, minority interest
   and equity in net income of non-filing               52.3
   entities....................................
Chapter 11 reorganization expenses, net .......         (9.1)
(Provision for) income taxes ..................        (24.2)
Equity in net income of non-filing entities ...         23.8
                                                 --------------
   NET INCOME .................................  $      42.8
===============================================================


===============================================================
                                                 APRIL 2, 2001
W. R. GRACE & CO. - CHAPTER 11 FILING ENTITIES         TO
DEBTOR-IN-POSSESSION CONDENSED STATEMENT OF      SEPTEMBER 30,
  CASH FLOWS (UNAUDITED)                              2001
===============================================================
Amounts in millions

OPERATING ACTIVITIES
Net income.....................................  $      42.8
Reconciliation to net cash used for operating
  activities:
  Non-cash items, net..........................         43.3
   Increase in accounts receivable due to
     termination of securitization program.....        (99.7)
   Decrease in subordinated interest of
     accounts receivable sold..................         34.9
   Changes in other assets and liabilities,
     excluding the effect of businesses                 (9.2)
     acquired/divested.........................
                                                 --------------
  NET CASH PROVIDED BY OPERATING ACTIVITIES....         12.1

  NET CASH USED FOR INVESTING ACTIVITIES.......         (9.7)

  NET CASH PROVIDED BY FINANCING ACTIVITIES....         34.5
                                                 --------------

  NET INCREASE IN CASH AND CASH EQUIVALENTS....         36.9
Cash and cash equivalents, Filing Date.........          8.6
                                                 --------------
Cash and cash equivalents, end of period.......  $      45.5
===============================================================


===============================================================
W. R. GRACE & CO. - CHAPTER 11 FILING ENTITIES
DEBTOR-IN-POSSESSION BALANCE SHEET               SEPTEMBER 30,
(UNAUDITED)                                          2001
===============================================================
Amounts in millions

ASSETS
CURRENT ASSETS
Cash and cash equivalents .....................  $      45.5
Notes and accounts receivable, net ............        147.9
Receivables from non-filing entities, net .....         36.7
Inventories ...................................         93.4
Other current assets...........................        105.7
                                                 --------------
   TOTAL CURRENT ASSETS .......................        429.2

Properties and equipment, net..................        384.9
Cash value of life insurance policies,
   net of policy loans.........................         76.8
Deferred income taxes .........................        418.4
Asbestos-related insurance expected to be
   realized after one year.....................        296.8
Loans receivable from non-filing entities, net         403.5
Investment in non-filing entities .............        135.2
Other assets ..................................        329.6
                                                 --------------
   TOTAL ASSETS ...............................  $   2,474.4
===============================================================

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE
Current Liabilities ...........................  $      93.1

Long-term debt - DIP facility .................         50.0
Other liabilities .............................         26.0
                                                 --------------
   TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE.        169.1

LIABILITIES SUBJECT TO COMPROMISE .............      2,329.5
                                                 --------------
   TOTAL LIABILITIES...........................      2,498.6

   SHAREHOLDERS' EQUITY (DEFICIT) .............        (24.2)
                                                 --------------
   TOTAL LIABILITIES AND SHAREHOLDERS'
     EQUITY (DEFICIT) .........................  $   2,474.4
===============================================================

                                      I-8
<PAGE>

BASIS OF PRESENTATION

The interim consolidated financial statements presented herein are unaudited and
should be read in conjunction with the consolidated financial statements
presented in the Company's 2000 Form 10-K. Such interim consolidated financial
statements reflect all adjustments that, in the opinion of management, are
necessary for a fair presentation of the results of the interim periods
presented; all such adjustments are of a normal recurring nature. All
significant intercompany accounts and transactions have been eliminated.

The results of operations for the three- and nine-month interim periods ended
September 30, 2001 are not necessarily indicative of the results of operations
for the year ending December 31, 2001.

RECLASSIFICATIONS

Certain amounts in prior years' consolidated financial statements have been
reclassified to conform to the 2001 presentation.

EFFECT OF NEW ACCOUNTING STANDARDS

Grace adopted Emerging Issues Task Force ("EITF") 00-10, "Accounting for
Shipping and Handling Fees and Costs," in the fourth quarter of 2000. The
adoption of this standard did not effect pre-tax or net income; however, freight
costs and sales commissions (previously shown as a reduction of net sales) are
now included in costs of goods sold and selling, general and administrative
expenses, respectively. Sales for the three-month and nine-month periods ended
September 30, 2000, as previously reported, were $394.7 million and $1,144.2
million, respectively. Sales for the three-month and nine-month periods ended
September 30, 2000, as currently reported are $415.7 million and $1,205.5
million, respectively.

In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 prohibits the use of the pooling-of-interest method in
accounting for business combinations and further clarifies the criteria to
recognize intangible assets separately from goodwill. SFAS No. 141 is effective
for business combinations initiated after June 30, 2001. SFAS No. 142 changes
the accounting for goodwill and intangible assets with indefinite lives to
require an annual review for impairment (or more frequently if impairment
indicators arise). Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives. SFAS No.
142 is effective for fiscal years beginning after December 15, 2001 for goodwill
and intangible assets acquired prior to July 1, 2001, and applies to all
goodwill and other intangible assets recognized in an entity's financial
statements as of that date. Goodwill and intangible assets acquired after June
30, 2001 will be immediately subject to the nonamortization and amortization
provisions of SFAS No. 142. Amortization expense for the three months and nine
months ended September 30, 2001 of $1.3 million and $3.6 million, respectively,
includes $0.6 million and $1.3 million, respectively, related to the
amortization of goodwill that will not be required after December 31, 2001 under
SFAS No. 142.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," and SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 143 requires the accrual of asset retirement
obligations by increasing the initial carrying amount of the related long-lived
asset, and systematically expensing such costs over the asset's useful life. The
standard is effective for fiscal years beginning after June 15, 2002. SFAS No.
144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," and expands the scope of
discontinued operations. SFAS 144 is effective for financial statements issued
for fiscal years beginning after December 15, 2001. The Company does not expect
SFAS No. 143 or 144 to have a material effect on its financial statements.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires that management make estimates and assumptions
affecting the assets and liabilities (including contingent assets and
liabilities) reported at the date of the consolidated financial statements and
the revenues and expenses reported for the periods presented. Actual amounts
could differ from those estimates.

--------------------------------------------------------------------------------
2.       LIABILITIES SUBJECT TO COMPROMISE
--------------------------------------------------------------------------------

As a result of the Filing, Grace's balance sheet as of September 30, 2001
separately identifies the liabilities that are "subject to compromise" under the
Chapter 11 proceedings. In Grace's case, liabilities "subject to compromise"
represent pre-petition amounts as determined under generally accepted accounting
principles. Changes to the recorded amount of such liabilities will be based on
Bankruptcy Court orders and management's assessment of the claim amounts that
will ultimately be allowed by the Bankruptcy Court. Changes to pre-petition
liabilities are for: 1)



                                      I-9
<PAGE>

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

Components of liabilities subject to compromise are as follows:

===============================================================
                                SEPTEMBER 30,       Filing
(Dollars in millions)                2001            Date
===============================================================

Debt, pre-petition plus
  accrued interest...........   $      520.0    $    511.5
Accounts payable.............           33.3          43.0
Income taxes payable.........          216.1         210.1
Asbestos-related liability...          998.6       1,002.8
Other liabilities (Note 6)...          561.5         598.6
                                --------------- ---------------
                                $    2,329.5    $  2,366.0
===============================================================

Set forth below is a reconciliation of the changes in pre-Filing Date liability
balances for the periods presented.

===============================================================
                                                 Cumulative
(Dollars in millions)                           Since Filing
===============================================================
Balance, Filing Date........................  $     2,366.0
Cash disbursements and/or reclassifications
  under bankruptcy court orders:
   Freight and distribution order...........           (5.6)
   Trade accounts payable order.............           (7.1)
Other court orders including employee wages
  and benefits, sales and use tax and
  customer programs.........................          (46.2)
Expense/(income) items:
   Interest on pre-petition debt............           16.5
   Current period employment-related
     accruals...............................            9.7
   Environmental accruals...................            5.8
   Interest on income tax contingencies.....            6.5
Balance sheet reclassifications.............           (3.9)
---------------------------------------------------------------
Balance, end of period......................  $     2,341.7
===============================================================
Pre-Filing Date Liabilities Not Subject to
  Compromise................................  $        12.2
Pre-Filing Date Liabilities Subject to
  Compromise................................  $     2,329.5
===============================================================

Pre-Filing Date obligations allowable under current court orders and expected to
be paid prior to an adopted plan of reorganization are classified as
"liabilities not subject to compromise." Additional liabilities subject to
compromise may arise due to the rejection of executory contracts or unexpired
leases, or as a result of the allowance of contingent or disputed claims.

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

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

As of the Filing Date, Grace was a defendant in 65,656 asbestos-related lawsuits
(eight involving claims for property damage, nine involving a former attic
insulation product, and the remainder involving 129,191 claims for bodily
injury). Due to the Filing, holders of asbestos claims are stayed from
continuing to prosecute pending litigation and from commencing new lawsuits
against the Debtors. Additional asbestos claims are expected to be filed as part
of the Chapter 11 claims process. Separate creditors' committees representing
the interests of property damage and bodily injury claimants have been appointed
in the Chapter 11 Cases. Grace's obligations with respect to present and future
claims will be determined through litigation in Delaware federal court and
negotiations with each of the official committees appointed in the Chapter 11
Cases, which will provide the basis for a plan of reorganization.

