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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                         -------------------------------
                                    FORM 10-K
                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                     THE SECURITIES AND EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 2003       Commission file number 1-13953


                                W. R. GRACE & CO.

Incorporated under the Laws of the            I.R.S. Employer Identification No.
       State of Delaware                                  65-0773649

                 7500 GRACE DRIVE, COLUMBIA, MARYLAND 21044-4098
                                  410/531-4000

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                                   NAME OF EACH EXCHANGE ON
     TITLE OF EACH CLASS                                WHICH REGISTERED
     -------------------                                ----------------

Common Stock, $.01 par value            }        New York Stock Exchange, Inc.
Preferred Stock Purchase Rights         }


           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                                      None

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 and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]

The aggregate market value of W. R. Grace & Co. voting and non-voting common
equity held by non-affiliates as of June 30, 2003 (the last business day of the
registrant's most recently completed second fiscal quarter) was $239,410,239.

At February 20, 2004, 65,614,064 shares of W. R. Grace & Co. Common Stock, $.01
par value, were outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

None.

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                                TABLE OF CONTENTS


PART I.........................................................................1

     Item 1.  Business ........................................................1
                    AVAILABILITY OF SEC REPORTS................................1
                    PROJECTIONS AND OTHER FORWARD-LOOKING INFORMATION..........1
                    CHAPTER 11 FILING..........................................2
                    BUSINESS OVERVIEW..........................................3
                    PRODUCTS AND MARKETS.......................................4
                    INTELLECTUAL PROPERTY; RESEARCH ACTIVITIES.................9
                    ENVIRONMENTAL, HEALTH AND SAFETY MATTERS...................9
     Item 2.  Properties......................................................10
     Item 3.  Legal Proceedings...............................................11
     Item 4.  Submission of Matters to a Vote of Security Holders.............18

PART II.......................................................................18

     Item 5.  Market for Registrant's Common Equity and Related
              Shareholder Matters.............................................18
     Item 6.  Selected Financial Data.........................................19
     Item 7.  Management's Discussion and Analysis of Results of
              Operations and Financial Condition..............................19
     Item 7A. Quantitative and Qualitative Disclosures About Market Risk......20
     Item 8.  Financial Statements and Supplementary Data.....................20
     Item 9.  Changes in and Disagreements with Accountants on
              Accounting and Financial Disclosure.............................20
     Item 9A  Controls and Procedures.........................................20

PART III......................................................................20

     Item 10. Directors and Executive Officers of the Registrant..............20
     Item 11. Executive Compensation..........................................22
     Item 12. Security Ownership of Certain Beneficial Owners and
              Management and Related Stockholder Matters......................30
     Item 13. Certain Relationships and Related Transactions..................32
     Item 14  Principal Accounting Fees and Services..........................32

PART IV.......................................................................33

     Item 15. Exhibits, Financial Statement Schedules, and Reports on
              Form 8-K........................................................33

SIGNATURES....................................................................38

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                                     PART I

ITEM 1. BUSINESS

AVAILABILITY OF SEC REPORTS

     W. R. Grace & Co.(1) maintains an Internet website at www.grace.com. Grace
makes available, free of charge through its website, its annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports, filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably
practicable after such reports are electronically filed with, or furnished to,
the Securities and Exchange Commission ("SEC"). These reports may be accessed
through the website's investor information page.

PROJECTIONS AND OTHER FORWARD-LOOKING INFORMATION

     This Report contains, and other communications by Grace may contain,
projections or other "forward-looking" information. Forward-looking information
includes all statements regarding Grace's expected financial position, results
of operations, cash flows, dividends, financing plans, business strategy,
budgets, capital and other expenditures, competitive positions, growth
opportunities for existing products, benefits from new technology, plans and
objectives of management, and markets for stock. Like any other business, Grace
is subject to risks and other uncertainties that could cause its actual results
to differ materially from any projections or that could cause other
forward-looking information to prove incorrect. Grace does not undertake any
obligation to update any forward-looking information that may be contained in
this Report.

     Most significantly, Grace filed for protection under Chapter 11 of the
United States Bankruptcy Code ("Chapter 11") on April 2, 2001 as a result of a
sharply increasing number of asbestos bodily injury claims. See the discussion
below, in Item 3 of this Report, and Notes 1, 2 and 3 to Grace's Consolidated
Financial Statements as of December 31, 2003 and December 31, 2002, and for each
of the three years ended December 31, 2003, 2002 and 2001 ("Consolidated
Financial Statements") and "Management's Discussion and Analysis of Results of
Operations and Financial Condition" in the Financial Supplement to this Report,
for a more detailed discussion of risks related to Grace's asbestos liabilities.

     In addition to general economic, business and market conditions, Grace is
also subject to other risks and uncertainties, including the following:

o    developments in and the outcome of the Chapter 11 proceedings, including
     but not limited to the determination of the cost of resolution of pending
     and future asbestos-related claims and the time required to confirm and
     implement a plan of reorganization;

o    the loss of senior management and other key employees as a result of the
     Chapter 11 proceedings;

o    the loss of flexibility in operating its businesses and the higher costs of
     doing business under Chapter 11;

o    greater than expected liabilities with respect to environmental remediation
     (see Item 3);

o    an inability to obtain committed credit facilities or alternative sources
     of liquidity in amounts sufficient to fund operations, growth initiatives
     and non-core obligations;

o    a decline in worldwide oil consumption or the development of new methods of
     oil refining;

o    increases in prices of raw materials and energy costs;

-------------------
(1) 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.

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o    the consolidation of major customers, which could increase customer
     purchasing power, thereby putting pressure on operating profits;

o    an inability to gain customer acceptance, or slower than anticipated
     acceptance, of new products or product enhancements;

o    changes in environmental regulations or societal pressures that make
     Grace's business operations more costly or that change the types of
     products used by customers, especially petroleum-based products;

o    slower than anticipated economic advances in less developed countries;

o    foreign currency devaluations in developing countries or other adverse
     changes in currency exchange rates (including, in particular, the U.S.
     dollar to Euro exchange rate);

o    technological breakthroughs rendering a product, a class of products or a
     line of business obsolete;

o    an inability to adapt to continuing technological improvements by
     competitors or customers; and

o    the acquisition (through theft or other means) and use by others of Grace's
     proprietary technology and other know-how.

See Notes 1, 2, 3, 4, 5, 10, 13 and 14 to the Consolidated Financial Statements
and "Management's Discussion and Analysis of Results of Operations and Financial
Condition" in the Financial Supplement for additional information concerning
risks and uncertainties.

CHAPTER 11 FILING

     On April 2, 2001, W. R. Grace & Co. and 61 of its United States
subsidiaries and affiliates filed voluntary petitions for reorganization under
Chapter 11 in the United States Bankruptcy Court for the District of Delaware.
The cases were consolidated for the purpose of joint administration and were
assigned case numbers 01-01139 through 01-01200. Grace's non-U.S. subsidiaries
and certain of its U.S. subsidiaries were not included in the filing.

     The filing was made in response to a sharply increasing number of
asbestos-related bodily injury claims. Under Chapter 11, Grace is operating its
businesses as debtor-in-possession under court protection from its creditors and
claimants, while using the Chapter 11 process to develop and implement a plan
for addressing the asbestos-related claims against it.

     Prior to 2000, Grace was able to settle asbestos-related claims through
direct negotiations. The filing of claims had stabilized, and annual cash flows
were manageable and fairly predictable. In 2000, the litigation environment
changed with an unexpected 81% increase in bodily injury claims, which Grace
believes was due to a surge in unmeritorious claims. Trends in claims filing and
settlement demands showed no signs of returning to historic levels and were
exacerbated by the Chapter 11 filings of several co-defendants in asbestos
bodily injury litigation. These trends greatly increased the risk that Grace
would not be able to resolve its pending and future asbestos-related claims
under the state court system.

     Grace concluded that a federal court-supervised Chapter 11 filing provides
the best forum available to achieve predictability and fairness in the claims
resolution process. By filing under Chapter 11, Grace expects to be able both to
obtain a comprehensive resolution of the claims against it and to preserve the
inherent value of its businesses.

     As a consequence of the filing, pending litigation against Grace 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 an order of the Bankruptcy Court. Since the filing,
all motions necessary to conduct normal business activities have been approved
by the Bankruptcy Court.

     Grace intends to address all of its pending and future asbestos-related
claims and all other pre-petition

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

     Grace's asbestos-related litigation and Chapter 11 filing are discussed in
more detail in Item 3 of this Report, and in Notes 1, 2 and 3 to the
Consolidated Financial Statements, and "Management's Discussion and Analysis of
Results of Operations and Financial Condition" in the Financial Supplement to
this Report.

BUSINESS OVERVIEW

     Grace, through its subsidiaries, is one of the world's leading specialty
chemicals and materials companies. Grace entered the specialty chemicals
industry in 1954, when it acquired both the Dewey and Almy Chemical Company and
the Davison Chemical Company. Grace operates in the following two business
segments:

o    Davison Chemicals manufactures catalysts and silica-based products. Davison
     Chemicals' catalysts include (1) fluid cracking catalysts and additives
     used by petroleum refineries to convert distilled crude oil into
     transportation fuels and other petroleum-based products; (2)
     hydroprocessing catalysts that upgrade heavy oils and remove certain
     impurities; and (3) polyolefin catalysts and catalyst supports that are
     essential components in the manufacture of high density and linear low
     density polyethylene resins, and polypropylene resins, used in products
     such as plastic film, high-performance plastic pipe and plastic household
     containers. Davison Chemicals' silica gels, colloidal silicas, precipitated
     silicas, and zeolite adsorbents are used in a wide variety of industrial,
     consumer, biotechnology and pharmaceutical segments, such as ink jet paper,
     paints, toothpastes, precision investment casting, rubber compounds,
     insulated glass and separations/chromatography, as well as in edible oil
     refining and petrochemical processes. Davison Chemicals accounted for
     approximately 52% of Grace's 2003 sales.

o    Performance Chemicals produces (1) specialty construction chemicals,
     including performance-enhancing concrete admixtures, cement additives and
     additives for masonry products; (2) specialty building materials, including
     fireproofing and waterproofing materials and systems; and (3) sealants and
     coatings for packaging that protect food and beverages from bacteria and
     other contaminants, extend shelf life and preserve flavor. Performance
     Chemicals accounted for approximately 48% of Grace's 2003 sales.

     Grace's principal executive offices are located at 7500 Grace Drive,
Columbia, Maryland 21044, telephone 410/531-4000. As of year-end 2003, Grace had
approximately 6,300 full-time employees worldwide.

     Information concerning the net sales, pretax operating income and total
assets of Grace's continuing operations by business segment and information by
geographic area for 2003, 2002 and 2001 is contained in Note 19 to the
Consolidated Financial Statements in the Financial Supplement to this Report.

     Strategic Objectives and Actions. Grace's strategy has been, and will
continue to be, to enhance enterprise value by profitably growing its specialty
chemicals businesses globally and achieving high levels of

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financial performance. To achieve these objectives, Grace plans to (i) invest in
research and development activities, with the goals of introducing new
high-performance products and services and enhancing manufacturing processes;
(ii) implement process and productivity improvements and cost-management
initiatives (including the use of Six Sigma processes), such as rigorous
controls on working capital and capital spending, and programs for procurement
and materials management; and (iii) pursue selected acquisitions and alliances.
These plans are designed to make Grace a high-performance company focused on the
strengths of its global specialty chemicals businesses.

PRODUCTS AND MARKETS

     Specialty Chemicals Industry Overview. Specialty chemicals, such as those
produced by Grace, are high-value-added products used as catalysts,
intermediates, components or additives in a wide variety of products and
processes. They are generally produced in relatively small volumes (compared to
commodity chemicals) and must satisfy well-defined performance requirements and
specifications. Specialty chemicals are often critical components of the end
products and catalysts for the processes in which they are used; consequently,
they are tailored to meet customer needs, which generally results in a close
relationship between the specialty chemicals producer and the customer. Rapid
response to changing customer needs and reliability of product and supply are
important competitive factors in specialty chemicals businesses.

     Grace's management believes that in specialty chemicals businesses
technological leadership (resulting from continuous innovation through research
and development), combined with product differentiation and superior customer
service, deliver increased value to customers and lead to higher operating
margins. Grace believes that these factors reward it for the research and
development and customer service costs associated with its strategy.

     Davison Chemicals Business Segment (Catalysts and Silica-Based Products).
Davison, founded in 1832, is composed of two primary product groups: (i)
catalysts and (ii) silica products and adsorbents. These product groups
principally apply silica, alumina and zeolite technology in the design and
manufacture of products to meet the varying specifications of such diverse
customers as major oil refiners, plastics and chemical manufacturers, and
consumer products and pharmaceutical/nutraceutical companies. Grace believes
that Davison's technological expertise provides a competitive edge, allowing it
to quickly design products and materials that meet changing customer
specifications and to develop new products and materials that expand its
existing technology.

     Catalysts. Davison produces refinery catalysts, including (i) fluid
cracking catalysts ("FCC") used by petroleum refiners to convert distilled crude
oil into transportation fuels (such as gasoline and diesel fuels) and other
petroleum-based products, and (ii) hydroprocessing catalysts that upgrade heavy
oils and remove certain impurities (such as nitrogen, sulfur and heavy metals).
Davison also develops and manufactures FCC additives used for octane enhancement
and to reduce emissions of sulfur oxides, nitrogen oxides and carbon monoxide
from the FCC unit. Davison has recently introduced new catalyst/additive
technologies for sulfur reduction in gasoline and, as an alternative technology,
membranes which, when employed in a pervaporation system, will remove sulfur
from refinery streams. Oil refining is a highly specialized discipline,
demanding that products be tailored to meet local variations in crude oil and
the refinery's product mix. Davison works regularly with most of the
approximately 360 refineries in the world, helping to find the most appropriate
catalyst formulations for refiners' changing needs. To better serve its
customers, Davison has designed a user-specific website, e-Catalysts.com.

     Davison's catalyst business has benefited from the increased use of FCC
units to produce selected petrochemical feedstocks. It has also benefited from
the passage of more stringent environmental regulations, which has increased
demand for FCC additives and other products that reduce environmental emissions.


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Davison's business is affected by the capacity utilization of customers'
processing units - as capacity utilization increases, the customer frequently
uses a disproportionately greater amount of catalysts. Consolidation in the
refining industry may affect Davison's catalyst sales and margins, as the
purchasing power of its customers may increase, and the gain or loss of a
customer may have a greater impact on Davison's sales.

     Davison operates its hydroprocessing catalyst business through Advanced
Refining Technologies LLC ("ART"), a joint venture between Grace and Chevron
Products Company that combines Chevron's fixed bed residuum catalyst business
with Davison's ebullating bed residuum catalyst and distillate catalyst
business. In 2002, ART acquired an exclusive license in most of the world for
the hydroprocessing technology of Japan Energy Corporation and its subsidiary,
Orient Catalyst Company, which expanded Davison's position in residuum and
distillate hydroprocessing technologies. In response to increased demand for
lower sulfur transportation fuels, ART has recently introduced new
hydroprocessing catalyst technologies for sulfur reduction in gasoline and
diesel fuels.

     Grace believes that Davison is one of the world leaders in refinery
catalysts and the largest supplier of FCCs in the world. Competition in the
refinery catalyst business is based on technology, product performance, customer
service and price. Davison's two principal global competitors in FCCs are
Engelhard Corporation and Akzo Nobel. Davison has several regional competitors
for FCC additives and hydroprocessing catalysts.

     Davison is also a major producer of polyolefin catalysts and catalyst
supports, essential components in the manufacture of high density and linear low
density polyethylene resins, and polypropylene resins, that are in turn used in
products such as plastic film, high-performance plastic pipe and plastic
household containers. Davison catalysts and catalyst supports are used in
manufacturing nearly half of all such supported polyethylene resins produced
worldwide. The polyolefin catalyst business is technology-intensive and focuses
on providing products formulated to meet customer specifications. There are many
manufacturers of polyolefin catalysts, and most compete on a worldwide basis.
Competition has recently intensified because of evolving technologies,
particularly the use of metallocene catalysts, which allow manufacturers to
design polymers with exact performance characteristics. In January 2002, Davison
acquired the polyolefin catalyst manufacturing assets of Borealis A/S, giving
Davison access to new polyolefin catalyst and catalyst carrier technologies. In
addition, Davison produces other chemical catalysts for a wide variety of uses,
including environmental control, petrochemical synthesis and pharmaceutical
applications.

     Silicas and Adsorbents. Silica products and zeolite adsorbents produced by
Davison are used in a wide variety of industrial, consumer, biotechnology and
pharmaceutical applications. Davison manufactures silica gels, colloidal silicas
and precipitated silicas. These silicas have different physical properties, such
as particle size, surface area, porosity, and surface chemistry, which give each
type of silica unique characteristics that make it appropriate for specific
applications. Davison has multiple competitors in each silicas/adsorbents
segment in which it participates. Competition is based on product performance
and quality, customer service, and price.

     Silica gels are used in coatings as matting agents (i.e., to reduce gloss),
in plastics to improve handling, in pharmaceuticals as a formulating agent, in
toothpastes as abrasives and whiteners, in foods to carry flavors and prevent
caking, and in the purification of edible oils and beer stabilization. Davison
is leveraging its materials science expertise, both internally and through
acquisitions, to develop and introduce new silica materials and technologies,
particularly for the higher-growth segments of digital media, industrial
coatings, and biotechnology separations applications. Davison recently has
developed a new colloidal-based product as well as other silica formulations
for ink jet paper coatings to provide both glossy and matte functionality,
expanding its portfolio of digital media solutions for ink jet papers, photos,
and commercial wide-format printing. Davison has also introduced new products
for industrial coatings (where silica is used

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to reduce gloss), such as for thin film applications, industrial wood coatings,
radiation-cured coatings, and anti-corrosion coatings.

     Davison has recently focused on expanding its separations business to take
advantage of higher growth opportunities in the drug discovery, purification and
manufacturing processes. During 2003, Davison introduced several new products,
including new higher-performing silica gel media for separations and, through
two small acquisitions, high-performance chromatography columns and custom
column packing services.

     Davison's colloidal silicas are used primarily as binders in precision
investment casting and refractory applications. They have also recently been
introduced for use in ink jet printing of digital media, such as digital
photographs. Precipitated silicas are used predominantly in the manufacture of
tires and other industrial rubber goods such as belts, hoses and footwear.
Zeolites, while not silica-based products, are based on related silica/alumina
technology. Zeolite adsorbents are used between the two panes of insulating
glass to adsorb moisture and are also used in process applications to adsorb
water and separate certain chemical components from mixtures.

     The silicas and adsorbents business has a large, fragmented customer base,
reflecting the diverse markets served by its products. To better serve these
customers, the business uses a direct sales force as well as a distribution
network, and has introduced web-based initiatives. Web-based offerings include
technical service, literature access, customer feedback tools, and process
design formulas to assist customers in determining their needs. Approximately
half of Davison's silica and adsorbent sales are in Europe.

     Davison Financial and Other Business Information. Davison's net sales were
$1,040 million in 2003, $939 million in 2002, and $868 million in 2001; 38% of
Davison's 2003 net sales were generated in North America, 40% in Europe, 17% in
Asia Pacific, and 5% in Latin America. Sales of catalysts accounted for 37% of
total net sales of Grace in 2003 and 2002, and 36% in 2001. Sales of silica
products and zeolite adsorbents accounted for 15% of Grace's total net sales in
2003 and 2002, and 14% in 2001.

     At year-end 2003, Davison employed approximately 3,100 people worldwide in
16 facilities. Davison has a direct selling force and distributes most of its
products directly to approximately 12,000 customers (500 for catalysts and more
than 11,000 for silicas/adsorbents), the largest of which accounted for
approximately 4% of Davison's 2003 sales.

     Most raw materials used in the manufacture of Davison products are
available from multiple sources. In some instances, Davison produces its own raw
materials and intermediates. Natural gas and petroleum-based raw materials are
two of the principal materials used in Davison's manufacturing process. World
events and other economic factors have caused volatility in the price of these
materials, which have impacted Davison's operating margins. Seasonality does not
have a significant overall effect on Davison's business. However, sales of FCC
catalysts tend to be lower in the first quarter prior to the shift in production
by refineries from home heating oil for the winter season to gasoline production
for the summer season. Silica products and polyolefin catalysts are the product
lines most sensitive to general downturns in economic activity.

     Performance Chemicals Business Segment (Specialty Construction Chemicals,
Specialty Building Materials, and Sealants and Coatings). Grace's Performance
Chemicals businesses include: (1) specialty construction chemicals and building
materials, in which Grace is a leading supplier to the nonresidential
(commercial and infrastructure) construction industry, and to a lesser extent,
the residential construction and repair segment; and (2) a sealants and coatings
product line operated under the Darex(R) brand.

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     Construction Chemicals and Building Materials. Specialty construction
chemicals (principally concrete admixtures, cement additives and additives for
masonry products) improve durability and enhance the handling and application of
concrete, improve the manufacturing efficiency and performance of cement, and
improve the water resistance and other qualities of masonry wall and paving
systems.

     Grace has introduced a number of new construction chemicals products and
product enhancements in recent years. These include: an additive that improves
cement processing efficiency and product quality; new polymeric fiber
reinforcements for concrete that can substitute for secondary metal
reinforcements; an automated system to improve the reliability and accuracy of
adding fibers to concrete production; an admixture system for producing
self-consolidating concrete (which improves the concrete's conformity to the
shape of a structure); and a liquid pigment admixture and dispensing system for
concrete. Grace seeks to continuously improve and adapt these products for
different applications.

     Grace's strategy is also to extend its product portfolio and geographic
reach through acquisitions. In 2003, Grace acquired the assets of Tricosal
Beton-Chemie GmbH & Co. KG, which significantly expanded Grace's presence in
Germany and Eastern Europe.

     Specialty building materials prevent structural water damage (for example,
water- and ice-barrier products for residential use and waterproofing systems
for commercial structures), and protect structural steel against collapse caused
by fire. In North America, the specialty building materials product line also
manufactures and distributes vermiculite products used in insulation and other
applications. Recent product developments include liquid-applied waterproofing
products and new roof underlayments that provide protection from ice and
wind-driven rain; enhancements to spray-on fireproofing products that improve
applicator productivity; and, through an acquisition in 2000, firestops.
Firestops are caulk and sealant systems that retard the spread of heat, flame
and smoke through walls, ceiling joints, and openings for wiring and piping. The
spray-on fire protection product line recently has been adversely affected by
the adoption in the U.S. of new international building codes. These codes
require less fire protection materials for structural steel used in commercial
buildings.

     In addition to new product introductions, product enhancements and
acquisitions, Grace looks for growth opportunities in developing countries,
where increases in construction activity and sophistication of construction
practices can increase demand for Grace's higher-performance construction
chemicals and building materials products.

     Construction chemicals and building materials are marketed under the
Grace(R) brand to a broad range of customers, including cement manufacturers,
ready-mix and precast concrete producers, local contractors, specialty
subcontractors and applicators, masonry block manufacturers, building materials
distributors and other industrial manufacturers, as well as to architects and
structural engineers. For some of these customer groups (such as contractors),
cost and ease of application are key factors in making purchasing decisions; for
others (such as architects and structural engineers), product performance and
design versatility are the critical factors.

     In view of this diversity, and because the construction chemicals and
building materials businesses require intensive sales and customer service
efforts, Performance Chemicals maintains a separate sales and technical support
team for each of its product groups. These sales and support teams sell products
under global contracts, under U.S. or regional contracts, and on a job-by-job
basis. Consequently, Grace competes globally with several large construction
materials suppliers and regionally and locally with numerous smaller
competitors. In recent years, the cement and concrete industry has experienced
some consolidation, particularly in markets outside of the U.S., thereby
increasing the importance of servicing the global customers. Competition in
these businesses is based largely on technical support and service, product
performance, adaptability of the product and price.

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     The construction business is cyclical in response to economic conditions
and construction demand. The construction business is also seasonal and
dependent on favorable weather conditions. Grace seeks to increase profitability
and minimize the impact of cyclical downturns in regional economies by
introducing technically advanced higher-performance products, expanding
geographically, and developing business opportunities in renovation construction
markets. Although in recent years these strategies have been successful in
minimizing the impact of cyclicality on Grace's construction business, a
significant downturn in North American commercial construction activity
adversely affected results of operations in 2002 and the first half of 2003.

     The raw materials used by the construction chemicals and building materials
product lines can be obtained from multiple sources, including commodity
chemical producers, petroleum companies and paper manufacturers. In most
instances, there are at least two alternative suppliers for each of the
principal raw materials used by these businesses. Recent higher petroleum-based
raw material costs and other supply/demand disruptions have negatively impacted
the operating margins of these product lines.

     Sealants and Coatings. The Darex(R) sealants and coatings business consists
primarily of four product lines: can sealants for rigid containers, sealants for
metal and plastic bottle closures, coatings for metal packaging, and specialty
barrier coatings for flexible packaging. These products are used to assure the
quality of packaging and to preserve container contents. Can sealants ensure a
hermetic seal between the lid and the body of beverage, food, aerosol and other
cans. Closure sealants are used to seal pry-off and twist-off metal crowns, as
well as roll-on pilfer-proof and plastic closures for glass and plastic bottles
and jars used in beverage and food applications. Coatings are used in the
manufacture of cans and closures to protect the metal against corrosion, to
protect the contents against the influences of metal, to ensure proper adhesion
of sealing compounds to metal surfaces, and to provide base coats for inks and
for decorative purposes. These products are principally sold to container
manufacturers. Specialty barrier coatings are used to improve the gas and/or
vapor barrier performance of various packaging materials. They are principally
sold to manufacturers of oriented polypropylene films for food packaging.

     Grace is seeking to expand its Darex(R) product offerings and improve sales
growth by extending its technology to new markets, such as its oxygen-scavenging
compounds (which absorb oxygen to increase shelf life) and high barrier
materials that limit gas transmission into plastic packaging. Grace is also
looking to improve sales of closure sealants for plastic bottles, and can
sealants and coatings through niche opportunities in metal packaging and
continued growth in developing countries. However, sales growth has been
impacted, and will likely continue to be impacted in the future, by the trend
toward increasing use of plastic packaging. Grace will continue to focus on
improving the profitability and cash flows of this business through worldwide
productivity and strategic sourcing initiatives.

     Competition is based on providing high-quality customer service at customer
sites, as well as on uniform product quality and reliability, the ability to
offer environmentally friendly products and price. In addition, because of the
relative concentration of the canning and bottling market, maintaining
relationships with leading container manufacturers, canners and bottlers, and
assisting them as they re-engineer processes are key elements for success.

     Although raw materials used in the sealants and coatings business,
including resins, rubber and latices, are generally available from multiple
sources, many raw materials are purchased from single source suppliers. Some raw
materials are also subject to pricing pressures from time to time, particularly
oil-based specialty and commodity materials such as resins and solvents. Also,
currency devaluations versus the U.S. dollar and Euro in developing countries
may adversely affect raw material costs and the prices the business may charge
for its products. The business is focused on managing raw material costs and
sourcing

                                       8
<PAGE>

opportunities to alleviate some of these pressures. Since Darex is a global
business, the impact of seasonality is not significant.

     Performance Chemicals Financial and Other Business Information. Net sales
of Grace's Performance Chemicals segment in 2003 totaled $940 million (52% in
North America, 28% in Europe, 14% in Asia Pacific, and 6% in Latin America),
versus $881 million in 2002 and $855 million in 2001. Sales of specialty
construction chemicals accounted for 23% of Grace's total net sales in 2003, and
22% in 2002 and 2001; sales of specialty building materials accounted for 12% of
Grace's total net sales in 2003, 13% in 2002, and 14% in 2001; and sales of
Darex(R) products accounted for 13% of Grace's total net sales in 2003 and 2002,
and 14% in 2001.

     At year-end 2003, Grace employed approximately 3,000 people at 62
Performance Chemicals production facilities. Most of Performance Chemicals'
sales are direct sales to the customer. Performance Chemicals' capital
expenditures tend to be relatively lower, and sales and marketing expenditures
tend to be relatively higher, than those of Davison Chemicals.

     See Note 19 to the Consolidated Financial Statements and "Management's
Discussion and Analysis of Results of Operations and Financial Condition" in the
Financial Supplement for further information regarding the Davison and
Performance Chemicals business segments.

INTELLECTUAL PROPERTY; RESEARCH ACTIVITIES

     Grace's products, processes and manufacturing equipment are protected by
numerous patents and patent applications. Grace also benefits from legally
protectable know-how and other proprietary information relating to many of its
products and processing technologies. As competition in the markets in which
Grace does business is often based on technological superiority and innovation,
with new products based on technological developments being introduced
frequently, the ability to achieve technological innovations and to obtain
patent or other intellectual property protection is important. There can be no
assurance, however, that Grace's patents, patent applications or other
intellectual property will provide sufficient proprietary protection. In
addition, other companies may independently develop similar systems or processes
that circumvent patents issued to Grace, or may acquire patent rights within the
fields of Grace's businesses.

     Grace's research and development programs are directed toward the
development of new products and processes and the improvement of, and
development of new uses for, existing products and processes. Research is
conducted in all regions, with North America and Europe accounting for the most
activity. Grace's research and development strategy is to develop technology
platforms on which new products will be based, while also focusing on the
improvement of existing products and/or the adaptation of existing products to
customer needs.

     Research and development expenses relating to continuing operations
amounted to $52 million in 2003 and 2002, and $50 million in 2001. These amounts
include expenses incurred in funding external research projects. The amount of
research and development expenses relating to government- and customer-sponsored
projects (rather than projects sponsored by Grace) was not material.

ENVIRONMENTAL, HEALTH AND SAFETY MATTERS

     Manufacturers of specialty chemicals products, including Grace, are subject
to stringent regulations under numerous U.S. federal, state and local and
foreign environmental, health and safety laws and regulations relating to the
generation, storage, handling, discharge, disposition and stewardship of
hazardous wastes and other materials. Grace has expended substantial funds to
comply with such laws and regulations

                                       9
<PAGE>

and expects to continue to do so in the future. The following table sets forth
Grace's expenditures in the past three years, and its estimated expenditures in
2004 and 2005, for (i) the operation and maintenance of environmental facilities
and the disposal of wastes; (ii) capital expenditures for environmental control
facilities; and (iii) site remediation:


                                (i)               (ii)              (iii)
                           Operation of
                          Facilities and         Capital            Site
                          Waste Disposal      Expenditures       Remediation
                          --------------      ------------       -----------
                                             (in $ millions)

       2001                      $33                 $4               $27
       2002                       38                  6                14
       2003                       46                  8                 7
       2004 (est.)                47                 12                38
       2005 (est.)                48                 15                 7

     The decline in site remediation costs since 2001 reflects reduced spending
at non-owned sites due to Grace's Chapter 11 status. The $38 million in
estimated site remediation expenditures in 2004 includes a potential $22 million
payment to transfer liability with respect to a non-owned site to a third party;
such payment is subject to the approval of the Bankruptcy Court. The $38 million
does not include possible additional spending or reimbursement of remediation
costs related to Grace's former vermiculite mining and processing activities.

     Grace continuously seeks to improve its environmental, health and safety
performance. To the extent applicable, Grace extends the basic elements of the
American Chemistry Council's Responsible Care(R) program to all Grace locations
worldwide, embracing specific performance objectives in the key areas of product
stewardship, employee health and safety, community awareness and emergency
response, distribution, process safety and pollution prevention. In addition,
Grace has implemented key elements of the new Responsible Care(R) Security Code
for its operations and systems. It has completed a review of existing company
security (including cyber-security) vulnerability, and is in the process of
taking actions to enhance security systems and protect company assets.

     For additional information, see Item 3 of this Report, and Note 14 to the
Consolidated Financial Statements and "Management's Discussion and Analysis of
Results of Operations and Financial Condition" in the Financial Supplement to
this Report.

ITEM 2. PROPERTIES

     Grace operates manufacturing and other types of plants and facilities
(including office and other service facilities) throughout the world. Some of
these plants and facilities are shared by more than one Grace business unit.
Grace owns all of its major manufacturing facilities. Substantially all of its
U.S. properties are subject to security interests under Grace's
debtor-in-possession borrowing facility. Grace considers its major operating
properties to be in good operating condition and suitable for their current use.
Grace believes that, after taking planned expansion into account, the productive
capacity of its plants and other facilities is generally adequate for current
operations and foreseeable growth. See Note 19 to the Consolidated Financial
Statements and "Management's Discussion and Analysis of Results of Operations
and Financial Condition" in the Financial Supplement for information regarding
Grace's capital expenditures.

                                       10
<PAGE>

     Davison Chemicals operates out of 16 facilities in the following regions:

               Region                              Number of Facilities
               ------                              --------------------

               North America                              11
               Europe                                      3
               Latin America                               1
               Asia Pacific                                1

Its largest facilities are located in Baltimore, Maryland; Lake Charles,
Louisiana; and Worms, Germany.

     Performance Chemicals operates out of 62 facilities in the following
regions:

               Region                              Number of Facilities
               ------                              --------------------

               North America                              26
               Europe                                     12
               Latin America                               6
               Asia Pacific                               18

Its largest facilities are located in Cambridge, Massachusetts; Chicago,
Illinois; Slough, England; Epernon, France; and Singapore. Because of the nature
of its products, Performance Chemicals requires a greater number of facilities
to service its customers than Davison. Also, these facilities are generally
smaller and less capital intensive than Davison's facilities.

ITEM 3. LEGAL PROCEEDINGS

     Asbestos Litigation. Grace is a defendant in property damage and bodily
injury lawsuits relating to previously sold asbestos-containing products. In
most of the bodily injury lawsuits, Grace is one of many defendants. As a result
of the Chapter 11 filing, all asbestos-related litigation has been stayed and no
party may commence any new proceedings against Grace.

     Grace was a defendant in 65,656 asbestos-related lawsuits on April 2, 2001,
the date of Grace's Chapter 11 filing. Seventeen of such lawsuits involve claims
for property damage, nine relating to Grace's former Zonolite attic insulation
("ZAI") product (one of which has since been dismissed) and eight relating to a
number of former asbestos-containing products (two of which also involve ZAI).
The remainder of such lawsuits involve 129,191 claims for bodily injury.

