<PAGE>   1
                                                                      Exhibit 99
                                                                      ----------
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                    FORM 10-K
                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1997       Commission file number 1-12139


                                W. R. GRACE & CO.


Incorporated under the Laws of the            I.R.S. Employer Identification No.
      State of Delaware                                   65-0654331

              ONE TOWN CENTER ROAD, BOCA RATON, FLORIDA 33486-1010
                                  561/362-2000

               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               }

7-3/4% Notes Due 2002                         }
(issued by W. R. Grace & Co.-Conn.,           }    New York Stock Exchange, Inc.
a wholly owned subsidiary) and                }
related Guarantees                            }


           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 Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in the Proxy Statement incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.[ ]

         The aggregate market value of W. R. Grace & Co. voting stock held by
nonaffiliates was approximately $5.9 billion at January 31, 1998.

         At February 28, 1998, 75,351,985 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
<TABLE>
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                                                          PART I
<S>               <C>                                                                                                    <C>
Item 1.           Business............................................................................................... 1
                    Introduction and Overview ........................................................................... 1
                    Products and Markets................................................................................. 3
                    Discontinued Operations.............................................................................. 7
                    Research Activities.................................................................................. 8
                    Patents and Other Intellectual Property Matters ..................................................... 8
                    Environmental, Health and Safety Matters............................................................. 9
Item 2.           Properties.............................................................................................10
Item 3.           Legal Proceedings..................................................................................... 10
Item 4.           Submission of Matters to a Vote of Security Holders................................................... 16


                                                          PART II

Item 5.           Market for Registrant's Common Equity and Related Stockholder Matters................................. 16
Item 6.           Selected Financial Data............................................................................... 18
Item 7.           Management's Discussion and Analysis of Financial
                    Condition and Results of Operations................................................................. 18
Item 7A.          Quantitative and Qualitative Disclosures About Market Risk............................................ 18
Item 8.           Financial Statements and Supplementary Data............................................................18
Item 9.           Changes in and Disagreements with Accountants on
                    Accounting and Financial Disclosure................................................................. 18

                                                         PART III

Item 10.          Directors and Executive Officers of the Registrant.................................................... 19
Item 11.          Executive Compensation.................................................................................23
Item 12.          Security Ownership of Certain Beneficial Owners and Management........................................ 24
Item 13.          Certain Relationships and Related Transactions.........................................................25

                                                          PART IV

Item 14.          Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................................... 26

Signatures.............................................................................................................. 30

Financial Supplement....................................................................................................F-1
</TABLE>



<PAGE>   3




                                     PART I

Item 1.  Business.

INTRODUCTION AND OVERVIEW

         W. R. Grace & Co., through its subsidiaries, is one of the world's
leading specialty chemicals 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 primarily operates through the following
three business units:

*        GRACE DAVISON manufactures catalysts, including fluid cracking
         catalysts that "crack" crude oil into transportation fuels and other
         petroleum-based products, as well as polyolefin catalysts that are
         critical in the manufacture of polyethylene resins for plastic film,
         high-performance pipe and household containers. Grace Davison also
         manufactures silica and zeolite adsorbents, which are used in a wide
         variety of products, such as plastics, toothpastes, paints and
         insulated glass, as well as in the refining of edible oils. Grace
         Davison accounted for approximately 48% of Grace's 1997 sales and
         revenues from continuing operations.

*        GRACE CONSTRUCTION PRODUCTS produces specialty construction chemicals,
         including performance-enhancing concrete admixtures, cement additives
         and masonry products; and specialty building materials, including
         fireproofing and waterproofing materials and systems. Grace
         Construction Products accounted for approximately 32% of Grace's 1997
         sales and revenues from continuing operations.

*        DAREX CONTAINER PRODUCTS produces container and closure sealants that
         protect food and beverages from bacteria and other contaminants, extend
         shelf life and preserve flavor; it also produces coatings used in the
         manufacture of cans and closures. Darex Container Products accounted
         for approximately 18% of Grace's 1997 sales and revenues from
         continuing operations.

Grace has classified certain other businesses as discontinued operations, the
most significant of which is its flexible packaging business ("Packaging
Business"). Also see "Products and Markets -- Other Businesses and Investments"
below.

         As used in this Report, the term "Company" refers to W. R. Grace & Co.,
a Delaware corporation, and the term "Grace" refers to the Company and/or one
or more of its subsidiaries and, in certain cases, their respective
predecessors. Grace's principal executive offices are located at One Town Center
Road, Boca Raton, Florida 33486-1010, and its telephone number is 561/362-2000.
As of year-end 1997, Grace had approximately 6,300 full-time employees worldwide
in its continuing operations.