PROPERTY DAMAGE LITIGATION

The plaintiffs in property damage lawsuits generally seek to have the defendants
absorb the cost of removing, containing or repairing the asbestos-containing
materials in the affected buildings. Each property damage case is unique in that
the age, type, size and use of the building, and the difficulty of asbestos
abatement, if necessary, vary from structure to structure. Thus, the amounts
involved in prior dispositions of property damage cases are not necessarily
indicative of the amounts that may be required to dispose of cases in the
future. Information regarding product identification, the amount of product in
the building, the age, type, size and use of the building, the jurisdictional
history of prior cases and the court in which the case is pending provide
meaningful guidance as to the range of potential costs. Grace has recorded an
accrual for all outstanding property damage cases for which sufficient
information is available to form a reasonable estimate of such exposure.

                                      I-10
<PAGE>
Through the Filing Date, out of 371 asbestos property damage cases filed, 140
were dismissed without payment of any damages or settlement amounts; judgments
were entered in favor of Grace in nine cases (excluding cases settled following
appeals of judgments in favor of Grace); judgments were entered in favor of the
plaintiffs in seven cases for a total of $60.3 million; 207 property damage
cases were settled for a total of $696.8 million and eight cases remain
outstanding. One new case was filed during the first quarter of 2001, and there
have been no cases settled or dismissed since December 31, 2000.

ATTIC INSULATION LITIGATION

As of the Filing Date, Grace was a defendant in nine class action lawsuits
brought since February 2000 on behalf of owners of homes containing Zonolite
attic insulation, one of which was dismissed subsequent to the Filing Date.
These lawsuits seek damages and equitable relief, including the removal,
replacement and/or disposal of all such insulation. This former attic insulation
product has never previously been the subject of property damage litigation.
Grace believes that this product was safe for its intended purpose.

BODILY INJURY LITIGATION

Bodily injury claims are generally similar to each other (differing primarily in
the type of asbestos-related illness allegedly suffered by the plaintiff).
However, Grace's estimated liability for such claims has been influenced by
numerous variables, including the solvency of other former asbestos producers,
cross-claims by co-defendants, the rate at which new claims are filed, the
jurisdiction in which the claims are filed, and the defense and disposition
costs associated with these claims. As of the Filing Date, Grace's bodily injury
liability reflected management's estimate of the number and ultimate cost of
present and future bodily injury claims expected to be asserted against Grace
given demographic assumptions of possible exposure to asbestos products
manufactured by Grace.

Through the Filing Date, 16,354 asbestos bodily injury lawsuits involving 35,720
claims were dismissed without payment of any damages or settlement amounts
(primarily on the basis that Grace products were not involved), and 55,489
lawsuits involving 163,698 claims were disposed of (through settlement and
judgments) for a total of $645.6 million. During the first quarter of 2001,
16,411 new bodily injury claims were filed, 11,841 claims were settled and 286
claims were dismissed prior to the Filing. As of September 30, 2001, outstanding
claims totaled 129,191.

ASBESTOS-RELATED LIABILITY

As of the Filing Date, Grace's estimated property damage and bodily injury
liabilities were based on its experience with, and recent trends in, asbestos
litigation. Its recorded liabilities covered indemnity and defense costs for
pending property damage cases and for pending and projected future bodily injury
claims. The amounts recorded as of the Filing Date reflected Grace's estimate
based on measures governed by generally accepted accounting principles, of
probable and estimable liabilities for asbestos-related litigation in all
material respects. Due to the increased uncertainty created as a result of the
Filing, no change has been made to the previously recorded asbestos-related
liability except to record the payment of normal post-Filing administrative
costs primarily related to claims processing. The total asbestos-related
liability balance as of September 30, 2001 and December 31, 2000 was $998.6
million and $1,105.9 million, respectively. As of September 30, 2001, the
asbestos-related liability was included in liabilities subject to compromise.
Due to the Filing and the uncertainties of asbestos-related litigation, actual
amounts could differ materially from the recorded liability.

ASBESTOS INSURANCE

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 nine
months ended September 30, 2001 was as follows:

===============================================================
ESTIMATED INSURANCE RECOVERY ON
ASBESTOS-RELATED LIABILITIES
(Dollars in millions)
===============================================================

NOTES RECEIVABLE
Notes receivable from insurance carriers,
  beginning of year, net of discount of $0.2      $      2.7
Proceeds received under asbestos-related
  insurance settlements ......................          (2.9)
Current year amortization of discount ........           0.2
---------------------------------------------------------------
  Notes receivable from insurance carriers, end
    of quarter ...............................          --
---------------------------------------------------------------

INSURANCE RECEIVABLE
Asbestos-related insurance receivable,
  beginning of  year .........................         369.3
Proceeds received under asbestos-related
  insurance settlements ......................         (69.8)
---------------------------------------------------------------
   Asbestos-related insurance receivable, end          299.5
     of quarter...............................
---------------------------------------------------------------
Total amounts due from insurance carriers ....         299.5
Expected to be realized within one year ......           2.7
---------------------------------------------------------------
   Expected to be realized after one year ....    $    296.8
===============================================================

                                      I-11
<PAGE>

Grace has settled with and has been paid by its primary insurance carriers with
respect to both property damage and bodily injury cases and claims. Grace has
also settled with its excess insurance carriers that wrote policies available
for property damage cases; those settlements involve amounts paid and to be paid
to Grace. In addition, Grace has settled with excess insurance carriers that
wrote policies available for bodily injury claims in layers of insurance that
Grace believes may be reached based on its current estimates. Insurance coverage
for asbestos-related liabilities has not been commercially available since 1985.

The asbestos-related insurance asset represents amounts expected to be received
from carriers under settlement agreements for defense and disposition costs to
be paid by Grace. Estimated insurance reimbursements relate to property damage
and bodily injury cases and claims pending as of the Filing Date and bodily
injury claims expected to be filed in the future. The estimated insurance asset
is related to the amount of the asbestos-related liability and could change if
the ultimate amount of the liability differs from the recorded amount.

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

In March 2001, Grace acquired The Separations Group, a manufacturer of
chromatography columns and separations media, and the precipitated silicas
business of AKZO-PQ Silicas. These acquisitions were accounted for under the
purchase method of accounting.

On March 1, 2001, Grace and Chevron Products Co. (Chevron) formed Advanced
Refining Technologies (ART) to develop and market globally hydroprocessing
catalysts. ART conducts business through two distribution companies and one
operating company. Grace has a majority ownership interest in and controls both
distribution companies; therefore, for financial reporting purposes, the assets,
liabilities and results of operations of these entities are included in Grace's
consolidated financial statements. The minority interest in Grace's consolidated
statement of operations pertains to Chevron's 45% interest in the distribution
companies. Grace does not exercise governance control over the operating company
and therefore, assets, liabilities and results of operations of this company are
not consolidated in Grace's financial statements. The equity income or loss
related to the operating company is reported in "Other Income" in Grace's
consolidated statement of operations. As of September 30, 2001, the accompanying
Consolidated Balance Sheet includes a receivable from the operating company of
$36.7 million included in other current assets, and a payable to the operating
company of $23.4 million included in other current liabilities. ART has
agreements with both Grace and Chevron under which each provides certain
administrative and research and development services to ART.

In July 2001, Grace acquired Pieri S.A., a leading supplier of specialty
construction chemicals in Europe. This acquisition was accounted for under the
purchase method of accounting.

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

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

Components of other income are as follows:

===============================================================
OTHER INCOME                  THREE MONTHS      NINE MONTHS
                                  ENDED            ENDED
(Dollars in millions)         SEPTEMBER 30,    SEPTEMBER 30,
===============================================================
                              2001     2000    2001     2000
                             ----------------------------------
Investment income (loss).... $  (0.5) $   0.2 $   5.8  $   5.8
Gain on sales of
  investments ..............    --        3.6     7.9      7.9
Net gain on dispositions
  of assets.................    --       --       3.0      5.2
Tolling revenue.............     1.1      0.7     2.3      1.8
Interest income.............     1.1      2.3     3.8      7.4
Equity in net income of
  affiliates................     2.9      0.1     3.9      0.4
Other miscellaneous income..     0.7      0.1     3.7      4.5
---------------------------------------------------------------
   Total other income......  $   5.3  $   7.0 $  30.4  $  33.0
===============================================================