     The plaintiffs in property damage lawsuits generally seek to have the
defendants pay the cost of removing, containing or repairing the
asbestos-containing materials in the affected buildings. Cumulatively through
April 2, 2001, 140 asbestos property damage cases were dismissed without payment
of any damages or settlement amounts; judgments were entered in favor of Grace
in nine cases (excluding cases settled following appeals of judgments in favor
of Grace); judgments were entered in favor of the plaintiffs in eight cases for
a total of $86.1 million (one of which is on appeal); and 207 property damage
cases were settled for a total of $696.8 million.

     In February 2000 a purported class action lawsuit was filed in the U.S.
District Court for the Eastern District of Massachusetts against the Company
(Lindholm v. W. R. Grace & Co.) on behalf of all owners of homes containing ZAI,
a product formerly sold by Grace that may contain trace amounts of asbestos. The
action seeks damages and equitable relief, including the removal, replacement
and/or disposal of all such insulation. After Lindholm was filed, nine
additional purported class action ZAI lawsuits were initiated

                                       11
<PAGE>

against Grace prior to the Chapter 11 filing. The nine lawsuits were filed in
various state and federal courts asserting similar claims and seeking damages
similar to those in Lindholm. One of the purported federal class actions has
been consolidated with Lindholm. As a result of the Chapter 11 filing, all of
these cases have been transferred to the U.S. Bankruptcy Court for the District
of Delaware.

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

     As part of the Chapter 11 process, the Bankruptcy Court established a bar
date of March 31, 2003 for submission of asbestos-related property damage
claims. (The bar date did not apply to asbestos-related bodily injury claims or
claims related to ZAI.) Approximately 4,000 additional property damage claims
were filed prior to the bar date. Grace has analyzed the information provided by
the claimants and has attempted to assess the validity and potential liability
related to these claims. Approximately 170 claims failed to provide sufficient
information to permit an evaluation. With respect to the remainder of such
claims, based on its experience in valuing property damage claims, Grace
estimates the cost to resolve such claims to be $30 million. This estimate is
subject to change based on the receipt of additional information or other
developments in the Chapter 11 proceeding.

     Cumulatively through April 2, 2001, 16,354 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 for a total of $645.6
million.

     Based on Grace's experience and analysis of trends in asbestos bodily
injury litigation, Grace has endeavored to project the number and ultimate cost
of all present and future bodily injury claims expected to be asserted, based on
actuarial principles, and to measure probable and estimable liabilities under
generally accepted accounting principles. Grace has accrued $992 million at
December 31, 2003 as its estimate of the cost to resolve all asbestos-related
bodily injury cases and claims pending as well as those expected to be filed in
the future, and all pending property damage cases (including the additional
claims filed prior to the bar date described above) for which sufficient
information is available to form a reasonable estimate of the cost of
resolution. This estimate has been made based on historical facts and
circumstances prior to April 2, 2001. Grace does not expect to adjust this
estimate (other than for normal costs of continuing claims administration)
unless developments in the Chapter 11 proceeding provide a reasonable basis for
a revised estimate. Grace intends to use the Chapter 11 process to determine the
validity and ultimate amount of its aggregate liability for asbestos-related
claims. Due to the uncertainties of asbestos-related litigation and the Chapter
11 process, Grace's ultimate liability could differ materially from the recorded
liability.

     Grace previously purchased insurance policies under which Grace claims
coverage for its asbestos-related lawsuits and claims. Grace has settled with
and has been paid by all of its primary insurance carriers with respect to both
property damage and bodily injury cases and claims. Grace has also settled with
its excess insurance carriers that wrote policies available for property damage
cases; those settlements involve amounts paid and to be paid to Grace. Grace
believes that certain of these settlements may cover attic

                                       12
<PAGE>

insulation claims as well as other property damage claims. In addition, Grace
believes that additional coverage for attic insulation claims may exist under
excess insurance policies not subject to settlement agreements. Grace has
settled with excess insurance carriers that wrote policies available for bodily
injury claims in layers of insurance that Grace believes may be reached based on
its current estimates. Insurance coverage for asbestos-related liabilities has
not been commercially available since 1985.

     Pursuant to settlements with primary-level and excess-level insurance
carriers with respect to asbestos-related claims, Grace received payments
totaling $1.054 billion prior to 2001, as well as payments totaling $78.8
million in 2001, $10.8 million in 2002, and $13.2 million in 2003. Under certain
settlements, Grace expects to receive additional amounts from insurance carriers
in the future and has recorded a receivable of $269.4 million to reflect the
amounts expected to be recovered in the future, based on projected payments
equal to the amount of the recorded asbestos-related liability.

     During 2000, the number of bodily injury claims made against Grace
increased significantly compared with 1999 and prior year claim levels, with a
total of 48,786 bodily injury claims being received in 2000, versus 26,941
claims in 1999. This trend continued in the first quarter of 2001, when Grace
received 16,411 bodily injury claims. Also, costs to resolve asbestos litigation
were higher than expected for bodily injury and certain property damage claims.
In addition, five significant codefendant companies in bodily injury litigation
had petitioned for reorganization under Chapter 11. These developments and
events caused an environment that increased the risk of more claims being filed
against Grace than previously projected, with higher settlement demands and
trial risks. These developments and events also raised substantial doubt whether
Grace would be able to manage its asbestos liabilities over the long term under
the existing state court system. As a result, following a thorough review of the
strategic and operating issues associated with continuing to defend asbestos
litigation through the court system versus voluntarily seeking a resolution of
such litigation through reorganization under Chapter 11, Grace filed for
protection under Chapter 11 on April 2, 2001.

     Since its Chapter 11 filing, Grace is aware that asbestos bodily injury
lawsuits have continued to be filed against co-defendant companies, and at
higher than historical rates. As asbestos bodily injury claims are typically
filed against numerous defendants, Grace believes that had it not filed for
Chapter 11 reorganization, it likely would have received thousands more claims
than it had previously projected.

     See Item 1 of this Report and Notes 1, 2 and 3 to the Consolidated
Financial Statements and "Management's Discussion and Analysis of Results of
Operations and Financial Condition" in the Financial Supplement for additional
information.

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

                                       13
<PAGE>

monitoring costs. In this action, the EPA also sought a declaration of Grace's
liability that would be binding in future actions to recover further response
costs.

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

     In October 2000, a purported class action lawsuit was filed in the U.S.
District Court for Minnesota, 4th Division (Chase v. W. R. Grace & Co.-Conn.)
alleging loss of property values of residents in the vicinity of a former Grace
plant in Minneapolis, which processed vermiculite from the Libby mine. This case
has been stayed as a result of Grace's Chapter 11 filing. The EPA has commenced
and is continuing a program for removing suspected vermiculite processing
by-products from the yards and driveways of houses near the former plant. The
EPA has reviewed 1,648 residential properties and targeted 269 for cleanup. Of
the 269 properties, the EPA has taken action at 252, and has not obtained access
to the remaining 17. As of December 31, 2003, the EPA had spent $3.4 million on
residential cleanup actions. While Grace has not completed its investigation of
the claims in Chase, Grace has no reason to believe that it will incur material
liability in addition to the amount of the EPA's remediation costs. The EPA also
has remediated industrial property in the area, including the former vermiculite
expanding plant, at a cost of $650,000. The EPA has submitted a claim for $7.9
million for the past and projected future costs (including indirect costs) of
remediation of the residential and industrial properties at or around the former
plant site.

     The EPA also has compiled for investigation a list of 245 facilities that
at one time used, stored, or processed concentrate that originated from the
Libby vermiculite mine. Included in this list are 50 vermiculite expansion
plants currently or formerly operated by Grace. The EPA has listed 17 of these
50 sites as requiring additional action. Grace has conducted corrective actions
or investigations at six of these sites. The EPA has filed claims for 10 of
these sites (exclusive of Libby, Montana) in the amount of $16 million. In
addition, another governmental agency has commenced a separate investigation at
28 of the 245 facilities, 22 of which are currently or were formerly operated by
Grace. Grace does not have sufficient information to determine whether this
separate investigation is likely to result in any additional liability.

     As a result of the ruling by the District Court in Montana, and Grace's
evaluation of probable remediation costs at vermiculite processing sites, Grace
estimates its total liability for vermiculite-related remediation at $181
million. Grace's estimate of expected costs is based on public comments
regarding the EPA's spending plans, discussions of spending forecasts with EPA
representatives, and analysis of other information made available from the EPA.
However, the EPA's cost estimates have changed regularly and increased
substantially over the course of its cleanup. Consequently, Grace's estimate may
change materially as more information becomes available. Any such additional
information could have a material effect on Grace's liability for this matter
and on its Consolidated Financial Statements. Any payments to the EPA would be
subject to the outcome of the Chapter 11 proceedings.

     Libby Private Property Owners' Lawsuit. In February 2000, a purported class
action lawsuit was filed in the U.S. District Court for Montana, Missoula
Division (Tennison, et al. v. W. R. Grace & Co., et al.) against Grace on behalf
of all owners of improved private real property situated within 12 miles of
Libby, Montana. The action alleges that the class members have suffered harm in
the form of environmental contamination and loss of property rights resulting
from Grace's former vermiculite mining and processing

                                       14
<PAGE>

operations. The complaint seeks remediation, property damages and punitive
damages. This case has been stayed as a result of Grace's Chapter 11 filing.
However, as described above, the EPA has been conducting remediation activities
in and around Libby, which includes the remediation of private real property.
While Grace has not completed its investigation of the claims in Tennison, Grace
has no reason to believe that it will incur material liability in addition to
the amount of the EPA's recoverable costs for cleanup activities around Libby.

     Proceedings in which Grace is a Potentially Responsible Party. Grace
(together, in most cases, with many other companies) has been designated a
"potentially responsible party" ("PRP") by the EPA with respect to paying the
costs of investigating and remediating pollution at various sites. At year-end
2003, proceedings were pending with respect to approximately 30 sites as to
which Grace has been designated a PRP by the EPA. U.S. law provides that all
PRPs for a site may be held jointly and severally liable for the costs of
investigating and remediating the site. Grace is also conducting investigatory
and remediation activities at sites under the jurisdiction of state and/or local
authorities. During the Chapter 11 proceeding, Grace does not expect to
participate (except in a limited number of special cases) in the joint funding
of investigation and remediation at non-owned sites where it is a PRP. Grace's
expected liability with respect to these sites is included in an aggregate $151
million liability for environmental remediation (excluding liability related to
Grace's former vermiculite mining and processing activities as described above);
however, Grace's ultimate liability with respect to many of such sites will be
determined as part of its Chapter 11 proceeding.

     Other Proceedings. Grace is also a party to additional proceedings
involving U.S. federal, state and/or local government agencies and private
parties regarding Grace's compliance with environmental laws and regulations.
These proceedings are not expected to result in significant sanctions or in any
material liability. However, Grace may incur material liability in connection
with future actions of governmental agencies or private parties relating to past
or future practices of Grace with respect to the generation, storage, handling,
discharge, disposition or stewardship of hazardous wastes and other materials.

     Determination of Other Environmental Liabilities. Based on its analysis of
environmental-related claims submitted prior to the March 31, 2003 bar date and
other available information, Grace increased its aggregate estimated liability
for environmental remediation, other than remediation related to its former
vermiculite mining and processing operations (discussed above), by $20 million
in the fourth quarter of 2003 to an estimated aggregate liability of $151
million. These environmental liabilities are reassessed whenever circumstances
become better defined or remediation efforts and their costs can be better
estimated. These liabilities are evaluated quarterly, based on currently
available information, including the progress of remedial investigation at each
site, the current status of discussions with regulatory authorities regarding
the method and extent of remediation at each site, existing technology, prior
experience in contaminated site remediation and the apportionment of costs among
potentially responsible parties. The estimated aggregate liability could change
materially as additional information becomes available or circumstances change.
Grace does not have sufficient information to determine how the funding of
environmental remediation activities will be affected by the Chapter 11
proceedings.

     Environmental Insurance Litigation. Grace is a party to three pending
environmental insurance coverage actions. The first is styled Maryland Casualty
Co. v. W. R. Grace & Co. (filed in 1988). This litigation involves Grace's
coverage claims against a primary-level carrier, Continental Casualty Company,
for environmental property damage. In 2001, Grace appealed certain rulings by
the U.S. District Court for the Southern District of New York. In June 2003, the
U.S. District Court of Appeals for the Second Circuit affirmed certain rulings
dismissing Grace's claims for coverage of defense costs under certain policy
years, but vacated the District Court's ruling dismissing coverage for defense
costs under the last policy year at issue. The case was remanded to the District
Court for further proceedings. A trial on the remaining issues has been
scheduled for the fourth quarter of 2004. The second case, entitled Uniguard v.
W. R. Grace, was filed in 1997 in the U.S. District Court for the Southern
District of New York. This declaratory judgment

                                       15
<PAGE>

action seeks a determination concerning the liability of one excess carrier for
bodily injury claims as a result of environmental contamination. This case has
been stayed as a result of Grace's Chapter 11 filing. In June 2000, a separate
lawsuit was filed in the U.S. District Court for the Southern District of New
York against Grace by one of its former primary insurance carriers seeking
coverage determinations regarding 45 claims (Continental Casualty Company v. W.
R. Grace & Co. and W. R. Grace & Co.-Conn.). Most of these claims involve
alleged environmental property damage at sites once owned and operated by Grace
or at waste sites that allegedly received waste materials from plants operated
by Grace, including Grace's claims for coverage regarding certain claims
involving its former vermiculite mining and processing operations. This case has
been stayed as a result of Grace's Chapter 11 filing. The outcome of these
cases, as well as the amounts of any recoveries that Grace may receive in
connection therewith, is presently uncertain.

     For further information, see "Environmental, Health and Safety Matters"
under Item 1 above, Note 14 to Grace's Consolidated Financial Statements and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" in the Financial Supplement.

     Litigation Related to Former Packaging and Medical Care Businesses. In
September 2000, Grace was named in a purported class action suit filed in
California Superior Court for the County of San Francisco alleging that the 1996
reorganization involving a predecessor of Grace and Fresenius Medical Care
Holdings, Inc. and the 1998 reorganization involving a predecessor of Grace and
Sealed Air Corporation were fraudulent transfers (Abner, et al., v. W. R. Grace
& Co., et al.). The suit is alleged to have been brought on behalf of all
individuals who then had lawsuits on file asserting personal injury or wrongful
death claims against any of the defendants. Since Abner, and prior to the
Chapter 11 filing, two other similar class actions were filed. These lawsuits
have been stayed as a result of Grace's Chapter 11 filing.

     The Bankruptcy Court authorized the Official Committee of Asbestos Personal
Injury Claimants and the Official Committee of Asbestos Property Damage
Claimants to proceed with claims against Sealed Air and Fresenius on behalf of
Grace's estate. On November 29, 2002, Sealed Air and Fresenius each announced
that they had reached agreements in principle with such Committees to settle
asbestos and fraudulent conveyance claims related to such transactions. Under
the terms of the Fresenius settlement, as subsequently revised and subject to
certain conditions, Fresenius would contribute $115.0 million to the Grace
estate as directed by the Bankruptcy Court upon confirmation of Grace's plan of
reorganization. In July 2003, the Fresenius settlement was approved by the
Bankruptcy Court. Under the terms of the proposed Sealed Air settlement, Sealed
Air would make a payment of $512.5 million (plus interest at 5.5% per annum,
commencing on December 21, 2002) and nine million shares of Sealed Air common
stock, valued at $487 million as of December 31, 2003, as directed by the
Bankruptcy Court upon confirmation of Grace's plan of reorganization. The Sealed
Air settlement has not been agreed to by Grace and remains subject to the
approval of the Bankruptcy Court and the fulfillment of specified conditions.
Upon the effectiveness of these settlements the Abner and all similar actions
will be dismissed. Grace is unable to predict how these settlements may
ultimately affect its plan of reorganization.

     Tax Claims. Grace has received the examination report from the Internal
Revenue Service (the "IRS") for tax periods 1993 through 1996 asserting, in the
aggregate, approximately $114.0 million of proposed tax adjustments, including
accrued interest. The most significant contested issue addressed in such report
concerns corporate-owned life insurance ("COLI") policies and is discussed
below. Other proposed IRS tax adjustments include Grace's tax position regarding
research and development credits, the reporting of certain divestitures and
other miscellaneous proposed adjustments. The tax audit for the 1993 through
1996 tax period was under the jurisdiction of the IRS Office of Appeals ("IRS
Appeals"), where Grace filed a protest. IRS Appeals has returned the audit to
the examination team for further review of the proposed adjustments as well as
several affirmative tax claims raised by Grace. Grace's federal tax returns
covering periods 1997 and forward are either under examination by the IRS or
open for future examination. In addition, Grace will be required to report the
additional taxable income (and the related accrued interest)

                                       16
<PAGE>

resulting from IRS adjustments to state and local tax jurisdictions upon
resolution of the Federal tax audit. Grace believes that the impact of probable
tax return adjustments are adequately recognized as liabilities at December 31,
2003. Any cash payment would be subject to Grace's Chapter 11 proceedings.

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

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

     The IRS has assessed additional federal income tax withholding and Federal
Insurance Contributions Act taxes plus interest and related penalties for
calendar years 1993 through 1995 against a Grace subsidiary that formerly
operated a temporary staffing business for nurses and other health care
personnel. The assessments, aggregating $21.8 million, were made in connection
with a meal and incidental expense per diem plan for traveling health care
personnel, which was in effect through 1999, the year in which Grace sold the
business. The IRS contends that certain per diem reimbursements should have been
treated as wages subject to employment taxes and federal income tax withholding.
Grace contends that its per diem and expense allowance plans were in accordance
with statutory and regulatory requirements, as well as other published guidance
from the IRS. The IRS has issued additional assessments aggregating $40.1
million for the 1996 through 1998 tax periods. The statute of limitations has
expired with respect to the 1999 tax year. Grace has a right to indemnification
for approximately 36% of any tax liability (including interest thereon) for the
period from July 1996 through December 1998 from its former partner in the
business. The matter is currently pending in the United States Court of Claims.
Grace is currently in discussions with the Department of Justice concerning
possible settlement options.

     Other Claims Received Prior to the Bar Date. The Bankruptcy Court
established a bar date of March 31, 2003 for claims of general unsecured
creditors, asbestos-related property damage claims and medical monitoring claims
related to asbestos. The bar date did not apply to asbestos-related bodily
injury claims or claims related to ZAI, which will be dealt with separately.
Approximately 15,000 proofs of claim were filed by the bar date. Of these
claims, approximately 10,000 were non-asbestos related, approximately 4,000 were
for asbestos-related property damage (discussed above), and approximately 1,000
were for medical monitoring. In addition, approximately 400 proofs of claim have
been filed after the bar date.

                                       17
<PAGE>

     The medical monitoring claims were made by individuals due to alleged
exposure to asbestos through Grace's products or operations. These claims, if
sustained, would require Grace to fund ongoing health monitoring costs for
qualified claimants. Based on the number and expected value of such claims,
Grace does not believe such claims will have a material effect on its
Consolidated Financial Statements.

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

     Grace's initial analysis indicated that many claims are duplicates,
represent the same claim filed against more than one of the debtors, lack any
supporting documentation, or provide insufficient supporting documentation. As
of December 31, 2003, Grace had filed with the Bankruptcy Court approximately
1,100 objections with respect to such claims, most of which were non-substantive
(duplicates, no supporting documentation, late filed claims, etc.). As of
December 31, 2003, orders had been entered expunging 890 claims, and 177 of the
objections had been withdrawn on the basis of responses received from the
claimants. Grace expects to file a substantial number of additional objections,
most of which will be substantive, as analysis and evaluation of the claims
progresses.

     At this time, Grace believes that its recorded liabilities are sufficient
to cover the remaining types of claims. However, because of the uncertainties of
the Chapter 11 and litigation process, the in-progress state of Grace's
investigation of submitted claims, and the lack of documentation submitted in
support of many claims, the amounts required to satisfy all such claims may
exceed such recorded liabilities. As claims are resolved, Grace will make
adjustments to the liabilities recorded on its financial statements as
appropriate. Any such adjustments could be material to its consolidated
financial position and results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     This Item is inapplicable, as no matters were submitted to a vote of the
Company's security holders during the fourth quarter of 2003.

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.

     Except as provided below, the information called for by this Item appears
in the Financial Supplement under the heading "Financial Summary" opposite the
caption "Other Statistics - Common shareholders of record" (page F-35); under
the heading "Quarterly Summary and Statistical Information - Unaudited" opposite
the caption "Market price of common stock" (page F-34); and in Note 15 to the
Consolidated Financial Statements (page F-27).

     On March 31, 1998, the Company paid a dividend of one Preferred Stock
Purchase Right ("Right") on each share of the Company's Common Stock. Subject to
prior redemption by the Company for $.01 per Right, Rights will become
exercisable on the earlier of (a) 10 days after a person or group ("Acquiring
Person") has acquired beneficial ownership of 20% or more of the outstanding
Common Stock or (b) 10

                                       18
<PAGE>

business days (or a later date fixed by the Company's Board of Directors) after
an Acquiring Person commences (or announces the intention to commence) a tender
offer or exchange offer for beneficial ownership of 20% or more of the Common
Stock. Until such events occur, the Rights will automatically trade with the
Common Stock, and separate certificates for the Rights will not be distributed.
The Rights do not have voting or dividend rights.

     Generally, each Right not owned by an Acquiring Person (i) will initially
entitle the holder to buy from the Company one hundredth of a share of the
Company's Junior Participating Preferred Stock ("Junior Preferred Stock"), for
$100, subject to adjustment ("exercise price"); (ii) will entitle such holder to
receive upon exercise, in lieu of shares of Junior Preferred Stock, that number
of shares of Common Stock having a market value of two times the exercise price
of the Right; and (iii) may be exchanged by the Company for one share of Common
Stock or one hundredth of a share of Junior Preferred Stock, subject to
adjustment. Generally, if there is an Acquiring Person and the Company is
acquired, each Right not owned by an Acquiring Person will entitle the holder to
buy a number of shares of common stock of the acquiring company having a market
value equal to twice the exercise price of the Right.

     Each share of Junior Preferred Stock will be entitled to a minimum
preferential quarterly dividend payment of $1.00 per share but will be entitled
to an aggregate dividend equal to 100 times the dividend declared per share of
Common Stock whenever such dividend is declared. In the event of liquidation,
holders of Junior Preferred Stock will be entitled to a minimum preferential
liquidation payment of $100 per share but will be entitled to an aggregate
payment equal to 100 times the payment made per share of Common Stock. Each
share of Junior Preferred Stock will have 100 votes, voting together with the
Common Stock. Finally, in the event of any business combination, each share of
Junior Preferred Stock will be entitled to receive an amount equal to 100 times
the amount received per share of Common Stock. These rights are protected by
customary antidilution provisions.

     The terms of the Rights may be amended by the Company's Board of Directors
without the consent of the holders of the Rights. The Rights are currently
scheduled to expire on March 31, 2008. As a result of Grace's Chapter 11 filing,
the rights could be modified in a plan of reorganization.

     This summary of the Rights does not purport to be complete and is qualified
in its entirety by reference to the Rights Agreement, which was filed as Exhibit
4.1 to the Company's Form 8-K filed on April 8, 1998.

ITEM 6. SELECTED FINANCIAL DATA

     The information called for by this Item appears under the heading
"Financial Summary" (page F-35 of the Financial Supplement) and in Notes 1, 2,
3, 4, 10, 13 and 14 to the Consolidated Financial Statements (pages F-10 through
F-20, and F-22 through F-27 of the Financial Supplement), which is incorporated
herein by reference. In addition, Exhibit 12 to this Report (page F-50) of the
Financial Supplement) contains the ratio of earnings to fixed charges and
combined fixed charges and preferred stock dividends for Grace for the years
1999-2003.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION

     The information called for by this Item appears on pages F-36 to F-48 of
the Financial Supplement, which is incorporated herein by reference.

                                       19
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The information called for by this Item appears in Notes 12 and 13 to the
Consolidated Financial Statements (pages F-23 and F-24 of the Financial
Supplement), which is incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     See the Index to Consolidated Financial Statements and Financial Statement
Schedule and Exhibit on page F-2 of the Financial Supplement, which is
incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

     This Item is inapplicable, as no such changes or disagreements have
occurred.

ITEM 9A. CONTROLS AND PROCEDURES

     The information called for by this Item appears under the heading "Report
on Internal Controls and Procedures" on page F-51 of the Financial Supplement,
which is incorporated herein by reference.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The Company's current directors and executive officers are listed below.
The Company's Certificate of Incorporation provides for the division of the
Board of Directors into three classes, each to serve for a three-year term or
until their respective successors are elected. In view of the Chapter 11 filing,
the directors are expected to continue to serve beyond the expiration of their
respective current terms. Executive officers are elected to serve until the next
annual meeting of the Company's Board of Directors or until their respective
successors are elected. Each of the directors, other than the Chief Executive
Officer, meets the independence standards of the New York Stock Exchange.


    Name and Age                 Office                        First Elected
    ------------                 ------                        -------------

John F. Akers (69)          Class II Director                    05/09/97

H. Furlong Baldwin (72)     Class I Director                     01/16/02

Ronald C. Cambre (65)       Class III Director                   09/01/98

Marye Anne Fox (56)         Class I Director                     05/10/96

John J. Murphy (72)         Class II Director                    05/09/97

Paul J. Norris (56)         Class III Director (Chairman)        01/01/99
                            Chief Executive Officer              11/01/98


                                       20
<PAGE>

    Name and Age                 Office                            First Elected
    ------------                 ------                            -------------

Thomas A. Vanderslice (72)  Class I Director and Lead Director        05/10/96

Robert J. Bettacchi (61)    Senior Vice President                     04/01/97

William M. Corcoran (54)    Vice President                            05/11/99

Alfred E. Festa (44)        President and Chief Operating Officer     11/17/03

W. Brian McGowan (54)       Senior Vice President                    12/06/90*

David B. Siegel (54)        Senior Vice President, General Counsel   09/01/98*
                            and Chief Restructuring Officer

Robert M. Tarola (53)       Senior Vice President and Chief          05/11/99
                            Financial Officer

*  Designated an Executive Officer on July 9, 1998

     Mr. Akers served as Chairman of the Board and Chief Executive Officer of
International Business Machines Corporation from 1985 until his retirement in
1993. He is also a director of Hallmark Cards, Inc., Lehman Brothers Holdings,
Inc., The New York Times Company and PepsiCo, Inc.

     Mr. Baldwin served as a director of Mercantile Bankshares Corporation from
1970 to 2003, and as Chairman of the Board from 1984 to 2003. From 1976 to 2001
he served as President and Chief Executive Officer. Mr. Baldwin is a Co-Chairman
of NASDAQ Stock Market, Inc., and also a director of Platinum Underwriters
Holdings, Ltd. and Allegheny Energy Inc.

     Mr. Cambre is retired Chairman of the Board and CEO of Newmont Mining
Corporation. He joined Newmont as Vice Chairman and CEO in 1993 and retired as
CEO in 2000 and as Chairman in 2001. He is also a director of Cleveland-Cliffs
Inc., McDermott International, Inc. and Inco Limited.

     Dr. Fox is Chancellor of North Carolina State University and University
Distinguished Professor of Chemistry at that institution. She is also a director
of Boston Scientific Corporation, Red Hat, Inc. and Pharmaceutical Product
Development, Inc.

     Mr. Murphy served as Chairman of the Board of Dresser Industries, Inc., a
supplier of products and technical services to the energy industry, until 1996.
From 1997 to 2000, he was a Managing Director of SMG Management L.L.C., a
privately owned investment group. Mr. Murphy is also a director of CARBO
Ceramics, Inc. and ShawCor Ltd.

     Mr. Norris has been actively engaged in Grace's business for the past five
years. He is also a director of Borden Chemical, Inc. In addition, he performs
advisory services for Kolberg, Kravis Roberts & Co., the principal shareholder
of Borden.

     Mr. Vanderslice served as Chairman and Chief Executive Officer of M/A-COM,
Inc., a designer and manufacturer of radio frequency and microwave components,
devices and subsystems for commercial and defense applications, from 1989 until
his retirement in 1995. He is also a director of ChevronTexaco Corporation. As
lead director of Grace's Board, he presides at all executive sessions.

                                       21
<PAGE>

     Messrs. Bettacchi, McGowan and Siegel have been actively engaged in Grace's
business for the past five years.

     Mr. Corcoran previously served as Vice President of Business and Regulatory
Affairs for AlliedSignal Incorporated's (now Honeywell International Inc.)
specialty chemicals business from 1997 until he joined Grace.

     Mr. Festa joined Grace from Morganthaler Private Equity Partners, a venture
capital and buyout firm, where he was a partner. From 2000 to 2002, he was with
ICG Commerce, Inc., a private company providing on-line procurement services,
where he last served as President and Chief Executive Officer. For two years
prior to that, he served as Vice President and General Manager of AlliedSignal's
performance fibers business.

     Mr. Tarola joined Grace from MedStar Health, Inc., where he had served as
Senior Vice President and Chief Financial Officer from 1998 until May 1999. He
previously served in a similar capacity with Helix Health, Inc. for two years.
From 1974 until 1996, Mr. Tarola was an employee and partner of Price Waterhouse
LLP.

     Audit Committee. The Company has a standing Audit Committee established in
accordance with SEC rules. The Committee members are John F. Akers, H. Furlong
Baldwin, Ronald C. Cambre, Marye Anne Fox, John J. Murphy, and Thomas A.
Vanderslice, each of whom meet the independence standards of the SEC and New
York Stock Exchange. The Board of Directors of the Company has determined that
all Committee members are audit committee financial experts as defined by SEC
regulations.

     Compliance with Section 16(a) of the Securities Exchange Act. Under Section
16 of the Securities Exchange Act of 1934, the Company's directors, certain of
its officers, and beneficial owners of more than 10% of the outstanding Common
Stock are required to file reports with the SEC and the New York Stock Exchange
concerning their ownership of and transactions in Common Stock or other
securities of the Company; such persons are also required to furnish the Company
with copies of such reports. Based upon the reports and related information
furnished to the Company, the Company believes that all such filing requirements
were complied with in a timely manner during and with respect to 2003, except
that Mr. Tarola filed a Form 4 Report on March 5, 2003 that was due on February
12, 2003. This transaction involved an inadvertent transfer of 50 shares of
Grace common stock (having a value of $130.50) in connection with a rebalancing
of Mr. Tarola's 401(k) savings plan portfolio.

     Code of Ethics for Principal Officers. The Board of Directors of the
Company and its Audit Committee have adopted revised Business Ethics and
Conflicts of Interest policies, which apply to all of the Company's directors,
officers, and employees, including the Company's principal officers. These
policies are accessible through the Company's Internet website, www.grace.com
under the "Corporate Governance" heading, and are available in hard copy upon
request. The Company granted no waivers to these policies during 2003. Any
amendments or waivers to these policies affecting any principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions for the Company will be
promptly posted on the website.

ITEM 11. EXECUTIVE COMPENSATION

     Summary Compensation Table. The following Summary Compensation Table
contains information concerning the compensation of (a) Paul J. Norris, Chief
Executive Officer; and (b) the other four most highly compensated executive
officers of Grace who were serving as such at year-end 2003. Certain information
has been omitted from the Summary Compensation Table because it is not
applicable or because it is not required under the rules of the SEC.

                                       22
<PAGE>

<TABLE>
<CAPTION>
                                                  Annual Compensation              Long-Term Compensation
                                     ---------------------------------------  ----------------------------------
                                                                                   Awards          Payouts
                                                                              ----------------  ----------------
                                                                                No. of Shares
                                                                  Other           Underlying
     Name and Principal                                           Annual           Options           LTIP             All Other
          Position             Year     Salary      Bonus      Compensation        Granted          Payouts       Compensation (a)
          --------             ----     ------      -----      ------------        -------          -------       ----------------
<S>                           <C>    <C>         <C>           <C>               <C>               <C>             <C>
P. J. Norris                   2003  $1,000,000  $1,000,000            ---             ---                ---         $1,349,800
Chairman and Chief Executive   2002     958,333   1,010,000            ---             ---                ---            587,808
Officer                        2001     887,500     936,250            ---         121,000                ---          1,457,298

R. J. Bettacchi                2003     370,667     300,000            ---             ---                ---            279,663
Senior Vice President          2002     358,000     265,000            ---             ---                ---             30,597
                               2001     345,340     275,000            ---          35,000                ---            366,346

W. M. Corcoran                 2003     287,667     155,000            ---             ---                ---            213,143
Vice President                 2002     277,667     155,000            ---             ---                ---             33,463
                               2001     267,333     150,000            ---          12,300                ---            283,428

D. B. Siegel                   2003     421,333     250,000            ---             ---                ---            338,497
Senior Vice President and      2002     408,000     265,000            ---             ---                ---            244,448
General Counsel                2001     370,000     240,000            ---          21,800                ---            627,915

R. M. Tarola                   2003     398,667     245,000            ---            ----                ---            298,163
Senior Vice President and      2002     388,000     250,000            ---            ----                ---             33,147
Chief Financial Officer        2001     374,500     250,000            ---          27,900                ---            374,277
</TABLE>

(a)  The amounts in this column for 2003 consist of the following:

     (i)       retention payments made as follows: Mr. Norris -- $1,235,000; Mr.
               Bettacchi -- $240,933; Mr. Corcoran -- $186,983; Mr. Siegel --
               $273,867; and Mr. Tarola -- $259,133; See "Retention Agreements"
               for a description of the retention arrangements entered into with
               the executive officers, and "Employment Agreements" for a
               description of Mr. Norris's retention arrangements;

     (ii)      payments made to persons whose personal and/or Company
               contributions to Grace's Salaried Employees Savings and
               Investment Plan ("Savings Plan") would be subject to limitations
               under federal income tax law, as follows: Mr. Norris -- $101,550;
               Mr. Bettacchi -- $25,980; Mr. Corcoran -- $13,660; Mr. Siegel --
               $26,880; and Mr. Tarola -- $26,280;

     (iii)     Company contributions to the Savings Plan, as follows: Mr. Norris
               -- $12,000; Mr. Bettacchi -- $12,000; Mr. Corcoran -- $12,000;
               Mr. Siegel -- $12,000; and Mr. Tarola -- $12,000;

     (iv)      the value of Company-provided personal liability insurance, as
               follows: Mr. Norris -- $1,250; Mr. Bettacchi -- $750; Mr.
               Corcoran -- $500; Mr. Siegel -- $750; and Mr. Tarola -- $750; and

     (v)       for Mr. Siegel, $25,000 of forgiveness of indebtedness income
               under the terms of a relocation loan made in April 2002, the
               balance of which was $32,300 as of December 31, 2003.