         Grace's Consolidated Financial Statements for the three years in the
period ended December 31, 1997 ("Consolidated Financial Statements") and other
financial information are included in the Financial Supplement to this Report
and are incorporated by reference in this Report.



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         Information concerning the sales and revenues, pretax operating income
and total assets of Grace's continuing operations by geographic area for 1997,
1996 and 1995 is contained in Note 18 to the Consolidated Financial Statements.

         For additional information concerning Grace's continuing operations by
business segment and geographic area for 1997, 1996 and 1995, see Note 18 to the
Consolidated Financial Statements in the Financial Supplement.

         STRATEGIC OBJECTIVES AND ACTIONS. Grace's strategy has been, and will
continue to be, to enhance stockholder value by profitably growing its specialty
chemicals businesses on a global basis and achieving high levels of financial
performance. To achieve these objectives, Grace plans to (i) invest in research
and development activities, with the goals of introducing new value-added
products and services and enhancing manufacturing processes; (ii) make selected
strategic acquisitions; and (iii) continue to implement process improvements and
cost-management initiatives, including rigorous controls on working capital and
capital spending. These plans are designed to make Grace a high-performance
company focused on the strengths of its global specialty chemicals businesses.

         In furtherance of this strategy, Grace entered into a definitive
agreement with Sealed Air Corporation ("Sealed Air") in August 1997 to combine
the Packaging Business with Sealed Air. This transaction was approved by the
Company's shareholders on March 20, 1998 and by Sealed Air shareholders on March
23, 1998. As a result of these approvals, Grace has classified the Packaging
Business as a discontinued operation as of December 31, 1997. Grace will effect
the transaction with Sealed Air by transferring its specialty chemicals
businesses to a new Delaware corporation ("New Grace"), spinning off New Grace
to Grace shareholders and merging a subsidiary of the Company with Sealed Air.
For further information, see the Company's Joint Proxy Statement/Prospectus
dated February 13, 1998, New Grace's Information Statement dated February 13,
1998, and Notes 1 and 3 to the Consolidated Financial Statements in the
Financial Supplement.

         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. In addition to general economic, business and market conditions,
Grace is subject to risks and uncertainties that could cause its projections and
other forward-looking information to prove incorrect, including the following:

*        technological breakthroughs rendering a product, a class of products or
         a line of business obsolete;
*        an inability to adapt to continuing technological improvements by
         competitors or customers;
*        a decline in worldwide oil consumption or the development of new
         methods of oil refining;
*        increases in prices of raw materials;
*        an inability to gain customer acceptance, or slower than anticipated
         acceptance, of new products or product enhancements (particularly in
         the construction industry);



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*        changes in environmental regulations or societal pressures that make
         Grace's businesses more costly or that change the types of products
         used, especially petroleum-based products;
*        slower than anticipated economic advances in less developed countries;
*        the acquisition (through theft or other means) and use by others of
         Grace's proprietary formulas and other know-how (particularly in the
         Darex Container Products business);
*        greater than expected liabilities with respect to the defense and
         disposition of asbestos-related lawsuits and claims; and
*        an inability to pursue potential acquisitions or other transactions as
         a result of certain restrictions imposed on New Grace to protect the
         tax-free treatment of the transaction with Sealed Air, described above.

         See Notes 1, 2, 3, 4, 6, 8, 11, 17 and 18 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.

PRODUCTS AND MARKETS

         SPECIALTY CHEMICALS INDUSTRY OVERVIEW. Specialty chemicals, such as
those produced by Grace, are high-value-added products used as intermediates,
components or additives in a wide variety of products and processes; they are
produced in relatively small volumes and must satisfy well-defined performance
requirements and specifications. Specialty chemicals are often critical
components of the end products and processes in which they are used;
consequently, they are tailored to 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, lead to high operating margins. Grace believes that its businesses are
characterized by market features that reward the research and development and
customer service costs associated with its strategy.

         GRACE DAVISON (CATALYSTS AND SILICA-BASED PRODUCTS). Grace Davison,
founded in 1832, is composed of two primary product groups: (i) catalysts and
(ii) silica products and adsorbents. These products principally apply silica,
alumina and zeolite technology and are designed and manufactured to meet the
varying specifications of such diverse customers as major oil refiners, plastics
and chemical manufacturers, and consumer products companies. Grace Davison
believes that its technological expertise provides a competitive edge, allowing
it to quickly design products that meet changing customer specifications and to
develop new products that expand its existing technology. For example, Grace
Davison estimates that from 50% to 75% of its 1997 fluid cracking catalyst sales
was attributable to products introduced in the previous five years.