                                      I-12
<PAGE>

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

===============================================================
                                  SEPTEMBER 30,   December 31,
(Dollars in millions)                 2001           2000
===============================================================
NOTES AND ACCOUNTS RECEIVABLE,
  NET
Trade receivables, less
  allowance of $4.7 (2000 -
  $3.9)........................   $     321.3     $     172.2
Other receivables, less
  allowance of $1.9 (2000 -
  $0.5)........................          25.4            25.0
                                 ------------------------------
                                  $     346.7     $     197.2
===============================================================
INVENTORIES
Raw materials .................   $      40.5     $      32.7
In process ....................          30.3            22.4
Finished products .............         113.2            96.4
General merchandise ...........          23.3            22.0
Less:  Adjustment of certain
  inventories to a
  last-in/first-out (LIFO)
  basis .......................         (29.3)          (29.3)
                                 ------------------------------
                                  $     178.0     $     144.2
===============================================================
OTHER ASSETS
Plan assets in excess of
  defined benefit pension
  obligation...................   $     213.8     $     200.1
Unamortized costs of overfunded
  pension plans ...............         107.8           104.7
Deferred charges ..............          49.7            44.3
Long-term receivables, less
  allowances of $0.6 (2000 -
  $0.8)........................           2.2             2.4
Long-term investments .........           3.0             3.6
Patents, licenses and other
  intangible assets ...........          64.2            39.2
                                 ------------------------------
                                  $     440.7     $     394.3
===============================================================
OTHER CURRENT LIABILITIES
Retained obligations of
  divested businesses .........   $      --       $      67.2
Accrued compensation ..........          35.2            32.6
Environmental remediation .....          --              36.2
Deferred compensation .........          --              10.5
Accrued interest ..............           4.9             6.3
Other accrued liabilities .....         100.4            99.2
                                 ------------------------------
                                  $     140.5     $     252.0
===============================================================
OTHER LIABILITIES
Other postretirement benefits ..  $      --       $     189.1
Environmental remediation ......         --             138.7
Defined benefit obligation in
  excess of pension plan assets          75.0           167.8
Unamortized costs of
  underfunded pension plans ....        (10.4)          (36.0)
Deferred compensation ..........         --               9.5
Long-term self insurance
  reserve ......................         --               5.6
Retained obligations of
  divested businesses ..........         --              10.9
Taxes payable, including
  interest .....................         --             103.0
Other accrued liabilities ......          6.2            27.0
                                 ------------------------------
                                  $      70.8     $     615.6
===============================================================
LIABILITIES SUBJECT TO
  COMPROMISE
OTHER LIABILITIES
Other postretirement benefits..   $     180.3     $      --
Environmental remediation......         158.0            --
Retained obligations of
  divested businesses..........          81.9            --
Defined benefit obligation in
  excess of pension plan assets          94.5            --
Unamortized cost of underfunded
  pension plans................         (21.2)           --
Deferred compensation..........           7.3            --
Self insurance reserve.........          11.2            --
Other accrued liabilities......          49.5            --
                                 ------------------------------
                                  $     561.5     $      --
===============================================================

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

Grace is the beneficiary of life insurance policies on current and former
employees with benefits in force of approximately $2,292.4 million and a net
cash surrender value of $76.8 million at September 30, 2001. The policies were
acquired to fund various employee benefit programs and other long-term
liabilities and are structured to provide cash flow (primarily tax-free) over an
extended number of years. The following table summarizes activity in these
policies for the nine months ended September 30, 2001 and 2000 and components of
the net cash value at September 30, 2001 and December 31, 2000:

============================================================
ACTIVITY SUMMARY -
LIFE INSURANCE                      NINE MONTHS ENDED
(Dollars in millions)                  SEPTEMBER 30,
============================================================
                                   2001           2000
                               -------------- --------------

Earnings on policy assets....  $      31.5    $       27.3
Interest on policy loans.....        (25.7)          (22.0)
Premiums.....................          2.6             2.6
Proceeds from policy loans...        (48.7)           --
Policy loan repayments.......         14.8             4.7
Net investing activity.......         (2.0)           10.7
                               -----------------------------
  Change in net cash value...  $     (27.5)   $       23.3
============================================================
Tax-free proceeds received...  $      17.1    $       17.1
============================================================
COMPONENTS OF                    SEPTEMBER    December 31,
 NET CASH VALUE                  30, 2001         2000
============================================================
Gross cash value.............  $     469.7    $      452.4
Principal - policy loans.....       (377.8)         (325.8)
Accrued interest - policy
 loans.......................        (15.1)          (22.3)
                               -----------------------------
   Net cash value............  $      76.8    $      104.3
============================================================
Insurance benefits in force..  $   2,292.4    $    2,286.0
============================================================

In the first quarter of 2001, accrued loan interest payable of $18.1 million was
transferred into the policy loan principal balance in connection with the
additional borrowings of $48.7 million. Policy loans bore interest at an average
annualized rate of 9.7% through September 30, 2001, compared to an average of
9.2% for the year ended December 31, 2000. Policy assets are invested primarily
in general accounts of the insurance carriers and earned returns at an average
annualized rate of 9.0% through September 30, 2001 (calculated on a trailing
four quarters basis), compared to an average of 8.2% for the year ended December
31, 2000.

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



                                      I-13
<PAGE>

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

On September 30, 2001, and December 31, 2000, the Company's debt was as follows:

=============================================================
COMPONENTS OF DEBT               SEPTEMBER 30,  December 31,
(Dollars in millions)                2001           2000
=============================================================

SHORT-TERM DEBT
Bank borrowings................  $      --      $     400.0
8.0% Notes Due 2004............         --              5.7
7.75% Notes Due 2002...........         --              2.0
Other short-term borrowings ...         14.0           14.2
                                 ---------------------------
                                 $      14.0    $     421.9
                                 ===========================

LONG-TERM DEBT
DIP facility...................  $      50.0    $      --
Other long-term borrowings.....          0.1           --
                                 ---------------------------
                                 $      50.1    $      --
                                 ===========================

DEBT SUBJECT TO COMPROMISE
Bank borrowings ...............  $     500.0    $      --
8.0% Notes Due 2004 ...........         --             --
7.75% Notes Due 2002 ..........         --             --
Other borrowings ..............          1.3           --
Accrued interest ..............         18.7           --
                                 ----------------------------
                                 $     520.0    $      --
=============================================================

The Debtors have negotiated a debtor-in-possession post-petition loan and
security agreement with Bank of America, N.A. (the "DIP facility") in the
aggregate amount of $250 million. The DIP facility has a term of two years, is
secured by a priority lien on substantially all assets of the Debtors, and bears
interest at either Bank of America's prime rate or a formula based on the London
Inter-Bank Offered Rate (LIBOR) plus 2.00 to 2.25 percentage points. The
Bankruptcy Court issued a final approval of the DIP facility on May 3, 2001.

The 7.75% Notes were repaid on June 11, 2001 and the 8.0% Notes were repaid on
August 15, 2001 by the unaffiliated guarantor of the Notes. Grace's liability
with respect to these notes is included in other liabilities subject to
compromise as of September 30, 2001.

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

The Company is authorized to issue 300,000,000 shares of common stock. Of the
common stock unissued on September 30, 2001, approximately 13,830,000 shares
were reserved for issuance pursuant to stock option and other stock incentive
plans. In the first nine months of 2001, the Company granted a total of
1,336,446 options with an average exercise price of $2.53. For the year ended
December 31, 2000, the Company granted a total of 2,555,000 options with an
average exercise price of $13.32.

In May 2000, the Company's Board of Directors approved a program to repurchase
up to 12,000,000 of the Company's outstanding shares in the open market. The
Company made no purchases during the first nine months of 2001.

For additional information, see Notes 16 and 18 to the Consolidated Financial
Statements in the 2000 Form 10-K.

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

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

================================================================
EARNINGS PER SHARE
(Amounts in millions,        THREE MONTHS        NINE MONTHS
except per share                 ENDED              ENDED
amounts)                     SEPTEMBER 30,      SEPTEMBER 30,
================================================================
                             2001     2000     2001      2000
                           -------------------------------------
NUMERATORS
  Net income ............  $  19.8   $ 34.1   $  57.4  $ 92.9
                           =====================================
DENOMINATORS
  Weighted average
   common shares -
   basic calculation.....     65.3     66.7      65.3    67.3

  Effect of dilutive
   securities:
  Employee
   compensation-
   related shares .......      0.1      0.7       0.1     1.1
                           -------------------------------------

  Weighted average
   common shares
   diluted calculation...     65.4     67.4      65.4    68.4
                           =====================================

BASIC EARNINGS PER
 SHARE ..................  $  0.30   $ 0.51   $  0.88  $ 1.38
                           =====================================
DILUTED EARNINGS PER
 SHARE ..................  $  0.30   $ 0.51   $  0.88  $ 1.36
                           =====================================



                                      I-14
<PAGE>

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

The tables below present the pre-tax, tax and after-tax components of the
Company's other comprehensive income (loss) for the three-month and nine-month
periods ended September 30, 2001 and 2000:

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

=============================================================
Three Months Ended                        Tax       After-
September 30, 2000           Pre-tax   (Provision)    Tax
(Dollars in millions)        Amount     Benefit     Amount
=============================================================
Unrealized gains on
  securities............... $    4.2   $   (1.4)   $    2.8
Reclassification
  adjustment for gains
  realized in net income...     (3.6)       1.2        (2.4)
                            ---------------------------------
Net unrealized gain........      0.6       (0.2)        0.4
Foreign currency
  translation adjustments..    (19.2)      --         (19.2)
                            ---------------------------------
Other comprehensive loss... $  (18.6)  $   (0.2)   $  (18.8)
=============================================================
Nine Months Ended                                   After-
September 30, 2000           Pre-tax      Tax         Tax
(Dollars in millions)        Amount     Benefit     Amount
=============================================================
Unrealized losses on
  securities............... $   (7.5)  $    2.7    $   (4.8)
Reclassification
  adjustment for gains
  realized in net income...     (7.9)       2.7        (5.2)
                            ---------------------------------
Net unrealized loss........    (15.4)       5.4       (10.0)
Foreign currency
  translation adjustments..    (42.2)      --         (42.2)
                            ---------------------------------
Other comprehensive loss... $  (57.6)  $    5.4    $  (52.2)
=============================================================


The table below presents the components of Grace's accumulated other
comprehensive loss at September 30, 2001 and December 31, 2000:

=============================================================
COMPONENTS OF
ACCUMULATED OTHER
COMPREHENSIVE LOSS              SEPTEMBER 30,   December 31,
(Dollars in millions)               2001            2000
=============================================================

Foreign currency translation
  adjustments ...............   $    (150.8)   $     (140.0)
Net unrealized gains on
  investments ...............          (0.1)            0.1
Minimum pension liability
  adjustments ...............         (11.6)          (11.6)
                                -----------------------------
Total accumulated other
  comprehensive loss.........   $    (162.5)   $     (151.5)
=============================================================

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


ENVIRONMENTAL

In February 2000, a putative class action lawsuit was filed in U.S. District
Court in Missoula, Montana against Grace on behalf of all owners of real
property situated within 12 miles of Libby, Montana that are improved private
properties. The action alleges that the class members have suffered harm from
environmental contamination and loss of property rights resulting from Grace's
former vermiculite mining and processing operations. The complaint seeks
remediation, property damages and punitive damages. While Grace has not
completed its investigation of the claims, and therefore is not able to assess
the extent of any possible liability related to this lawsuit, it has no reason
to believe that its former activities caused damage to the environment or
property.