     Stock Options. Grace granted no stock options during 2003, and no
previously granted options were exercised by the named individuals during 2003.
The following table sets forth the value of unexercised "in-the-money" options
held at December 31, 2003 (the difference between the aggregate purchase price
of all such options held and the market value of the shares covered by such
options at December 31, 2003).

                                       23
<PAGE>

<TABLE>
<CAPTION>
                               No. of Shares Underlying Unexercised      Value of Unexercised In-the-Money
                                        Options at 12/31/03                     Options at 12/31/03
 Name                                Exercisable/Unexercisable               Exercisable/Unexercisable
                              ---------------------------------------  ----------------------------------------
<S>                           <C>                                       <C>
P. J. Norris ...........               1,124,692 / 40,334                        $18,553 / $9,277

R. J. Bettacchi ........                 533,938 / 11,667                         $5,367 / $2,683

W. M. Corcoran .........                  80,700 / 4,100                          $1,886 / $943

D. B. Siegel ...........                 372,728 / 7,267                          $3,343 / $1,671

R. M. Tarola ...........                 193,600 / 9,300                          $4,278 / $2,139
</TABLE>

     Long-Term Incentive Program. The Company's long-term incentive plans
generally are designed to provide key employees with long-term incentives having
a value at the 60th percentile of long-term incentives offered by specialty
chemical companies of comparable size to Grace. In 2001, the Company's Board of
Directors approved a Long-Term Incentive Plan for key employees ("2001 LTIP")
for the 2001-2003 period. For each key employee, the targeted value of the 2001
LTIP award was split so that 50% of the value of the award was provided in the
form of a stock option grant, and 50% was in the form of cash compensation,
payable if the Company achieves certain pretax earnings targets over a three
calendar year period. No payments will be made under the cash compensation
portion of the 2001 LTIP.

     In 2002, the Board and the Bankruptcy Court approved the 2002 LTIP for the
2002-2004 period. The 2002 LTIP operates in substantially the same manner as the
2001 LTIP, except that the targeted value of the 2002 LTIP award is payable 100%
in cash, and the pretax earnings targets have been revised. If a key employee
becomes entitled to cash compensation under the 2002 LTIP, then such
compensation will generally be paid in two installments: one in the first
quarter of 2004 (which will be a partial payment based on performance for the
first two years of the applicable three-year period), and the other in the first
quarter of 2005 (which will consider performance for the complete three-year
period and will be offset by the amount of the prior installment). Generally, a
key employee will forfeit his or her rights to receive an installment of cash
compensation if, prior to the payment of the installment, the employee either
voluntarily resigns from the Company or is terminated by the Company for cause.

     In 2003, the Board and the Bankruptcy Court approved the 2003 LTIP for the
2003-2005 period. The 2003 LTIP operates in substantially the same manner as the
2002 LTIP, with revised pretax earnings targets. The following table sets forth
threshold, targeted and maximum awards under the 2003 LTIP:


<TABLE>
<CAPTION>
                                                                                  Estimated Future Payouts
                                             Performance or Other               Under Non-Stock Price-Based
                  No. of Shares, Units       Period Until Maturation                        Plans
   Name             Or Other Rights          or Payout                   Threshold(a)        Target         Maximum
   ----             ---------------          ---------                   ------------        ------         -------
<S>                 <C>                     <C>                       <C>                <C>             <C>
P. J. Norris         $1,452,000              2003-2005                   $0 or $24,248    $1,452,000     $2,904,000
R. J. Bettacchi         420,000              2003-2005                   $0 or $ 7,014       420,000        840,000
W. M. Corcoran          150,000              2003-2005                   $0 or $ 2,505       150,000        300,000
D. B. Siegel            335,000              2003-2005                   $0 or $ 5,595       335,000        670,000
R. M. Tarola            335,000              2003-2005                   $0 or $ 5,595       335,000        670,000
</TABLE>

(a)  No payment will be made unless the minimum targeted level of pretax
     earnings is achieved.

                                       24
<PAGE>

     Pension Arrangements. Full-time salaried employees who are 21 or older and
who have one or more years of service are eligible to participate in the
Retirement Plan for Salaried Employees. Under this basic retirement plan,
pension benefits are based upon (a) the employee's average annual compensation
for the 60 consecutive months in which his or her compensation is highest during
the last 180 months of continuous participation, and (b) the number of years of
the employee's credited service. For purposes of this basic retirement plan,
compensation generally includes nondeferred base salary and annual incentive
compensation (bonus) awards; however, for 2003, federal income tax law limited
to $200,000 the annual compensation on which benefits under this plan may be
based.

     Grace also has a Supplemental Executive Retirement Plan under which a
covered employee will receive the full pension to which he or she would be
entitled in the absence of the limitations described above and other limitations
imposed under federal income tax law. In addition, this supplemental plan
recognizes deferred base salary, deferred annual incentive compensation awards
and, in some cases, periods of employment during which an employee was
ineligible to participate in the basic retirement plan. (Commencing in 2001,
Grace no longer permits deferrals of base salary or incentive compensation.)

     The following table shows the annual pensions payable under the basic and
supplemental plans for different levels of compensation and years of credited
service. The amounts shown have been computed on the assumption that the
employee retired at age 65 on January 1, 2003, with benefits payable on a
straight life annuity basis. Such amounts are subject to (but do not reflect) an
offset of 1.25% of an estimate of the employee's primary Social Security benefit
at retirement age for each year of credited service under the basic and
supplemental plans.

<TABLE>
<CAPTION>

 Highest Average                                 Years of Credited Service
      Annual        ----------------------------------------------------------------------------------
   Compensation       10 Years      15 Years        20 Years      25 Years     30 Years     35 Years
------------------  ------------  ------------  ------------  ------------  ------------  ------------
<S>                 <C>           <C>             <C>           <C>          <C>          <C>
      $100,000        $15,000       $22,500         $30,000       $37,500      $45,000      $52,500
       200,000         30,000        45,000          60,000        75,000       90,000      105,000
       300,000         45,000        67,500          90,000       112,500      135,000      157,500
       400,000         60,000        90,000         120,000       150,000      180,000      210,000
       500,000         75,000       112,500         150,000       187,500      225,000      262,500
       600,000         90,000       135,000         180,000       225,000      270,000      315,000
       700,000        105,000       157,500         210,000       262,500      315,000      367,500
       800,000        120,000       180,000         240,000       300,000      360,000      420,000
       900,000        135,000       202,500         270,000       337,500      405,000      472,500
     1,000,000        150,000       225,000         300,000       375,000      450,000      525,000
     1,100,000        165,000       247,500         330,000       412,500      495,000      577,500
     1,200,000        180,000       270,000         360,000       450,000      540,000      630,000
     1,300,000        195,000       292,500         390,000       487,500      585,000      682,500
     1,400,000        210,000       315,000         420,000       525,000      630,000      735,000
     1,500,000        225,000       337,500         450,000       562,500      675,000      787,500
     1,600,000        240,000       360,000         480,000       600,000      720,000      840,000
     1,700,000        255,000       382,500         510,000       637,500      765,000      892,500
     1,800,000        270,000       405,000         540,000       675,000      810,000      945,000
     1,900,000        285,000       427,500         570,000       712,500      855,000      997,500
     2,000,000        300,000       450,000         600,000       750,000      900,000    1,050,000
     2,100,000        315,000       472,500         630,000       787,500      945,000    1,102,500
     2,200,000        330,000       495,000         660,000       825,000      990,000    1,155,000
</TABLE>


                                       25
<PAGE>

     At December 31, 2003, Messrs. Norris, Bettacchi, Corcoran, Siegel and
Tarola had 11.83, 32, 4.56, 26.75 and 4.56 years of credited service,
respectively, under the basic and supplemental retirement plans. (Mr. Norris'
years of credited service include his eligible service with Grace from 1975 to
1981.) For purposes of those plans, the 2003 compensation of such executive
officers was as follows: Mr. Norris -- $2,010,000; Mr. Bettacchi -- $635,667;
Mr. Corcoran -- $442,667; Mr. Siegel -- $686,333; and Mr. Tarola -- $648,667.
Messrs. Norris, Corcoran and Tarola are entitled to additional pension benefits
under their employment agreements (see "Employment Agreements").

     Employment Agreements. Paul J. Norris. Effective January 1, 2003, Mr.
Norris entered into a letter agreement with Grace (the "Letter Agreement"),
whereby his employment agreement, dated October 26, 1998 (the "1998 Agreement"),
was extended beyond its original termination date of December 31, 2002, and was
amended as described herein. Under the Letter Agreement, Mr. Norris' employment
with Grace will continue until terminated by Grace or Mr. Norris. Except as
amended by the Letter Agreement, the provisions of the 1998 Agreement remain
applicable to Mr. Norris during his post-2002 employment term with Grace.

     Under the 1998 Agreement, during his post-2002 employment term, Mr. Norris
will continue to be entitled to an annual base salary of not less than $875,000.
In addition, he will continue to participate in Grace's annual incentive
compensation program, under which his targeted award will be at least 75% of his
annual base salary. (As of January 1, 2004, Mr. Norris' annual base salary is
$1,000,000 and his targeted percentage for his annual incentive compensation
award is 125%.)

     Under the terms of the Letter Agreement, on December 31, 2003, Mr. Norris
received a $1,235,000 retention bonus for services performed during 2003. Mr.
Norris is eligible to receive, on December 31, 2004, an additional retention
bonus of $1,235,000 for services performed during 2004. Pursuant to a separate
agreement, Mr. Norris has agreed that 50% of such amount will be paid on
December 31, 2004, and the remaining 50% will be subject to the achievement of
specified earnings targets for 2004 and, to the extent achieved, will be paid in
the first quarter of 2005. Mr. Norris will not receive a 2004 retention bonus
if, prior to December 31, 2004, he is terminated by Grace for cause. In
addition, Mr. Norris will not receive a 2004 retention bonus, if prior to
December 31, 2004, he resigns his employment with Grace, unless such resignation
is on the basis of constructive discharge. If Mr. Norris' employment is
terminated on the basis of constructive discharge (or as a result of his death
or disability) during 2004, then he (or his beneficiary, in the case of death)
will be entitled to a payment of a pro-rated portion of the actual retention
bonus otherwise payable for such year, based on the portion of such year that he
remained an employee of Grace.

     Under the 1998 Agreement, during his post-2002 employment term with Grace,
if Mr. Norris' employment is terminated by Grace without cause or by Mr. Norris
on the basis of constructive discharge, then he will be entitled to receive a
severance payment equal to two times the dollar amount that equals 175% of his
annual base salary at the time of such termination. Such payment will be made in
a lump sum immediately after Mr. Norris' date of termination.

     Under the Letter Agreement, Mr. Norris is obligated to provide Grace with
at least 180 days written prior notice of his intention to resign his employment
with Grace in order to receive certain benefits and payments upon termination,
which were originally specified under the 1998 Agreement. Specifically, if Mr.
Norris provides such timely notice, he will receive the following benefits and
payments upon termination: (1) an award under Grace's annual incentive
compensation program for the calendar year of termination, which will be
pro-rated based on the portion of such calendar year that he remained an
employee of Grace, (2) a supplemental pension payment (described below), (3)
principal residence relocation assistance (described below), and (4) a payment
of the cash component of any award made to Mr. Norris under Grace's long-term
incentive plans, which will be pro-rated based on the portion of the applicable
3-year performance period that he remained an employee of Grace. Under the
Letter Agreement, Mr. Norris will also be entitled to these

                                       26
<PAGE>

benefits and payments if his employment is terminated by Grace for any reason
except cause. If Mr. Norris' employment is terminated for cause, he will not be
entitled to those benefits and payments.

     If Mr. Norris becomes entitled to a supplemental pension payment as
referenced above, then in determining the benefits payable to Mr. Norris under
Grace's basic and supplemental retirement plans, his years of service with Grace
and his prior employer will be recognized as if those years were continuous
service with Grace, with an offset for any retirement benefits payable from his
prior employer's retirement plans. Such payment would be made in a lump sum
immediately after Mr. Norris' date of termination.

     Also, if Mr. Norris does not receive supplemental retirement benefits under
any Grace plan (as a result of any reduction regarding such a plan pursuant to
any Chapter 11 proceeding or otherwise), then such supplemental benefits will
become payable to Mr. Norris under his employment agreement.

     If Mr. Norris becomes entitled to the principal residence relocation
assistance referenced above, Grace will provide him with relocation assistance
to any location within the continental United States selected by Mr. Norris.
Such relocation assistance would include certain cash payments and other
relocation assistance, as well as compensation for any loss incurred on the sale
of his Maryland home.

     The 1998 Agreement also provides for Mr. Norris' participation in other
benefits and compensation programs, including benefits and programs generally
available to other senior executives of Grace.

     The forgoing description of Mr. Norris' employment agreement does not
purport to be complete and is qualified in its entirety by reference to the 1998
Agreement, which has been filed with the SEC as Exhibit 10.20 to Grace's 2000
Annual Report on Form 10-K, and by reference to the Letter Agreement, which has
been filed with the SEC as Exhibit 10.19 to Grace's 2002 Annual Report on Form
10-K.

     William M. Corcoran. Mr. Corcoran had an employment agreement with Grace
that expired on May 31, 2002. Under terms of the agreement that survived the
expiration date, if Mr. Corcoran is terminated without cause, he will generally
be entitled to a severance payment equal to 137% of his annual base salary at
the time of termination. (However, along with other executive officers and
certain key employees of Grace, Mr. Corcoran has entered into a retention
agreement with Grace, described below, under which he may be entitled to
enhanced severance pay in lieu of, but not in addition to, the severance pay
provided under his employment agreement.) In addition, the benefits payable to
Mr. Corcoran under Grace's basic and supplemental retirement plans will continue
to be determined by adding additional years of credited service under those
plans. Generally, for each year of credited service under those plans that he
actually earns during his period of employment with Grace, he will receive
credit for an additional one-half year of credited service (up to a maximum of 5
additional years of credited service), except that in no event will he receive
less than 5 years of credited service, regardless of the date his employment
with Grace actually terminates. The foregoing description of Mr. Corcoran's
employment agreement does not purport to be complete and is qualified in its
entirety by reference to such agreement, which has been filed with the SEC as
Exhibit 10.24 to Grace's 2000 Annual Report on Form 10-K.

     Alfred E. Festa. Mr. Festa has a three year employment agreement with Grace
dated November 17, 2003, his first day of employment with Grace. Under the
agreement, Mr. Festa is entitled to an initial annual base salary of $550,000.
He is also entitled to participate in the Company's Annual Incentive
Compensation Program. Under the agreement, for 2003 he was entitled to 100% of
base salary for the portion of 2003 during which he was actually employed by the
Company. For 2004 his targeted award will be 100% of his annual base salary
earned during such year;. For 2005 and thereafter, his targeted award will be
75% (or greater, if determined by the Company's Board) of his annual base salary
earned during the applicable year.

                                       27
<PAGE>

     Under the agreement, Mr. Festa will also participate in the Company's
currently effective LTIPs for the 2002-2004 and 2003-2005 performance periods.
His targeted award under each of the LTIPs is $687,000. However, any award to
which he becomes entitled under either of the LTIPs will be pro-rated to reflect
the percentage of days that he was an active employee of the Company during the
applicable performance period.

     Also, under terms of the agreement, if Mr. Festa's employment is terminated
by the Company without cause, or by him as a result of constructive discharge,
prior to the expiration of his employment agreement, he will be entitled to a
severance payment equal to 1.5 times 175% of his annual base salary at the time
of his termination. Mr. Festa would also be entitled to such a severance payment
if he terminates his employment with the Company in the event that he is not
offered the position of Chief Executive Officer upon the departure of Mr.
Norris. In addition, the agreement provides that Mr. Festa is eligible to
participate in other compensation and benefit plans and programs that are
provided to the other senior officers of the Company. The foregoing description
of Mr. Festa's employment agreement does not purport to be complete and is
qualified in its entirety by reference to such agreement, which has been filed
with the SEC as Exhibit 10.27 to this Report Form.

     David B. Siegel. Under terms of a January 1, 2001 agreement, Mr. Siegel
continues to be entitled to an enhanced severance payment equal to two times his
annual base salary if his employment is involuntarily terminated without cause
under circumstances that would qualify him for severance pay under Grace's
severance plan that generally covers salaried employees. In addition, on January
1, 2002, under the terms of such agreement, Mr. Siegel relocated from Florida to
Columbia, Maryland, and received the relocation benefits generally available to
all Grace employees who relocated to Maryland in conjunction with the relocation
of Grace's corporate headquarters. Grace has further agreed to provide Mr.
Siegel with post-employment relocation assistance (on the terms of the
relocation policy in effect for active employees) under certain conditions; this
further agreement has not yet been finalized.

     Robert M. Tarola. Mr. Tarola had an employment agreement that expired on
November 10, 2002. Under terms of the agreement that survived the expiration
date, if Mr. Tarola is terminated without cause, he will generally be entitled
to a severance payment equal to 145% of his annual base salary at the time of
termination. (However, along with the other executive officers and certain key
employees of Grace, Mr. Tarola has entered into a retention agreement with
Grace, described below, under which he may be entitled to enhanced severance pay
in lieu of, but not in addition to, the severance pay provided under his
employment agreement.) In addition, the benefits payable to Mr. Tarola under
Grace's basic and supplemental retirement plans will continue to be determined
by adding additional years of credited service under those plans. Generally, for
each year of credited service under those plans that he actually earns during
his period of employment with Grace, he will receive credit for one additional
year of credited service (up to a maximum of 10 additional years of credited
service), except that in no event will he receive less than 5 years of credited
service, regardless of the date his employment with Grace actually terminates.
The foregoing description of Mr. Tarola's employment agreement does not purport
to be complete and is qualified in its entirety by reference to such agreement,
which has been filed with the SEC as Exhibit 10.1 to Grace's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999.

     Change-in-Control Severance Agreements. In addition to the severance
provisions described under "Retention Agreements" below, Grace has severance
agreements with all of its executive officers, which renew automatically unless
the Board of Directors of the Company elects not to renew them. These agreements
generally provide that in the event of the involuntary termination of the
individual's employment without cause (including constructive termination caused
by a material reduction in his or her authority or responsibility or by certain
other circumstances) following a "change in control" of Grace, he or she will
generally receive a severance payment equal to three times the sum of his or her
annual base salary plus target annual incentive compensation (bonus), subject to
pro rata reduction in the case of an officer who is within 36 months of normal
retirement age (65). For purposes of the severance agreements, "change in
control" means

                                       28
<PAGE>

the acquisition of 20% or more of the Common Stock (but not if such acquisition
is the result of the sale of Common Stock by Grace that has been approved by the
Board), the failure of Board-nominated directors to constitute a majority of any
class of the Board of Directors, the occurrence of a transaction in which the
shareholders of Grace immediately preceding such transaction do not own more
than 50% of the combined voting power of the company resulting from such
transaction, or the liquidation or dissolution of Grace. This description of the
severance agreements does not purport to be complete and is qualified in its
entirety by reference to the form of such agreement, which has been filed with
the SEC as Exhibit 10.17 to Grace's 2002 Annual Report on Form 10-K. As a result
of Grace's Chapter 11 filing, the following events will not constitute a "change
in control": (i) the acquisition by a trust of Common Stock, established for
purposes of administering asbestos-related claims pursuant to a plan of
reorganization, and (ii) a corporate transaction pursuant to Section 363 of the
U.S. Bankruptcy Code or a plan of reorganization.

     Retention Agreements. Effective January 1, 2001, Grace entered into
retention agreements with each of the executive officers other than Messrs.
Norris and Siegel (and Mr. Festa, who did not join Grace until November 2003),
whose retention arrangements were covered by their respective employment
agreements. These agreements were approved by the Compensation Committee in
recognition of the adverse effect that the market performance of the Common
Stock has had and is expected to continue to have on Grace's ability to attract
and retain key employees. Under the terms of these agreements, each such
executive officer received a payment in January 2001 equal to his annual base
salary, subject to remaining employed with Grace through December 31, 2002. The
retention payments are not considered compensation for purposes of any Grace
benefit or compensation plans or programs. In addition to the retention payment,
the retention agreements provide that in the event of the involuntary
termination of such officer's employment under circumstances that would qualify
such officer for severance pay under Grace's severance plan that generally
covers salaried employees, then the officer would be entitled to severance pay
equal to two times his or her annual base salary. With respect to any such
officer who has any other agreement with Grace regarding the payment of
severance upon termination of employment, if such officer becomes entitled to
severance under both the terms of the retention agreement and such other
agreement, then the officer would only receive severance pay under the retention
agreement, unless the other agreement provides for a greater amount of severance
pay (in which case, the officer would only receive severance pay under such
other agreement).

     Grace has implemented a new retention program for 2003 and 2004 under which
each executive officer (except for Mr. Norris, whose retention arrangement is
covered by separate agreements, and Mr. Festa) would be entitled to receive a
payment equal to 65% of his base salary if the officer remains employed with
Grace for the entire year. The payment of the 2003 retention bonus was made to
each eligible executive officer at the end of 2003. For 2004, 50% of the
retention bonus is contingent upon the achievement of specified earnings targets
for such year. Therefore, 50% of such retention bonus will be paid to each
eligible executive at the end of 2004, and the remaining bonus, if any, will be
paid during the first quarter of 2005. These retention payments are not
considered compensation for purposes of any Grace benefit or compensation plans
or programs.

     Executive Salary Protection Plan. All executive officers participate in the
Executive Salary Protection Plan ("ESPP"), which provides that, in the event of
a participant's disability or death prior to age 70, Grace will continue to pay
all or a portion of base salary to the participant or a beneficiary for a period
based on the participant's age at the time of disability or death. Payments
under the ESPP may not exceed 100% of base salary for the first year and 60%
thereafter in the case of disability (50% in the case of death). This
description of the ESPP does not purport to be complete and is qualified in its
entirety by reference to the text of the ESPP, as amended, which is filed as
Exhibit 10.8 to Grace's 2001 Annual Report on Form 10-K.

     Effect of Chapter 11 Filing. The U.S. Bankruptcy Court has approved the
employment agreements and the continuation of the executive compensation and
benefit agreements and programs described above.

                                       29
<PAGE>

The continuation of these agreements and programs, and the establishment of new
programs may be affected by the Chapter 11 proceedings.

     Directors' Compensation. Under the compensation program for nonemployee
directors in effect for 2003, each nonemployee director received an annual
retainer of $50,000, 50% of which was paid in cash and 50% of which was paid in
the form of Common Stock. In addition, directors received $4,000 ($5,000 for
directors holding a committee chair) in cash for each meeting date in respect of
the Board meeting and all committee meetings held on such date. The same
compensation program will be effective during 2004. Grace reimburses nonemployee
directors for expenses they incur in attending Board and committee meetings.
Grace also maintains business travel accident insurance coverage for them.

     Compensation Committee Interlocks and Insider Participation. During 2003,
the Compensation Committee of the Board was comprised of Messrs. Akers (Chair),
Baldwin, Cambre, Murphy and Vanderslice, and Dr. Fox. None of such persons is a
current or former officer or employee of Grace or any of its subsidiaries, nor
did any of such persons have any reportable transactions with Grace or any of
its subsidiaries.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS

     Security Ownership. The following table sets forth the Common Stock
beneficially owned, directly or indirectly, as of January 31, 2004 by (1) each
person known to Grace to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock, and (2) each current director, each of the
executive officers named in the Summary Compensation Table set forth in Item 11
above, and such directors and all executive officers as a group.

<TABLE>
<CAPTION>
                                                         Shares of Common Stock
Beneficial Owner                                           Beneficially Owned                 Percent
----------------                                           ------------------                 -------
<S>                                                       <C>                               <C>
Peninsula Partners, L.P. (1)...................                10,765,600                       16.41%
404B East Main Street, 2nd Floor
Charlottesville, VA 22902

J. F. Akers ...................................                    38,996                         *
                                                                   74,535      (O)
                                                                   15,196      (T)

H. F. Baldwin ..................................                   21,918                         *

R. J. Bettacchi ...............................                                                   *
                                                                  545,605      (O)
                                                                   24,675      (T)

R. C. Cambre ...................................                   64,135                         *

W. M. Corcoran ................................                    10,000                         *
                                                                   84,800      (O)
                                                                    1,265      (T)

M. A. Fox .....................................                    41,246                         *
                                                                    8,942      (T)
</TABLE>



                                       30
<PAGE>

<TABLE>
<CAPTION>
                                                         Shares of Common Stock
Beneficial Owner                                           Beneficially Owned                 Percent
----------------                                           ------------------                 -------
<S>                                                       <C>                               <C>
J. J. Murphy ...................................                   38,930                         *
                                                                   15,528      (O)
                                                                   18,629      (T)

P. J. Norris ...................................                  138,822                       1.95%
                                                                1,165,026      (O)
                                                                    1,071      (T)

D. B. Siegel ...................................                   15,100                         *
                                                                  379,995      (O)
                                                                   20,832      (T)

R. M. Tarola  .................................                    15,000                         *
                                                                  202,900      (O)

T. A. Vanderslice .............................                    39,522                         *
                                                                   69,876      (O)
                                                                   14,932      (T)

Directors and executive officers as a group ...                   433,669                       4.52%
                                                                2,864,545      (O)
                                                                  121,960      (T)
</TABLE>


*           Indicates less than 1%

(O)         Shares covered by stock options exercisable on or within 60 days
            after January 31, 2004.

(T)         Shares owned by trusts and other entities as to which the person has
            the power to direct voting and/or investment.

(1)         The ownership information set forth is based in its entirety on
            material contained in a Form 4 report dated September 10, 2001 filed
            with the SEC.


     Equity Compensation Plan Information. The following table sets forth
information as of December 31, 2003 with respect to Grace's compensation plans
under which shares of Common Stock are authorized for issuance upon the exercise
of options, warrants or other rights. The only such compensation plans in effect
are stock incentive plans providing for the issuance of stock options. All such
plans have been approved by Grace's shareholders.

<TABLE>
<CAPTION>

                                                                                       Number of securities remaining available
                           Number of securities to         Weighted-average                for future issuance under equity
                           be issued upon exercise            exercise of              compensation plans (excluding securities
                           of outstanding options         outstanding options                  reflected in column (a))
Plan category                        (a)                          (b)                                     (c)
<S>                      <C>                                <C>                      <C>
Equity compensation               9,582,789                     $12.02                             4,474,004
plans approved by
security holders
</TABLE>

                                       31
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Commercial Transactions. During 2003, no director, executive officer (or
any member of any of their respective immediate families) or, to the Company's
knowledge, any holder of more than 5% of the Common Stock, had a direct or
indirect material interest in any transaction (or any proposed transaction) to
which the Company was (or will become) a party.

     Legal Proceedings; Indemnification. During 2003 there were no legal
proceedings pending in which any current officers or directors of the Company
were parties adverse to, or had a material interest adverse to, the Company.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

     The Audit Committee of the Board of Directors of Grace selected
PricewaterhouseCoopers LLP ("PwC") to continue to act as Grace's principal
independent accountants for 2003. The following table sets forth the fees
incurred by Grace for the services of PwC for the years ended December 31, 2003
and 2002:


         ----------------------------------------------------------------
                                        2003                 2002
         ----------------------------------------------------------------
         Audit Fees               $1,763,000            $1,587,000
         ----------------------------------------------------------------
         Audit-Related Fees          210,500               198,000
         ----------------------------------------------------------------
         Tax Fees                    133,000               160,000
         ----------------------------------------------------------------
         All Other Fees                    -               988,000
         ----------------------------------------------------------------
           Total Fees             $2,106,500            $2,933,000
         ----------------------------------------------------------------

     Audit Services consisted of the audit of Grace's consolidated financial
statements, the review of its consolidated quarterly financial statements and
statutory audits of certain of Grace's non-U.S. subsidiaries and affiliates.

     Audit-Related Services consisted of financial statement audits of Grace's
U.S. employee benefit plans and the audit of the financial statements of
Advanced Refining Technologies, LLC (a joint venture with Chevron Products
Company).

     Tax Services consisted of tax advice and compliance for non-U.S.
subsidiaries, including preparation of tax returns.

     All Other Services consisted of expert services related to environmental
litigation.

     The Audit Committee has adopted a preapproval policy that requires the
Audit Committee to specifically preapprove the annual engagement of the
independent accountants for the audit of Grace's consolidated financial
statements. The policy also provides for general preapproval of certain
audit-related, tax and other services, up to a specified dollar amount for each
year. Services in excess of such dollar amounts and any other services must be
specifically preapproved by the Audit Committee. However, the chair of the Audit
Committee has the authority to preapprove services requiring immediate
engagement between scheduled meetings of the Audit Committee. The chair must
report any such preapproval decisions to the full Audit Committee at its next
scheduled meeting. During 2003, no audit-related, tax, or other services were
performed by PwC without specific or general approval as described above.

                                       32
<PAGE>

                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

     Financial Statements and Schedules. See the Index to Consolidated Financial
Statements and Financial Statement Schedule and Exhibit on page F-2 of the
Financial Supplement.

     Reports on Form 8-K. The following reports on Form 8-K were filed during
the fourth quarter of 2003: October 24, 2003 - Press release announcing Grace's
financial results for the third quarter of 2003.

     Exhibits. The exhibits to this Report are listed below. Other than exhibits
that are filed herewith, all exhibits listed below are incorporated by
reference. Exhibits indicated by an asterisk (*) are the management contracts
and compensatory plans, contracts or arrangements required to be filed as
exhibits to this Report.

     For purposes of describing these exhibits, "Old Grace" means W. R. Grace &
Co., a Delaware corporation (subsequently renamed Sealed Air Corporation), a
predecessor to the Company, and "Grace New York" means W. R. Grace & Co., a New
York corporation (subsequently renamed Fresenius Medical Care Holdings, Inc.), a
predecessor to Old Grace.

EXHIBIT
  NO.               EXHIBIT                                 WHERE LOCATED
  ---               -------                                 -------------

  2.1      Form of Distribution Agreement, by       Annex B to the Joint Proxy
           and among Old Grace, W. R. Grace &       Statement/Prospectus dated
           Co.-Conn. and Grace Specialty            February 13, 1998 of Old
           Chemicals, Inc. (now named W. R.         Grace and Sealed Air
           Grace & Co.)                             Corporation included in
                                                    Form S-4 (filed 2/13/98)

  3.1      Restated Certificate of Incorporation    Exhibit 3.1 to Form 8-K
           of W. R. Grace & Co.                     (filed 4/8/98; SEC File No.
                                                    001-13953)

  3.2      Amended and Restated By-laws of W. R.    Exhibit 3.2 to Form 10-K
           Grace & Co.                              (filed 3/28/02)

  4.1      Rights Agreement dated as of March       Exhibit 4.1 to Form 8-K
           31, 1998 between W. R. Grace & Co.       (filed 4/8/98; SEC File No.
           and The Chase Manhattan Bank, as         001-13953)
           Rights Agent

  4.2      Credit Agreement dated as of May 14,     Exhibit 4.1 to Form 10-Q
           1998, among W. R. Grace & Co.-Conn.,     (filed 8/14/98; SEC File
           W. R. Grace & Co., the several banks     No. 001-13953)
           parties thereto; the co-agents
           signatories thereto; The Chase
           Manhattan Bank, as administrative
           agent for such banks; and Chase
           Securities Inc., as arranger


                                       33
<PAGE>

EXHIBIT
  NO.               EXHIBIT                                 WHERE LOCATED
  ---               -------                                 -------------

  4.3      364-Day Credit Agreement, dated as of    Exhibit 4.1 to Form 10-Q
           May 5, 1999, among W. R. Grace &         (filed 8/3/99)
           Co.-Conn.; W. R. Grace & Co.; the
           several banks parties thereto; the
           co-agents signatories thereto; Bank
           of America National Trust and Savings
           Association, as documentation agent;
           The Chase Manhattan Bank, as
           administrative agent for such banks;
           and Chase Securities Inc., as book
           manager

  4.4      First Amendment to 364-Day Credit        Exhibit 4 to Form 10-Q
           Agreement dated as of May 5, 1999        (filed 8/15/00)
           among W. R. Grace & Co.-Conn.; W. R.
           Grace & Co.; the several banks
           parties thereto; Bank of America
           National Trust and Savings
           Association, as document agent; The
           Chase Manhattan Bank, as
           administrative agent for such banks;
           and Chase Securities, Inc., as bank
           manager

  4.5      Post-Petition Loan and Security          Exhibit 4 to Form 10-Q
           Agreement dated as of April 1, 2001      (filed 8/14/01)
           among the financial institutions
           named therein, as Lenders, Bank of
           America, N.A. as Agent, and W. R.
           Grace & Co. and its subsidiaries
           named therein as Debtors and
           Debtors-in-Possession, as Borrowers

  4.6      Amendment No. 1 and Limited Waiver to    Exhibit 4 to Form 10-Q
           Post-Petition Loan and Security          (filed May 13, 2003)
           Agreement

  10.1     Form of Employee Benefits Allocation     Exhibit 10.1 to Form 10-K
           Agreement, by and among Old Grace, W.    (filed March 13, 2003)
           R. Grace & Co.-Conn. and Grace
           Specialty Chemicals, Inc. (now named
           W. R. Grace & Co.)

  10.2     Form of Tax Sharing Agreement, by and    Exhibit 10.2 to Form 10-K
           among Old Grace, W. R. Grace &           (filed March 13, 2003)
           Co.-Conn. and Grace Specialty
           Chemicals, Inc. (now named W. R.
           Grace & Co.)