         Grace Davison produces refinery catalysts, including (i) fluid cracking
catalysts used by petroleum refiners to convert crude oil into more valuable
transportation fuels (such as gasoline and jet and diesel fuels) and other
petroleum-based products, and (ii) hydroprocessing catalysts that remove certain
impurities (such as nitrogen, sulfur and heavy metals) from crude oil prior to
the use of fluid

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cracking catalysts. Grace Davison also develops and manufactures fluid cracking
catalyst additives used for octane enhancement and to reduce emissions of sulfur
oxides, nitrogen oxides and carbon monoxide. Oil refining is a highly
specialized discipline, demanding that products be tailored to meet local
variations in crude oil and the refinery's product output mix. Grace 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. Grace Davison's business has benefited in recent years, in part,
from refiners' use of heavier crude oils, and could be adversely affected by an
increase in the availability of lighter crude oil, which generally requires less
fluid cracking catalysts to refine. Grace Davison's business is also affected by
the capacity utilization of refiners' cracking units, as disproportionately
greater amounts of fluid cracking catalysts are used at higher levels of
capacity utilization. Competition in the refinery catalyst business is based on
technology, product performance, customer service and price. Grace Davison
believes it is one of the world leaders in refinery catalysts and the largest
supplier of fluid cracking catalysts in the world.

         Grace 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 used in products such as plastic film,
high-performance plastic pipe and plastic household containers. Grace Davison
catalysts and catalyst supports are used in manufacturing nearly half of all
such resins produced worldwide. The polyolefin catalyst business is
technology-intensive and focused on providing products formulated to meet
customer specifications. Manufacturers generally compete on a worldwide basis,
and competition has recently intensified due to evolving technologies,
particularly the use of metallocenes. Grace Davison believes that metallocenes
represent a revolutionary development in the making of plastics, allowing
manufacturers to design polymers with exact performance characteristics. Grace
Davison is continuing to work on the development and commercialization of
metallocene catalysts.

         Silica products and zeolite adsorbents produced by Grace Davison are
used in a wide variety of industrial and consumer applications. For example,
silicas are used in coatings as flatting agents (i.e., to reduce gloss), in
plastics to improve handling, in toothpastes as thickeners and cleaners, in
foods to carry flavors and prevent caking, and in the purification of edible
oils. Zeolite adsorbents are used between the two panes of insulated glass to
adsorb moisture and are used in process applications to separate certain
chemical components from mixtures. Competition is based on product performance,
customer service and price.

         Grace Davison's sales and revenues were $712 million in 1997, $732
million in 1996 and $700 million in 1995; 56% of Grace Davison's 1997 sales and
revenues were generated in North America, 33% in Europe, 9% in Asia Pacific and
2% in Latin America. Sales of catalysts accounted for 28% of the total sales and
revenues of Grace's continuing operations in 1997, 26% in 1996 and 23% in 1995.
Sales of silica products and zeolite adsorbents accounted for 14% of the total
sales and revenues of Grace's continuing operations in 1997, 17% in 1996 and 14%
in 1995. At year-end 1997, Grace Davison employed approximately 2,700 people
worldwide in 10 facilities (six in the U.S. and one each in Canada, Germany,
Brazil and Malaysia). Grace Davison's principal U.S. manufacturing facilities
are located in Baltimore, Maryland and Lake Charles, Louisiana. Grace Davison
has a direct selling force and distributes its products directly to over 19,000
customers, the largest of which accounted for approximately 7% of Grace
Davison's 1997 sales and revenues.



                                      - 4 -

<PAGE>   7

         Most raw materials used in the manufacture of Grace Davison products
are available from multiple sources, and, in some instances, are produced by
Grace Davison. Because of the diverse applications of products using Grace
Davison technology and the geographic areas in which such products are used,
seasonality does not have a significant effect on Grace Davison's businesses.