In October 2000, a putative class action lawsuit was filed in the 4th District
Court of Minneapolis, Minnesota, against Grace on behalf of all owners of real
property situated near a former vermiculite processing plant in Northeast,
Minneapolis. The action alleges that the class members have suffered harm in the
form of environmental contamination and loss of property rights resulting from
the former vermiculite processing operations. The complaint seeks remediation,
property damages, and punitive damages.


                                      I-15
<PAGE>

INCOME TAXES

The Internal Revenue Service (IRS) is challenging deductions taken by a number
of companies throughout the United States of interest on policy loans related to
corporate owned life insurance (COLI) policies for years prior to January 1,
1999. In July 2000, Grace paid $21.2 million of tax and interest related to this
issue for tax years 1990 through 1992. Subsequent to 1992, Grace deducted
approximately $163.2 million in interest attributable to COLI policy loans for
which Grace expects to be challenged. Grace filed a claim for refund of the
amount paid to date and will contest any future IRS assessments on the grounds
that these insurance policies and related loans had, and continue to have a
valid business purpose, that the COLI policies have economic substance and that
interest deductions claimed were in compliance with tax laws in effect at the
time. During the first quarter of 2001, a U. S. District Court ruling, American
Electric Power, Inc. vs. United States, denied interest deductions of a taxpayer
in a similar situation. Until this ruling, Grace's accounting reflected its
estimate of resolution in connection with ongoing tax examinations. However, as
a result of the ruling, Grace recorded an additional accrual in the fourth
quarter of 2000 for tax exposure and related interest through 2000. The
effective tax rate for the fiscal year 2001 includes a factor for current period
interest on this tax contingency.

The IRS also has assessed additional federal income tax withholding and Federal
Insurance Contributions Act taxes plus interest and related penalties for
calendar years 1993 through 1995 against CCHP, Inc. (CCHP), a Grace subsidiary
that formerly operated a temporary staffing business for nurses and other
healthcare personnel. The assessments, aggregating $21.8 million, were made in
connection with a meal and incidental expense per diem plan for travelling
healthcare personnel, which was in effect through 1999. The matter is currently
pending in the United States Court of Claims. In addition, CCHP and other Grace
subsidiaries retain potential withholding and FICA tax liability for 1996
through 1999 in connection with the continuation of the per diem plan by CCHP
and then by Cross Country Staffing, a joint venture majority-owned by CCHP.
Grace expects that the IRS will make additional assessments for that period.

Grace has received notification from a foreign taxing authority assessing tax
deficiencies plus interest relating to the purchase and sale of foreign bonds in
1989 and 1990. This assessment of approximately $10.5 million is related to the
Bekaert Group which Grace sold in 1991 but retained liability for tax
deficiencies attributable to tax periods prior to the sale. The matter is
currently before the foreign authorities but no decision has been rendered.

FRAUDULENT TRANSFERS

Grace and one of its subsidiaries have been named in a putative class action
suit alleging that the 1996 reorganization involving a predecessor of Grace and
Fresenius A.G. and the 1998 reorganization involving a predecessor of Grace and
Sealed Air Corporation were fraudulent transfers. The suit is alleged to have
been brought on behalf of all individuals who presently have lawsuits on file
that are pursuing personal injury or wrongful death claims against any of the
defendants. The other defendants in the suit have all asserted claims against
Grace for indemnification. Grace believes that the suit is without merit.

RETAINED OBLIGATIONS

Under certain divestiture agreements, the Company has retained contingent
obligations that could develop into situations where accruals for estimated
costs of defense or loss would be recorded in a period subsequent to divestiture
under generally accepted accounting principles. The Company assesses its
retained risks quarterly and accrues amounts estimated to be payable related to
these obligations when probable and estimable. As of September 30, 2001 and
December 31, 2000 Grace had recorded $81.9 million and $78.1 million,
respectively, to satisfy such obligations.

PURCHASE COMMITMENTS

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

ACCOUNTING FOR CONTINGENCIES

Although the outcome of each of the matters discussed above cannot be predicted
with certainty, Grace has assessed its risk and has made accounting estimates as
required under generally accepted accounting principles. As a result of the
Filing, claims related to the items discussed above will be addressed as part of
Grace's Chapter 11 proceedings. Accruals recorded for such contingencies have
been included in liabilities subject to compromise on the accompanying
Consolidated Balance Sheet as of September 30, 2001.



                                      I-16
<PAGE>
--------------------------------------------------------------------------------
13.      BUSINESS SEGMENT INFORMATION
--------------------------------------------------------------------------------

The table below presents information related to Grace's business segments for
the three-month and nine- month periods ended September 30, 2001 and 2000.

===============================================================
BUSINESS SEGMENT          THREE MONTHS         NINE MONTHS
DATA                          ENDED               ENDED
(Dollars in millions)     SEPTEMBER 30,       SEPTEMBER 30,
===============================================================
                         2001      2000      2001      2000
                        ---------------------------------------

NET SALES
Davison Chemicals...... $  224.9 $ 199.5   $   656.0 $  586.9
Performance Chemicals..    223.2   216.2       638.1    618.6
                        ---------------------------------------

TOTAL.................. $  448.1 $ 415.7   $ 1,294.1 $1,205.5
                        =======================================
PRE-TAX OPERATING
  INCOME
Davison Chemicals...... $   33.6 $  33.5   $    94.8 $  104.0
Performance Chemicals..
                            30.6    30.6        78.9     80.8
                        ---------------------------------------

TOTAL..................  $  64.2  $ 64.1    $  173.7 $  184.8
===============================================================

The table below presents information related to the geographic areas in which
Grace operated for the three-month and nine-month periods ended September 30,
2001 and 2000.

===============================================================
GEOGRAPHIC AREA           THREE MONTHS         NINE MONTHS
DATA                          ENDED               ENDED
(Dollars in millions)     SEPTEMBER 30,       SEPTEMBER 30,
===============================================================
                         2001      2000      2001      2000
                        ---------------------------------------

NET SALES

  North America........ $  226.0 $ 226.0   $   662.4 $  652.6
  Europe...............    124.5   107.3       351.2    318.2
  Asia Pacific.........     69.8    56.6       202.8    159.1
  Latin America........     27.8    25.8        77.7     75.6
                        ---------------------------------------
TOTAL..................  $ 448.1  $415.7   $ 1,294.1  $1,205.5
===============================================================

The pre-tax operating income for Grace's business segments for the three-month
and nine-month periods ended September 30, 2001 and 2000 is reconciled below to
income before Chapter 11 reorganization expenses, income taxes and minority
interest presented in the accompanying Consolidated Statement of Operations.

============================================================
RECONCILIATION OF
  BUSINESS SEGMENT
  DATA TO FINANCIAL       THREE MONTHS        NINE MONTHS
  STATEMENTS                 ENDED              ENDED
(Dollars in millions)     SEPTEMBER 30,      SEPTEMBER 30,
============================================================
                         2001      2000      2001     2000
                        ------------------------------------
Pre-tax operating
  income - business
  segments............  $  64.2  $  64.1   $ 173.7  $ 184.8
Add back:
  Minority interest...      0.2     --         1.4     --
                        ------------------------------------
                           64.4     64.1     175.1    184.8
Interest expense and
  related financing
  costs...............     (8.3)    (8.0)    (30.0)   (20.2)
Interest income.......      1.1      2.3       3.8      7.4
Corporate operating
  costs...............    (10.4)   (11.1)    (33.4)   (33.3)
Income (loss) from
  noncore activities..     (5.8)     5.9       2.7      6.3
                        ------------------------------------
Income before Chapter
  11 reorganization
  expenses, income
  taxes and minority
  interest............  $  41.0  $  53.2   $ 118.2  $ 145.0
============================================================

                                      I-17
<PAGE>

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

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

Grace is engaged in specialty chemicals and specialty materials businesses on a
global basis. Its principal business segments are Davison Chemicals, which
produces catalysts and silica products, and Performance Chemicals, which
produces construction chemicals, building materials and container products.

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

On April 2, 2001, (the "Filing Date") W. R. Grace & Co. and 61 of its United
States subsidiaries and affiliates, including Grace-Conn. (collectively, the
"Debtors"), filed voluntary petitions for reorganization (the "Filing") under
Chapter 11 of the United States Bankruptcy Code ("Chapter 11" or the "Bankruptcy
Code") in the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"). The cases were consolidated and are being jointly
administered under case number 01-1139 (the "Chapter 11 Cases"). Grace's
non-U.S. operating subsidiaries and certain of its U.S. subsidiaries were not a
part of the Filing.

The Filing was made in response to a sharply increasing number of
asbestos-related bodily injury claims. These claims are discussed in more detail
in Note 3 to the Consolidated Financial Statements. Under Chapter 11, the
Debtors expect to continue to operate their businesses as debtors-in-possession
under court protection from their creditors and claimants, while using the
Chapter 11 process to develop and implement a plan for addressing the
asbestos-related claims against them.

Background of Filing - On January 29, 2001, Grace announced that recent
developments in asbestos-related litigation had led to a fourth quarter 2000
charge of $208.0 million (net of expected insurance recovery). The charge was
made to account for probable and estimable costs related to several adverse
developments in Grace's asbestos litigation during 2000, including: a
significant increase in bodily injury claims; higher than expected costs to
resolve bodily injury and certain property damage claims; and new class-action
lawsuits alleging damages from a former attic insulation product not previously
subject to property damage litigation. These adverse developments continued
during the first quarter of 2001.