  10.3     W. R. Grace & Co. 2000 Stock             Exhibit 10 to Form 10-Q
           Incentive Plan, as amended               (filed 8/15/00)*

  10.4     W. R. Grace & Co. 1998 Stock             Exhibit 10.4 to Form 10-K
           Incentive Plan                           (filed March 13, 2003)*

  10.5     W. R. Grace & Co. 1998 Stock Plan for    Exhibit 10.5 to Form 10-K
           Nonemployee Directors                    (filed March 13, 2003)*


                                       34
<PAGE>

EXHIBIT
  NO.               EXHIBIT                                 WHERE LOCATED
  ---               -------                                 -------------

  10.6     W. R. Grace & Co. 1996 Stock             Filed herewith*
           Incentive Plan, as amended

  10.7     W. R. Grace & Co. Supplemental           Exhibit 10.7 to Form 10-K
           Executive Retirement Plan, as amended    (filed 3/28/02)*

  10.8     W. R. Grace & Co. Executive Salary       Exhibit 10.8 to Form 10-K
           Protection Plan, as amended              (filed 3/28/02)*

  10.9     W. R. Grace & Co. 1986 Stock             Exhibit 10.9 to Form 10-K
           Incentive Plan, as amended               (filed 3/28/02)*

 10.10     W. R. Grace & Co. 1989 Stock             Exhibit 10.10 to Form 10-K
           Incentive Plan, as amended               (filed 3/28/02)*

 10.11     W. R. Grace & Co. 1994 Stock             Exhibit 10.11 to Form 10-K
           Incentive Plan, as amended               (filed 3/28/02)*

 10.12     Forms of Stock Option Agreements         Exhibit 10.15 to Form 10-K
                                                    (filed 3/29/99)*

 10.13     Form of Stock Option Agreements          Exhibit 10.14 to
                                                    Registration Statement on
                                                    Form S-1 of Old Grace
                                                    (filed 8/2/96)*

 10.14     Form of Stock Option Agreements          Exhibit 10.5 to Form 10-Q
                                                    (filed 5/15/98; SEC File
                                                    No. 001-13953)*

 10.15     Form of 2001-2003 Long Term Incentive    Exhibit 10.23 to Form 10-K
           Program Award                            (filed 4/16/01)*

 10.16     Form of 2002-2004 Long-Term Incentive    Exhibit 10.16 to Form 10-K
           Program Award                            (filed March 13, 2003)*

 10.17     Form of Executive Severance Agreement    Exhibit 10.17 to Form 10-K
           between W. R. Grace & Co. and officers   (filed March 13, 2003)*

 10.18     Employment Agreement, dated January      Exhibit 10.20 to Form 10-K
           1, 2001, by and between W. R. Grace &    (filed 4/16/01)*
           Co. and Paul J. Norris

 10.19     Amendment dated November 6, 2002 to      Exhibit 10.19 to Form 10-K
           Employment Agreement between W. R.       (filed March 13, 2003)*
           Grace & Co. and Paul J. Norris

 10.20     Employment Agreement dated May 11,       Exhibit 10.1 to Form 10-Q
           1999 between W. R. Grace & Co.-Conn.     (filed 8/13/99)*
           and Robert M. Tarola

                                       35
<PAGE>

EXHIBIT
  NO.               EXHIBIT                                 WHERE LOCATED
  ---               -------                                 -------------

 10.21     Letter Agreement dated January 30,       Exhibit 10.22 to Form 10-K
           2001 between Paul J. Norris, on          (filed 4/16/01)*
           behalf of W. R. Grace & Co., and
           David B. Siegel

 10.22     Letter Agreement dated May 7, 1999       Exhibit 10.24 to Form 10-K
           between Paul J. Norris, on behalf of     (filed 4/16/01)*
           W. R. Grace & Co., and William M.
           Corcoran

 10.23     Form of Indemnification Agreement        Exhibit 10.27 to Form 10-K
           between W. R. Grace & Co. and certain    (filed 4/16/01)*
           Officers and Directors

 10.24     Form of Retention Agreement for          Exhibit 10.28 to Form 10-K
           2001-2002                                (filed 4/16/01)*

 10.25     Form of Retention Agreement for 2003     Exhibit 10.25 to Form 10-K
                                                    (filed March 13, 2003)*

 10.26     Annual Incentive Compensation Program    Exhibit 10.26 to Form 10-K
                                                    (filed March 13, 2003)*

 10.27     Letter Agreement dated November 17,      Filed herewith*
           2003 between Paul J. Norris, on
           behalf of W. R. Grace & Co., and Fred
           Festa

 10.28     Form of Retention Agreement for 2004     Filed herewith*

 10.29     Form of 2003-2005 Long-Term Incentive    Filed herewith*
           Program Award

   12      Computation of Ratio of Earnings to      Filed herewith in Financial
           Fixed Charges and Combined Fixed         Supplement to Grace's 2003
           Charges and Preferred Stock Dividends    Form 10-K

   21      List of Subsidiaries of W. R. Grace &    Filed herewith
           Co.

   23      Consent of Independent Accountants      Filed herewith in Financial
                                                    Supplement to Grace's 2003
                                                    Form 10-K

   24      Powers of Attorney                       Filed herewith

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

                                       36
<PAGE>

EXHIBIT
  NO.               EXHIBIT                                 WHERE LOCATED
  ---               -------                                 -------------

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

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



                                       37
<PAGE>

                                   SIGNATURES

            Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereto duly authorized.


                                            W. R. GRACE & CO.


                                            By: /s/ Paul J. Norris
                                                -------------------------
                                                    Paul J. Norris
                                                    (Chairman and
                                                    Chief Executive Officer)


                                            By: /s/ Robert M. Tarola
                                                -------------------------
                                                    Robert M. Tarola
                                                    (Senior Vice President and
                                                    Chief Financial Officer)

Dated: March 5, 2004

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 5, 2004.

     Signature                             Title
     ---------                             -----

     J. F. Akers*                   }
     H. F. Baldwin*                 }
     R. C. Cambre*                  }
     M. A. Fox*                     }      Directors
     J. J. Murphy*                  }
     T. A. Vanderslice*             }


   /s/  Paul J. Norris                     Chief Executive Officer and Director
------------------------------             (Principal Executive Officer)
       (Paul J. Norris)


    /s/ Robert M. Tarola                   Senior Vice President and Chief
------------------------------             Financial Officer (Principal
       (Robert M. Tarola)                  Financial Officer and Principal
                                           Accounting Officer)



---------------------------------
*    By signing his name hereto, Mark A. Shelnitz is signing this document on
     behalf of each of the persons indicated above pursuant to powers of
     attorney duly executed by such persons and filed with the Securities and
     Exchange Commission.

                                             By: /s/ Mark A. Shelnitz
                                                 -----------------------------
                                                 Mark A. Shelnitz
                                                 (Attorney-in-Fact)


                                       38

<PAGE>










                              FINANCIAL SUPPLEMENT


                                W. R. GRACE & CO.
                           ANNUAL REPORT ON FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 2003




<PAGE>

                              FINANCIAL SUPPLEMENT
                                       TO
                     ANNUAL REPORT ON FORM 10-K FOR THE YEAR
                             ENDED DECEMBER 31, 2003

                       W. R. GRACE & CO. AND SUBSIDIARIES

                   Index to Consolidated Financial Statements
                  and Financial Statement Schedule and Exhibit



Management's Responsibility for Financial Reporting................  F-3
Report of Independent Auditors.....................................  F-4
Report of Independent Auditors on Financial Statement Schedule.....  F-5
Consent of Independent Accountants.................................  F-5
Consolidated Statements of Operations for the three years in the
   period ended December 31, 2003..................................  F-6
Consolidated Statements of Cash Flows for the three years in the
   period ended December 31, 2003..................................  F-7
Consolidated Balance Sheets at December 31, 2003 and 2002..........  F-8
Consolidated Statements of Shareholders' Equity (Deficit) for
   the three years in the period ended December 31, 2003...........  F-9
Consolidated Statements of Comprehensive (Loss) Income for
   the three years in the period ended December 31, 2003...........  F-9
Notes to Consolidated Financial Statements.........................  F-10 - F-34
Financial Summary..................................................  F-35
Management's Discussion and Analysis of Results of Operations
   and Financial Condition.........................................  F-36 - F-48

Financial Statement Schedule
   Schedule II - Valuation and Qualifying Accounts and Reserves....  F-49

Exhibit 12:  Computation of Ratio of Earnings to Fixed Charges
   and Combined Fixed Charges and Preferred Stock Dividends........  F-50


Report on Internal Controls and Procedures ........................  F-51


The financial data listed above appearing in this Financial Supplement are
incorporated by reference herein. The Financial Statement Schedule should be
read in conjunction with the Consolidated Financial Statements and Notes
thereto. Financial statements of less than majority-owned persons and other
persons accounted for by the equity method have been omitted as provided in Rule
3-09 of Securities and Exchange Commission Regulation S-X. Financial Statement
Schedules not included have been omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements or Notes
thereto.


                                      F-2
<PAGE>

MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING

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

     Management maintains internal controls to assist it in fulfilling its
responsibility for financial reporting. These internal controls consist of the
control environment, risk assessment, control activities, information and
communication, and monitoring. A chartered Disclosure Committee oversees Grace's
public financial reporting process and key managers are required to confirm
their compliance with Grace's policies and internal controls. While no system of
internal controls can ensure elimination of all errors and irregularities,
Grace's internal controls, which are reviewed and modified in response to
changing conditions, have been designed to provide reasonable assurance that
assets are safeguarded, policies and procedures are followed, transactions are
properly executed and reported, and appropriate disclosures are made. The
concept of reasonable assurance is based on the recognition that there are
limitations in all systems of internal control and that the costs of such
systems should not exceed their benefits.

     The Audit Committee of the Board of Directors, which is comprised solely of
independent directors, meets regularly with Grace's senior financial management,
internal auditors and independent auditors to review audit plans and results, as
well as the actions taken by management in discharging its responsibilities for
accounting, financial reporting and internal controls. The Audit Committee is
responsible for the selection and compensation of the independent auditors.
Grace's financial management, internal auditors and independent auditors have
direct and confidential access to the Audit Committee at all times.

     The independent auditors are engaged to conduct the audits of and report on
the Consolidated Financial Statements in accordance with auditing standards
generally accepted in the United States of America. These standards require an
assessment of the systems of internal controls and tests of transactions to the
extent considered necessary by the independent auditors for purposes of
supporting their opinion as set forth in their report.



/s/ Paul J. Norris                               /s/ Robert M. Tarola
Paul J. Norris                                   Robert M. Tarola
Chairman and                                     Senior Vice President and
Chief Executive Officer                          Chief Financial Officer

March 5, 2004


                                      F-3
<PAGE>

REPORT OF INDEPENDENT AUDITORS

TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
W. R. GRACE & CO.

     In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of cash flows, of shareholders'
equity (deficit) and of comprehensive income (loss), present fairly, in all
material respects, the financial position of W. R. Grace & Co. and its
subsidiaries at December 31, 2003 and 2002, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2003, in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

     The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated 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 financial statements do not include any
adjustments that might result from the outcome of this uncertainty.



/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Baltimore, Maryland
January 27, 2004


                                      F-4
<PAGE>

         REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE


TO THE SHAREHOLDERS AND BOARD OF
DIRECTORS OF W. R. GRACE & CO.

Our audits of the consolidated financial statements referred to in our report
dated January 27, 2004, which was modified as to a matter raising substantial
doubt about the Company's ability to continue as a going concern, appearing on
page F-4 of this 2003 Annual Report on Form 10-K of W. R. Grace & Co. also
included an audit of the Financial Statement Schedule listed on page F-2 in the
Index to Consolidated Financial Statements and Financial Statement Schedule and
Exhibit of this Form 10-K. In our opinion, this Financial Statement Schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.



/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Baltimore, Maryland
January 27, 2004



                       CONSENT OF INDEPENDENT ACCOUNTANTS


We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-37024, 333-49083, 333-49507, 333-49509,
333-49511, 333-49513, 333-49515, 333-49703 and 333-49705) of W. R. Grace & Co.
of our report dated January 27, 2004 appearing on page F-4 of this 2003 Annual
Report on Form 10-K of W. R. Grace & Co. We also consent to the incorporation by
reference of our report dated January 27, 2004 relating to the Financial
Statement Schedule, which appears above in this Form 10-K.


/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Baltimore, Maryland
March 5, 2004


                                      F-5
<PAGE>

CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
===========================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS                       YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
In millions, except per share amounts
                                                         2003        2002         2001
                                                      -------------------------------------
<S>                                                   <C>         <C>          <C>
Net sales..........................................   $ 1,980.5   $ 1,819.7    $ 1,722.9
Other income.......................................        16.7        22.5         30.8
                                                      -------------------------------------
                                                        1,997.2     1,842.2      1,753.7

Cost of goods sold, exclusive of depreciation and
   amortization shown separately below.............     1,289.8     1,148.1      1,076.3
Selling, general and administrative expenses,
   exclusive of net pension expense (income)
    shown separately below.........................       365.6       345.1        343.6
Depreciation and amortization......................       102.9        94.9         89.2
Research and development expenses..................        52.0        51.5         49.5
Net pension expense (income).......................        52.7        19.5         (9.5)
Interest expense and related financing costs.......        15.6        20.0         37.1
Provision for environmental remediation............       142.5        70.7          5.8
Provision for asbestos-related litigation..........        30.0        --           --
                                                      -------------------------------------
                                                        2,051.1     1,749.8      1,592.0
                                                      -------------------------------------

(Loss) income before Chapter 11 expenses, income
   taxes, and minority interest....................       (53.9)       92.4        161.7
Chapter 11 expenses, net...........................       (14.8)      (30.1)       (15.7)
Benefit from (provision for) income taxes..........        12.3       (38.0)       (63.7)
Minority interest in consolidated entities.........         1.2        (2.2)        (3.7)
                                                      -------------------------------------
   NET (LOSS) INCOME...............................   $   (55.2)  $    22.1    $    78.6
===========================================================================================

BASIC (LOSS) EARNINGS PER SHARE:
   Net (loss) income...............................   $   (0.84)  $    0.34    $    1.20

Weighted average number of basic shares............        65.5        65.4         65.3

DILUTED (LOSS) EARNINGS PER SHARE:
   Net (loss) income...............................   $   (0.84)  $    0.34   $     1.20

Weighted average number of diluted shares..........        65.5        65.5         65.4

===========================================================================================
</TABLE>


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

                                      F-6

<PAGE>



<TABLE>
<CAPTION>
===========================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS                       YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
In millions
                                                             2003        2002      2001
                                                          ---------------------------------
<S>                                                       <C>         <C>        <C>
OPERATING ACTIVITIES
(Loss) income before Chapter 11 expenses, income
  taxes, and minority interest........................    $  (53.9)   $   92.4  $  161.7
Reconciliation to cash provided by operating activities:
   Depreciation and amortization......................       102.9        94.9      89.2
   Interest accrued on pre-petition debt subject to
     compromise.......................................        11.2        14.5      23.2
   Loss (gain) on sales of investments and disposals
     of assets........................................         1.5        (1.9)     (9.7)
   Provision for environmental remediation............       142.5        70.7       5.8
   Provision for asbestos-related litigation..........        30.0          --        --
   Net income from life insurance policies............        (5.6)       (4.7)     (5.4)
   Changes in assets and liabilities, excluding effect
     of businesses acquired/divested and foreign
     currency translation:
      Working capital items...........................       (22.5)       22.2     (63.5)
      Contributions to defined benefit pension plans..       (60.5)      (10.2)    (10.6)
      Contributions to postretirement benefit plans...       (12.6)      (21.5)    (22.3)
      Expenditures for asbestos-related litigation....       (10.4)      (13.1)   (109.6)
      Proceeds from asbestos-related insurance........        13.2        10.8      78.8
      Expenditures for environmental remediation......       (11.2)      (20.8)    (28.9)
      Expenditures for retained obligations of
        discontinued operations.......................        (1.3)       (4.5)     (9.1)
      Increase in accounts receivable due to
        termination of securitization program.........          --          --     (65.3)
      Changes in other accruals and non-cash items....        32.2        25.6      20.0
                                                         ----------------------------------
   NET CASH PROVIDED BY OPERATING ACTIVITIES BEFORE
     INCOME TAXES AND CHAPTER 11 EXPENSES.............       155.5       254.4      54.3
Chapter 11 expenses paid, net.........................       (17.5)      (27.1)    (11.8)
Income taxes paid, net of refunds.....................       (27.2)      (31.8)    (27.9)
                                                         ----------------------------------
   NET CASH PROVIDED BY OPERATING ACTIVITIES..........       110.8       195.5      14.6
                                                         ----------------------------------

INVESTING ACTIVITIES
Capital expenditures..................................       (86.4)      (91.1)    (62.9)
Businesses acquired, net of cash acquired.............       (26.9)      (28.5)    (84.4)
Investment in life insurance policies.................       (11.6)      (16.4)    (17.6)
Proceeds from life insurance policies.................        11.9        19.4      18.0
Proceeds from sales of investments and disposals of
   assets.............................................         3.9         5.9      15.5
                                                         ----------------------------------
   NET CASH USED FOR INVESTING ACTIVITIES.............      (109.1)     (110.7)   (131.4)
                                                         ----------------------------------

FINANCING ACTIVITIES
Net change in loans secured by cash value of life
   insurance..........................................        (3.1)       (5.1)     33.7
Borrowings under credit facilities, net of repayments.         2.3        (2.8)     94.1
Borrowings under debtor-in-possession facility, net of
   fees...............................................        46.1        18.7      71.5
Repayments of borrowings under debtor-in-possession
   facility...........................................       (50.0)      (20.0)    (75.0)
Purchase of common stock..............................          --          --      (0.6)
                                                         ----------------------------------
   NET CASH (USED FOR) PROVIDED BY FINANCING
     ACTIVITIES ......................................        (4.7)       (9.2)    123.7
                                                         ----------------------------------
Effect of currency exchange rate changes on cash and
   cash equivalents...................................        28.6        16.1      (6.9)
                                                         ----------------------------------
   INCREASE IN CASH AND CASH EQUIVALENTS..............        25.6        91.7        --
Cash and cash equivalents, beginning of period........       283.6       191.9     191.9
                                                         ----------------------------------
Cash and cash equivalents, end of period..............    $  309.2    $  283.6  $  191.9
===========================================================================================
</TABLE>

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

                                      F-7

<PAGE>


<TABLE>
<CAPTION>
==========================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS                                          DECEMBER 31,
------------------------------------------------------------------------------------------
In millions, except par value and shares                         2003           2002
                                                             -----------------------------
ASSETS
CURRENT ASSETS
<S>                                                          <C>              <C>
Cash and cash equivalents..................................      $   309.2     $  283.6
Accounts and other receivables, net........................          347.5        316.6
Inventories................................................          214.6        173.6
Deferred income taxes......................................           29.8         20.6
Other current assets.......................................           27.8         35.9
                                                             -----------------------------
   TOTAL CURRENT ASSETS....................................          928.9        830.3

Properties and equipment, net of accumulated depreciation
  and amortization of $1,216.9 (2002 - $1,071.7)...........          656.6        622.2
Goodwill...................................................           85.2         65.2
Cash value of life insurance policies, net of policy loans.           90.8         82.4
Deferred income taxes......................................          587.1        574.1
Asbestos-related insurance expected to be realized after
  one year.................................................          269.4        282.6
Other assets...............................................          256.2        234.9
                                                             -----------------------------
   TOTAL ASSETS............................................      $ 2,874.2     $2,691.7
                                                             =============================

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE
CURRENT LIABILITIES
Debt payable within one year...............................      $     6.8     $    4.3
Accounts payable...........................................          101.8        100.3
Income taxes payable.......................................           16.6         11.4
Other current liabilities..................................          145.6        131.3
                                                             -----------------------------
   TOTAL CURRENT LIABILITIES...............................          270.8        247.3

Deferred income taxes......................................           35.3         30.5
Other liabilities..........................................          286.4        301.4
                                                             -----------------------------
   TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE.............          592.5        579.2

LIABILITIES SUBJECT TO COMPROMISE - NOTE 2.................        2,465.3      2,334.7
                                                             -----------------------------
   TOTAL LIABILITIES.......................................        3,057.8      2,913.9
                                                             -----------------------------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY (DEFICIT)
Common stock issued, par value $0.01; 300,000,000 shares
  authorized; outstanding: 2003 - 65,558,510 (2002 -
  65,466,725)..............................................            0.8          0.8
Paid-in capital............................................          432.1        433.0
Accumulated deficit........................................         (170.9)      (115.7)
Treasury stock, at cost: shares: 2003 - 11,421,250; (2002 -
  11,513,035)..............................................         (135.9)      (137.0)
Accumulated other comprehensive loss.......................         (309.7)      (403.3)
                                                             -----------------------------
   TOTAL SHAREHOLDERS' EQUITY (DEFICIT)....................         (183.6)      (222.2)
                                                             -----------------------------
   TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)....      $ 2,874.2     $2,691.7
==========================================================================================
</TABLE>


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


                                      F-8

<PAGE>

<TABLE>
<CAPTION>
==========================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
------------------------------------------------------------------------------------------
                              Common      Retained              Accumulated      TOTAL
                             Stock and    Earnings                 Other      SHAREHOLDERS'
                              Paid-in   (Accumulated  Treasury  Comprehensive    EQUITY
In millions                   Capital     Deficit)     Stock        Loss        (DEFICIT)
------------------------------------------------------------------------------------------
<S>                          <C>         <C>          <C>          <C>          <C>
BALANCE, DECEMBER 31, 2000   $  433.0    $  (216.4)   $  (136.4)   $  (151.5)   $  (71.3)
Net income................       --           78.6         --           --          78.6
Purchase of common stock .       --           --           (0.6)        --          (0.6)
Shares issued under stock
  plans...................        0.8         --           --           --           0.8
Other comprehensive loss..       --           --           --         (149.2)     (149.2)
                             --------------------------------------------------------------
BALANCE, DECEMBER 31, 2001   $  433.8    $  (137.8)   $  (137.0)   $  (300.7)   $ (141.7)
                             ==============================================================

Net income................   $   --      $    22.1    $    --      $    --      $   22.1
Other comprehensive loss..       --           --           --         (102.6)     (102.6)
                             --------------------------------------------------------------
BALANCE, DECEMBER 31, 2002   $  433.8    $  (115.7)   $  (137.0)   $  (403.3)   $ (222.2)
                             ==============================================================

Net loss..................   $   --      $   (55.2)   $    --      $    --      $  (55.2)
Stock plan activity.......       (0.9)        --            1.1         --           0.2
Other comprehensive income       --           --           --           93.6        93.6
                             --------------------------------------------------------------
BALANCE, DECEMBER 31, 2003   $  432.9    $  (170.9)   $  (135.9)   $  (309.7)   $ (183.6)
==========================================================================================
</TABLE>

<TABLE>
<CAPTION>

=======================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)                                                    YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
In millions                                             2003         2002        2001
---------------------------------------------------------------------------------------
<S>                                                    <C>         <C>         <C>
NET (LOSS) INCOME................................      $(55.2)     $  22.1     $  78.6

OTHER COMPREHENSIVE INCOME (LOSS):
  Foreign currency translation adjustments.......        75.3         45.1       (24.8)
  Minimum pension liability adjustments, net of
    income taxes.................................        18.3       (147.7)     (124.4)
                                                    -----------------------------------
  Total other comprehensive income (loss)........        93.6       (102.6)     (149.2)
                                                    -----------------------------------
COMPREHENSIVE INCOME (LOSS)......................       $38.4      $ (80.5)    $ (70.6)
=======================================================================================
</TABLE>



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

                                      F-9

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

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

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

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

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

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

As provided by the Bankruptcy Code, the Debtors had the exclusive right to
propose a plan of reorganization


                                      F-10

<PAGE>


for a 120-day period following the Filing Date. The Debtors have received
extensions of their exclusivity period during which to file a plan of
reorganization through February 1, 2004, and extensions of the Debtors'
exclusive right to solicit acceptances of a reorganization plan through April 1,
2004. The Debtors have filed a motion with the Bankruptcy Court to further
extend the exclusivity periods for an additional six months.

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

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

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

Approximately 15,000 proofs of claim were filed by the bar date. Of these
claims, approximately 10,000 were non-asbestos related, approximately 4,000 were
for asbestos-related property damage, and approximately 1,000 were for medical
monitoring. In addition, approximately 400 proofs of claim were filed after the
bar date. The discussion below refers to claims filed before the bar date.

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

The Debtors' preliminary analysis indicated that many claims are duplicates,
represent the same claim filed against more than one of the Debtors, lack any
supporting documentation, or provide insufficient supporting documentation. As
of December 31, 2003, the Debtors had filed with the Bankruptcy Court
approximately 1,100 objections with respect to such claims, most of which were
non-substantive (duplicates, no supporting documentation, late filed claims,
etc.). The Debtors expect to file a substantial number of additional objections,
most of which will be substantive, as analysis and evaluation of the claims
progresses. However, based on its initial claims analysis and other available
information, Grace increased its aggregate estimated liability for environmental
remediation and asbestos-related litigation as discussed in Notes 3 and 14. No
other changes to Filing Date liabilities was deemed warranted at this time.

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

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

                                      F-11

<PAGE>


statements as appropriate. Any such adjustments could be material to its
consolidated financial position and results of operations.

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

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

On November 29, 2002, Sealed Air and Fresenius each announced that they had
reached agreements in principle with such Committees to settle asbestos and
fraudulent conveyance claims related to such transactions. Under the terms of
the Fresenius settlement, as subsequently revised and subject to certain
conditions, Fresenius would contribute $115.0 million to the Debtors' estate as
directed by the Bankruptcy Court upon confirmation of the Debtors' plan of
reorganization. In July 2003, the Fresenius settlement was approved by the
Bankruptcy Court. Under the terms of the proposed Sealed Air settlement, Sealed
Air would make a payment of $512.5 million (plus interest at 5.5% per annum,
commencing on December 21, 2002) and nine million shares of Sealed Air common
stock (valued at $487.3 million as of December 31, 2003), as directed by the
Bankruptcy Court upon confirmation of Debtors' plan of reorganization. The
Sealed Air settlement has not been agreed to by the Debtors and remains subject
to the approval of the Bankruptcy Court and the fulfillment of specified
conditions. The Debtors are unable to predict how these settlements may
ultimately affect their plan of reorganization.

Impact on Debt Capital - All of the Debtors' pre-petition debt is in default due
to the Filing. The accompanying Consolidated Balance Sheet as of December 31,
2003 reflects the classification of the Debtors' pre-petition debt within
"liabilities subject to compromise."

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

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

Pursuant to SOP 90-7, Grace's pre-petition liabilities that are subject to
compromise are required to be reported separately on the balance sheet at an
estimate of the amount that will ultimately be allowed by the Bankruptcy Court.
As of December 31, 2003, such pre-petition liabilities include fixed obligations
(such as debt and contractual commitments), as well as estimates of costs
related to contingent liabilities (such as asbestos-related litigation,
environmental remediation, and other claims). The recorded amounts of such
liabilities generally reflect accounting measurements as of the Filing Date,
adjusted as warranted for changes in facts and circumstances, new information
obtained in the claims review process, and/or rulings under Grace's Chapter 11
proceedings subsequent to the Filing. (See Note 2 to the Consolidated Financial
Statements for detail of the liabilities subject to compromise.) Obligations of
Grace subsidiaries not covered by the Filing continue to be classified on the
Consolidated Balance Sheets based upon maturity dates or the

                                      F-12


<PAGE>


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.

PRINCIPLES OF CONSOLIDATION: The Consolidated Financial Statements include the
accounts of Grace and entities as to which Grace exercises control over
operating and financial policies. Intercompany transactions and balances are
eliminated in consolidation. Investments in affiliated companies in which Grace
can significantly influence operating and financial policies are accounted for
under the equity method, unless Grace's investment is deemed to be temporary, in
which case the investment is accounted for under the cost method.

RECLASSIFICATIONS: Certain amounts in prior years' Consolidated Financial
Statements have been reclassified to conform to the 2003 presentation.

EFFECT OF NEW ACCOUNTING STANDARDS: In December 2003, the Financial Accounting
Standards Board ("FASB") revised Statement of Financial Accounting Standards
("SFAS") No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," to require additional disclosure about the assets,
obligations, cash flows, and net periodic benefit cost of defined benefit plans
and other postretirement plans. Grace adopted the provisions of SFAS No. 132 in
December 2003. (See Note 18.)

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

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements of Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). Grace adopted FIN 45 in the
first quarter of 2003. FIN 45 did not have a material effect on the Consolidated
Financial Statements. (See Note 14.)

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses issues related to the
recognition, measurement, and reporting of costs associated with exit and
disposal activities, including restructuring activities. Grace adopted SFAS No.
146 in 2003. SFAS No. 146 did not have a material effect on the Consolidated
Financial Statements.

STOCK INCENTIVE PLANS: SFAS No. 123 permits the Company to follow the
measurement provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and not recognize compensation
expense for its stock-based incentive plans. Had compensation cost for the
Company's stock-based incentive compensation plans been determined based on the
fair value at the grant dates of awards under those plans, consistent with the
fair value methodology prescribed by SFAS No. 123, the Company's net (loss)
income and related (loss) earnings per share for the years ended December 31,
2003, 2002 and 2001 would have been reduced to the pro forma amounts indicated
below:

===========================================================================
PRO FORMA EARNINGS
  UNDER SFAS NO. 123
---------------------------------------------------------------------------
                                                   YEAR ENDED DECEMBER 31,
                                                 --------------------------
(In millions, except per share amounts)            2003     2002     2001
---------------------------------------------------------------------------
Net (loss) income, as reported..............     $ (55.2)  $ 22.1   $ 78.6
Deduct:
Total stock-based employee compensation
  expense determined under fair
  value based method for all awards,
  net of related tax effects................        (1.4)    (4.2)    (7.4)
                                                 --------------------------
Pro forma net (loss) income  (1)............     $ (56.6)  $ 17.9   $ 71.2
                                                 ==========================
Basic (loss) earnings per share:
As reported.................................     $ (0.84)  $ 0.34   $ 1.20
Pro forma net (loss) income  (1)............       (0.86)    0.27     1.09
Diluted (loss) earnings per share:
As reported.................................     $ (0.84)  $ 0.34   $ 1.20
Pro forma net (loss) income  (1)............       (0.86)    0.27     1.09
===========================================================================

(1) These pro forma amounts may not be indicative of future (loss) income and
    (loss) earnings per share due to Grace's Chapter 11 Filing.

<PAGE>


To determine compensation cost under SFAS No. 123, the fair value of each option
is estimated on the date of grant using the Black-Scholes option pricing model,
with the following historical weighted average assumptions applied to grants in
2001:

===========================================
OPTION VALUE ASSUMPTIONS            2001
-------------------------------------------
Dividend yield.................    -- %
Expected volatility............     61%
Risk-free interest rate........      5%
Expected life (in years).......      4
===========================================

Based upon the above assumptions, the weighted average fair value of each option
granted was $1.28 per share for 2001. There were no option grants in 2003 and
2002.


                                      F-13
<PAGE>


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

o    Contingent liabilities such as asbestos-related matters (see Note 3),
     environmental remediation (see Note 14), income taxes (see Note 14), and
     retained obligations of divested businesses.

o    Pension and postretirement liabilities that depend on assumptions regarding
     discount rates and/or total returns on invested funds. (See Note 18.)

o    Depreciation and amortization periods for long-lived assets, including
     property and equipment, intangible, and other assets.

o    Realization values of various assets such as net deferred tax assets (see
     Note 4), trade receivables, inventories, insurance receivables, income
     taxes, and goodwill.

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

CASH EQUIVALENTS: Cash equivalents consist of liquid instruments with maturities
of three months or less when purchased. The recorded amounts approximate fair
value.

SALE OF ACCOUNTS RECEIVABLE: Prior to the Filing, Grace entered into a program
to sell certain of its trade accounts receivable and retained a subordinated
interest and servicing rights. Net losses on the sale of receivables were based
on the carrying value of the assets sold, allocated in proportion to their fair
value. Retained interests were carried at fair value and were included in "other
current assets" in the Consolidated Balance Sheets. Grace generally estimated
fair value based on the present value of expected future cash flows less
management's best estimate of uncollectible accounts receivable. Grace
maintained an allowance for doubtful accounts receivable based upon the expected
collectibility of all trade receivables, including receivables sold. The
allowance was reviewed regularly and adjusted for accounts deemed uncollectible
by management. Expenses and losses associated with the program were recognized
as a component of interest expense and related financing costs. As a result of
the Filing, which constituted an event of default under the program, outstanding
balances were satisfied through the use of pre-petition trade receivables
collected during the period from the Filing Date to early May 2001. The program
was terminated effective May 14, 2001.

INVENTORIES: Inventories are stated at the lower of cost or market. The methods
used to determine cost include first-in/first-out and, for substantially all
U.S. inventories, last-in/first-out. Market values for raw materials are based
on current cost and, for other inventory classifications, net realizable value.

PROPERTIES AND EQUIPMENT: Properties and equipment are stated at cost.
Depreciation of properties and equipment is generally computed using the
straight-line method over the estimated useful life of the asset. Estimated
useful lives range from 20 to 40 years for buildings, 3 to 7 years for
information technology equipment, 3 to 10 years for machinery and equipment and
5 to 10 years for furniture and fixtures. Interest is capitalized in connection
with major project expenditures. Fully depreciated assets are retained in
properties and equipment and related accumulated depreciation accounts until
they are removed from service. In the case of disposals, assets and related
accumulated depreciation are removed from the accounts and the net amount, less
any proceeds from disposal, is charged or credited to operations. Grace reviews
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable.

GOODWILL: Goodwill arises from certain purchase business combinations. With
respect to business combinations completed prior to June 30, 2001, goodwill was
amortized through December 31, 2001 using the straight-line method over
appropriate periods not exceeding 40 years. Grace reviews its goodwill for
impairment on an annual basis and whenever events or changes in circumstances
indicate that the carrying amount may not be fully recoverable. The provisions
of SFAS No. 141 "Business Combinations" were applied to goodwill and intangible
assets acquired after June 30, 2001.

REVENUE RECOGNITION: Grace recognizes revenue when all of the following criteria
are satisfied: risk of loss and title transfer to the customer; the price is
fixed and determinable; and collectibility is reasonably assured. Certain
customer arrangements include conditions for volume rebates. Grace accrues a
rebate allowance and reduces recorded sales for anticipated selling price
adjustments at the time of sale. Grace regularly reviews



                                      F-14
<PAGE>


rebate accruals based on actual and anticipated sales patterns.