         GRACE CONSTRUCTION PRODUCTS (SPECIALTY CONSTRUCTION CHEMICALS AND
BUILDING MATERIALS). Grace Construction Products is a leading supplier of
specialty chemicals and building materials to the nonresidential (commercial and
government) construction industry, and to a lesser extent, the residential
construction industry. Its products fall into two main groups: (i) specialty
construction chemicals (principally concrete admixtures, cement additives and
masonry products) that add strength, control corrosion, and enhance the handling
and application of concrete; and (ii) specialty building materials that prevent
water damage to structures (such as water- and ice-barrier products for
residential use and waterproofing systems for commercial structures) and protect
structural steel against collapse due to fire. In North America, Grace
Construction Products also manufactures and distributes vermiculite products
used in construction and other applications.

         Grace Construction Products has introduced a number of new products and
product enhancements in recent years. These new products and enhancements
include an admixture that reduces concrete shrinkage and helps prevent cracking;
a product that enables contractors to pour and "work" concrete in colder
temperatures; an admixture that inhibits corrosion and prolongs the life of
concrete structures; an additive that improves cement processing efficiency and
product quality; new roof underlayments that provide protection from ice and
wind-driven rain; enhancements to fireproofing products that make Grace
Construction Products' fireproofing systems more price-competitive for smaller
jobs; and fireproofing products for industrial, petrochemical and acoustical
applications. In addition to customer acceptance of these and other product
introductions, Grace Construction Products' growth is dependent on the
advancement of less developed economies, with accompanying increases in
construction activity and sophistication of construction practices, which in
turn increase demand for Grace Construction Products offerings.

         The materials produced by Grace Construction Products are marketed to
an extremely broad range of customers, including cement manufacturers, ready-mix
and pre-stressed concrete producers, local contractors, specialty subcontractors
and applicators, masonry block manufacturers, building materials distributors
and other industrial manufacturers, as well as construction specifiers, such as
architects and structural engineers. For some of these customer groups (such as
contractors), cost and ease of application are the 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 Grace Construction Products' business requires
intensive sales and customer service efforts, Grace Construction Products
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
Construction Products competes globally with several large construction
materials suppliers and regionally and locally with numerous smaller
competitors. In recent years, the cement manufacturing business and the
contracting business have experienced substantial consolidation, particularly in
markets outside the U.S. Competition is based largely on technical support and
service, product performance, adaptability of the product and price.




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         Grace Construction Products' 1997 sales and revenues totaled $478
million (65% in North America, 17% in Asia Pacific, 16% in Europe and less than
2% in Latin America), versus $435 million in 1996 and $397 million in 1995.
Sales of specialty construction chemicals accounted for 19% of the total sales
and revenues of Grace's continuing operations in 1997, 15% in 1996 and 12% in
1995; sales of specialty building materials accounted for 13% of the total sales
and revenues of Grace's continuing operations in 1997, 11% in 1996 and 9% in
1995. At year-end 1997, Grace Construction Products employed approximately 2,000
people at 52 production facilities (22 in North America, 19 in Asia Pacific, 7
in Europe and 4 in Latin America) and 75 sales offices worldwide. Grace
Construction Products' capital expenditures tend to be relatively lower, and
sales and marketing expenditures tend to be relatively higher, than those of
Grace's other businesses.

         The construction business is cyclical, in response to economic
conditions and construction demand. The construction market experienced slow but
steady growth through 1997 from a cyclical low in 1991. During this time, the
management of Grace Construction Products has focused its efforts on
streamlining its range of products by introducing new higher-value products,
eliminating lower-growth and lower-margin products and reducing costs. For
example, during this period, Grace Construction Products restructured its global
research activities and implemented a lower cost structure by consolidating
manufacturing operations and streamlining its management structure. The
construction business is also seasonal due to weather conditions. Grace
Construction Products seeks to increase profitability and minimize the impact of
cyclical and seasonal downturns in regional economies by introducing technically
advanced value-added products, expanding geographically, and developing business
opportunities in renovation construction markets. However, there can be no
assurance that Grace Construction Products' strategy to minimize the impact of
the cyclicality and seasonality of the construction business will succeed, and
such cyclicality and seasonality could adversely affect Grace Construction
Products' business and results of operations.

         The raw materials used by Grace Construction Products 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 Grace
Construction Products. The worldwide supply of calcium lignin, a wood pulping
by-product used as a raw material in the production of concrete admixtures, had
been decreasing as paper mills converted to new manufacturing processes. In
1996, additional supplies of calcium lignin became available, alleviating the
shortage. However, there is no assurance that the additional supplies will
remain available in sufficient quantities or at satisfactory prices.