Grace also announced on January 29, 2001 that it was reviewing the strategic and
operating issues associated with continuing to defend asbestos litigation
through the state court system versus voluntarily seeking a resolution of such
litigation through reorganization under Chapter 11. As a result of that review,
the Board of Directors of Grace concluded on April 2, 2001 that a federal
court-supervised Chapter 11 filing provides the best forum available to achieve
predictability and fairness in the claims settlement process. By filing under
Chapter 11, Grace expects to be able to both obtain a comprehensive resolution
of the claims against it and preserve the inherent value of its businesses.

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

It is the Debtors' intention to address all of their pending and future
asbestos-related claims and all other pre-petition claims in a plan of
reorganization. However, it is currently impossible to predict with any degree
of certainty how the plan will treat asbestos and other pre-petition claims or
what impact any reorganization plan may have on the shares of common stock of
Grace. The formulation and implementation of the plan of reorganization could
take a significant period of time.

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



                                      I-18
<PAGE>

All of the Debtor's outstanding pre-petition debt is now in default due to the
Filing. The accompanying Consolidated Balance Sheet as of September 30, 2001
reflects the classification of the Debtors' pre-petition debt within liabilities
subject to compromise.

The Debtors have negotiated a debtor-in-possession post-petition loan and
security agreement with Bank of America, N.A. (the "DIP facility") in the
aggregate amount of $250 million. The DIP facility has a term of two years and
bears interest at either Bank of America's prime rate or a formula based on the
London Inter-Bank Offered Rate ("LIBOR") plus 2.00 to 2.25 percentage points.
The Bankruptcy Court issued a final order approving the DIP facility on May 3,
2001. As of September 30, 2001, the Debtors had borrowed a total of $50.0
million against the DIP facility.

The Debtors have received approval from the Bankruptcy Court to pay or otherwise
honor certain of their pre-petition obligations in the ordinary course of
business, including employee wages and benefits, customer programs, shipping
charges and a limited amount of claims of essential trade creditors.

As provided by the Bankruptcy Code, the Debtors had the exclusive right to
propose a plan of reorganization for a 120-day period following the Filing Date.
The Debtors requested an extension of their exclusive period during which to
file a plan of reorganization through August 1, 2002, and similarly requested an
extension of the Debtors' exclusive rights to solicit acceptances of a
reorganization plan through October 1, 2002. The Bankruptcy Court approved the
Debtors' extension request on September 18, 2001.

Three creditors' committees, two representing asbestos claimants and the third
representing other unsecured creditors, and an equity committee have been
appointed in the Chapter 11 Cases. In accordance with the provisions of the
Bankruptcy Code, these committees will have the right to be heard on all matters
that come before the Bankruptcy Court. The Debtors are required to bear certain
of the committees' costs and expenses including those of their counsel and other
advisors.

Accounting Impact - Pursuant to SOP 90-7, Grace's pre-petition liabilities that
are subject to compromise are reported separately on the balance sheet at an
estimate of the amount that will ultimately be allowed by the Bankruptcy Court.
See Note 2 to the Consolidated Financial Statements for detail of the
liabilities subject to compromise as of September 30, 2001, and as of the Filing
Date. Obligations of Grace subsidiaries not covered by the Filing will remain
classified on the Consolidated Balance Sheet based upon maturity dates or the
expected dates of payment. SOP 90-7 also requires separate reporting of certain
expenses, realized gains and losses, and provisions for losses related to the
Filing as reorganization items. Accordingly, the Debtors recorded Chapter 11
reorganization expenses of $4.8 million and $12.0 million for the three month
and nine month periods ended September 30, 2001, respectively. See Note 1 to the
Consolidated Financial Statements for further information concerning the Chapter
11 Filing.

--------------------------------------------------------------------------------
CONTINUING OPERATIONS
--------------------------------------------------------------------------------

Grace is engaged in specialty chemicals and specialty materials businesses on a
global basis. The principal business segments are Davison Chemicals, which
produces catalysts and silica products, and Performance Chemicals, which
produces construction chemicals, building materials and container products. Set
forth below is a chart that lists key operating statistics and percentage
changes for the three- and nine-month periods ended September 30, 2001 and 2000,
which should be referenced when reading management's discussion and analysis of
the results of continuing operations. The chart below, as well as the financial
information presented throughout this discussion, divides Grace's financial
results between "core operations" and "noncore activities." Core operations
comprise the financial results of Davison Chemicals, Performance Chemicals and
the costs of corporate activities that directly or indirectly support business
operations. In contrast, noncore activities comprise all other events and
transactions that are not directly related to the generation of customer revenue
or the support of core operations.



                                      I-19
<PAGE>

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

ANALYSIS OF CONTINUING OPERATIONS                        THREE MONTHS ENDED                           NINE MONTHS ENDED
 (Dollars in millions)                                      SEPTEMBER 30,                              SEPTEMBER 30,
====================================================================================================================================

                                                                             % Change                                    % Change
                                                  2001          2000       Fav (Unfav)        2001           2000       Fav (Unfav)
                                              --------------------------------------------------------------------------------------
<S>                                           <C>          <C>                 <C>       <C>            <C>               <C>
NET SALES
    DAVISON CHEMICALS
    Refining catalysts...................     $    131.6   $    109.7          20.0%     $    376.3     $    331.8        13.4%
    Chemical catalysts...................           28.6         30.6          (6.5%)          93.6           90.5         3.4%
    Silica products......................           64.7         59.2           9.3%          186.1          164.6        13.1%
                                              --------------------------------------------------------------------------------------
  TOTAL DAVISON CHEMICALS................          224.9        199.5          12.7%          656.0          586.9        11.8%
                                              --------------------------------------------------------------------------------------
    PERFORMANCE CHEMICALS
    Construction chemicals...............           97.3         91.6           6.2%          268.2          263.0         2.0%
    Building materials...................           64.5         61.1           5.6%          184.9          177.8         4.0%
    Container products...................           61.4         63.5          (3.3%)         185.0          177.8         4.0%
                                              --------------------------------------------------------------------------------------
  TOTAL PERFORMANCE CHEMICALS............          223.2        216.2           3.2%          638.1          618.6         3.2%
                                              --------------------------------------------------------------------------------------
TOTAL GRACE SALES - CORE OPERATIONS......     $    448.1   $    415.7           7.8%     $  1,294.1     $  1,205.5         7.3%
====================================================================================================================================
PRE-TAX OPERATING INCOME:
    Davison Chemicals....................     $     33.6   $     33.5           0.3%     $     94.8     $    104.0        (8.8%)
    Performance Chemicals................           30.6         30.6          --              78.9           80.8        (2.4%)
    Corporate operating costs............          (10.4)       (11.1)          6.3%          (33.4)         (33.3)       (0.3%)
                                              --------------------------------------------------------------------------------------
PRE-TAX INCOME FROM CORE OPERATIONS......           53.8         53.0           1.5%          140.3          151.5        (7.4%)
                                              --------------------------------------------------------------------------------------
PRE-TAX INCOME (LOSS) FROM NONCORE
    ACTIVITIES...........................           (5.8)         5.9          NM               2.7            6.3         NM
                                              --------------------------------------------------------------------------------------
Interest expense.........................           (8.3)        (8.0)         (3.8%)         (30.0)         (20.2)      (48.5%)
Interest income..........................            1.1          2.3         (52.2%)           3.8            7.4       (48.6%)
                                              --------------------------------------------------------------------------------------
INCOME BEFORE CHAPTER 11 REORGANIZATION
   EXPENSES AND INCOME TAXES.............           40.8         53.2         (23.3%)         116.8          145.0       (19.4%)
Chapter 11 reorganization expenses, net..           (4.8)        --            NM             (12.0)          --          NM
(Provision for) income taxes ............          (16.2)       (19.1)         15.2%          (47.4)         (52.1)        9.0%
                                              --------------------------------------------------------------------------------------
NET INCOME ..............................     $     19.8   $     34.1         (41.9%)    $     57.4     $     92.9       (38.2%)
====================================================================================================================================

KEY FINANCIAL MEASURES:
Pre-tax income from core operations as a
   percentage of sales...................           12.0%        12.7%         (0.7) pts       10.8%          12.6%       (1.8) pts
Pre-tax income from core operations before
   depreciation and amortization.........     $     75.6   $     74.6           1.3%     $    204.7     $    217.4        (5.8%)
As a percentage of sales.................           16.9%        17.9%         (1.0) pts       15.8%          18.0%       (2.2) pts
====================================================================================================================================
NET SALES BY REGION:
North America............................     $    226.0   $    226.0          --        $    662.4     $    652.6         1.5%
Europe...................................          124.5        107.3          16.0%          351.2          318.2        10.4%
Asia Pacific.............................           69.8         56.6          23.3%          202.8          159.1        27.5%
Latin America............................           27.8         25.8           7.8%           77.7           75.6         2.8%
                                              --------------------------------------------------------------------------------------
TOTAL....................................     $    448.1   $    415.7           7.8%     $  1,294.1     $  1,205.5         7.3%
====================================================================================================================================
   NM = Not meaningful.
</TABLE>



                                      I-20
<PAGE>
NET SALES

The following table identifies the quarter-over-quarter increase or decrease in
sales attributable to changes in product volume, product price and/or mix, and
the impact of foreign currency translation.