RESEARCH AND DEVELOPMENT COSTS: Research and development costs are charged to
expense as incurred.

INCOME TAXES: Grace recognizes deferred tax assets and liabilities with respect
to the expected future tax consequences of events that have been recorded in the
Consolidated Financial Statements and tax returns. If it is more likely than not
that all or a portion of deferred tax assets will not be realized, a valuation
allowance is provided against such deferred tax assets.

FOREIGN CURRENCY TRANSLATION: Assets and liabilities of foreign subsidiaries
(other than those located in countries with highly inflationary economies) are
translated into U.S. dollars at current exchange rates, while their revenues,
costs and expenses are translated at average exchange rates during each
reporting period. The resulting translation adjustments are included in the
"accumulated other comprehensive loss" section of the Consolidated Balance
Sheets. The financial statements of subsidiaries located in countries with
highly inflationary economies, if any, are remeasured as if the functional
currency were the U.S. dollar; the remeasurement creates translation adjustments
that are reflected in "net income (loss)" in the Consolidated Statements of
Operations.

FINANCIAL INSTRUMENTS: From time to time, Grace enters into interest rate swap
agreements and foreign exchange forward and option contracts to manage exposure
to fluctuations in interest and foreign currency exchange rates. Grace does not
hold or issue derivative financial instruments for trading purposes. At December
31, 2003, Grace did not hold and had not issued any derivative financial
instruments.

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

As a result of the Filing, Grace's Consolidated Balance Sheets separately
identify the liabilities that are "subject to compromise" as a result of the
Chapter 11 proceedings. In Grace's case, "liabilities subject to compromise"
represent pre-petition liabilities as determined under U.S. generally accepted
accounting principles. Changes to the recorded amount of such liabilities will
be based on developments in the Chapter 11 Cases and management's assessment of
the claim amounts that will ultimately be allowed by the Bankruptcy Court.
Changes to pre-petition liabilities subsequent to the Filing Date reflect: 1)
cash payments under approved court orders; 2) the accrual of interest on
pre-petition debt at the pre-petition contractual rate; 3) accruals for
employee-related programs; and 4) changes in estimates related to pre-petition
contingent liabilities.

Condensed financial information and components of liabilities subject to
compromise of the Debtors are presented below:


<TABLE>
<CAPTION>
====================================================================================================================
W. R. GRACE & CO. - CHAPTER 11 FILING ENTITIES            JANUARY 1, 2003     January 1, 2002       April 2, 2001
  DEBTOR-IN-POSSESSION STATEMENTS OF OPERATION                   TO                 to                    to
(In millions) (Unaudited)                                DECEMBER 31, 2003   December 31, 2002    December 31, 2001
====================================================================================================================
<S>                                                          <C>                  <C>                 <C>
Net sales, including intercompany..................          $ 1,031.9            $   979.4           $   763.0
Other income.......................................               66.3                 61.2                45.5
                                                             -----------------------------------------------------
                                                               1,098.2              1,040.6               808.5
Cost of goods sold, including intercompany, exclusive of
  depreciation shown separately below..............              714.8                626.6               474.5
Selling, general and administrative expenses, exclusive
  of net pension expense (income) shown separately
  below............................................              217.8                214.0               154.1
Research and development expenses..................               38.0                 41.4                30.6
Depreciation and amortization .....................               61.1                 60.6                43.4
Net pension expense (income).......................               47.6                 22.6                (3.3)
Interest expense and related financing costs.......               15.3                 19.5                26.9
Provision for environmental remediation............              142.5                 70.7                 5.8
Provision for asbestos-related litigation..........               30.0                 --                  --
                                                             -----------------------------------------------------
                                                               1,267.1              1,055.4               732.0
(Loss) income before Chapter 11 expenses, income taxes,
  and equity in net income of non-filing entities..             (168.9)               (14.8)               76.5
Chapter 11 expenses, net ..........................              (14.8)               (30.1)              (15.7)
Benefit from (provision for) income taxes..........               45.4                 (3.3)              (34.3)
                                                             -----------------------------------------------------
(Loss) income before equity in net income of non-filing
  entities.........................................             (138.3)               (48.2)               26.5
Equity in net income of non-filing entities .......               83.1                 70.3                37.4
                                                             -----------------------------------------------------
NET (LOSS) INCOME .................................          $   (55.2)           $    22.1           $    63.9
====================================================================================================================

<PAGE>

====================================================================================================================
                                                                                                     Filing Date
(In millions)                                           DECEMBER 31,2003     December 31, 2002       (Unaudited)
====================================================================================================================
Debt, pre-petition plus accrued interest...........         $    550.3            $   538.8           $   511.5
Asbestos-related liability.........................              992.3                973.2             1,002.8
Income taxes ......................................              217.9                227.8               210.1
Environmental remediation..........................              332.4                201.1               164.8
Postretirement benefits other than pension.........              134.3                147.2               185.4
Special pension arrangements.......................               69.5                 74.9                70.8
Retained obligations of divested businesses........               57.0                 55.3                75.5
Accounts payable...................................               31.9                 32.4                43.0
Other accrued liabilities..........................               79.7                 84.0               102.1
                                                            -----------------------------------------------------
TOTAL LIABILITIES SUBJECT TO COMPROMISE............         $  2,465.3            $ 2,334.7           $ 2,366.0
====================================================================================================================
</TABLE>


                                      F-15
<PAGE>


<TABLE>
<CAPTION>
==========================================================================================================================
W. R. GRACE & CO. - CHAPTER 11 FILING ENTITIES                  JANUARY 1, 2003     January 1, 2002       April 2, 2001
DEBTOR-IN-POSSESSION CONDENSED STATEMENTS OF CASH FLOWS               TO                  to                    to
(In millions) (Unaudited)                                      DECEMBER 31, 2003   December 31, 2002    December 31, 2001
==========================================================================================================================
<S>                                                               <C>                <C>                  <C>
OPERATING ACTIVITIES
(Loss) income before Chapter 11 expenses, income taxes,
  and equity in net income of non-filing entities..... .......    $  (168.9)         $   (14.8)           $    76.5
Reconciliation to net cash provided by (used for)
  operating activities:
   Non-cash items, net........................................        237.9              140.5                 67.0
   Contributions to defined benefit pension plans.............        (52.9)              (4.3)                (6.8)
   Increase in accounts receivable due to termination of
     securitization program...................................         --                 --                  (98.4)
   Decrease in subordinated interest of accounts
     receivable sold..........................................         --                 --                   33.1
   Changes in other assets and liabilities, excluding
     the effect of businesses acquired/divested...............        (14.1)             (36.1)               (15.3)
                                                                  --------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.....................          2.0               85.3                 56.1

NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES..........         68.7              (60.1)               (21.5)

NET CASH USED FOR FINANCING ACTIVITIES........................         (7.0)              (6.4)                (5.2)
                                                                  --------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS.....................         63.7               18.8                 29.4
Cash and cash equivalents, beginning of period................         56.8               38.0                  8.6
                                                                  --------------------------------------------------------
Cash and cash equivalents, end of period......................    $   120.5          $    56.8            $    38.0
==========================================================================================================================
</TABLE>

Set forth below is a reconciliation of the changes in pre-filing date liability
balances for the period from the Filing Date through December 31, 2003.

<TABLE>
<CAPTION>
==========================================================================
(In millions) (Unaudited)                                Cumulative Since
                                                              Filing
--------------------------------------------------------------------------
<S>                                                     <C>
Balance, Filing Date...............................     $    2,366.0
Cash disbursements and/or reclassifications under
  Bankruptcy Court orders:
  Freight and distribution order...................             (5.7)
  Trade accounts payable order.....................             (9.1)
  Other court orders including employee wages and
    benefits, sales and use tax, and customer
    programs.......................................           (183.6)
Expense/(income) items:
  Interest on pre-petition debt....................             46.7
  Current period employee-related accruals.........             19.5
  Change in estimate of asbestos-related property
    damage contingencies...........................             30.0
  Change in estimate of environmental contingencies            219.0
  Change in estimate of income tax contingencies...              6.9
  Balance sheet reclassifications..................            (24.4)
                                                       -------------------
Balance, end of period.............................     $    2,465.3
==========================================================================
</TABLE>


<PAGE>


<TABLE>
<CAPTION>
===========================================================================================
W. R. GRACE & CO. - CHAPTER 11 FILING ENTITIES
DEBTOR-IN-POSSESSION BALANCE SHEETS                                      DECEMBER 31,
                                                                ---------------------------
(In millions) (Unaudited)                                            2003           2002
===========================================================================================
<S>                                                             <C>             <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................................      $   120.5       $    56.8
Accounts and other receivables, net.......................          105.6           114.7
Receivables from non-filing entities, net.................           46.2            43.4
Inventories...............................................           81.2            70.5
Other current assets......................................           47.9            45.6
                                                                ---------------------------
TOTAL CURRENT ASSETS......................................          401.4           331.0

Properties and equipment, net.............................          383.9           389.7
Cash value of life insurance policies, net of policy loans           90.8            82.4
Deferred income taxes.....................................          587.9           574.4
Asbestos-related insurance expected to be realized after
 one year.................................................          269.4           282.6
Loans receivable from non-filing entities, net............          448.0           444.4
Investment in non-filing entities.........................          283.8           244.7
Other assets..............................................           92.7            92.2
                                                                ---------------------------
TOTAL ASSETS..............................................      $ 2,557.9       $ 2,441.4
                                                                ===========================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE
Current liabilities.......................................      $    94.6       $    99.3
Other liabilities.........................................          181.6           229.6
                                                                ---------------------------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE...............          276.2           328.9

LIABILITIES SUBJECT TO COMPROMISE.........................        2,465.3         2,334.7
                                                                ---------------------------
TOTAL LIABILITIES.........................................        2,741.5         2,663.6

SHAREHOLDERS' EQUITY (DEFICIT) ...........................         (183.6)         (222.2)
                                                                ---------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) .....      $ 2,557.9       $ 2,441.4
===========================================================================================
</TABLE>

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

The Debtors' Chapter 11 expenses for 2003, 2002, and 2001 consist of:

<TABLE>
<CAPTION>
===========================================================================================
(In millions)                                       2003            2002             2001
-------------------------------------------------------------------------------------------
<S>                                             <C>            <C>              <C>
Legal and financial advisory fees........       $   15.4       $   30.6         $   16.6
Interest income..........................           (0.6)          (0.5)            (0.9)
                                                 -----------------------------------------
Chapter 11 expenses, net.................       $   14.8       $   30.1         $   15.7
===========================================================================================
</TABLE>

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

In addition to Grace's financial reporting obligations as prescribed by the U.S.
Securities and Exchange Commission ("SEC"), the Debtors are also required, under
the rules and regulations of the Bankruptcy Code, to periodically file certain
statements and schedules and a monthly operating report with the Bankruptcy
Court. This information is available to the public through the



                                      F-16
<PAGE>


Bankruptcy Court. This information is prepared in a format that may not be
comparable to information in Grace's quarterly and annual financial statements
as filed with the SEC. The monthly operating reports are not audited, do not
purport to represent the financial position or results of operations of Grace on
a consolidated basis, and should not be relied on for such purposes.

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

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

PROPERTY DAMAGE LITIGATION

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

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

Approximately 4,000 additional property damage claims were filed prior to the
March 31, 2003 claims bar date. Grace has analyzed the information provided by
the claimants and has attempted to assess the validity and potential liability
related to these claims. Approximately 170 claims contained insufficient
information to permit an evaluation. (See "Asbestos-Related Liability" below for
further discussion.)

The ZAI cases were filed as class action lawsuits in 2000 and 2001 on behalf of
owners of homes containing ZAI. These cases seek damages and equitable relief,
including the removal, replacement and/or disposal of all such insulation. The
plaintiffs assert that this product is in millions of homes throughout the U.S.
and that the cost of removal could be several thousand dollars per home. As a
result of the Filing, these cases have been transferred to the U.S. Bankruptcy
Court. Based on Grace's investigation of the claims described in these lawsuits,
and testing and analysis of this product by Grace and others, Grace believes
that the product was and continues to be safe for its intended purpose and poses
little or no threat to human health. In July 2002, the Bankruptcy Court approved
special counsel to represent the ZAI claimants, at the Debtors' expense, in a
proceeding to determine certain threshold scientific issues regarding ZAI. The
parties have completed discovery with respect to these threshold issues and have
filed motions asking the Bankruptcy Court to resolve a number of important legal
and factual issues regarding the ZAI claims. The Debtors expect the Bankruptcy
Court to establish a schedule for determining the pending motions following the
next status conference in May 2004. At this time, Grace is not able to assess
the extent of any possible liability related to this matter.

BODILY INJURY LITIGATION

Asbestos bodily injury claims are generally similar to each other (differing
primarily in the type of asbestos-related illness allegedly suffered by the
plaintiff). However, Grace's estimated liability for such claims has been
influenced by numerous variables, including the



                                      F-17
<PAGE>


solvency of other former producers of asbestos containing products, cross-claims
by co-defendants, the rate at which new claims are filed, the jurisdiction in
which the claims are filed, and the defense and disposition costs associated
with these claims. Grace's bodily injury liability reflects management's
estimate, as of the Filing Date (adjusted for post-Filing defense and claims
administration costs), of the number and ultimate cost of present and future
bodily injury claims expected to be asserted against Grace given demographic
assumptions of possible exposure to asbestos containing products previously
manufactured by Grace.

Cumulatively through the Filing Date, 16,354 asbestos bodily injury lawsuits
involving approximately 35,720 claims were dismissed without payment of any
damages or settlement amounts (primarily on the basis that Grace products were
not involved), and approximately 55,489 lawsuits involving approximately 163,698
claims were disposed of (through settlement and judgments) for a total of $645.6
million. (See "Asbestos-Related Liability" below.)

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

ASBESTOS-RELATED LIABILITY

Asbestos-related litigation is stayed by the Chapter 11 Cases. Ongoing costs are
generally limited to claims administration costs and to defense costs incurred
in connection with litigation permitted by the Bankruptcy Court. Other
adjustments to the recorded liability will be based on developments in the
Chapter 11 Cases including additional information or developments related to the
new property damage claims submitted, and the assessment process.

For periods prior to and as of the Filing Date, Grace's estimated
asbestos-related 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 for which sufficient information was available, and for pending and
projected future bodily injury claims. Since the Filing, Grace is aware that
bodily injury claims have continued to be filed against co-defendant companies,
and at higher than historical rates. Grace believes that had it not filed for
Chapter 11 reorganization, it likely would have received thousands more claims
than it had previously projected.

The total asbestos-related liability balances as of December 31, 2003 and 2002
were $992.3 million and $973.2 million, respectively. The increase in the
liability during 2003 reflects a $30.0 million pre-tax charge taken in the
fourth quarter for new asbestos-related property damage claims, net of defense
and claims administration costs. The pre-tax charge was based on an initial
review, completed in the fourth quarter of 2003, of more than 4,000 new claims
submitted prior to the March 31, 2003 claims bar date. Each claim is unique as
to property, product in question, legal status of claimant, potential cost of
remediation, and other factors. Such claims were reviewed in detail by Grace,
categorized into claims with sufficient information to be evaluated or claims
that require additional information and, where sufficient information existed,
the cost of resolution was estimated. (Grace's revised estimate of liability
does not include any amounts for approximately 170 claims for which sufficient
information was not available to evaluate potential liability.) However, due to
the Filing and the uncertainties of asbestos-related litigation, the actual
amount of Grace's asbestos-related liability could differ materially from the
recorded liability. The recorded asbestos-related liability is included in
"liabilities subject to compromise."

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

ASBESTOS INSURANCE

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



                                      F-18
<PAGE>


insurance policies not subject to settlement agreements. Grace has settled with
excess insurance carriers that wrote policies available for bodily injury claims
in layers of insurance that Grace believes may be reached based on its current
estimates.

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


<TABLE>
<CAPTION>
==================================================================================================
ESTIMATED INSURANCE RECOVERY ON ASBESTOS-RELATED LIABILITIES
(In millions)                                                         2003             2002
--------------------------------------------------------------------------------------------------
INSURANCE RECEIVABLE
<S>                                                              <C>              <C>
Asbestos-related insurance receivable, beginning of year ...     $   282.6        $   293.4
Proceeds received under asbestos-related insurance
  settlements ..............................................         (13.2)           (10.8)
                                                                 ---------------------------------
Asbestos-related insurance receivable, end of year expected
  to be realized after one year ............................     $   269.4        $   282.6
==================================================================================================
</TABLE>

--------------------------------------------------------------------------------
4.    INCOME TAXES
--------------------------------------------------------------------------------

The components of (loss) income from consolidated operations before income taxes
and the related benefit from (provision for) income taxes for 2003, 2002, and
2001 are as follows:

<TABLE>
<CAPTION>
==================================================================================================
INCOME TAXES - CONSOLIDATED OPERATIONS
(In millions)                                                       2003       2002        2001
--------------------------------------------------------------------------------------------------
<S>                                                               <C>        <C>        <C>
(Loss) income before income taxes:
  Domestic..................................................      $ (175.7)  $  (44.6)  $   67.1
  Foreign...................................................         126.2      104.8       75.7
  Intercompany eliminations.................................         (18.0)      (0.1)      (0.5)
                                                                 ---------------------------------
                                                                  $  (67.5)  $   60.1   $  142.3
                                                                 =================================
Benefit from (provision for) income taxes:
  Federal - current.........................................      $    9.9   $    8.1   $   (7.7)
  Federal - deferred........................................          34.5      (11.0)     (27.5)
  State and local - current.................................           3.8       (1.0)      (3.2)
  Foreign - current.........................................         (34.3)     (27.6)     (22.2)
  Foreign - deferred........................................          (1.6)      (6.5)      (3.1)
                                                                 ---------------------------------
                                                                  $   12.3   $  (38.0)  $  (63.7)
==================================================================================================
</TABLE>


<PAGE>


At December 31, 2003 and 2002, the tax attributes giving rise to deferred tax
assets and liabilities consisted of the following items:

<TABLE>
<CAPTION>
==================================================================================================
DEFERRED TAX ANALYSIS
(In millions)                                                           2003             2002
--------------------------------------------------------------------------------------------------
<S>                                                                 <C>             <C>
Liability for asbestos-related litigation....................       $   347.3       $   340.6
Net operating loss/credit carryforwards......................           141.4           155.1
Deferred state taxes.........................................           126.1           117.7
Liability for environmental remediation......................           116.4            70.4
Other postretirement benefits................................            47.0            51.5
Deferred charges.............................................            42.9            46.1
Reserves and allowances......................................            28.8            27.1
Research and development.....................................            34.6            35.0
Pension liabilities..........................................            83.1            94.6
Foreign loss/credit carryforwards............................            20.0            14.8
Other........................................................             9.8            12.4
--------------------------------------------------------------------------------------------------
Total deferred tax assets....................................           997.4           965.3
--------------------------------------------------------------------------------------------------
Asbestos-related insurance receivable........................          (100.6)         (103.6)
Pension assets...............................................           (14.2)          (13.7)
Properties and equipment.....................................           (72.4)          (71.7)
Other........................................................           (60.8)          (60.4)
--------------------------------------------------------------------------------------------------
Total deferred tax liabilities...............................          (248.0)         (249.4)
--------------------------------------------------------------------------------------------------
Deferred state taxes.........................................          (126.1)         (117.7)
Net operating loss/credit carryforwards......................           (23.7)          (23.7)
Foreign loss carryforwards...................................           (18.5)          (11.1)
--------------------------------------------------------------------------------------------------
Total valuation allowance ...................................          (168.3)         (152.5)
--------------------------------------------------------------------------------------------------
Net deferred tax assets......................................       $   581.1       $   563.4
==================================================================================================
</TABLE>

The valuation allowance shown above arises from uncertainty as to the
realization of certain deferred tax assets, primarily foreign tax credit
carryforwards and foreign, state and local net operating loss carryforwards.
Based upon anticipated future results, Grace has concluded that it is more
likely than not that the balance of the net deferred tax assets, after
consideration of the valuation allowance, will be realized. Because of the
nature of the items that make up this balance, the realization period is likely
to extend over a number of years and the outcome of the Chapter 11 process could
materially impact the realization period.

At December 31, 2003, there were $213.7 million of U.S. federal net operating
loss carryforwards, representing deferred tax assets of $74.8 million, with
expiration dates through 2023; $6.2 million of foreign tax credit carryforwards
with expiration dates through 2006; $15.8 million of general business credit
carryforwards with expiration dates through 2008; and $44.6 million of
alternative minimum tax credit carryforwards with no expiration dates.

The difference between the benefit from (provision for) income taxes at the
federal income tax rate of 35% and Grace's overall income tax provision are
summarized as follows:


                                      F-19
<PAGE>


<TABLE>
<CAPTION>
==================================================================================================================
INCOME TAX BENEFIT (PROVISION) ANALYSIS                                      2003           2002         2001
(In millions)
------------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>            <C>           <C>
Tax benefit (provision) at federal corporate rate.....................   $   23.6       $  (21.0)     $  (49.8)
Change in provision resulting from:
  Nontaxable income/non-deductible expenses...........................       (0.6)          (1.0)         (1.6)
  State and local income taxes, net of federal income tax benefit ....        2.5           (0.7)         (1.7)
  Federal and foreign taxes on foreign operations.....................       (3.6)           1.6           1.3
  Chapter 11 expenses (non-deductible)................................       (4.3)         (10.5)         (5.5)
  Tax and interest relating to tax deductibility of interest on
    life insurance policy loans (See Note 14).........................       (5.3)          (6.4)         (6.4)
                                                                         -----------------------------------------
Income tax benefit from (provision for) continuing operations.........   $   12.3       $  (38.0)     $  (63.7)
==================================================================================================================
</TABLE>

Federal, state, local and foreign taxes have not been accrued on approximately
$371.0 million of undistributed earnings of certain foreign subsidiaries, as
such earnings are expected to be retained indefinitely by such subsidiaries for
reinvestment. However, Chapter 11 and/or changes in the tax laws could affect
this expectation in the future. The distribution of these earnings would result
in additional foreign withholding taxes of approximately $17.3 million and
additional federal income taxes to the extent they are not offset by foreign tax
credits. It is not practicable to estimate the total tax liability that would be
incurred upon such a distribution.

--------------------------------------------------------------------------------
5.    ACQUISITIONS AND JOINT VENTURES
--------------------------------------------------------------------------------

In 2003, Grace completed three business combinations for a total cash cost of
$26.9 million as follows:

o    In April 2003, Grace, through its subsidiary The Separations Group,
     acquired the business and assets of MODcol Corporation, a manufacturer of
     preparative chromatography columns and provider of custom column packaging
     services.

o    In July 2003, Grace acquired the chromatography business of Argonaut
     Technologies, Inc., which had been marketed under the Jones Chromatography
     name.

o    In October 2003, Grace through its German subsidiary, acquired certain
     assets of Tricosal Beton - Chemie GmbH & Co. KG, a leading supplier
     of specialty chemicals and materials to the European construction industry.

Goodwill recognized in those transactions amounted to $12.0 million, of which
$1.3 million was assigned to Davison Chemicals and $10.7 million was assigned to
Performance Chemicals.

In 2002, Grace completed three business combinations for a total cash cost of
$28.5 million as follows:

o    In January 2002, Grace, through its Swedish subsidiary, acquired the
     catalyst manufacturing assets of Borealis A/S.

o    In March 2002, Grace acquired the business and assets of Addiment,
     Incorporated, a leading supplier of specialty chemicals to the concrete
     paver and masonry industries in the U.S. and Canada.

o    In August 2002, Advanced Refining Technologies LLC ("ART"), a joint venture
     between Grace and Chevron Products Company ("Chevron"), acquired an
     exclusive license for the hydroprocessing catalyst technology of Japan
     Energy Corporation and its subsidiary Orient Catalyst Company.

Goodwill recognized in those transactions amounted to $3.8 million, $0.9 million
of which was assigned to Davison Chemicals and $2.9 million of which was
assigned to Performance Chemicals.

--------------------------------------------------------------------------------
6.    OTHER INCOME
--------------------------------------------------------------------------------

Components of other income are as follows:

<TABLE>
<CAPTION>
============================================================================================================
OTHER INCOME
(In millions)                                                           2003           2002         2001
------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>            <C>           <C>
Investment income.............................................      $    5.6       $    4.7      $    5.4
Interest income...............................................           4.3            3.9           4.6
Gain on sale of investments...................................            --            1.2           7.9
Net (loss) gain on dispositions of assets.....................          (1.5)           0.7           1.8
Tolling revenue...............................................           1.0            3.1           3.1
Foreign currency..............................................          (4.4)          (1.1)          0.9
Other miscellaneous income ...................................          11.7           10.0           7.1
                                                                   -----------------------------------------
Total other income............................................      $   16.7       $   22.5      $   30.8
============================================================================================================
</TABLE>


--------------------------------------------------------------------------------
7.  GOODWILL AND OTHER INTANGIBLE ASSETS
--------------------------------------------------------------------------------

Grace adopted SFAS No. 142, "Goodwill and Other Intangible Assets" on January 1,
2002 and ceased the amortization of goodwill. The pro forma impact on pre-tax
income and earnings per share was immaterial. SFAS No. 142 requires that
goodwill and indefinite life intangible assets be tested for impairment on at
least an annual basis. For the purpose of measuring impairment under the
provisions of SFAS No. 142, Grace has identified its reporting units as catalyst
products and



                                      F-20
<PAGE>
silica products (Davison Chemicals), and construction chemicals, building
materials, and sealants and coatings (Performance Chemicals). In connection with
the adoption of SFAS No. 142 and as of November 30, 2003, Grace evaluated its
goodwill and other intangible assets that have indefinite useful lives, with no
impairment charge required.

At December 31, 2003 and December 31, 2002, Grace had goodwill balances of $85.2
million and $65.2 million, respectively. The carrying amount of goodwill
attributable to each reporting unit and the changes in those balances during the
year ended December 31, 2003 are as follows:

<TABLE>
<CAPTION>
==========================================================================================================
                                                                      Davison     Performance     Total
(In millions)                                                        Chemicals     Chemicals      Grace
==========================================================================================================
<S>                                                                <C>            <C>           <C>
Balance as of December 31, 2002 .............................      $   17.0       $   48.2      $   65.2
Goodwill acquired during the year............................           1.3           10.7          12.0
Foreign currency translation adjustment......................           2.5            5.5           8.0
                                                                  ----------------------------------------
BALANCE AS OF DECEMBER 31, 2003..............................      $   20.8       $   64.4      $   85.2
==========================================================================================================
</TABLE>

Grace's book value of other intangible assets at December 31, 2003 and December
31, 2002 was $65.1 million and $63.3 million, respectively, including
unamortizable intangible assets (primarily trademarks) of $6.9 million in 2002.
The composition of the remaining net amortizable intangible assets of $65.1
million and $56.4 million as of December 31, 2003 and December 31, 2002,
respectively, was as follows:

<TABLE>
<CAPTION>
==========================================================================================================
(In millions)                                                              AS OF DECEMBER 31, 2003
==========================================================================================================
                                                                     GROSS CARRYING         ACCUMULATED
                                                                         AMUOUNT            AMORTIZATION
                                                                  ----------------------------------------
<S>                                                                <C>                  <C>
Technology ..................................................      $       38.1         $       10.8
Patents......................................................              15.3                 15.2
Customer lists...............................................              29.8                  5.8
Other........................................................              15.7                  2.0
                                                                  ----------------------------------------
Total........................................................      $       98.9         $       33.8
==========================================================================================================
</TABLE>

<TABLE>
<CAPTION>
==========================================================================================================
(In millions)                                                              As of December 31, 2002
==========================================================================================================
                                                                    Gross Carrying         Accumulated
                                                                         Amount            Amortization
                                                                  ----------------------------------------
<S>                                                                <C>                  <C>
Technology ..................................................      $       34.6         $        4.6
Patents......................................................              15.3                 13.6
Customer lists...............................................              24.1                  3.3
Other........................................................               5.0                  1.1
                                                                 -----------------------------------------
Total........................................................      $       79.0         $       22.6
==========================================================================================================
</TABLE>

At December 31, 2003, estimated future annual amortization expenses were:

<TABLE>
<CAPTION>
================================================================================
ESTIMATED AMORTIZATION EXPENSE
(In millions)
--------------------------------------------------------------------------------
<S>                                                                    <C>
   2004.........................................................       $    6.0
   2005.........................................................            5.9
   2006.........................................................            5.7
   2007.........................................................            5.1
   2008.........................................................            5.0
================================================================================
</TABLE>

--------------------------------------------------------------------------------
8.    COMPREHENSIVE INCOME (LOSS)
--------------------------------------------------------------------------------

The tables below present the pre-tax, tax, and after tax components of Grace's
other comprehensive income (loss) for the years ended December 31, 2003, 2002
and 2001:

<PAGE>


<TABLE>
<CAPTION>
==========================================================================================================
YEAR ENDED
  DECEMBER 31, 2003                                                 Pre-Tax         Tax       After Tax
(In millions)                                                        Amount       Expense       Amount
----------------------------------------------------------------------------------------------------------
<S>                                                                  <C>           <C>          <C>
Minimum pension liability adjustments..........................      $   28.2      $   (9.9)    $   18.3
Foreign currency translation adjustments.......................          75.3          --           75.3
                                                                     ------------------------------------
Other comprehensive income.....................................      $  103.5      $   (9.9)    $   93.6
==========================================================================================================
</TABLE>

<TABLE>
<CAPTION>
==========================================================================================================
YEAR ENDED
  DECEMBER 31, 2002                                                 Pre-Tax         Tax       After Tax
(In millions)                                                        Amount       Expense       Amount
----------------------------------------------------------------------------------------------------------
<S>                                                                  <C>           <C>          <C>
Minimum pension liability adjustments..........................      $  (227.2)    $   79.5     $ (147.7)
Foreign currency translation adjustments.......................           45.1         --           45.1
                                                                     ------------------------------------
Other comprehensive loss.......................................      $  (182.1)    $   79.5     $ (102.6)
==========================================================================================================
</TABLE>

<TABLE>
<CAPTION>
==========================================================================================================
YEAR ENDED
  DECEMBER 31, 2001                                                 Pre-Tax         Tax       After Tax
(In millions)                                                        Amount       Expense       Amount
----------------------------------------------------------------------------------------------------------
<S>                                                                  <C>           <C>          <C>
Minimum pension liability adjustments..........................      $ (191.4)     $   67.0     $ (124.4)
Foreign currency translation adjustments.......................         (24.8)         --          (24.8)
                                                                     ------------------------------------
Other comprehensive loss.......................................      $ (216.2)     $   67.0     $ (149.2)
==========================================================================================================
</TABLE>

<TABLE>
<CAPTION>
==========================================================================================================
COMPOSITION OF ACCUMULATED OTHER
  COMPREHENSIVE LOSS
(In millions)                                                                      2003            2002
----------------------------------------------------------------------------------------------------------
<S>                                                                           <C>             <C>
Minimum pension liability................................................     $  (265.4)      $  (283.7)
Foreign currency translation ............................................         (44.3)         (119.6)
                                                                              ----------------------------
Accumulated other comprehensive loss.....................................     $  (309.7)      $  (403.3)
==========================================================================================================
</TABLE>

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


                                      F-21
<PAGE>


The decline in equity market returns in 2000-2002, coupled with a decline in
interest rates, created a shortfall between the accounting measurement of
Grace's obligations under certain of its qualified pension plans for U.S.
employees and the market value of dedicated pension assets. This condition
required Grace to record a minimum pension liability for these plans equal to
the funding shortfall and to offset related deferred costs against shareholders'
equity (deficit) at December 31, 2003 and 2002. Market returns in 2003 (22.5%
for Grace's domestic pension plan assets) and contributions of $48.5 million to
under-funded domestic plans were not sufficient to eliminate the minimum pension
liability. (See Note 18.)

--------------------------------------------------------------------------------
9.    OTHER BALANCE SHEET ACCOUNTS
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
====================================================================================================
(In millions)                                                              2003             2002
----------------------------------------------------------------------------------------------------
ACCOUNTS AND OTHER RECEIVABLES, NET
<S>                                                                     <C>              <C>
Trade receivables, less allowance of $4.6 (2002 - $3.7) ..........      $   331.5        $   302.8
Other receivables, less allowances of $1.7 (2002 - $1.7) .........           16.0             13.8
                                                                        --------------------------
                                                                        $   347.5        $   316.6
====================================================================================================
INVENTORIES (1)
Raw materials ....................................................      $    53.5        $    39.2
In process .......................................................           35.8             30.3
Finished products ................................................          134.0            110.8
General merchandise ..............................................           29.4             26.8
Less:  Adjustment of certain inventories to a last-in/first-out
        (LIFO) basis (2)..........................................          (38.1)           (33.5)
                                                                        --------------------------
                                                                        $   214.6        $   173.6
====================================================================================================
(1)   Inventories valued at LIFO cost comprised 49.2% of total inventories at
      December 31, 2003 and 48.4% at December 31, 2002
(2)   During 2002, a reduction in U.S. LIFO inventory levels resulted in product valued at costs
      pertaining to prior years being reflected in 2002 cost of sales. This
      so-called LIFO liquidation had the effect of increasing pre-tax income for
      the Davison segment and Grace by $0.5 million.
====================================================================================================
OTHER ASSETS
Deferred pension costs............................................      $   115.9        $   104.2
Deferred charges .................................................           45.7             38.7
Long-term receivables, less allowances of $0.7 (2002 - $0.8) .....            9.2              2.0
Patents, licenses and other intangible assets, net ...............           65.1             63.3
Pension-unamortized prior service cost ...........................           19.8             26.4
Investments in unconsolidated affiliates and other................            0.5              0.3
                                                                        --------------------------
                                                                        $   256.2        $   234.9
====================================================================================================
OTHER CURRENT LIABILITIES
Accrued compensation .............................................      $    44.8        $    40.0
Deferred tax liability ...........................................            0.5              0.8
Customer volume rebates ..........................................           28.1             21.2
Accrued commissions ..............................................            9.8              6.0
Accrued reorganization fees ......................................            6.9              9.4
Other accrued liabilities ........................................           55.5             53.9
                                                                        --------------------------
                                                                        $   145.6        $   131.3
====================================================================================================
OTHER LIABILITIES
Pension-underfunded plans ........................................      $   278.5        $   295.1
Other accrued liabilities ........................................            7.9              6.3
                                                                        --------------------------
                                                                        $   286.4        $   301.4
====================================================================================================
</TABLE>

--------------------------------------------------------------------------------
10.   PROPERTIES AND EQUIPMENT
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
====================================================================================================
(In millions)                                                              2003             2002
----------------------------------------------------------------------------------------------------
<S>                                                                     <C>              <C>
Land..............................................................      $    21.3        $    20.5
Buildings.........................................................          416.1            367.2
Information technology and equipment..............................          107.2             99.8
Machinery, equipment and other....................................        1,304.0          1,140.2
Projects under construction.......................................           24.9             66.2
                                                                        --------------------------
Properties and equipment, gross...................................        1,873.5          1,693.9
Accumulated depreciation and amortization.........................       (1,216.9)        (1,071.7)
                                                                        --------------------------
Properties and equipment, net.....................................      $   656.6        $   622.2
====================================================================================================
</TABLE>


<PAGE>


Interest costs are capitalized for significant, extended construction projects.
Capitalized interest cost was insignificant for the periods presented.
Depreciation and lease amortization expense relating to properties and equipment
amounted to $96.2 million in 2003, $89.8 million in 2002, and $84.2 million in
2001. Grace's rental expense for operating leases amounted to $15.4 million in
2003, $14.9 million in 2002, and $14.2 million in 2001. (See Note 14 for
information regarding contingent rentals.)

At December 31, 2003, minimum future non-cancelable payments for operating
leases were:


<TABLE>
<CAPTION>
====================================================================================
MINIMUM FUTURE PAYMENTS UNDER OPERATING LEASES
(In millions)
------------------------------------------------------------------------------------
<S>                                                                      <C>
   2004............................................................      $      16.7
   2005............................................................             13.5
   2006............................................................             12.6
   2007............................................................              7.3
   2008............................................................              6.3
   Thereafter......................................................             10.7
                                                                         -----------
   Total minimum lease payments....................................      $      67.1
====================================================================================
</TABLE>

The above minimum non-cancelable lease payments are net of anticipated sublease
income of $1.6 million in 2004, $1.5 million in 2005, $1.4 million in 2006, $1.4
million in 2007, and $0.9 million in 2008.

--------------------------------------------------------------------------------
11.   LIFE INSURANCE
--------------------------------------------------------------------------------

Grace is the beneficiary of life insurance policies on certain current and
former employees with a net cash surrender value of $90.8 million and $82.4
million at December 31, 2003 and 2002, respectively. The policies were acquired
to fund various employee benefit programs and other long-term liabilities and
are structured to provide cash flow (primarily tax-free) over an extended number
of years. The following table summarizes activity in these policies for 2003,
2002 and 2001:



                                      F-22
<PAGE>


<TABLE>
<CAPTION>
=============================================================================================================
LIFE INSURANCE - ACTIVITY SUMMARY
(In millions)                                                                2003          2002        2001
-------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>            <C>         <C>
Earnings on policy assets.........................................      $    38.7      $    39.4   $    40.3
Interest on policy loans..........................................          (33.1)         (34.7)      (34.9)
Premiums..........................................................            2.4            2.4         2.5
Proceeds from policy loans........................................           --             --         (48.7)
Policy loan repayments............................................            3.1            5.1        15.0
Net investing activity............................................           (2.7)          (5.4)       (2.9)
                                                                        -------------------------------------
Change in net cash value..........................................      $     8.4      $     6.8   $   (28.7)
=============================================================================================================
Gross cash value..................................................      $   478.5      $   471.3   $   477.5
Principal - policy loans..........................................         (365.3)        (365.4)     (377.6)
Accrued interest - policy loans ..................................          (22.4)         (23.5)      (24.3)
                                                                        -------------------------------------
Net cash value....................................................      $    90.8      $    82.4   $    75.6
=============================================================================================================
Insurance benefits in force.......................................      $  2,213.1     $ 2,240.8   $ 2,291.0
=============================================================================================================
Tax-free proceeds received........................................      $    11.9      $    19.4   $    18.0
=============================================================================================================
</TABLE>


Grace's financial statements display income statement activity and balance sheet
amounts on a net basis, reflecting the contractual interdependency of policy
assets and liabilities. See Note 14 for tax contingencies regarding certain of
these life insurance policies.

--------------------------------------------------------------------------------
12.   DEBT
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
==================================================================================================
COMPONENTS OF DEBT
(In millions)                                                              2003           2002
==================================================================================================
<S>                                                                     <C>            <C>
DEBT PAYABLE WITHIN ONE YEAR
Other short-term borrowings (1)...................................      $     6.8      $     4.3
                                                                        --------------------------
                                                                        $     6.8      $     4.3
                                                                        ==========================
DEBT PAYABLE AFTER ONE YEAR
DIP facility (2)..................................................      $    --        $    --

DEBT SUBJECT TO COMPROMISE
Bank borrowings (3)...............................................      $   500.0      $   500.0
Other borrowings (4)..............................................            1.3            1.0
Accrued interest (5)..............................................           49.0           37.8
                                                                        --------------------------
                                                                        $   550.3      $   538.8
                                                                        ==========================
Full-year weighted average interest rates on total debt ..........            2.1%           2.8%
==================================================================================================
</TABLE>


(1)   Represents borrowings under various lines of credit and other
      miscellaneous borrowings.
(2)   In April 2001, the Debtors entered into a debtor-in-possession
      post-petition loan and security agreement with Bank of America, N.A. (the
      "DIP facility") in the aggregate amount of $250 million. The DIP facility
      is secured by priority liens on substantially all assets of the Debtors,
      and bears interest based on LIBOR plus 2.00 to 2.25 percentage points. The
      Debtors have extended the term of the DIP facility through April 1, 2006.
      As of December 31, 2003, the Debtors had no outstanding borrowings under
      the DIP facility. However, $25.6 million of standby letters of credit were
      issued and outstanding under the facility as of December 31, 2003, which
      were issued mainly for trade-related matters such as performance bonds, as
      well as certain insurance and environmental matters. The outstanding
      amount of standby letters of credit issued under the DIP facility reduces
      the borrowing availability by a corresponding amount. Under the DIP
      facility, the Debtors are required to maintain $50 million of liquidity, a
      combination of cash, cash equivalents and the cash value of life insurance
      policies. As of December 31, 2003, the cash value of life insurance
      policies exceeded the $50 million requirement.
(3)   Under bank revolving credit agreements in effect prior to the Filing,
      Grace could borrow up to $500 million at interest rates based upon the
      prevailing prime, federal funds and/or Eurodollar rates. Of that amount,
      $250 million was available under short-term facilities expiring in May
      2001, and $250 million was available under a long-term facility expiring
      in May 2003. As a result of the Filing, Grace was in default under the
      bank revolving credit agreements, and accordingly, the balance as of the
      Filing Date was reclassified to debt subject to compromise in the
      Consolidated Balance Sheet.
(4)   Miscellaneous borrowings primarily consisting of U.S. mortgages.
(5)   Grace is continuing to accrue interest expense on its pre-petition debt at
      the pre-petition contractual rate of LIBOR plus 100 basis points.

<PAGE>

Interest payments amounted to $4.2 million in 2003, $1.1 million in 2002, and
$9.5 million in 2001.

--------------------------------------------------------------------------------
13.   FINANCIAL INSTRUMENTS
--------------------------------------------------------------------------------

DEBT AND INTEREST RATE SWAP AGREEMENTS

Grace was not a party to any derivative financial instruments at December 31,
2003 and December 31, 2002.

FAIR  VALUE  OF DEBT  AND  OTHER  FINANCIAL
INSTRUMENTS

At December 31, 2003, the fair value of Grace's debt payable within one year not
subject to compromise approximated the recorded value of $6.8 million. Fair
value is determined based on expected future cash flows (discounted at market
interest rates), quotes from financial institutions and other appropriate
valuation methodologies. At December 31, 2003, the recorded values of other
financial instruments such as cash, short-term investments, trade receivables
and payables and short-term debt approximated their fair values, based on the
short-term maturities and floating rate characteristics of these instruments.
The fair value of debt subject to compromise is undeterminable; the ultimate
value of such debt will be determined by the outcome of the Chapter 11
proceedings.

SALE OF ACCOUNTS RECEIVABLE

Prior to the Filing, Grace sold, on an ongoing basis, approximately a $100
million pool of its eligible trade accounts receivable to a multi-seller
receivables company (the "conduit") through a wholly owned special purpose
subsidiary (the "SPS"). Upon sale of the receivables, the SPS held a
subordinated retained interest in the receivables. Under the terms of the
agreement, new receivables were added to the pool as collections reduced
previously sold receivables. Grace serviced, administered and collected the
receivables on behalf of the SPS and the conduit. The proceeds were used for the
reduction of other short-term obligations and are reflected as operating cash
flows in the Consolidated Statement of Cash Flows for the year ended December
31, 2001. Grace recorded a net loss of $1.2 million in 2001 from the
corresponding sales to the conduit. As a result of the Filing, which constituted
an event of default under the program, the amount



                                      F-23
<PAGE>


outstanding under the program, approximately $65.3 million, was satisfied
through the use of pre-petition trade receivables collected by the SPS during
the period from the Filing Date to early May 2001. The program was terminated
effective May 14, 2001.

CREDIT RISK

Trade receivables potentially subject Grace to credit risk. Concentrations of
credit to customers in the petroleum and construction industries represent the
greatest exposure. Grace's credit evaluation policies, relatively short
collection terms and history of minimal credit losses mitigate credit risk
exposures. Grace does not generally require collateral for its trade accounts
receivable.


--------------------------------------------------------------------------------
14.  COMMITMENTS AND CONTINGENT LIABILITIES
--------------------------------------------------------------------------------

ASBESTOS-RELATED LITIGATION - SEE NOTE 3

ENVIRONMENTAL REMEDIATION

General Matters and Discussion

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

Grace's environmental liabilities are reassessed whenever circumstances become
better defined or remediation efforts and their costs can be better estimated.
These liabilities are evaluated based on currently available information,
including the progress of remedial investigation at each site, the current
status of discussions with regulatory authorities regarding the method and
extent of remediation at each site, existing technology, prior experience in
contaminated site remediation and the apportionment of costs among potentially
responsible parties. Grace expects that the funding of environmental remediation
activities will be affected by the Chapter 11 proceedings; any such effect could
be material. Grace's environmental liabilities are included in "liabilities
subject to compromise" as of December 31, 2003.

At December 31, 2003, Grace's estimated liability for environmental
investigative and remediation costs totaled $332.4 million, as compared with
$201.1 million at December 31, 2002. This liability covers both vermiculite and
non-vermiculite related matters. The amount is based on funding and/or
remediation agreements in place and Grace's best estimate of its cost for sites
not subject to a formal remediation plan.

For the years ended December 31, 2003 and 2002, Grace recorded pre-tax charges
of $142.5 million and $70.7 million, respectively, for environmental matters.
Approximately $180.0 million of the pre-tax charges for these two years were in
connection with a cost recovery lawsuit brought by the U.S. government relating
to Grace's former vermiculite mining near Libby, Montana, and Grace's evaluation
of probable remediation costs at vermiculite processing sites currently or
formerly operated by Grace, as described below. The remainder of the pre-tax
charges were primarily attributable to the ongoing review of bankruptcy claims.

Cash expenditures charged against previously established reserves for the years
ended December 31, 2003, 2002 and 2001 were $11.2 million, $20.8 million and
$28.9 million, respectively.

Vermiculite Related Matters

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




                                      F-24
<PAGE>


and former mine workers, and investigation and monitoring costs. In this action,
the EPA also sought a declaration of Grace's liability that would be binding in
future actions to recover further response costs.

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

As a result of such ruling, Grace recorded a pre-tax charge of $50.0 million in
the third quarter of 2003. During the fourth quarter of 2003, Grace recorded a
$70.0 million pre-tax charge for estimated remediation costs in and around
Libby, Montana, and at vermiculite processing sites currently or formerly
operated by Grace. Grace's estimated liability for vermiculite-related matters
at December 31, 2003 and 2002 was $181.0 million and $62.7 million,
respectively. Grace's estimate of expected costs is based on public comments
regarding the EPA's spending plans, discussions of spending forecasts with EPA
representatives, analysis of other information made available from the EPA, and
evaluation of probable remediation costs at vermiculite processing sites.
However, the EPA's cost estimates have changed regularly and increased
substantially over the course of this clean-up. Consequently, Grace's estimate
may change materially as more information becomes available. Grace's liability
for this matter is included in "liabilities subject to compromise" as of
December 31, 2003.

Non-Vermiculite Related Matters

At December 31, 2003 and 2002, Grace's estimated liability for remediation of
sites not related to its former vermiculite mining and processing activities was
$151.4 million and $138.4 million, respectively. This liability relates to
Grace's current and former operations, including its share of liability for
off-site disposal at facilities where it has been identified as a potentially
responsible party. During the fourth quarter of 2003, Grace recorded a $20.0
million increase in its estimated environmental liability for non-vermiculite
related sites as part of the Chapter 11 claims review process. Grace's revised
estimated liability is based upon claims for which sufficient information was
available. As Grace receives new information and continues its claims evaluation
process, its estimated liability may change materially. Grace's liability for
this matter is included in "liabilities subject to compromise" as of December
31, 2003.

Insurance Matters

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

CONTINGENT RENTALS

Grace is the named tenant or guarantor with respect to leases entered into by
previously divested businesses. These leases, some of which extend through the
year 2017, have future minimum lease payments aggregating $123.8 million, and
are fully offset by anticipated future minimum rental income from existing
tenants and subtenants. In addition, Grace is liable for other expenses
(primarily property taxes) relating to the above leases; these expenses are paid
by current tenants and subtenants. Certain of the rental income and other
expenses are payable by tenants and subtenants that have filed for bankruptcy
protection or are otherwise experiencing financial difficulties. Grace believes
that any loss from these lease obligations would be immaterial. Grace has
rejected certain of these leases as permitted by the Bankruptcy Code, the
financial impacts of which are insignificant.

TAX MATTERS

Grace has received the examination report from the Internal Revenue Service (the
"IRS") for tax periods 1993 through 1996 asserting, in the aggregate,
approximately $114.0 million of proposed tax adjustments, including accrued
interest. The most significant contested issue addressed in such report concerns
corporate-owned life insurance ("COLI") policies and is discussed below. Other
proposed IRS tax adjustments include Grace's tax position regarding research and
development credits, the reporting of certain divestitures and other
miscellaneous proposed adjustments. The tax audit for the 1993 through 1996



                                      F-25
<PAGE>


tax period was under the jurisdiction of the IRS Office of Appeals, where Grace
filed a protest. The IRS Office of Appeals has returned the audit to the
examination team for further review of the proposed adjustments as well as
several affirmative tax claims raised by Grace. Grace's federal tax returns
covering periods 1997 and forward are either under examination by the IRS or
open for future examination. In addition, Grace will be required to report the
additional taxable income (and the related accrued interest) resulting from IRS
adjustments to state and local tax jurisdictions upon resolution of the Federal
tax audits. Grace believes that the impact of probable tax return adjustments
are adequately recognized as liabilities at December 31, 2003. Any cash payment
as a result of such adjustment would be subject to Grace's Chapter 11
proceedings.

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

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

The IRS has assessed additional federal income tax withholding and Federal
Insurance Contributions Act taxes plus interest and related penalties for
calendar years 1993 through 1995 against a Grace subsidiary that formerly
operated a temporary staffing business for nurses and other health care
personnel. The assessments, aggregating $21.8 million, were made in connection
with a meal and incidental expense per diem plan for traveling health care
personnel, which was in effect through 1999, the year in which Grace sold the
business. The IRS contends that certain per diem reimbursements should have been
treated as wages subject to employment taxes and federal income tax withholding.
Grace contends that its per diem and expense allowance plans were in accordance
with statutory and regulatory requirements, as well as other published guidance
from the IRS. The IRS has issued additional assessments aggregating $40.1
million for the 1996 through 1998 tax periods. The statute of limitations has
expired with respect to the 1999 tax year. Grace has a right to indemnification
for approximately 36% of any tax liability (including interest thereon) for the
period from July, 1996 through December, 1998 from its former partner in the
business. The matter is currently pending in the United States Court of Claims.
Grace is currently in discussions with the Department of Justice concerning
possible settlement options. Grace does not expect the resolution of this matter
to have significant adverse impact on its Consolidated Financial Statements.

PURCHASE COMMITMENTS

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

GUARANTEES AND INDEMNIFICATION OBLIGATIONS

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

o     Contracts providing for the sale of a former business unit or product line
      in which Grace has agreed to indemnify the buyer against liabilities
      arising prior to the closing of the transaction, including



                                      F-26
<PAGE>


      environmental liabilities. These liabilities are included in "liabilities
      subject to compromise" in the Consolidated Balance Sheets;

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

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

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

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

FINANCIAL ASSURANCES

Financial assurances have been established for a variety of purposes, including
insurance and environmental matters, asbestos settlements and appeals,
trade-related commitments and other matters. At December 31, 2003, Grace had
gross financial assurances issued and outstanding of $249.2 million, comprised
of $136.8 million of surety bonds issued by various insurance companies, and
$112.4 million of standby letters of credit and other financial assurances
issued by various banks. Of the standby letters of credit, $19.0 million act as
collateral for surety bonds, thereby reducing Grace's overall obligations under
its financial assurances to a net amount of $230.2 million. Of this net amount
of financial assurances, approximately $8.8 million were issued by non-Debtor
entities and $221.4 million were issued by the Debtors. Of the amounts issued by
the Debtors, approximately $191.3 million were issued before the Filing Date,
with the remaining $30.1 million being issued subsequent to the Filing, of which
$25.6 million was issued under the DIP facility.

ACCOUNTING FOR CONTINGENCIES

Although the outcome of each of the matters discussed above cannot be predicted
with certainty, Grace has assessed its risk and has made accounting estimates as
required under U.S. generally accepted accounting principles. As a result of the
Filing, claims related to certain of the items discussed above will be addressed
as part of Grace's Chapter 11 proceedings. Accruals recorded for such
contingencies have been included in "liabilities subject to compromise" on the
accompanying Consolidated Balance Sheets. The amounts of these liabilities as
ultimately determined through the Chapter 11 proceedings could be materially
different from amounts recorded by Grace at December 31, 2003.

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


Under its Certificate of Incorporation, the Company is authorized to issue
300,000,000 shares of common stock, $0.01 par value. Of the common stock
unissued at December 31, 2003, approximately 9,582,784 shares were reserved for
issuance pursuant to stock options and other stock incentives. The Company has
not paid a dividend on its common stock since 1998. The Certificate of
Incorporation also authorizes 53,000,000 shares of preferred stock, $0.01 par
value, none of which has been issued. Of the total, 3,000,000 shares have been
designated as Series A Junior Participating Preferred Stock and are reserved for
issuance in connection with the Company's Preferred Stock Purchase Rights
("Rights"). A Right trades together with each outstanding share of common stock
and entitles the holder to purchase one one-hundredth of a share of Series A
Junior Participating Preferred Stock under certain circumstances and subject to
certain conditions. The Rights are not and will not become exercisable unless
and until certain events occur, and at no time will the Rights have any voting
power.

In November 2001, 56,911 shares of restricted stock were reclassified as
treasury shares to reflect an election made by Paul J. Norris, Grace's Chairman
and Chief Executive Officer, under a Bankruptcy Court approved employment
agreement.




                                      F-27
<PAGE>


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

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

<TABLE>
<CAPTION>

========================================================================================================
(LOSS) EARNINGS PER SHARE
(In millions, except per share amounts)                                   2003        2002       2001
--------------------------------------------------------------------------------------------------------
NUMERATORS
<S>                                                                     <C>          <C>        <C>
 Net (loss) income................................................      $ (55.2)     $ 22.1     $ 78.6
                                                                        ==============================
DENOMINATORS
Weighted average common shares - basic calculation................         65.5        65.4       65.3
Dilutive effect of employee stock options and restricted shares...
                                                                           --           0.1        0.1
                                                                        ------------------------------
Weighted average common shares - diluted calculation..............         65.5        65.5       65.4
                                                                        ==============================
BASIC (LOSS) EARNINGS PER SHARE...................................      $ (0.84)     $ 0.34     $ 1.20
                                                                        ==============================
DILUTED (LOSS) EARNINGS PER SHARE.................................      $ (0.84)     $ 0.34     $ 1.20
========================================================================================================
</TABLE>


Stock options that could potentially dilute basic (loss) earnings per share
(that were excluded from the computation of diluted (loss) earnings per share
because their exercise prices were greater than the average market price of the
common shares) averaged approximately 9.4 million in 2003, 11.5 million in 2002,
and 14.2 million in 2001. As a result of the 2003 net loss of $55.2 million,
approximately 100,000 of employee compensation-related shares issuable under
stock options were excluded from the diluted loss per share calculation in 2003
because their effect would have been antidilutive.

--------------------------------------------------------------------------------
17.   STOCK INCENTIVE PLANS
--------------------------------------------------------------------------------

Each stock option granted under the Company's stock incentive plans has an
exercise price equal to the fair market value of the Company's common stock on
the date of grant. Options become exercisable at the time or times determined by
the Compensation Committee of the Company's Board of Directors and may have
terms of up to ten years and one month. The following table sets forth
information relating to such options during 2003, 2002 and 2001:

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

STOCK OPTION ACTIVITY                                    2003
--------------------------------------------------------------------------
                                              Number of        Average
                                               Shares       Exercise Price
                                            ------------------------------
Balance at beginning of year.............    10,440,417         $ 11.94
Options exercised........................       (15,831)           2.40
Options terminated or cancelled..........      (841,802)          11.24
                                            --------------
Balance at end of year...................     9,582,784           12.02
==========================================================================
Exercisable at end of year...............     9,227,438         $ 12.39
==========================================================================
                                                           2002
                                            ------------------------------
Balance at beginning of year.............    12,772,431         $ 11.88
Options exercised........................        (1,266)           2.40
Options terminated or cancelled..........    (2,330,748)          11.60
                                            --------------
Balance at end of year...................    10,440,417           11.94
==========================================================================
Exercisable at end of year...............     8,973,964         $ 12.58
==========================================================================
                                                           2001
                                            ------------------------------
Balance at beginning of year.............    14,005,209         $ 12.70
Options granted..........................     1,339,846            2.53
Options terminated or cancelled..........    (2,572,624)          11.46
                                            --------------
Balance at end of year...................    12,772,431           11.88
==========================================================================
Exercisable at end of year...............     9,586,993         $ 12.64
==========================================================================

Currently outstanding options expire on various dates through November 2011. At
December 31, 2003, 4,474,004 shares were available for additional stock option
or restricted stock grants.


<PAGE>


Following is a summary of stock options outstanding at December 31, 2003:

================================================================================
STOCK OPTIONS OUTSTANDING
--------------------------------------------------------------------------------
                             Weighted-
                              Average      Weighted-                   Weighted-
 EXERCISE                    Remaining      Average                     Average
  PRICE        Number       Contractual    Exercise       Number       Exercise
  RANGE     Outstanding    Life (Years)      Price      Exercisable      Price
--------------------------------------------------------------------------------
$1 - $8       2,300,702         5.23        $  4.17      1,945,356      $  4.49
$8 - $13      2,974,756         4.81          12.30      2,974,756        12.30
$13 - $18     2,791,126         7.44          14.14      2,791,126        14.14
$18 - $21     1,516,200         6.02          19.47      1,516,200        19.47
              ---------                                  ---------
              9,582,784         5.87          12.02      9,227,438        12.39
================================================================================

At December 31, 2001, restrictions on all prior grants of restricted stock, net
of forfeitures, totaled 55,000 shares; these restrictions lapsed in 2002. The
quoted market value of the restricted shares at the date of grant was amortized
to expense ratably over the restriction period.

--------------------------------------------------------------------------------
18.  PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS PLANS
--------------------------------------------------------------------------------

Grace maintains defined benefit pension plans covering employees of certain
units who meet age and service requirements. Benefits are generally based on
final average salary and years of service. Grace funds its U.S. pension plans
("domestic plans") in accordance with U.S. federal laws and regulations.
Non-U.S. pension plans ("foreign plans") are funded under a variety of methods,
as required under local laws and customs, and therefore cannot be summarized.

                                      F-28
<PAGE>

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

An amendment to the structure of the retiree-paid premiums for postretirement
medical benefits was approved by the Company's Board in November 2001. The
amendment became effective January 1, 2002, and requires all retirees and
beneficiaries covered by the postretirement medical plan to contribute a minimum
of 40% of the calculated premium for that coverage. Also, during 2002, per
capita costs under the retiree medical plans exceeded caps on the amount Grace
was required to contribute under a 1993 amendment to the plan. As a result, for
2003 and future years, retirees will bear 100% of any increase in premium costs.

At December 31, 2003 and 2002 the accounting measure of the accumulated benefit
obligation for certain of the domestic and foreign plans exceeded the fair value
of dedicated plan assets. As a result, Grace's accumulated other comprehensive
loss, reflected as a reduction of shareholders' equity (deficit), includes the
recognition of a minimum pension liability as of December 31, 2003 and 2002 of
$408.3 million ($265.4 million, net of tax) and $436.5 million ($283.7 million,
net of tax), respectively. These amounts include offsets of related deferred
pension costs.

The following summarizes the changes in benefit obligations and fair value of
retirement plan assets during 2003 and 2002 (Grace uses a December 31
measurement date for the majority of its plans):





                                      F-29
<PAGE>

<TABLE>
<CAPTION>
====================================================================================================================================
                                                                         PENSION
                                                --------------------------------------------------------------        OTHER
                                                                                                                 POST-RETIREMENT
                                                        U.S.              NON-U.S.               TOTAL                PLANS
CHANGE IN FINANCIAL STATUS OF RETIREMENT PLANS  ------------------------------------------------------------------------------------
(In millions)                                     2003       2002     2003      2002       2003        2002      2003       2002
------------------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>       <C>       <C>       <C>       <C>         <C>         <C>         <C>
CHANGE IN PROJECTED BENEFIT OBLIGATION
Benefit obligation at beginning of year.......  $ 870.2   $ 776.6   $ 233.7   $ 196.1   $ 1,103.9   $   972.7   $ 123.8    $ 136.0
Service cost..................................      9.8       8.5       5.3       4.3        15.1        12.8       0.6        0.6
Interest cost.................................     56.4      55.1      14.4      12.5        70.8        67.6       8.1        8.7
Plan participants' contributions..............     --        --         0.9       0.4         0.9         0.4       --         --
Amendments....................................     --         5.6      --         2.4        --           8.0       --       (31.1)
Acquisitions..................................     --        --         0.2      --           0.2        --         --         --
Change in discount rates and other assumptions     53.7      93.6      18.9       2.8        72.6        96.4       7.1       31.1
Benefits paid.................................    (72.0)    (69.2)    (13.6)    (11.1)      (85.6)      (80.3)    (12.6)     (21.5)
Currency exchange translation adjustments.....     --        --        34.1      26.3        34.1        26.3       --         --
------------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year.............  $ 918.1   $ 870.2   $ 293.9   $ 233.7   $ 1,212.0   $ 1,103.9   $ 127.0    $ 123.8
====================================================================================================================================

CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year  $ 557.2   $ 689.5   $ 159.2   $ 167.3   $   716.4   $   856.8   $   --     $   --
Actual return on plan assets..................    120.0     (67.8)     20.8     (21.4)      140.8       (89.2)      --         --
Employer contribution.........................     52.9       4.3       7.6       5.9        60.5        10.2      12.6       21.5
Acquisitions..................................     --         0.4       0.1       1.8         0.1         2.2       --         --
Plan participants' contribution...............     --        --         0.9       0.4         0.9         0.4       --         --
Benefits paid.................................    (72.0)    (69.2)    (13.6)    (11.1)      (85.6)      (80.3)    (12.6)     (21.5)
Currency exchange translation adjustment......     --        --        18.2      16.3        18.2        16.3       --         --
------------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year......  $ 658.1   $ 557.2   $ 193.2   $ 159.2   $   851.3   $   716.4   $   --     $   --
====================================================================================================================================

Funded status.................................  $(260.0)  $(313.0)  $(100.7)  $ (74.5)  $  (360.7)  $  (387.5)  $(127.0)   $(123.8)
Unrecognized transition obligation............     --        --         0.1       0.5         0.1         0.5       --         --
Unrecognized actuarial loss...................    423.4     463.6     108.0      90.6       531.4       554.2      55.4       51.9
Unrecognized prior service cost/(benefit).....     20.6      26.1       3.6       3.8        24.2        29.9     (62.7)     (75.3)
------------------------------------------------------------------------------------------------------------------------------------
Net amount recognized.........................  $ 184.0   $ 176.7   $  11.0   $  20.4   $   195.0   $   197.1   $(134.3)   $(147.2)
====================================================================================================================================

AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE
  SHEET CONSIST OF:
Prepaid pension costs.........................  $   6.3   $   5.3   $ 109.6   $  98.9   $  115.9    $   104.2   $   --     $   --
Pension obligation............................   (240.2)   (290.7)   (108.8)    (79.3)    (349.0)      (370.0)   (134.3)    (147.2)
Intangible asset..............................     19.8      26.2      --         0.2       19.8         26.4      N/A        N/A
Accumulated other comprehensive loss..........    398.1     435.9      10.2       0.6      408.3        436.5      N/A        N/A
------------------------------------------------------------------------------------------------------------------------------------
Net amount recognized.........................  $ 184.0   $ 176.7   $  11.0   $  20.4   $  195.0    $   197.1   $(134.3)   $(147.2)
====================================================================================================================================
(Decrease) Increase in Minimum Liability
  Included in Other Comprehensive
  Income (Loss)...............................  $ (37.8)  $ 227.5   $   9.6   $  (0.3)      NM          NM          NM         NM
====================================================================================================================================
WEIGHTED AVERAGE ASSUMPTIONS USED TO DETERMINE
  BENEFIT OBLIGATIONS AS OF DECEMBER 31
Discount rate.................................     6.25%     6.75%     5.32%     5.72%      NM          NM         6.25%     6.75%
Rate of compensation increase.................     4.25%     4.25%     3.50%     3.84%      NM          NM          NM         NM
====================================================================================================================================
WEIGHTED AVERAGE ASSUMPTIONS USED TO    U.S.
  DETERMINE NET PERIODIC BENEFIT COST   ----
  FOR YEARS ENDED DECEMBER 31           2004
                                        ----
Discount rate.......................    6.25%      6.75%      7.25%    5.72%     5.87%      NM          NM         6.75%     7.25%
Expected return on plan assets......    8.00%      8.25%      9.00%    8.16%     8.67%      NM          NM          NM         NM
Rate of compensation increase.......    4.25%      4.25%      4.25%    3.84%     4.08%      NM          NM          NM         NM
====================================================================================================================================
</TABLE>


<TABLE>
<CAPTION>

====================================================================================================================================
                                                             2003                      2002                        2001
                                                  ----------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST (INCOME)              NON-                     Non-                         Non-
(Dollars in millions)                               U.S.      U.S.    OTHER    U.S.    U.S.      Other     U.S.     U.S.     Other
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>      <C>      <C>      <C>     <C>      <C>       <C>       <C>      <C>
Service cost.....................................  $  9.8   $  5.3   $  0.6   $  8.5  $  4.3   $  0.6    $  7.9    $  3.8   $  0.7
Interest cost....................................    56.4     14.4      8.1     55.1    12.5      8.7      55.3      11.2      9.8
Expected return on plan assets...................   (44.5)   (13.3)      --    (59.1)  (14.8)     --      (69.1)    (15.9)    --
Amortization of transition obligation (asset)....    --        0.5       --      0.7     0.4      --      (10.0)     --       --
Amortization of prior service cost (benefit).....     5.5      0.6    (12.7)     5.2     0.6    (12.7)      7.6       0.5     (8.3)
Amortization of unrecognized actuarial loss......    18.4      4.4      3.7      9.7     1.8      3.0       2.4       0.2      0.1
Net curtailment and settlement loss..............    --        0.6       --       --      --      --         --       0.2     --
------------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost (income)...............  $ 45.6   $ 12.5   $ (0.3)  $ 20.1  $  4.8   $ (0.4)   $ (5.9)   $ --     $  2.3
====================================================================================================================================
</TABLE>

NM  - Not meaningful
N/A - Not applicable


                                      F-30
<PAGE>

<TABLE>
<CAPTION>
================================================================================================================================
                                                                                                            OTHER POST-
PENSION PLANS WHERE ACCUMULATED BENEFIT OBLIGATIONS            U.S.                NON-U.S.              RETIREMENT PLANS
EXCEED PLAN ASSETS                                   ---------------------------------------------------------------------------
(In millions)                                           2003        2002       2003        2002         2003          2002
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>         <C>         <C>         <C>          <C>           <C>
Projected benefit obligation...................       $ 909.6     $ 867.1     $ 121.0     $  95.6        N/A           N/A
Accumulated benefit obligation (1).............         887.8       841.9       111.3        82.1      $ 127.0       $ 123.8
Fair value of plan assets......................         647.6       551.2         5.3         3.3        --            --
================================================================================================================================
</TABLE>

N/A - Not applicable
(1)  The accumulated benefit obligation for all domestic plans was $896.2
     million and $845.0 million at December 31, 2003 and 2002, respectively.


The target allocation of investment assets for 2004, the actual allocation at
December 31, 2003 and 2002, and the expected long-term rate of return by asset
category for Grace's domestic plans are as follows:

<TABLE>
<CAPTION>
==============================================================================================
                                                                             WEIGHTED-AVERAGE
                                                            PERCENTAGE OF        EXPECTED
                                                TARGET       PLAN ASSETS        LONG-TERM
                                              ALLOCATION     DECEMBER 31,     RATE OF RETURN
                                             -------------------------------------------------
ASSET CATEGORY                                   2004        2003     2002         2003
----------------------------------------------------------------------------------------------
<S>                                              <C>         <C>        <C>          <C>
U.S. stock................................       45%         45%        42%          4.01%
Non-U.S. Stock............................       15%         16%        20%          2.39%
Short-term fixed income...................       10%          7%        --%            --%
Intermediate-term fixed income............       30%         32%        38%          1.85%
                                             --------------------------------
Total.....................................      100%        100%       100%          8.25%
==============================================================================================
</TABLE>

The investment goal for the domestic plans is to earn a long-term rate of return
consistent with the long-term funding requirements of the underlying benefit
obligation and cash flow profile. Plan amendments, assumptions and demographics
are considered in determining the necessary level of returns.