===============================================================
                     THREE MONTHS ENDED SEPTEMBER 30, 2001 AS A
NET SALES            PERCENTAGE INCREASE (DECREASE) FROM THREE
VARIANCE ANALYSIS         MONTHS ENDED SEPTEMBER 30, 2000
===============================================================
                      VOLUME   PRICE/MIX  TRANSLATION  TOTAL
                      -----------------------------------------
Davison Chemicals...       6.6%   8.1%       (2.0%)     12.7%
Performance
  Chemicals ........       6.6%  (0.4%)      (3.0%)      3.2%
Net sales...........       6.6%   3.7%       (2.5%)      7.8%
---------------------------------------------------------------
By Region:
  North America.....      (4.6%)  4.7%       (0.1%)       --%
  Europe............      18.9%   1.4%       (4.3%)     16.0%
  Asia Pacific......      27.9%   2.0%       (6.6%)     23.3%
  Latin America.....       6.2%   7.5%       (5.9%)      7.8%
===============================================================
                      NINE MONTHS ENDED SEPTEMBER 30, 2001 AS
NET SALES              A PERCENTAGE INCREASE (DECREASE) FROM
VARIANCE ANALYSIS      NINE MONTHS ENDED SEPTEMBER 30, 2000
===============================================================
                      VOLUME   PRICE/MIX  TRANSLATION  TOTAL
                      -----------------------------------------
Davison Chemicals...      10.1%   4.6%       (2.9%)     11.8%
Performance
  Chemicals ........       6.2%   0.3%       (3.3%)      3.2%
Net sales...........       8.0%   2.4%       (3.1%)      7.3%
---------------------------------------------------------------
By Region:
  North America.....      (0.3%)  2.0%       (0.2%)      1.5%
  Europe............      14.8%   2.1%       (6.5%)     10.4%
  Asia Pacific......      33.5%   1.8%       (7.8%)     27.5%
  Latin America.....      (0.8%)  8.5%       (4.9%)      2.8%
===============================================================

Grace's net sales increased 7.8% to $448.1 million in the third quarter of 2001
compared to the same period in 2000. Sales for the nine months ended September
30, 2001 totaled $1,294.1 million, a 7.3% increase over the prior year. The
sales growth was attributable to acquisitions, the ART joint venture and
favorable demand for refining catalysts, partially offset by foreign currency
translation. Acquisitions and the ART joint venture contributed $30.1 million of
the sales increase in the third quarter 2001, and $73.7 million of the sales
increase year-to-date. The impact from foreign currency translation was
experienced principally in Europe and Asia Pacific where sales, reported in US
dollars, were adversely affected by 4.3% and 6.6%, respectively, for the
quarter, and 6.5% and 7.8%, respectively, for the nine-month period.

In the third quarter of 2001, all product groups experienced volume growth. Asia
Pacific catalyst volumes were strong due to increased sales from the ART joint
venture. Construction chemical volume growth in Europe was driven by the
acquisition of Pieri S.A. Davison chemicals sales increases were impacted by
favorable product price and mix, primarily from increased sales of higher value
fluid cracking catalysts and the consolidation of third party sales from the ART
joint venture.

PRE-TAX INCOME FROM CORE OPERATIONS

Pre-tax income from core operations was $53.8 million for the third quarter of
2001, compared to $53.0 million for the third quarter 2000, a 1.5% increase
quarter-over-quarter. Pre-tax income from core operations was $140.3 million for
the nine months ended September 30, 2001, compared to $151.5 million for the
same period in 2000, a 7.4% decrease.

Operating income of Davison Chemicals for the third quarter of 2001 was $33.6
million, up 0.3% versus 2000, and its operating margin of 14.9% was 1.9
percentage points unfavorable to the prior year. Operating income of Performance
Chemicals for the third quarter of 2001 was $30.6 million, even with 2000, with
an operating margin of 13.7%, down 0.5 percentage points from 2000. Operating
income of Davison Chemicals for the nine-months ended September 30, 2001 was
$94.8 million, down 8.8% from the prior year period, and operating margin of
14.5% was 3.2 percentage points unfavorable to the prior year period. Operating
income of Performance Chemicals for the nine-months ended September 30, 2001 was
$78.9 million, down 2.4% from the prior year period, and operating margin of
12.4% was 0.7 percentage points unfavorable to the prior year period. These
decreases are mainly due to higher energy and raw material costs. The rise in
natural gas prices (used by Davison Chemicals as part of its manufacturing
process) and transportation fuel prices (impacting distribution costs for
Performance Chemicals) has had a significant adverse affect on profit margins.
In addition, these energy sources are a significant factor in the cost of many
raw materials used by both business segments. Selling price increases have not
kept pace with the rise in these energy related costs.

The following table identifies the percentage change in the cost per dollar of
sales for each business segment and Grace's core operations in total. The index
is calculated using 2000 as the base year and carving out selling price changes,
currency movement, cost inflation and unusual items. The resulting change in
cost per dollar of sales is Grace's productivity measure. Changes in product
volume and mix remain in the productivity equation.

                                      I-21
<PAGE>

==============================================================
                                         NINE MONTHS ENDED
PRODUCTIVITY INDEX                         SEPTEMBER 30,
==============================================================
                                         2001        2000
                                      ------------------------
COST PER $ OF SALES ON A CONSTANT $
  BASIS WITH 2000 AS BASE YEAR:
Davison Chemicals ...............        0.813       0.814
Performance Chemicals............        0.850       0.869
Corporate operating costs........        0.022       0.028
--------------------------------------------------------------
Total core operations............        0.853       0.870
--------------------------------------------------------------
PERCENTAGE IMPROVEMENT FROM PRIOR
 YEAR............................         1.9%
==============================================================

As reflected in the table above, on a constant dollar basis with 2000, Grace had
a 1.9% reduction in cost per dollar of sales during the nine months ended
September 30, 2001 attributable to productivity.

Corporate operating costs include expenses incurred by corporate headquarters
functions in support of core operations. Corporate operating costs in the third
quarter of 2001 were $10.4 million, compared to $11.1 million in third quarter
2000, a 6.3% decrease. For the nine months ended September 30, 2001, corporate
operating costs were $ 33.4 million, compared to $ 33.3 million in 2000, a 0.3%
increase.

PRE-TAX INCOME (LOSS) FROM NONCORE ACTIVITIES

Pre-tax results from noncore activities totaled losses of $5.8 million for the
third quarter of 2001 compared to income of $5.9 million for the same period of
2000. For the nine months ended September 30, 2001, income from noncore
activities was $2.7 million, compared to $6.3 million for the same period in
2000. The income from noncore activities for the nine months ended September 30,
2001 includes a $7.7 million gain from the sale of a noncore investment offset
by accruals for legal and environmental matters primarily related to the
Company's former operations in Libby, Montana.

INTEREST AND INCOME TAXES

Net interest expense for the third quarter of 2001 was $7.2 million, an increase
of $1.5 million over the third quarter of 2000. Net interest expense for the
nine months ended September 30, 2001 was $26.2 million, a 104.7% increase over
the same period in 2000. This increase is attributable to higher average debt
levels primarily to fund business acquisitions, asbestos payments, working
capital requirements and the termination of the receivable securitization
program. The Company is continuing to accrue interest expense on its
pre-petition debt at the pre-petition contractual rate, which amounted to $6.2
million in the third quarter of 2001.

The Company's effective tax rate was 44.6% for the three- and nine-month periods
ended September 30, 2001 and 36.0% for the same periods in 2000. The increase in
the fiscal year 2001 effective tax rate is attributable to the current period
interest on tax contingencies and the non-deductibility of certain Chapter 11
reorganization expenses.

DAVISON CHEMICALS

Recent Acquisitions and Joint Ventures

In March 2001, Grace acquired The Separations Group, a manufacturer of
chromatography columns and separations media. Also in March 2001, a German
subsidiary acquired the precipitated silicas business of AKZO-PQ Silicas.

On March 1, 2001, Grace and Chevron Products Co. (Chevron) formed Advanced
Refining Technologies (ART) to develop and market globally hydroprocessing
catalysts. ART conducts business through two distribution companies and one
operating company. Grace has a majority ownership interest in and controls both
distribution companies; therefore, for financial reporting purposes the assets,
liabilities and results of operations of these entities are included in Grace's
consolidated financial statements. The minority interest in Grace's consolidated
statement of operations pertains to Chevron's 45% interest in the distribution
companies. Grace does not exercise governance control over the operating company
and therefore, the assets, liabilities and results of operations of this company
are not consolidated in Grace's financial statements. The equity income or loss
related to the operating company is reported in "Other Income" in Grace's
consolidated statement of operations. ART has agreements with both Grace and
Chevron under which each provides certain administrative and research and
development services to ART.

Sales

Davison Chemicals is a leading global supplier of catalysts and silica products.
Refining catalysts, which represented approximately 29.0% of Grace's third
quarter and nine-month 2001 sales (27.0% - 2000), include fluid cracking
catalysts used by petroleum refiners to convert distilled crude oil into
transportation fuels and other petroleum-based products, hydroprocessing
catalysts which upgrade heavy oils and remove certain impurities, and chemical
additives for treatment of feedstock impurities. Chemical catalysts, which
represented approximately 7.0% of Grace's third quarter and nine-month 2001
sales (7.0% - 2000), include polyolefin catalysts which are essential components
in the manufacturing of
                                      I-22
<PAGE>

polyethylene resins used in products such as plastic film, high performance
plastic pipe and plastic household containers. Silica products, which
represented approximately 14.0% of Grace's third quarter and nine-month 2001
sales (14.0% - 2000), are used in a wide variety of industrial and consumer
applications such as coatings, food processing, plastics, adsorbents and
personal care products.