The domestic pension plans have assets managed by six investment managers. Some
of the general restrictions on their investments are summarized as follows:

o   For fixed income securities: single issuers are limited to 5% of the
    portfolio's market value (with the exception of U.S. government and agency
    securities); the average credit quality of the portfolio shall be at least A
    rated; no more than 15% of the market value of the portfolio shall be
    invested in non-dollar denominated bonds; and privately placed securities
    are limited to no more than 50% of the portfolio's market value.

o   For U.S. equity securities; the portfolio is entirely passively managed
    through investment in the Wilshire 5000 index.

o   For non-U.S. equity securities; no individual security shall represent more
    than 5% of the portfolio's market value at any time, investment in U.S.
    common stock securities is prohibited (with the exception of American
    Depository Receipts) and emerging market securities may represent up to 30%
    of the total portfolio's market value. Currency futures and forward
    contracts may be held for the sole purpose of hedging existing currency risk
    in the portfolio.

For 2004, the expected long-term rate of return on assets for domestic plans is
8.0% (8.25% in 2003). Average annual returns over one, three, five, ten and
fifteen year periods were 22.57%, 0.98%, 3.28%, 7.12%, and 8.50%, respectively.
The change in the expected rate is due to the reallocation of targeted equity
from 65% stocks/35% bonds to 60% stocks/40% bonds in December 2003. Grace
reallocated the assets due to the volatility in the equity markets and to
maintain an investment portfolio more in line with the profile of the domestic
plan participants, a significant portion of whom are drawing current benefits.

Non-U.S. pension plans accounted for approximately 22% of total global pension
assets at December 31, 2003 and 2002, respectively. Each of these plans, where
applicable, abide by local requirements and regulations. Some of the local
requirements include the establishment of a local pension committee, a formal
statement of investment policy and procedures, and routine plan valuations by
hired plan actuaries.

Subject to the approval of the Bankruptcy Court, Grace expects to contribute
approximately $40.0 million to its domestic qualified defined benefit pension
plans and approximately $12.0 million to its other postretirement plans in 2004.
Of the approximately $40.0 million expected to be contributed to the domestic
pension plans during 2004, approximately $33.0 million is estimated to be needed
to satisfy minimum funding requirements under the Employee Retirement Income
Security Act of 1984. Grace intends to contribute the additional $7.0 million to
help fund the shortfall between the accounting


                                      F-31
<PAGE>

measurement of Grace's U.S. qualified pension obligations and the market value
of dedicated pension assets. The entire contribution to fund the other
postretirement benefit plans is discretionary, as the plans are not subject to
any minimum regulatory funding requirements.

For 2003 measurement purposes, the per capita cost of covered retiree health
care benefits for pre-age 65 and post-age 65, respectively, were assumed to
increase at rates of 8.25% and 8.65%, respectively. The rate is assumed to
decrease gradually to 5.3% through 2007 and remain at that level thereafter. A
one percentage point increase or decrease in assumed health care medical cost
trend rates would have a negligible impact on Grace's postretirement benefit
obligations.

--------------------------------------------------------------------------------
19.   BUSINESS SEGMENT INFORMATION
--------------------------------------------------------------------------------

Grace is a global producer of specialty chemicals and specialty materials. It
generates revenues from two business segments: Davison Chemicals and Performance
Chemicals. Davison Chemicals produces a variety of catalyst and silica products.
Performance Chemicals produces specialty construction chemicals, building
materials and sealants and coatings. Intersegment sales, eliminated in
consolidation, are not material. The table below presents information related to
Grace's business segments for 2003, 2002, and 2001. Only those corporate
expenses directly related to the segment are allocated for reporting purposes.
All remaining corporate items are reported separately and labeled as such.


================================================================================
BUSINESS SEGMENT DATA
(In millions)                                2003           2002          2001
--------------------------------------------------------------------------------
NET SALES
Davison Chemicals....................     $ 1,039.9      $   939.3     $   868.3
Performance Chemicals................         940.6          880.4         854.6
                                       -----------------------------------------
Total................................     $ 1,980.5      $ 1,819.7     $ 1,722.9
                                       =========================================
PRE-TAX OPERATING INCOME
Davison Chemicals....................     $   118.9      $   129.4     $   123.8
Performance Chemicals................         107.9           98.8          96.7
                                       -----------------------------------------
Total................................     $   226.8      $   228.2     $   220.5
                                       =========================================
DEPRECIATION AND AMORTIZATION
Davison Chemicals....................     $    67.6      $    61.7     $    58.5
Performance Chemicals................          33.1           32.0          29.6
                                       -----------------------------------------
Total................................     $   100.7      $    93.7     $    88.1
                                       =========================================
CAPITAL EXPENDITURES
Davison Chemicals....................     $    68.1      $    59.5     $    39.3
Performance Chemicals................          16.5           27.9          22.8
                                       -----------------------------------------
Total................................     $    84.6      $    87.4     $    62.1
                                       =========================================
TOTAL ASSETS
Davison Chemicals....................     $   797.1      $   734.1     $   687.2
Performance Chemicals................         609.2          528.7         498.8
                                       -----------------------------------------
Total................................     $ 1,406.3      $ 1,262.8     $ 1,186.0
================================================================================


The table below presents information related to the geographic areas in which
Grace operated in 2003, 2002 and 2001.

================================================================================
GEOGRAPHIC AREA DATA
(In millions)                                  2003        2002         2001
--------------------------------------------------------------------------------
NET SALES
United States...........................   $   804.3    $   827.1    $   829.7
Canada and Puerto Rico..................        78.9         56.1         40.3
Germany.................................        92.2         70.9         61.8
Europe, other than Germany..............       584.7        490.0        417.6
Asia Pacific............................       312.7        269.0        266.7
Latin America...........................       107.7        106.6        106.8
                                       -----------------------------------------
Total...................................   $ 1,980.5    $ 1,819.7    $ 1,722.9
================================================================================
PROPERTIES AND EQUIPMENT, NET
United States...........................   $   386.4    $   392.0    $   386.7
Canada and Puerto Rico..................        19.4         18.5         20.1
Germany.................................       120.7         89.6         77.7
Europe, other than Germany..............        72.3         63.7         41.6
Asia Pacific............................        46.8         47.4         49.1
Latin America...........................        11.0         11.0         15.1
                                       -----------------------------------------
Total...................................   $   656.6    $   622.2    $   590.3
================================================================================

<PAGE>


Pre-tax operating income, depreciation and amortization, capital expenditures
and total assets for Grace's business segments are reconciled below to amounts
presented in the Consolidated Financial Statements.


                                      F-32

<PAGE>

<TABLE>
<CAPTION>
============================================================================================================
RECONCILIATION OF BUSINESS SEGMENT
DATA TO FINANCIAL STATEMENTS
(In millions)                                                          2003           2002          2001
------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>             <C>           <C>
Pre-tax operating income - business segments..................      $  226.8        $  228.2      $  220.5
Minority interest.............................................          (1.2)            2.2           3.7
(Loss) gain on sale of investments and disposal of assets.....          (1.5)            1.9           9.7
Provision for environmental remediation.......................        (142.5)          (70.7)         (5.8)
Provision for asbestos-related litigation.....................         (30.0)           --            --
Interest expense and related financing costs..................         (15.6)          (20.0)        (37.1)
Corporate costs...............................................         (78.1)          (47.4)        (33.0)
Other, net....................................................         (11.8)           (1.8)          3.7
                                                                    ----------------------------------------
(Loss) income from operations before Chapter 11
  expenses, income taxes, and minority interest...............      $  (53.9)       $   92.4      $  161.7
============================================================================================================
Depreciation and amortization
  - business segments.........................................      $  100.7        $   93.7      $   88.1
  - corporate.................................................           2.2             1.2           1.1
                                                                    ----------------------------------------
Total depreciation and amortization                                 $  102.9        $   94.9      $   89.2
============================================================================================================
Capital Expenditures
  - business segments.........................................      $   84.6        $   87.4      $   62.1
  - corporate.................................................           1.8             3.7           0.8
                                                                    ----------------------------------------
Total capital expenditures....................................      $   86.4        $   91.1      $   62.9
============================================================================================================
Total assets
  - business segments.........................................      $1,406.3        $1,262.8      $1,186.0
  - corporate.................................................         581.6           551.6         558.1
Asbestos-related receivables..................................         269.4           282.6         283.7
Deferred tax assets...........................................         616.9           594.7         525.4
                                                                    ----------------------------------------
Total assets..................................................      $2,874.2        $2,691.7      $2,553.2
============================================================================================================
</TABLE>



                                      F-33
<PAGE>


--------------------------------------------------------------------------------
20. QUARTERLY SUMMARY AND STATISTICAL INFORMATION (UNAUDITED)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
===============================================================================================================
QUARTERLY SUMMARY AND STATISTICAL INFORMATION (Unaudited)
(In millions, except per share)
---------------------------------------------------------------------------------------------------------------
                                                      March 31       June 30   September 30    December 31(1)
---------------------------------------------------------------------------------------------------------------
<S>                                                    <C>           <C>          <C>             <C>
2003
Net sales..........................................    $ 444.8       $ 503.4      $ 521.0         $ 511.3
Cost of goods sold.................................      296.7         329.7        336.5           326.9
Net (loss) income..................................       (2.3)          6.5         (9.9)          (49.5)

Net (loss) income per share: (2)
  Basic earnings per share:
     Net (loss) income.............................    $ (0.04)      $  0.10      $ (0.15)        $ (0.75)
  Diluted earnings per share:
     Net (loss) income.............................      (0.04)         0.10        (0.15)          (0.75)

Market price of common stock: (3)
    High...........................................    $  2.89       $  4.41      $  5.52         $  3.84
    Low............................................       1.48          1.65         2.57            2.34
    Close..........................................       1.48          4.41         3.10            2.57

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

2002
Net sales..........................................    $ 413.2      $  471.8      $ 480.0         $ 454.7
Cost of goods sold.................................      259.9         294.2        300.0           294.0
Net income (loss)..................................       12.4          21.2         14.0           (25.5)

Net income (loss) per share: (2)
  Basic earnings per share:
     Net income (loss).............................    $  0.19       $  0.32      $  0.21         $ (0.39)
  Diluted earnings per share:
     Net income (loss).............................       0.19          0.32         0.21           (0.39)

Market price of common stock: (3)
    High...........................................    $  2.47       $  3.75      $  3.05         $  2.50
    Low............................................       1.56          2.13         1.46            0.99
    Close..........................................       2.20          3.00         1.60            1.96
===============================================================================================================
</TABLE>

(1) Fourth quarter 2003 net loss includes $120.0 million for pre-tax charges to
    adjust Grace's estimated liability for environmental remediation and
    asbestos-related property damage. Fourth quarter 2002 net loss includes a
    $51.0 million pre-tax charge to adjust Grace's estimate of defense and other
    probable costs to resolve cost recovery claims by the EPA for clean-up of
    vermiculite in and around Libby, Montana.

(2) Per share results for the four quarters may differ from full-year per share
    results, as a separate computation of the weighted average number of shares
    outstanding is made for each quarter presented.

(3) Principal market: New York Stock Exchange.



                                      F-34
<PAGE>

<TABLE>
<CAPTION>
==================================================================================================================================
FINANCIAL SUMMARY (1)
(In millions, except per share amounts)
----------------------------------------------------------------------------------------------------------------------------------
                                                                 2003           2002          2001          2000           1999
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>           <C>            <C>           <C>          <C>
STATEMENT OF OPERATIONS
Net sales ................................................    $  1,980.5    $  1,819.7     $  1,722.9   $   1,597.4   $    1,550.9
(Loss) income from continuing operations before Chapter 11
    expenses, income taxes, and minority interest (2).....         (53.9)         92.4          161.7         (19.7)         203.4
(Loss) income from continuing operations (2)..............         (55.2)         22.1           78.6         (89.7)         130.2
Income from discontinued operations (2) ..................          --            --             --            --              5.7
Minority interest in consolidated entities................           1.2          (2.2)          (3.7)         --             --
Net (loss) income ........................................         (55.2)         22.1           78.6         (89.7)         135.9
----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Current assets (3)........................................    $    928.9    $    830.3     $    741.3   $     773.9   $      779.8
Current liabilities (3)...................................         270.8         247.3          236.1       1,092.9          769.4
Properties and equipment, net.............................         656.6         622.2          590.3         601.7          617.3
Total assets (3)..........................................       2,874.2       2,691.7        2,521.1       2,584.9        2,475.1
Total debt not subject to compromise (3)..................           6.8           4.3            6.9         421.9          136.2
Liabilities subject to compromise.........................       2,465.3       2,334.7        2,311.5          --             --
Shareholders' equity (deficit)............................        (183.6)       (222.2)        (141.7)        (71.3)         111.1
----------------------------------------------------------------------------------------------------------------------------------
CASH FLOW
Operating activities (3) .................................    $    110.8    $    195.5     $     14.6   $    (143.7)  $      130.5
Investing activities......................................        (109.1)       (110.7)        (131.4)        (94.0)          89.4
Financing activities (3)..................................          (4.7)         (9.2)         123.7         239.9          (80.9)
Net cash flow (3).........................................          25.6          91.7           --            (7.9)         134.5
----------------------------------------------------------------------------------------------------------------------------------
DATA PER COMMON SHARE (DILUTED)
(Loss) income from continuing operations (2)..............    $    (0.84)   $     0.34     $     1.20   $     (1.34)  $       1.76
Net (loss) income ........................................         (0.84)         0.34           1.20         (1.34)          1.84
Average common diluted shares outstanding (thousands).....        65,500        65,500         65,400        66,800         73,800
----------------------------------------------------------------------------------------------------------------------------------
OTHER STATISTICS
Capital expenditures......................................    $     86.4    $     91.1     $     62.9   $      64.8   $       82.5
Common stock price range..................................    $1.48-5.52    $0.99-3.75     $1.31-4.38   $1.94-14.94   $11.81-21.00
Common shareholders of record.............................        10,734        11,187         11,643        12,240         13,215
Number of employees - continuing operations...............         6,300         6,400          6,400         6,300          6,300
==================================================================================================================================
</TABLE>

(1) Certain prior-year amounts have been reclassified to conform to the 2003
    presentation.

(2) Amounts contain a provision for environmental remediation of $142.5 million
    and a provision for asbestos-related claims of $30.0 million for 2003.
    Amounts contain a provision for environmental remediation of $70.7 million
    for 2002. Amounts for 2000 also contain a provision for asbestos litigation,
    net of expected insurance recovery, of $208.0 million.

(3) 2001 results are retroactively restated to reflect the full consolidation of
    Advanced Refining Technologies LLC, previously reported as an equity method
    joint venture. This restatement had no effect on reported sales or net
    income.


                                      F-35
<PAGE>


         MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
                            AND FINANCIAL CONDITION


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

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

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

=========================================================================
                                            2003        2002       2001
-------------------------------------------------------------------------
Catalyst products....................        37%         37%        36%
Silica products......................        15%         15%        14%
                                         --------------------------------
DAVISON CHEMICALS....................        52%         52%        50%
Construction chemicals...............        23%         22%        22%
Building materials...................        12%         13%        14%
Sealants and coatings................        13%         13%        14%
                                         --------------------------------
PERFORMANCE CHEMICALS................        48%         48%        50%
                                         --------------------------------
TOTAL................................       100%        100%       100%
=========================================================================

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

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

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

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

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

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

<PAGE>


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

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

o   Contingent liabilities such as asbestos-related matters (see Note 3 to the
    Consolidated Financial Statements), environmental remediation (see Note 14
    to the Consolidated Financial Statements), income taxes (see Note 14


                                      F-36
<PAGE>

    to the Consolidated Financial Statements), and retained obligations of
    divested businesses.

o   Pension and postretirement liabilities that depend on assumptions regarding
    discount rates and/or total returns on invested funds. (See Note 18 to the
    Consolidated Financial Statements.)

o   Depreciation and amortization periods for long-lived assets, including
    property and equipment, intangible, and other assets.

o   Realization values of various assets such as net deferred tax assets (see
    Note 4 to the Consolidated Financial Statements), trade receivables,
    inventories, insurance receivables, income taxes, and goodwill.

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

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

Set forth below is a chart that lists key operating statistics, and dollar and
percentage changes for the years ended December 31, 2003, 2002, and 2001. The
chart should be referenced when reading management's discussion and analysis of
the results of operations and financial condition. The chart, as well as the
financial information presented throughout this discussion, divides Grace's
financial results between "core operations" and "noncore activities." Core
operations comprise the financial results of Davison Chemicals, Performance
Chemicals and the costs of corporate activities that directly or indirectly
support business operations. In contrast, noncore activities comprise all other
events and transactions not directly related to the generation of operating
revenue or the support of core operations and generally relate to Grace's former
operations and products.

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


                                      F-37
<PAGE>


<TABLE>
<CAPTION>
==================================================================================================================================
                                                                        $ Change   % Change                 $ Change   % Change
ANALYSIS OF CONSOLIDATED OPERATIONS                                       Fav         Fav                      Fav        Fav
(In millions)                                     2003        2002      (Unfav)     (Unfav)        2001      (Unfav)    (Unfav)
----------------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>         <C>         <C>          <C>         <C>          <C>        <C>
NET SALES:
    Davison Chemicals......................    $ 1,039.9   $   939.3   $  100.6     10.7%       $   868.3    $  71.0     8.2%
    Performance Chemicals..................        940.6       880.4       60.2      6.8%           854.6       25.8     3.0%
                                              ------------------------------------------------------------------------------------
TOTAL GRACE SALES - CORE OPERATIONS........    $ 1,980.5   $ 1,819.7   $  160.8      8.8%       $ 1,722.9    $  96.8     5.6%
==================================================================================================================================
PRE-TAX OPERATING INCOME: (1)
    Davison Chemicals (2)..................    $   118.9   $   129.4   $  (10.5)    (8.1%)      $   123.8    $   5.6     4.5%
    Performance Chemicals..................        107.9        98.8        9.1      9.2%            96.7        2.1     2.2%
    Corporate costs:
        Support functions..................        (30.2)      (31.1)       0.9      2.9%           (38.0)       6.9    18.2%
        Pension and other..................        (47.9)      (16.3)     (31.6)  (193.9%)            5.0      (21.3)    NM
                                              ------------------------------------------------------------------------------------
    Total Corporate costs..................        (78.1)      (47.4)     (30.7)   (64.8%)          (33.0)     (14.4)  (43.6%)
                                              ------------------------------------------------------------------------------------
PRE-TAX INCOME FROM CORE OPERATIONS........        148.7       180.8      (32.1)   (17.8%)          187.5       (6.7)   (3.6%)
PRE-TAX (LOSS) INCOME FROM NONCORE
  ACTIVITIES...............................       (190.1)      (74.5)    (115.6)     NM               3.0      (77.5)    NM
     Interest expense......................        (15.6)      (20.0)       4.4     22.0%           (37.1)      17.1    46.1%
     Interest income.......................          4.3         3.9        0.4     10.3%             4.6       (0.7)  (15.2%)
                                              ------------------------------------------------------------------------------------
(LOSS) INCOME BEFORE CHAPTER 11
  EXPENSES AND INCOME TAXES................        (52.7)       90.2     (142.9)     NM             158.0      (67.8)    NM
Chapter 11 expenses, net...................        (14.8)      (30.1)      15.3     50.8%           (15.7)     (14.4)  (91.7%)
Benefit from (provision for) income taxes..         12.3       (38.0)      50.3      NM             (63.7)      25.7     NM
                                              ------------------------------------------------------------------------------------
NET (LOSS) INCOME..........................    $   (55.2)  $    22.1   $  (77.3)     NM         $    78.6    $ (56.5)    NM
==================================================================================================================================

KEY FINANCIAL MEASURES:
  PRE-TAX INCOME FROM CORE OPERATIONS AS
      A PERCENTAGE OF SALES:
      Davison Chemicals....................         11.4%       13.8%       NM      (2.4) pts        14.3%       NM     (0.5) pts
      Performance Chemicals................         11.5%       11.2%       NM       0.3  pts        11.3%       NM     (0.1) pts
      Total Core Operations................          7.5%        9.9%       NM      (2.4) pts        10.9%       NM     (1.0) pts
  PRE-TAX INCOME FROM CORE OPERATIONS
      BEFORE DEPRECIATION AND
      AMORTIZATION.........................    $   251.6   $   275.7   $  (24.1)    (8.7%)      $   276.7    $  (1.0)   (0.4%)
      AS A PERCENTAGE OF SALES.............         12.7%       15.2%       NM      (2.5) pts        16.1%       NM     (0.9) pts
==================================================================================================================================

NET CONSOLIDATED SALES BY REGION:
  North America............................    $   883.2   $   883.2   $   --         --%       $   870.0    $  13.2     1.5%
  Europe...................................        676.9       560.9      116.0     20.7%           479.4       81.5    17.0%
  Asia Pacific.............................        312.7       269.0       43.7     16.2%           266.7        2.3     0.9%
  Latin America............................        107.7       106.6        1.1      1.0%           106.8       (0.2)   (0.2%)
                                              ------------------------------------------------------------------------------------
TOTAL......................................    $ 1,980.5   $ 1,819.7   $  160.8      8.8%       $ 1,722.9    $  96.8     5.6%
==================================================================================================================================
</TABLE>

NM = Not meaningful      (1)   Pre-tax operating income for all periods
                               presented reflects a reallocation of the cost of
                               earned pension benefits of active participants
                               from corporate to the respective business
                               segments.

                         (2)   Davison Chemicals pre-tax operating income
                               includes minority interest related to the
                               Advanced Refining Technologies joint venture.

                                      F-38
<PAGE>


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

NET SALES

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

================================================================================
NET SALES                                        2003 AS A PERCENTAGE
 VARIANCE ANALYSIS                           INCREASE (DECREASE) FROM 2002
--------------------------------------------------------------------------------
                                                             CURRENCY
                                        VOLUME   PRICE/MIX  TRANSLATION   TOTAL
                                      -----------------------------------------
Davison Chemicals..................       1.7%      2.8%        6.2%     10.7%
Performance Chemicals..............       2.4%      0.1%        4.3%      6.8%
Net sales..........................       2.0%      1.5%        5.3%      8.8%
--------------------------------------------------------------------------------
BY REGION:
  North America....................      (2.1%)     1.7%        0.4%       --%
  Europe...........................       5.7%     (1.4%)      16.4%     20.7%
  Latin America....................      (1.0%)     9.6%       (7.6%)     1.0%
  Asia Pacific.....................      14.4%     (1.4%)       3.2%     16.2%
================================================================================
                                                 2002 AS A PERCENTAGE
                                             INCREASE (DECREASE) FROM 2001
--------------------------------------------------------------------------------
Davison Chemicals..................       5.9%      1.4%        0.9%      8.2%
Performance Chemicals..............       4.7%     (0.7%)      (1.0%)     3.0%
Net sales..........................       5.3%      0.4%       (0.1%)     5.6%
--------------------------------------------------------------------------------
BY REGION:
  North America....................       0.3%      1.2%         --%      1.5%
  Europe...........................      14.5%     (0.9%)       3.4%     17.0%
  Latin America....................       2.5%     13.2%      (15.9%)    (0.2%)
  Asia Pacific.....................       8.4%     (7.6%)       0.1%      0.9%
================================================================================

Grace's 2003 sales were favorably impacted by currency translation, improved
volume, product mix and revenue from acquisitions in silica products and
construction chemicals. Acquisitions contributed $27.1 million or 1.5 percentage
points of the sales volume growth. The impact from foreign currency translation
occurred primarily from European sales, reflecting the strengthening of the Euro
against the U.S. dollar.

In 2003 and 2002, both business segments experienced volume growth. In 2003, the
volume growth in Davison Chemicals was primarily driven by acquisitions, while
Performance Chemicals' volume growth was primarily driven by the construction
chemicals product group. The most significant volume increases were experienced
in Asia Pacific, primarily attributable to construction chemicals and catalyst
products.

In 2002, catalyst volumes were strong due to increased refining catalyst demand.
Silica products sales reflect the addition of two acquisitions during the first
quarter of 2001 and volume increases of products used in coating applications.
Construction chemicals volume growth in Europe was driven by the acquisition of
Pieri S.A. in July 2001. In 2002, the most significant volume increases were
experienced in Europe, primarily attributable to the Borealis A/S and Pieri S.A.
acquisitions.

Reported net sales from Grace's non-U.S. operations were positively impacted by
foreign currency translation in 2003, with minor impact in 2002. For countries
in which Grace operates, weighted average foreign currency exchange rates
appreciated approximately 8.9% in 2003 relative to the U.S. dollar, and
depreciated approximately 0.1% in 2002.

PRE-TAX INCOME FROM CORE OPERATIONS

The decline in 2003 operating profit and margins was principally caused by
higher costs for pensions, natural gas, and certain raw materials. A change in
regional and product sales mix from North America to other regions, particularly
in the first half of 2003, also contributed to the decrease.

Operating income in 2002 was adversely affected by: weakness in the global
economy and in U.S. commercial construction activity; product mix; higher
expenses to support growth initiatives; and higher costs for pensions, medical
benefits, insurance and other operating costs. Higher sales and lower energy
costs compared with 2001 favorably affected operating income in 2002.


<PAGE>


Corporate costs include corporate functional costs (such as financial and legal
services, human resources, communications and information technology), the cost
of corporate governance (including directors and officers ("D&O") liability
insurance) and pension costs related to both corporate employees and to the
effects of changes in assets and liabilities for all Grace pension plans.
Corporate costs for the year ended December 31, 2003 increased over 2002
primarily due to: (1) added costs for pension benefits to account for the
negative equity market returns in 2000-2002 that have impacted the funded status
of defined benefit pension plans; and (2) higher D&O liability insurance
premiums. The total return on pension assets in 2003 (22.5% for Grace's domestic
pension plan assets versus an assumed rate of 8.25%) were not recognized in
income in 2003 under the deferral method of accounting for pension costs. These
actual-to-assumed performance differences will be recognized in earnings over a
period ranging from 12-24 years.

The increase in corporate costs from 2001 to 2002 was primarily attributable to
an increase in pension costs and D&O liability insurance premiums, offset by
lower support function expenses. Pension costs rose $29.1


                                      F-39
<PAGE>

million and $17.6 million in 2003 and 2002, respectively, reflecting the
accounting effects of negative returns on pension assets from 2000 to 2002, and
certain plan formula changes.

During 2003 and 2002, Grace continued to focus on productivity improvements to
partially offset adverse market and cost factors. The results of its
productivity initiatives are reflected in: (1) sales - through added plant
capacity resulting from improved production processes; (2) costs - through
efficiency gains and purchasing synergies; and (3) capital avoidance - by
maximizing asset utilization.

Grace values its U.S. inventories under the last-in/first-out method ("LIFO"),
and its non-U.S. inventories under the first-in/first-out ("FIFO") method. LIFO
was selected in 1974 for U.S. financial reporting and tax purposes because it
generally results in a better matching of current revenue with current costs.
Grace cannot elect LIFO for its non-U.S. inventories due to statutory
restrictions. However, if Grace valued its U.S. inventories using the FIFO
method, consistent with non-U.S. subsidiaries, pre-tax income from core
operations would have been approximately 4.0% and 3.0% higher for each of the
years ended December 31, 2003 and 2002, respectively, and approximately 2.0%
lower for the year ended December 31, 2001.

PRE-TAX LOSS FROM NONCORE ACTIVITIES

================================================================================
 (In millions)                                      2003       2002      2001
--------------------------------------------------------------------------------
Environmental provision - vermiculite mining...  $(122.5)    $ (68.0)   $ (5.7)
Environmental provision - all other sites......    (20.0)       (2.6)     (1.7)
Provision for asbestos-related litigation......    (30.0)       --        --
COLI income, net...............................      5.6         4.7       5.4
D&O insurance cost.............................     (6.8)       (3.4)     (3.0)
Pension and postretirement benefit costs.......     (9.0)       (6.2)      4.6
Other..........................................     (7.4)        1.0       3.4
                                                 -------------------------------
                                                 $(190.1)    $ (74.5)   $  3.0
================================================================================

The 2003 pre-tax loss from noncore activities was higher than 2002 primarily due
to pre-tax charges to adjust Grace's estimated liabilities for pre-Chapter 11
contingencies. Grace increased its estimated liability for environmental
clean-up related to previously operated vermiculite mining and processing sites
by $122.5 million to a total of $181.0 million at December 31, 2003. Grace also
recorded a $20.0 million increase in its estimated liability for non-vermiculite
related environmental risks identified and measured as part of the Chapter 11
claims review process. In addition, Grace recorded a $30.0 million increase in
its estimated liability for asbestos-related litigation to account for the
estimated cost of resolving new asbestos-related property damage claims received
through the Chapter 11 claims solicitation process.

Expense from noncore activities for 2002 included $70.7 million for Grace's
defense and other probable costs to resolve pending environmental litigation
(primarily relating to former vermiculite mining operations in Libby, Montana).

The pre-tax income from noncore activities for 2001 included $7.7 million from
the sale of Grace's remaining cost-based investment in Cross Country Staffing,
offset by accruals for legal and environmental matters primarily related to
Grace's former vermiculite mining operations in Libby, Montana.

CHAPTER 11 EXPENSES

Although it is difficult to measure precisely how Chapter 11 has impacted
Grace's overall financial performance, there are certain added costs that are
directly attributable to operating under the Bankruptcy Code. Net Chapter 11
expenses consist primarily of legal, financial and consulting fees incurred by
Grace and three creditors' committees. The decrease of Chapter 11 expenses in
2003 is related to reduced advisory activity compared with 2002. The increase in
Chapter 11 expenses in 2002 compared with 2001 was due to a full year of costs
and more activity in the Chapter 11 Cases. Grace believes that Chapter 11
expenses will range between $2 million and $6 million per quarter for the
foreseeable future.

In addition, for 2003, 2002 and 2001, Grace's pre-tax income from core
operations included expenses of $8.0 million, $7.8 million, and $10.0 million
respectively, for Chapter 11-related compensation charges. Poor stock price
performance in the period leading up to and after the Filing diminished the
value of Grace's stock option program to current and prospective employees,
which caused Grace to change its long-term incentive compensation program into a
cash-based program. Grace has also sought to address employee retention issues
by providing added compensation to certain employees and increasing Grace's
contribution to its retirement savings and investment plan.

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

                                      F-40
<PAGE>


INTEREST

The decrease in net interest expense over the last three years was primarily
attributable to a lower contractual interest rate on pre-petition debt subject
to compromise. The payment of interest accrued on pre-petition debt is subject
to the outcome of Grace's Chapter 11 proceedings.

INCOME TAXES

Grace's benefit from (provision for) income taxes at the federal corporate rate
of 35% for the years ended December 31, 2003, 2002 and 2001 was $23.6 million,
($21.0 million), and ($49.8 million), respectively. The primary differences
between these amounts and the overall benefit from and provision for income
taxes is attributable to current period interest on tax contingencies and the
non-deductibility of certain Chapter 11 expenses.

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

DAVISON CHEMICALS

================================================================================
                                                         $ Change    % Change
NET SALES BY PRODUCT LINE                                   Fav         Fav
(In millions)                        2003        2002     (Unfav)     (Unfav)
--------------------------------------------------------------------------------
Catalyst products..............    $  734.9    $ 678.0   $  56.9        8.4%
Silica products................       305.0      261.3      43.7       16.7%
--------------------------------------------------------------------------------
TOTAL DAVISON CHEMICALS........    $1,039.9    $ 939.3   $ 100.6       10.7%
--------------------------------------------------------------------------------
                                                         $ Change    % Change
                                                            Fav         Fav
                                     2002        2001     (Unfav)     (Unfav)
--------------------------------------------------------------------------------
Catalyst products..............    $  678.0    $ 621.8   $  56.2        9.0%
Silica products................       261.3      246.5      14.8        6.0%
--------------------------------------------------------------------------------
TOTAL DAVISON CHEMICALS........    $  939.3    $ 868.3   $  71.0        8.2%
================================================================================

================================================================================
                                                         $ Change    % Change
NET SALES BY REGION                                         Fav         Fav
(In millions)                        2003        2002     (Unfav)      (Unfav)
--------------------------------------------------------------------------------
North America..................    $  395.2    $ 388.1   $   7.1        1.8%
Europe.........................       418.3      354.2      64.1       18.1%
Asia Pacific...................       177.7      146.7      31.0       21.1%
Latin America..................        48.7       50.3      (1.6)      (3.2%)
--------------------------------------------------------------------------------
TOTAL DAVISON CHEMICALS........    $1,039.9    $ 939.3   $ 100.6       10.7%
--------------------------------------------------------------------------------
                                                         $ Change    % Change
                                                            Fav         Fav
                                     2002        2001     (Unfav)      (Unfav)
--------------------------------------------------------------------------------
North America..................    $  388.1    $ 362.3   $  25.8        7.1%
Europe.........................       354.2      303.8      50.4       16.6%
Asia Pacific...................       146.7      149.9      (3.2)      (2.1%)
Latin America..................        50.3       52.3      (2.0)      (3.8%)
--------------------------------------------------------------------------------
TOTAL DAVISON CHEMICALS........    $  939.3    $ 868.3   $  71.0        8.2%
================================================================================

Recent Acquisitions and Joint Ventures

See Note 5 to the Consolidated Financial Statements for a description of
acquisitions and joint ventures completed in 2003 and 2002.

Sales

The increase in sales for the Davison Chemicals segment in 2003 compared with
2002 was primarily attributable to the favorable impact of acquisitions,
currency translation, and product mix. Acquisitions accounted for $20.9 million
or 2.2 percentage points of the sales growth. The increase in sales of catalyst
products was a result of favorable currency effects and acquisitions in the
polyolefin and hydroprocessing catalyst businesses, partially offset by lower
sales volumes in North America caused by a decrease in demand. Increased sales
of silica products was attributable to added volume and favorable currency
translation impacts, and from growth programs for products used in coatings,
digital printing, and separations applications.

In Europe, the increase in sales was primarily due to favorable currency
translation and acquisitions, as well as volume growth in silica products. The
increase in Asia Pacific reflects volume growth and acquisition sales within the
catalyst product line.

Sales for the Davison Chemicals segment in 2002 increased over 2001 due to
increased demand, acquisitions and favorable foreign currency translation.
Acquisitions accounted for $26.5 million or 3.1 percentage points of the sales
growth. The increase in sales of catalyst products was primarily due to added
revenue from acquisitions and joint ventures in the polyolefin and
hydroprocessing catalyst businesses, and increased FCC volumes. Sales of silica
products increased due to acquisition sales, as well as growth programs in
coating applications and added volume in Europe and Asia Pacific.

In North America, the increase was primarily attributable to favorable order
patterns of hydroprocessing catalysts, offset by a decrease in sales of chemical
catalysts. In Europe, the increase was driven by refining catalysts and silica
coating applications, along with sales from the Borealis A/S acquisition.

Operating Income

The decline in pre-tax operating income in 2003 compared with 2002 reflects a
sluggish U.S. economy and higher energy, raw materials, and other manufacturing


                                      F-41
<PAGE>

costs. Manufacturing costs were higher in the first half of 2003 due to
maintenance and process problems at certain production facilities. Second half
comparisons improved as the U.S. economy strengthened, and manufacturing costs
and operating expenses were reduced.

Pre-tax operating income in 2002 was higher than 2001, due to year-over-year
sales growth and the positive effects of acquisitions. Increased gross margin
from higher sales was partially offset by higher expenses to support growth
initiatives and increases in employee benefits (including pension), insurance
and other operating costs.

PERFORMANCE CHEMICALS

================================================================================
NET SALES BY                                               $ Change    % Change
  PRODUCT LINE                                                Fav         Fav
(In millions)                        2003        2002       (Unfav)     (Unfav)
--------------------------------------------------------------------------------
Construction chemicals.........     $ 448.1    $ 405.4    $   42.7      10.5%
Building materials.............       231.0      230.2         0.8       0.3%
Sealants and coatings..........       261.5      244.8        16.7       6.8%
--------------------------------------------------------------------------------
TOTAL PERFORMANCE CHEMICALS....     $ 940.6    $ 880.4    $   60.2       6.8%
--------------------------------------------------------------------------------
                                                          $ Change    % Change
                                                             Fav         Fav
                                     2002        2001      (Unfav)     (Unfav)
--------------------------------------------------------------------------------
Construction chemicals.........     $ 405.4    $ 373.5    $   31.9       8.5%
Building materials.............       230.2      239.1        (8.9)     (3.7%)
Sealants and coatings..........       244.8      242.0         2.8       1.2%
--------------------------------------------------------------------------------
TOTAL PERFORMANCE CHEMICALS....     $ 880.4    $ 854.6    $   25.8       3.0%
================================================================================

================================================================================
                                                          $ Change    % Change
NET SALES BY REGION                                          Fav         Fav
(In millions)                        2003        2002      (Unfav)     (Unfav)
--------------------------------------------------------------------------------
North America..................     $ 488.0    $ 495.1    $   (7.1)     (1.4%)
Europe.........................       258.6      206.7        51.9      25.1%
Asia Pacific...................       135.0      122.3        12.7      10.4%
Latin America..................        59.0       56.3         2.7       4.8%
--------------------------------------------------------------------------------
TOTAL PERFORMANCE CHEMICALS....     $ 940.6    $ 880.4    $   60.2       6.8%
--------------------------------------------------------------------------------
                                                          $ Change    % Change
                                                             Fav         Fav
                                      2002       2001      (Unfav)     (Unfav)
--------------------------------------------------------------------------------
North America..................     $ 495.1    $ 507.7    $  (12.6)     (2.5%)
Europe.........................       206.7      175.6        31.1      17.7%
Asia Pacific...................       122.3      116.8         5.5       4.7%
Latin America..................        56.3       54.5         1.8       3.3%
--------------------------------------------------------------------------------
TOTAL PERFORMANCE CHEMICALS....     $ 880.4    $ 854.6    $   25.8       3.0%
================================================================================

Recent Acquisitions and Joint Ventures

See Note 5 to the Consolidated Financial Statements for a description of
acquisitions and joint ventures completed in 2003 and 2002.

Sales

The increase in sales for the Performance Chemicals segment in 2003 compared
with 2002 was primarily attributable to favorable foreign currency translation
and volume increases. Acquisitions accounted for $6.2 million, or 0.7 percentage
points of the sales growth, all related to construction chemicals. The increase
in sales of construction chemicals reflected favorable currency translation
impacts, the success of new product programs and sales initiatives in key
economies worldwide, and the acquisition of the assets of Tricosal Beton-Chemie,
completed during the fourth quarter of 2003. Sales of building materials were
essentially flat, as favorable currency translation impacts and growth in
waterproofing were offset by declines in fire protection materials. Sales from
fire protection materials declined as a result of the effects of new building
codes that permit less fire protection materials for structural steel used in
commercial buildings, as well as weak U.S. commercial construction activity.
Sales of sealants and coatings increased, reflecting favorable currency
translation impacts in Europe and growth initiatives in coatings and closure
sealants in Europe, Asia Pacific and Latin America, offset by unfavorable
currency exchange in Latin America.

In Europe, higher sales were due to favorable foreign currency translation and
volume growth in all product groups, particularly concrete admixtures. Sales in
Asia Pacific increased from the effects of favorable foreign currency, as well
as volume growth in construction chemicals.

<PAGE>


The increase in Performance Chemicals segment sales in 2002 versus 2001 was
primarily driven by acquisitions in construction chemicals, which accounted for
$20.0 million, or 2.4 percentage points, of the sales growth. Sales of
construction chemicals increased despite reduced U.S. commercial construction
activity, reflecting sales from the Pieri acquisition, an increase in
construction activity outside North America, and the success of new product
programs and sales initiatives. Sales of building materials, which are largely
based in North America, were down due to softness in U.S. commercial
construction and re-roofing activity. The increase in sales of sealants and
coatings reflected continued positive results from growth programs in coatings
and closure compounds, particularly in Europe.


                                      F-42
<PAGE>


The decline in North America reflected the impact of weak U.S. commercial
construction activity on sales of construction chemicals and building materials.
In Europe, the increase in sales was primarily attributable to the Pieri
acquisition and volume growth in all three product groups.

Operating Income

Pre-tax operating income was higher in 2003 compared with 2002, reflecting
favorable foreign currency translation, sales increases and successful
productivity programs, partially offset by increases in raw material and energy
costs. The second half of 2003 was significantly stronger than the first half,
which was affected by soft construction activity and weather-delayed projects in
the U.S. In the second half, U.S. construction weather improved, allowing for a
catch-up in project activity, and there was some leveling of the decline in
overall U.S. construction activity. Intensified focus on productivity programs
and discretionary expense control also contributed to improved profitability in
the second half.

The increase in pre-tax operating income in 2002 versus 2001 reflects the impact
of acquisitions in construction chemicals and growth programs across all product
groups, offset by the impact of weak U.S. commercial construction activity on
sales of fire protection materials, a decrease in sales of roofing underlayments
due to the effect of a mild U.S. 2001-02 winter on re-roofing activity and costs
for facility rationalizations and restructuring in building materials and
sealants and coatings.

FINANCIAL POSITION

The following charts set forth the Davison Chemicals and Performance Chemicals
total asset position and pre-tax return on average total assets for 2003 and
2002.


<TABLE>
<CAPTION>
=================================================================================================================
                                                                                     $ Change        % Change
                                                                                    (excluding      (excluding
                                                                                     currency        currency
                                                                                    translation)    translation)
DAVISON CHEMICALS                                                                      Fav              Fav
 (In millions)                                           2003           2002         (Unfav)          (Unfav)
-----------------------------------------------------------------------------------------------------------------
<S>                                                 <C>             <C>           <C>                <C>
Receivables..................................       $  146.3        $  137.6      $   (2.7)          (2.0%)
Inventory....................................          133.6           111.0          13.0           11.7%
Other current assets.........................            2.1             3.0          (0.9)         (30.0%)
                                                  ----------------------------------------------
Total current assets.........................          282.0           251.6           9.4            3.7%
Properties and equipment, net................          444.0           413.9           5.3            1.3%
Goodwill and other intangible assets.........           65.8            64.2          (5.0)          (7.8%)
Other assets.................................            5.3             4.4           0.4            9.1%
                                                  ----------------------------------------------
Total assets.................................       $  797.1        $  734.1      $   10.1            1.4%
                                                  ==============================================
Pre-tax return on average total assets.......           15.4%           17.5%                        (2.1) pts
=================================================================================================================
</TABLE>

Davison Chemicals' total assets increased by $63.0 million compared with the
prior year, of which $52.9 million was attributable to currency translation,
reflecting the weaker U.S. dollar. The remainder of such increase was primarily
due to increased inventories, offset by a decrease in receivables. The increase
in inventory was primarily in North America and was due to a build-up for 2004
sales, increased inventory costs and acquisitions. The decline in receivables
was caused by improved collections as well as changes in customer and product
mix.

The pre-tax return on average total assets decreased by 2.1 percentage points,
due to an 8.1% decline in pre-tax operating income.


<TABLE>
<CAPTION>
=================================================================================================================
                                                                                       $ Change        % Change
                                                                                      (excluding      (excluding
                                                                                       currency        currency
                                                                                     translation)    translation)
PERFORMANCE CHEMICALS                                                                    Fav             Fav
(In millions)                                              2003           2002         (Unfav)         (Unfav)
-----------------------------------------------------------------------------------------------------------------
<S>                                                    <C>            <C>           <C>                  <C>
Receivables......................................      $  196.2       $  172.8      $    8.0             4.6%
Inventory........................................          80.9           62.6          12.0            19.2%
Other current assets.............................           5.9            5.2           0.5             9.6%
                                                  ----------------------------------------------
Total current assets.............................         283.0          240.6          20.5             8.5%
Properties and equipment, net ...................         203.2          193.4          (2.4)           (1.2%)
Goodwill and other intangible ...................          84.5           64.3          11.0            17.1%
Other assets.....................................          38.5           30.4           6.7            22.0%
                                                  ----------------------------------------------
Total assets.....................................      $  609.2       $  528.7      $   35.8             6.8%
                                                  ==============================================
Pre-tax return on average total assets...........          18.7%          18.6%                          0.1  pts
=================================================================================================================
</TABLE>


                                      F-43
<PAGE>

Performance Chemicals' total assets increased by $80.5 million compared with the
prior year, of which $44.7 million was attributable to currency translation
reflecting the weaker U.S dollar. The remainder of such increases was primarily
due to receivables, inventory and goodwill and other intangible assets. The
increase in receivables was caused primarily by a shift in the regional sales
mix toward regions outside North America where, on average, the standard terms
of sale are longer. The increase in inventory was due primarily to advance
purchases of key raw materials to secure favorable pricing. The change in
goodwill and other intangible assets was primarily due to acquisitions.

The pre-tax return on average total assets for 2003 was consistent with 2002.

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

EFFECT OF CHAPTER 11

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

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

LIABILITIES AND CONTINGENCIES

Grace has a number of financial exposures originating from past businesses,
products and events. These obligations arose from transactions and/or business
practices that date back to when Grace was a much larger company, when it
produced products or operated businesses that are no longer part of its revenue
base, and when government regulations and scientific knowledge were much less
advanced than today. The following table summarizes net noncore liabilities at
December 31, 2003 and 2002:


================================================================================
                                                            DECEMBER 31,
NET NONCORE LIABILITIES                         --------------------------------
(In millions)                                           2003            2002
--------------------------------------------------------------------------------
NET NONCORE LIABILITIES:
Asbestos-related liabilities..................     $   (992.3)     $   (973.2)
Asbestos-related insurance receivable.........          269.4           282.6
                                                --------------------------------
Asbestos-related liability, net...............         (722.9)         (690.6)
Environmental remediation.....................         (332.4)         (201.1)
Postretirement benefits.......................         (134.3)         (147.2)
Retained obligations and other................          (57.0)          (55.3)
                                                --------------------------------
NET NONCORE LIABILITY.........................     $ (1,246.6)     $ (1,094.2)
================================================================================

The resolution of most of these noncore recorded and contingent liabilities will
be determined through the Chapter 11 proceedings. Grace cannot predict with any
certainty how, and for what amounts, any of such estimates will be resolved. The
amounts of these liabilities as ultimately determined through the Chapter 11
proceedings could be materially different from amounts recorded by Grace at
December 31, 2003.

ASBESTOS-RELATED MATTERS

Grace is a defendant in lawsuits relating to previously sold asbestos-containing
products. In 2003, Grace had net receipts of $2.8 million for the defense and
disposition of asbestos-related property damage and bodily injury litigation,
including amounts received under settlements with insurance carriers, compared
with net expenditures in 2002 of $2.3 million. At December 31, 2003, Grace's
balance sheet reflects a gross asbestos-related liability of $992.3 million
($722.9 million net of insurance). This liability represents management's
estimate, based on facts and circumstances existing prior to the Filing, of the
undiscounted net cash outflows necessary to satisfy Grace's pending property
damage claims for which sufficient information is available, and its pending and
projected future bodily injury claims. In the fourth quarter of 2003, Grace
recorded a $30.0 million pre-tax charge to its estimated liability for
asbestos-related litigation to account for the estimated cost of resolving new
asbestos-related property damage claims received through the Chapter 11 claims
solicitation process. The pre-tax charge was based on an initial review,
completed in the fourth quarter of 2003, of more than 4,000 new claims submitted


<PAGE>


prior to the March 31, 2003 claims bar date. Each claim is unique as to
property, product in question, legal status of claimant, potential cost of
remediation, and other factors. Such claims were reviewed in detail by Grace,
categorized into claims with sufficient information to be evaluated or claims
that require additional information and, where sufficient information existed,
the cost of resolution was estimated. Grace's revised estimate of liability does
not


                                      F-44
<PAGE>

include any amounts for approximately 170 claims for which sufficient
information was not available to evaluate potential liability. Any further
changes to the recorded amount of such liability will be based on additional
Chapter 11 developments and management's assessment of the claim amounts that
will ultimately be allowed by the Bankruptcy Court.

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

The Consolidated Balance Sheet at December 31, 2003 includes total amounts due
from insurance carriers of $269.4 million pursuant to settlement agreements with
those insurance carriers. The recovery of amounts due from insurance carriers is
dependent upon the timing, character and exposure periods of asbestos-related
claims. Grace's Chapter 11 proceedings and proposed federal legislation could
also affect the timing and amounts of Grace's recovery.

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

ENVIRONMENTAL MATTERS

Grace is subject to loss contingencies resulting from extensive and evolving
federal, state, local and foreign environmental laws and regulations. Grace has
expended substantial funds to comply with such laws and regulations and expects
to continue to do so in the future. The following table sets forth Grace's
expenditures in the past three years for (1) the operation and maintenance of
environmental facilities and the disposal of wastes; (2) capital expenditures
for environmental control facilities; and (3) site remediation.


================================================================================
                              OPERATION OF
                               FACILITIES        CAPITAL          SITE
(In millions)                   AND WASTE     EXPENDITURES     REMEDIATION
--------------------------------------------------------------------------------
2003                            $ 46.1           $ 8.1          $  7.0
--------------------------------------------------------------------------------
2002                              38.0             5.6            13.7
--------------------------------------------------------------------------------
2001                              33.0             3.8            26.6
================================================================================

At December 31, 2003, Grace's recorded liability for environmental investigation
and remediation costs totaled $332.4 million, as compared with $201.1 million at
December 31, 2002. This liability covers both vermiculite and non-vermiculite
related matters. The amount is based on funding and/or remediation agreements in
place, together with Grace's best estimate of its cost for sites not subject to
a formal remediation plan. The increase in the liability is primarily
attributable to pre-tax charges relating to former vermiculite mining operations
in Libby, Montana, as described below.

Grace's estimated liability for vermiculite-related remediation at December 31,
2003 and 2002 was $181.0 million and $62.7 million, respectively. Based on a
previous ruling by the U.S. District Court of Montana, Grace is required to
reimburse the EPA for all appropriate costs expended for clean-up activities in
and around Libby, Montana, related to its former mining activities. As a result
of such ruling, Grace recorded a pre-tax charge of $50.0 million in the third
quarter of 2003. During the fourth quarter of 2003, Grace recorded a $70.0
million pre-tax charge based on additional information from the EPA and its
evaluation of probable remediation costs at vermiculite processing sites.
However, the EPA's cost estimates have changed regularly and increased
substantially over the course of this clean-up. Consequently, Grace's estimate
may change materially as more information becomes available. Grace's liability
for this matter is included in "liabilities subject to compromise" as of
December 31, 2003.

At December 31, 2003 and 2002, Grace's estimated liability for remediation of
sites not related to its former vermiculite mining and processing activities was
$151.4 million and $138.4 million, respectively. This liability relates to
Grace's current and former operations, including its share of liability for
off-site disposal at facilities where it has been identified as a potentially
responsible party. During the fourth quarter of 2003, Grace recorded a $20.0
million increase in its estimated environmental liability for non-vermiculite
related sites as part of the Chapter 11 claims review process. Grace's revised
estimated liability is based upon claims for which sufficient information was
available. As Grace receives new information and continues its claims evaluation
process, its estimated liability may change materially. Grace's liability for
this matter is included in "liabilities subject to compromise" as of
December 31, 2003.

See Note 14 to the Consolidated Financial Statements for a background
description of Grace's Vermiculite and Non-Vermiculite Related Matters.


                                      F-45
<PAGE>

POSTRETIREMENT BENEFITS

Grace provides certain health care and life insurance benefits for retired
employees, a large majority of which pertain to retirees of previously divested
businesses. These plans are unfunded, and Grace pays the costs of benefits under
these plans as they are incurred. Effective January 1, 2002, Grace's
postretirement medical plan was amended to increase the contribution required to
be paid by the retirees to a minimum of 40% of the calculated premium. Also,
during 2002, per capita costs under the retiree medical plans exceeded caps on
the amount Grace is required to contribute under a 1993 amendment to the plan.
As a result, for 2003 and future years, retirees will bear 100% of any increase
in premium costs. Grace's share of benefits under this program was $12.6 million
during 2003, compared with $21.5 million in 2002. Grace's recorded liability for
postretirement benefits of $134.3 million at December 31, 2003 is stated at net
present value discounted at 6.25%. The continuing payment of these benefits has
been approved by the Bankruptcy Court; however, the program would still be
subject to the terms of a Chapter 11 reorganization plan.

TAX MATTERS

The net deferred tax asset was $581.1 million and $563.4 million as of December
31, 2003 and 2002, respectively. Based upon anticipated future results, Grace
has concluded that it is more likely than not that the balance of the net
deferred tax assets (including the valuation allowance) will be realized.
Because of the nature of the items that make up this balance, the realization
period is likely to extend over a number of years and the outcome of the Chapter
11 process could materially impact the realization period.

See Note 14 to the Consolidated Financial Statements for a discussion of Grace's
other tax-related contingencies.

OTHER CONTINGENCIES

See Note 14 to the Consolidated Financial Statements for a discussion of Grace's
other contingent matters.

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

CASH RESOURCES AND AVAILABLE CREDIT FACILITIES

At December 31, 2003, Grace had $400.0 million in cash and cash-like assets on
hand ($309.2 million in cash and cash equivalents and $90.8 million in cash
value of life insurance). In addition, Grace had access to committed credit
facilities aggregating $250.0 million under the DIP facility, of which $215.9
million (net of borrowings, letters of credit, and holdback provisions) was
available at December 31, 2003. The term of the DIP facility expires April 1,
2006. Grace believes that these funds and credit facilities will be sufficient
to finance its business strategy while in Chapter 11.

CASH FLOW

================================================================================
                                                          DECEMBER 31,
CORE OPERATIONS                                 --------------------------------
(In millions)                                      2003       2002       2001
--------------------------------------------------------------------------------
CASH FLOWS:
Pre-tax operating income.......................  $ 148.7    $ 180.8    $ 187.5
Depreciation and amortization..................    102.9       94.9       89.2
                                                --------------------------------
PRE-TAX EARNINGS BEFORE DEPRECIATION AND
  AMORTIZATION.................................    251.6      275.7      276.7
Working capital and other changes..............    (63.4)      24.1      (50.6)
                                                --------------------------------
CASH FLOW BEFORE INVESTING.....................    188.2      299.8      226.1
Capital expenditures...........................    (86.4)     (91.1)     (62.9)
Businesses acquired............................    (26.9)     (28.5)     (84.4)
                                                --------------------------------
NET CASH FLOW FROM CORE OPERATIONS.............  $  74.9    $ 180.2    $  78.8
================================================================================

Grace's net cash flow from core operations before investing decreased due to
lower pre-tax operating income and increased investment in working capital and
other items. The lower pre-tax operating income in 2003 resulted primarily from
higher costs for pensions, certain raw materials, and natural gas. The increased
investment in working capital and other items was due to a shift in regional
sales mix outside North America where standard terms of sale are longer and
advanced purchasing of key raw materials is often necessary. Capital
expenditures were consistent year-over-year with a substantial portion of these
expenditures directed toward the business segments for routine capital
replacements and construction of new catalyst production capacity at the Lake
Charles, Louisiana site.

Grace expects to continue to invest excess cash flow and/or other available
capital resources in its core business base. These investments are likely to be
in the form of added plant capacity, product line extensions and geographic
market expansions, and/or acquisitions


                                      F-46
<PAGE>

for similar strategic purposes. Investments that are outside the ordinary course
of business may be subject to Bankruptcy Court approval and Chapter 11 creditor
committee review.

================================================================================
                                                             DECEMBER 31,
NONCORE ACTIVITIES                                ------------------------------
(In millions)                                        2003       2002     2001
--------------------------------------------------------------------------------
CASH FLOWS:
Pre-tax (loss) income from noncore activities...   $(190.1)   $(74.5)   $  3.0
Non-cash charges................................     189.2      81.1       6.4
Cash spending for:
  Asbestos-related litigation, net of
    insurance recovery..........................       2.8      (2.3)    (30.8)
  Environmental remediation.....................     (11.2)    (20.8)    (28.9)
  Postretirement benefits.......................     (12.6)    (21.5)    (22.3)
  Retained obligations and other................      (1.3)     (4.5)     (9.1)
                                                  ------------------------------
NET CASH OUTFLOW FOR NONCORE ACTIVITIES ........   $ (23.2)   $(42.5)   $(81.7)
================================================================================

Expenditures for environmental remediation were lower in 2003, due partly to
Grace's Chapter 11 proceedings and partly to the completion of remediation work
on certain sites. Postretirement benefit payments were also lower in 2003 due to
changes in cost sharing under retiree medical plans. Payments for retained
obligations of divested businesses and other contingencies were lower in 2003
due to the stay of litigation and to the one-time nature of these matters. These
cash outflows were partially offset by asbestos-related cash inflows where
insurance proceeds exceeded continuing administrative costs of claims
administration.

See the "Consolidated Statements of Cash Flows" included in the Consolidated
Financial Statements for investing and financing activities for the years ended
December 31, 2003, 2002 and 2001.

LIFE INSURANCE

Grace is the beneficiary of life insurance policies on certain current and
former employees with a net cash surrender value of $90.8 million at December
31, 2003. This net cash surrender value is composed of $478.5 million in policy
gross cash value offset by $387.7 million of 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. Certain of these policies are of the type that has received
recent judicial and legislative attention including proposals to tax benefit
proceeds under certain circumstances. Pending rulings and proposed reforms could
adversely affect the availability of these policies as a funding source for
Grace's noncore liabilities. Grace is evaluating whether to continue the
policies that may be affected by these developments or to terminate them for
their cash value.

PENSION BENEFITS UNDER U.S. QUALIFIED PLANS

The decline in value of the U.S. and global equity markets from 2000-2002,
coupled with a decline in interest rates during 2001 and 2002, created a
shortfall between accounting measurements of Grace's obligations under certain
of its qualified pension plans and the market value of dedicated pension assets.
A balance sheet adjustment of $147.7 million was recorded (net of tax) to reduce
shareholders' equity (deficit) at December 31, 2002, to recognize the pension
shortfall and to fully reserve deferred pension losses. Market returns in 2003
(22.5% for Grace's domestic pension plan assets) and contributions of $48.5
million to under-funded domestic plans served to lower, but were not sufficient
to eliminate this shortfall. The increase in pension assets over 2003 resulted
in a balance sheet adjustment of $18.3 million to increase shareholders' equity
(deficit) at December 31, 2003. The market returns experienced in 2003 are not
fully recognized in 2003 under the deferral method of accounting required under
generally accepted accounting principles. These gains, along with other
differences between assumed and actual returns, will be recognized into earnings
over a period ranging from 12-24 years. Grace has lowered its assumed return on
plan assets for 2004 to 8.0%, down from 8.25% for 2003 and 9.0% for 2002. The
new rate of return is comparable to the average long-term rate of return Grace
has experienced since 1990.

Under ERISA Grace will be required to make additional contributions to certain
of its U.S. qualified pension plans in the future. The amount and timing of
contributions could be affected by Grace's Chapter 11 proceedings.


                                      F-47
<PAGE>


DEBT AND OTHER CONTRACTUAL OBLIGATIONS

================================================================================
CONTRACTUAL OBLIGATIONS NOT SUBJECT TO COMPROMISE
--------------------------------------------------------------------------------
                                                   Payments due by Period
                                         ---------------------------------------
                                                      Less
                                                     than 1     1-3
(In millions)                              Total      Year     Years  Thereafter
--------------------------------------------------------------------------------
Operating commitments (1)...............  $ 14.2    $ 13.8   $  0.4    $   --
Debt....................................     6.8       6.8       --        --
Operating leases........................    67.1      16.7     33.4      17.0
Capital leases..........................     3.2       0.5      1.9       0.8
Pension funding requirements per ERISA..    33.0      33.0       --        --
                                         ---------------------------------------
TOTAL CONTRACTUAL CASH OBLIGATIONS......  $124.3    $ 70.8   $ 35.7    $ 17.8
================================================================================
(1)  Amounts do not include open purchase commitments which are routine in
     nature and normally settle within 90 days.


Total debt outstanding at December 31, 2003 was $557.1 million, including $49.0
million of accrued interest on pre-petition debt. As a result of the Filing,
Grace is now in default on $501.3 million of pre-petition debt, which, together
with accrued interest thereon, has been included in "liabilities subject to
compromise" as of December 31, 2003. The automatic stay provided under the
Bankruptcy Code prevents Grace's lenders from taking any action to collect the
principal amounts as well as related accrued interest. However, Grace will
continue to accrue and report interest on such debt during the Chapter 11
proceedings unless further developments lead management to conclude that it is
probable that such interest will be compromised.

See Note 14 to the Consolidated Financial Statements for a discussion of
financial assurances.

--------------------------------------------------------------------------------
INFLATION
--------------------------------------------------------------------------------

The financial statements are presented on a historical cost basis and do not
fully reflect the impact of prior years' inflation. While the U.S. inflation
rate has been modest for several years, Grace operates in international
economies with both inflation and currency risks. The ability to pass on
inflation costs is an uncertainty due to general economic conditions and
competitive situations. The cost of replacing Grace's property and equipment
today is estimated to be greater than its historical cost. Accordingly,
depreciation expense would be greater if the expense were stated on a current
cost basis.

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

See Note 1 of Consolidated Financial Statements for a discussion of recent
accounting pronouncements and their effect on Grace.

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

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

                                      F-48
<PAGE>


<TABLE>
<CAPTION>
                                            W. R. GRACE & CO. AND SUBSIDIARIES
                                      VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                                                       (In millions)

                                                     FOR THE YEAR 2003
=========================================================================================================================
                                                                                 Additions/(deductions)
                                                                  -------------------------------------------------------
                                                                                  Charged/
                                                                                 (credited)
                                                                   Balance at     to costs                  Balance at
                                                                    beginning       and          Other        end of
                          Description                               of period     expenses      net (1)       period
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>          <C>           <C>          <C>
VALUATION AND QUALIFYING ACCOUNTS DEDUCTED FROM ASSETS:
     Allowances for notes and accounts receivable..............      $   5.4      $   0.9       $  --        $   6.3
     Allowances for long-term receivables......................          0.8         (0.1)         --            0.7
     Valuation allowance for deferred tax assets...............        152.5         15.8          --          168.3
RESERVES:
     Reserves for retained obligations of divested businesses..      $  55.3      $  --         $  1.7       $  57.0
=========================================================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                     FOR THE YEAR 2002
=========================================================================================================================
                                                                                 Additions/(deductions)
                                                                  -------------------------------------------------------
                                                                                  Charged/
                                                                                 (credited)
                                                                   Balance at     to costs                  Balance at
                                                                    beginning       and          Other        end of
                          Description                               of period     expenses      net (2)       period
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>          <C>           <C>          <C>
VALUATION AND QUALIFYING ACCOUNTS DEDUCTED FROM ASSETS:
     Allowances for notes and accounts receivable..............      $   7.6      $  (2.2)      $  --        $   5.4
     Allowances for long-term receivables......................          0.6          0.2          --            0.8
     Valuation allowance for deferred tax assets...............        158.0         (5.5)         --          152.5
RESERVES:
     Reserves for retained obligations of divested businesses..      $  80.5      $  --         $ (25.2)     $  55.3
=========================================================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                     FOR THE YEAR 2001
=========================================================================================================================
                                                                                 Additions/(deductions)
                                                                  -------------------------------------------------------
                                                                                  Charged/
                                                                                 (credited)
                                                                   Balance at     to costs                  Balance at
                                                                    beginning       and          Other        end of
                          Description                               of period     expenses      net (1)       period
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>          <C>           <C>          <C>
VALUATION AND QUALIFYING ACCOUNTS DEDUCTED FROM ASSETS:
     Allowances for notes and accounts receivable..............      $   4.4      $   3.2       $  --        $   7.6
     Allowances for long-term receivables......................          0.8         (0.2)         --            0.6
     Valuation allowance for deferred tax assets...............        179.1        (21.1)         --          158.0
RESERVES:
     Reserves for retained obligations of divested businesses..      $  78.1      $  --         $   2.4      $  80.5
=========================================================================================================================
</TABLE>

(1)  Various miscellaneous adjustments against reserves established for divested
     business.
(2)  $25.2 million represents net spending offset by a reclass of an $18.0
     million tax receivable relating to Grace's divested packaging business.


                                      F-49
<PAGE>


                                                                      EXHIBIT 12


<TABLE>
<CAPTION>

                                            W. R. GRACE & CO. AND SUBSIDIARIES
                                   COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
                                 COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (1)
                                               (In millions, except ratios)
                                                        (Unaudited)

===============================================================================================================================
                                                                               YEARS ENDED DECEMBER 31, (2)
                                                              -----------------------------------------------------------------
                                                              2003 (3)     2002 (4)       2001       2000 (5)        1999
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>          <C>          <C>           <C>           <C>
Net (loss) income from continuing operations...........      $ (55.2)     $  22.1      $  78.6       $ (89.7)      $ 130.2
(Benefit from) provision for income taxes..............        (12.3)        38.0         63.7          70.0          73.2

Minority interest in income (loss) of majority owned
  subsidiaries.........................................          1.2         (2.2)        (3.7)         --            --

Equity in unremitted losses (earnings) of less than
  50%-owned companies..................................          0.7          0.1         --            (0.5)         (0.2)

Interest expense and related financing costs,
  including amortization of capitalized interest.......         17.5         22.3         39.5          30.6          18.8

Estimated amount of rental expense deemed to represent
  the interest factor..................................          5.1          4.9          4.7           4.7           5.2
                                                              -----------------------------------------------------------------
(Loss) income as adjusted..............................      $ (43.0)     $  85.2      $ 182.8       $  15.1       $ 227.2
                                                              =================================================================
Combined fixed charges and preferred stock dividends:
  Interest expense and related financing costs,
    including capitalized interest.....................      $  18.0      $  21.8      $  36.6       $  29.1       $  17.0

  Estimated amount of rental expense deemed to
    represent the interest factor......................          5.1          5.0          4.7           4.7           5.2
                                                              -----------------------------------------------------------------
Fixed charges..........................................         23.1         26.8         41.3          33.8          22.2

Combined fixed charges and preferred stock dividends...      $  23.1      $  26.8      $  41.3       $  33.8       $  22.2
                                                              =================================================================
Ratio of earnings to fixed charges.....................        (6)           3.18         4.43           (6)         10.23
                                                              -----------------------------------------------------------------
Ratio of earnings to combined fixed charges and
  preferred stock dividends............................        (6)           3.18         4.43           (6)         10.23
===============================================================================================================================
</TABLE>

(1)  Grace's preferred stocks were retired in 1996.

(2)  Certain amounts have been restated to conform to the 2003 presentation.

(3)  Amounts include $172.5 million for pre-tax charges to adjust Grace's
     estimated liability for environmental remediation and asbestos-related
     property damage.

(4)  Amounts contain a provision for non-operating environmental remediation of
     $70.7 million.

(5)  Includes a pre-tax provision of $208.0 million for asbestos-related
     liabilities net of insurance coverage. The provision for income taxes
     includes a $75.0 million charge for tax and interest relating to tax
     deductibility of interest on corporate-owned life insurance policy loans.

(6)  As a result of the losses incurred for the years ended December 31, 2003
     and 2000, Grace was unable to fully cover the indicated fixed charges (a
     shortfall of $66.1 million and $18.7 million, respectively).


                                      F-50
<PAGE>



                       W. R. GRACE & CO. AND SUBSIDIARIES
                   REPORT ON INTERNAL CONTROLS AND PROCEDURES


General Statement Of Responsibility.
-----------------------------------

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


Evaluation Of Disclosure Controls And Procedures.
-------------------------------------------------

As of December 31, 2003, Grace carried out an evaluation of the effectiveness of
the design and operation of its disclosure controls and procedures pursuant to
Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Based upon that evaluation, Grace's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in ensuring that information required to be disclosed
in the Company's periodic filings under the Exchange Act is accumulated and
communicated to such officers to allow timely decisions regarding required
disclosures. There was no significant change in the Company's internal control
over financial reporting that has materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial reporting.


                                      F-51