In the third quarter of 2001, refining catalysts sales were $131.6 million, an
increase of 20.0% compared to the same period in 2000. For the nine months ended
September 30, 2001, refining catalysts sales were $376.3 million, an increase of
13.4% compared to the same period in 2000. This increase is a result of
favorable demand in Europe and Asia Pacific, partially offset by declines in
North America, and added sales from the ART joint venture. Chemical catalysts
sales decreased 6.5% to $28.6 million in the third quarter of 2001 due to soft
demand for polyolefin catalysts as well as other chemical catalysts. For the
nine months ended September 30, 2001, sales of chemical catalysts increased 3.4%
to $93.6 million, reflecting strong volumes in European and Asian polyolefin
catalysts during the first half of 2001. Silica products sales of $64.7 million
and $186.1 million for the third quarter and the nine-month period 2001 were up
9.3% and 13.1%, respectively, compared to the same periods of 2000 primarily due
to acquisitions completed in the past year which expanded the silicas product
line into colloidal and precipitated silicas and chromatography columns and
separation media. Excluding the negative impact of currency translations, 2001
third quarter and nine month sales for the Davison Chemicals segment were up
14.7% over the prior year periods. This translation effect was primarily due to
the fact that a significant portion of the silicas business is based in Europe
where the Euro has weakened against the U.S. dollar.

Operating Earnings

Pre-tax operating income of $33.6 million for the third quarter 2001 was 0.3%
higher than the third quarter of 2000. Operating margins declined 1.9 percentage
points to 14.9%, primarily due to higher production costs and negative foreign
currency translation.

PERFORMANCE CHEMICALS

Recent Acquisitions and Joint Ventures

In July 2001, a French subsidiary of Grace acquired Pieri S.A., a leading
supplier of specialty chemicals to the European construction industry.

Sales

Performance Chemicals' major product groups include specialty construction
chemicals and specialty building materials used primarily by the nonresidential
construction industry; and container sealants and coatings for food and beverage
packaging, and other related products. Construction chemicals, which represented
approximately 21.0% of Grace's third quarter 2001 and nine-month 2001 sales
(22.0% - 2000), add strength, control corrosion, and enhance the handling and
application of concrete. Building materials, which represented approximately
14.0% of Grace's third quarter and nine-month 2001 sales (15.0% - 2000), prevent
water damage to structures and protect structural steel against collapse due to
fire. Container products, which represented approximately 14.0% of the third
quarter and nine-month 2001 sales (15.0% - 2000), seal beverage and food cans,
and glass and plastic bottles, and protect metal packaging from corrosion and
the contents from the influences of metal.

In the third quarter of 2001, sales of construction chemicals were $97.3
million, an increase of 6.2% over the same period in 2000. For the nine months
ended September 30, 2001, sales of construction chemicals were $268.2 million,
an increase of 2.0% over the same period in 2000. Volume increases were
experienced in all regions, with the Pieri S.A. acquisition favorably impacting
European sales. Sales of building materials in the third quarter of 2001
increased 5.6% to $64.5 million compared to the third quarter of 2000. For the
nine months ended September 30, 2001, sales increased 4.0% to $184.9 million.
Volume increases in North America were partially offset by negative currency
translation. Sales of container products decreased 3.3% to $61.4 million for the
third quarter of 2001, reflecting a decline in demand for metal food packages in
favor of plastic and paper substitutes. Sales of container products increased
4.0% to $185.0 million for the nine months ended September 30, 2001 as compared
to the prior year period due to the acquisition of the Hampshire Polymers
business in July 2000. Excluding the negative impacts of foreign exchange, sales
for the Performance Chemicals segment were up 6.2% and 6.5% compared to the
third quarter of 2000 and nine months ended September 30, 2000, respectively.



                                      I-23
<PAGE>

Operating Earnings

Pre-tax operating income of $30.6 million was even with the prior year period,
and operating margin of 13.7% was down 0.5 percentage points from the third
quarter of 2000. These decreases were caused by higher energy and raw material
costs as discussed above.

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

The charts below are intended to enhance the readers' understanding of the
Company's overall financial position by separately showing assets, liabilities
and cash flows related to core operations from those related to noncore
activities. The Company's management structure and activities are tailored to
the separate focus and accountability of core operations and noncore activities.

=================================================================
CORE OPERATIONS
(Dollars in millions)
---------------------------------
CAPITAL INVESTED IN CORE             SEPTEMBER 30, December 31,
   OPERATIONS                            2001          2000
=================================================================

BOOK VALUE OF INVESTED CAPITAL

Receivables ........................ $     347.9   $    187.4
Inventory ..........................       178.0        144.2
Properties and equipment, net ......       578.5        596.2
Intangible assets and other.........       539.2        437.8

                                     ----------------------------
ASSETS SUPPORTING CORE OPERATIONS        1,643.6      1,365.6
Accounts payable and accruals.......      (383.2)      (329.9)

                                     ----------------------------
CAPITAL INVESTED IN CORE
   OPERATIONS....................... $   1,260.4   $  1,035.7
                                     ----------------------------
After-tax return on average
   invested capital (trailing
   four quarters)...................         9.8%        12.0%
=================================================================
                                          NINE MONTHS ENDED
                                            SEPTEMBER 30,
                                     ----------------------------
NET CASH FLOW FROM CORE OPERATIONS       2001          2000
=================================================================
CASH FLOWS:

Pre-tax operating income ........... $     140.3   $    151.5
Depreciation and amortization ......        64.4         65.9
                                     ----------------------------
PRE-TAX EARNINGS BEFORE
   DEPRECIATION AND AMORTIZATION           204.7        217.4
Capital expenditures ...............       (36.3)       (41.4)
Businesses acquired ................       (84.4)       (51.8)
Receivables securitization                 (65.3)        (0.5)
   program .........................
Working capital and other changes...       (94.5)       (61.8)
                                     ----------------------------
NET CASH FLOW FROM CORE
   OPERATIONS ...................... $     (75.8)  $     61.9
=================================================================

The Company has a net asset position supporting its core operations of $1,260.4
million at September 30, 2001 compared to $1,035.7 million at December 31, 2000
after adding back the cumulative translation account reflected in Shareholders'
Equity (Deficit) of $150.8 million at September 30, 2001 and $140.0 million at
December 31, 2000. Weighted average invested capital over the past four quarters
was $1,151.9 million. The change in the net asset position is primarily due to
an increase in net assets from business acquisitions and the termination of the
receivables securitization program. After-tax return on capital invested in core
operations (calculated based on a trailing four quarters) decreased 2.2
percentage points.

The Company has a number of financial exposures originating from past
businesses, products and events. These obligations arose from transactions
and/or business practices that date back to when Grace was a much larger
company, when it produced products or operated businesses that are no longer
part of its revenue base, and when government regulations and scientific
knowledge were much less advanced than today. Grace's current core operations,
together with other available assets, are being managed to generate sufficient
cash flow to fund these obligations over time. Each noncore liability has
different characteristics, risks and expected liquidation profiles. The table
below summarizes the net noncore liabilities at December 31, 2000 and September
30, 2001, and the net cash flow from noncore activities for the nine months
ended September 30, 2001 and 2000.

==================================================================
NONCORE ACTIVITIES
(Dollars in millions)
---------------------------------     SEPTEMBER 30, December 31,
NET NONCORE LIABILITY                     2001          2000
==================================================================

Asbestos-related litigation.......... $    (998.6)  $  (1,105.9)
Asbestos-related insurance
   receivable .......................       299.5         372.0
                                      ----------------------------
Asbestos-related liability, net......      (699.1)       (733.9)
Environmental remediation............      (158.0)       (174.9)
Postretirement benefits..............      (180.3)       (189.1)
Retained obligations and other.......       (81.9)        (78.1)
------------------------------------------------------------------
NET NONCORE LIABILITIES.............. $  (1,119.3)  $  (1,176.0)
==================================================================
                                           NINE MONTHS ENDED
                                             SEPTEMBER 30,
NET CASH FLOW FROM NONCORE            ----------------------------
        ACTIVITES                          2001          2000
==================================================================

Pre-tax income from noncore
   activities........................ $       2.7   $       6.3
Other changes........................        24.8          27.8
Cash spending for:
   Asbestos-related litigation,
     net of insurance recovery.......       (34.5)       (140.3)
   Environmental remediation.........       (23.9)        (27.9)
   Postretirement benefits...........       (14.8)        (15.1)
   Retained obligations and other....        (5.1)        (21.6)
------------------------------------------------------------------
NET CASH FLOW FOR NONCORE
   ACTIVITIES ....................... $     (50.8)  $    (170.8)
==================================================================

As a result of the Filing, the noncore liabilities listed in the table above are
subject to compromise under Chapter 11. A plan of reorganization under Chapter
11 could result in material changes to the carrying value of such liabilities.



                                      I-24
<PAGE>

ASBESTOS-RELATED MATTERS

Grace is a defendant in lawsuits relating to previously sold asbestos-containing
products. During the third quarter of 2001, Grace received a net $33.2 million
with respect to its asbestos-related litigation, as insurance proceeds related
to prior period payments exceeded defense and disposition costs as a result of
the Filing. For the nine months ended September 30, 2001, Grace paid $34.5
million for the defense and disposition of asbestos-related litigation, net of
insurance proceeds. In 2000, Grace paid a net of $89.6 million and $140.3
million during the third quarter and nine months ended September 30, 2000,
respectively. At September 30, 2001, Grace's balance sheet reflects a gross
liability for asbestos-related litigation of $998.6 million and a liability net
of insurance recovery of $699.1 million, which represents management's estimate
as of the balance sheet date (in conformity with generally accepted accounting
principles) of the undiscounted net cash outflows in satisfaction of Grace's
current and expected asbestos-related claims based on facts and circumstances
existing as of the Filing Date. Changes to the recorded amount of such liability
will be based on Chapter 11 developments and management's assessment of the
claim amounts that will ultimately be allowed by the Bankruptcy Court.

The Consolidated Balance Sheet at September 30, 2001 includes total amounts due
from insurance carriers of $299.5 million pursuant to settlement agreements with
insurance carriers. The recovery of amounts due from insurance carriers is
consistent with the timing of payment of an asbestos claim.

See Note 3 to the Consolidated Financial Statements for further information
concerning asbestos related lawsuits and claims. Although all such litigation
has been stayed, Grace expects to continue to fund claims processing costs and
certain defense costs as part of its Chapter 11 proceedings.

ENVIRONMENTAL MATTERS

Grace is subject to loss contingencies resulting from extensive and evolving
federal, state, local and foreign environmental laws and regulations relating to
the generation, storage, handling, discharge and disposition of hazardous wastes
and other materials. Grace charged its previously established reserves for
environmentally impaired sites during the third quarter of 2001 and 2000 for
$5.9 million and $9.1 million, respectively, and $23.9 million and $27.9 million
during the nine months ended September 30, 2001 and 2000, respectively. During
the third quarter of 2001, Grace recorded a pre-tax charge of $5.8 million
primarily related to the Company's former operations in Libby, Montana. At
September 30, 2001, Grace's liability for environmental investigatory and
remediation costs related to continuing and discontinued operations totaled
$158.0 million, as compared to $174.9 million at December 31, 2000. Grace
expects that the funding of environmental remediation activities will be
affected by the Chapter 11 proceedings.

Grace is in litigation with two excess insurance carriers regarding the
applicability of the carriers' policies to environmental remediation costs. The
outcome of such litigation, as well as the amounts of any recoveries that Grace
may receive, is presently uncertain. Accordingly, Grace has not recorded a
receivable with respect to such insurance coverage.

See Note 12 to the Consolidated Financial Statements for further information
concerning environmental matters.

POSTRETIREMENT BENEFITS

Grace provides certain postretirement health care and life insurance benefits
for retired employees, a large majority of which pertains to retirees of
previously divested businesses. These plans are unfunded, and Grace pays the
costs of benefits under these plans as they are incurred.

Spending under this program during the third quarter of 2001 was $4.3 million,
and during the nine months ended September 30, 2001 was $14.8 million. Grace's
estimated pre-tax spending under this program is approximately $20.3 million for
the year ending December 31, 2001. Grace's recorded liability of $180.3 million
at September 30, 2001 is stated at net present value discounted at 7.5%. The
continued payment of these benefits has been approved by the Bankruptcy Court.

RETAINED OBLIGATIONS OF DIVESTED BUSINESSES

The principal retained obligations of divested businesses relate to contractual
indemnification and to contingent liabilities not assumed by the new owner. At
September 30, 2001, Grace had recorded $81.9 million to satisfy such
obligations. Grace expects that these claims will be resolved as part of its
plan of reorganization under Chapter 11.



                                      I-25
<PAGE>

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

LIQUIDITY POSITION

Total debt outstanding at September 30, 2001 was $565.4 million. As a result of
the Filing, Grace is now in default on $501.3 million of such debt which has
been included in liabilities subject to compromise as of September 30, 2001. The
automatic stay provided under the Bankruptcy Code prevents the Company's lenders
from taking any action to collect the principal amounts as well as related
accrued interest. In addition, the Company's accounts receivable securitization
program has been terminated, and all outstanding balances have been satisfied
under the terms of the program.

To meet its liquidity needs over the next two years, Grace entered into a
debtor-in-possession loan facility (the "DIP facility") in the aggregate amount
of $250 million, under which Grace has borrowed $50.0 million as of September
30, 2001. In addition, Grace has cash and cash equivalents of $175.8 million and
cash value of life insurance (net) of $76.8 million at September 30, 2001.
Management believes that the DIP facility and the existing liquid assets will be
sufficient to meet the operating needs of Grace over the next year.

CASH FLOW

Cash flow from core operations during the nine months ended September 30, 2001
was an outflow of $75.8 million compared to an inflow of $61.9 million for the
prior year period. This reduction in cash flows from core operations was
primarily attributable to working capital pressures stemming from concerns over
the Filing and the termination of the receivable securitization program.

The net cash flow of noncore activities was an outflow of $50.8 million for the
nine months ended September 30, 2001, compared to an outflow of $170.8 million
for the prior year period. The decreased cash outflow was primarily due to lower
asbestos-related payments in 2001 as compared to 2000, due to the stay on
payments for asbestos-related claims after the Filing Date.

Cash flows used for investing activities during the nine months ended September
30, 2001 were $113.9 million, compared to $89.9 million during the prior year
period. Net cash outflow for the nine months ended September 30, 2001 was
impacted by capital expenditures and $84.4 million used for business
acquisitions. Total capital expenditures during the nine month periods ended
September 30, 2001 and 2000 were $36.3 and $41.4, respectively, substantially
all of which was directed toward Grace's business segments.

Net cash provided by financing activities during the nine months ended September
30, 2001 was $177.3 million, principally representing $143.4 million in net
borrowings against the Company's credit facilities, including $46.5 million (net
of $3.5 million in fees) against the DIP facility, and $33.9 million of proceeds
from loans secured by the cash value of life insurance policies, net of loan
repayments. The net borrowing against the credit facilities and life insurance
policies was used primarily to fund the business acquisitions, asbestos
payments, working capital requirements and the termination of the receivables
securitization program. Cash provided by financing activities during the nine
months ended September 30, 2000 was $130.4 million, principally representing
$197.0 million in net borrowings against the Company's credit facilities, offset
by payments for long term debt and the purchase of treasury stock.

Grace is the beneficiary of life insurance policies on current and former
employees with benefits in force of approximately $2,292.4 million and a net
cash surrender value of $76.8 million at September 30, 2001, comprised of $469.7
million in policy gross cash value offset by $392.9 million of principal and
accrued interest on policy loans. The policies were acquired to fund various
employee benefit programs and other long-term liabilities and are structured to
provide cash flows (primarily tax-free) over an extended period. The Company
intends to utilize policy cash flows, which are actuarially projected to range
from $15 million to $45 million annually over the policy terms, to fund
(partially or fully) noncore liabilities and to earmark gross policy cash value
as a source of funding for noncore obligations.

Grace employees currently receive salaries, incentive bonuses, other benefits,
and stock options. Each stock option granted under the Company's stock incentive
plan has an exercise price equal to the fair market value of the Company's
common stock on the date of grant. In the first nine months of 2001, the Company
granted a total of 1,336,446 options with an average exercise price of $2.53.
Poor stock price performance in the period leading up to and after the Filing
have diminished the value of the option program to current and prospective
employees, which caused the Company to change its long-term incentive
compensation program into more of a cash-based program. The Company has also
sought to address employee retention issues by providing added compensation to
certain employees and increasing the



                                      I-26
<PAGE>

company contribution to its savings and investment plan. For the nine months
ended September 30, 2001, Grace's pre-tax income from core operations includes
an expense of $7.5 million for these Chapter 11 related compensation charges.

--------------------------------------------------------------------------------
ACCOUNTING PRONOUNCEMENTS
--------------------------------------------------------------------------------

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 prohibits the
use of the pooling-of-interest method in accounting for business combinations
and further clarifies the criteria to recognize intangible assets separately
from goodwill. SFAS No. 141 is effective for business combinations initiated
after June 30, 2001. SFAS No. 142 changes the accounting for goodwill and
intangible assets with indefinite lives to require an annual review for
impairment (or more frequently if impairment indicators arise). Separable
intangible assets that are not deemed to have an indefinite life will continue
to be amortized over their useful lives. SFAS No. 142 is effective for fiscal
years beginning after December 15, 2001 for goodwill and intangible assets
acquired prior to July 1, 2001, and applies to all goodwill and other intangible
assets recognized in an entity's financial statements as of that date. Goodwill
and intangible assets acquired after June 30, 2001 will be immediately subject
to the nonamortization and amortization provisions of SFAS No. 142. Amortization
expense for the three months and nine months ended September 30, 2001 of $1.3
million and $3.6 million, respectively, includes $0.6 million and $1.3 million,
respectively, related to the amortization of goodwill that will not be required
after December 31, 2001 under SFAS No. 142.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," and SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 143 requires the accrual of asset retirement
obligations by increasing the initial carrying amount of the related long-lived
asset, and systematically expensing such costs over the asset's useful life. The
standard is effective for fiscal years beginning after June 15, 2002. SFAS No.
144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," and expands the scope of
discontinued operations. SFAS 144 is effective for financial statements issued
for fiscal years beginning after December 15, 2001. The Company does not expect
SFAS No. 143 or 144 to have a material effect on its financial statements.

--------------------------------------------------------------------------------
FORWARD-LOOKING STATEMENTS
--------------------------------------------------------------------------------

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



                                      I-27
<PAGE>


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

Grace had no outstanding derivative financial instruments on September 30, 2001.
For further information concerning Grace's quantitative and qualitative
disclosures about market risk, refer to Note 11 in the Consolidated Financial
Statements in the 2000 Form 10-K.












                                      I-28
<PAGE>

                           PART II. OTHER INFORMATION


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

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



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

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

                  15 Accountants' Awareness Letter

         (b)      Reports on Form 8-K. The Company filed no reports on Form 8-K
                  during the third quarter of 2001.




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<PAGE>





                                    SIGNATURE

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

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




Date:  November 14, 2001                  By    /s/ Robert M. Tarola
                                                --------------------
                                                   Robert M. Tarola
                                               Chief Financial Officer
                                            (Principal Accounting Officer)



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<PAGE>


                                  EXHIBIT INDEX


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


    15           Accountants' Awareness Letter











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