         DAREX CONTAINER PRODUCTS (CONTAINER SEALANTS AND COATINGS). Darex
Container Products consists primarily of three product lines: can sealants,
closure sealants and coatings for metal packaging. 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 third parties
that manufacture containers or perform canning and bottling for food and
beverage companies.




                                      - 6 -

<PAGE>   9

         Darex Container Products is expanding its product offering and is
seeking to improve sales growth through new technologies, such as its
oxygen-scavenging compounds. These compounds are combined with closure sealants
to absorb oxygen in cans, jars and bottles, resulting in significantly extended
shelf life. Darex Container Products is commercially producing oxygen-scavenging
compounds for several breweries and is testing such compounds in other beverage
and food applications. Darex Container Products is also expanding in developing
regions. However, future sales growth will likely be impacted by the trend
toward can systems requiring fewer seams, as well as the increasing use of
plastic and glass containers. Competition is based on providing high-quality
customer service at customer sites, as well as on price, quality and
reliability. 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 install new
production equipment and reengineer processes, are key elements for success.

         Darex Container Products' sales and revenues were $264 million in 1997,
$275 million in 1996 and $280 million in 1995. Its products are marketed
internationally, with 35% of 1997 sales and revenues in Europe, 25% in North
America, 22% in Asia Pacific and 18% in Latin America. At year-end 1997, Darex
Container Products employed approximately 1,200 people at 22 production
facilities (7 in each of Latin America and Asia Pacific and 4 in each of North
America and Europe) and 37 sales offices worldwide.

         Although the raw materials used in Darex Container Products'
operations, including resins, rubber and latices, are generally available from
multiple sources, the prices of certain raw materials experienced upward
pressure during most of 1996 and, to a lesser extent, 1997. Darex Container
Products is seeking to establish global supply arrangements that would tend to
alleviate this pressure; however, no assurance can be given that such
arrangements can be entered into on acceptable terms. Although demand for
container packaging and sealant products tends to increase slightly during the
second and third quarters, the impact of such seasonality is not significant to
Darex Container Products.

         Grace is considering strategic alternatives for Darex Container
Products. These alternatives include acquiring one or more complementary
businesses; entering into joint ventures or other combinations with such
businesses; or selling Darex Container Products. However, there is no assurance
as to whether or when any of these strategic alternatives will be accomplished.

         OTHER BUSINESSES AND INVESTMENTS. Grace also owns businesses and
investments involved in health care services, the development of bioartificial
organs and other products and services. Grace is considering strategic
alternatives for these businesses and investments.

DISCONTINUED OPERATIONS

         Grace's most significant discontinued operation is the Packaging
Business, a leading global supplier of high-performance materials and systems
used in packaging food and industrial and consumer products. The Packaging
Business operates in the U.S. and in 45 other countries throughout the world.
The principal products of the Packaging Business are various food packaging
products and shrink and non-shrink films for industrial and consumer products.



                                     - 7 -
<PAGE>   10

         Approximately 80% of the 1997 net sales of the Packaging Business were
generated by food packaging products. These products include (i) shrink bags,
shrink films, laminated films and other specialty packaging systems (including
material, equipment and services) marketed under the Cryovac(R) registered
trademark for a broad range of perishable foods such as fish, smoked and
processed meat products, cheese, poultry, prepared foods (including soups and
sauces for restaurants and institutions), baked goods and produce; (ii)
polystyrene foam prepackaging trays for supermarkets and poultry and other food
processors, marketed under the FormpacTM trademark; and (iii) rigid plastic
containers for dairy and other food and nonfood products, marketed under the
OmicronTM trademark.

         Approximately 20% of the 1997 net sales of the Packaging Business were
generated by shrink films and other films used in packaging a variety of
non-food industrial and consumer products, such as housewares, toys, electronics
and medical products.

         The Packaging Business had net sales of $1.83 billion in 1997, $1.74
billion in 1996 and $1.69 billion in 1995. At year-end 1997, the Packaging
Business employed approximately 10,000 people. Grace expects to complete the
disposition of the Packaging Business in the 1998 first quarter. For further
information, see "Strategic Objectives and Actions" above, as well as Notes 1
and 3 to the Consolidated Financial Statements and "Management's Discussion and
Analysis of Results of Operations and Financial Condition" in the Financial
Supplement.

RESEARCH ACTIVITIES

         Grace engages in research and development programs 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
carried out by product line laboratories in North America, Europe, Asia Pacific
and Latin America. Grace's research and development strategy will be to develop
technology platforms on which new products will be based, while focusing
development efforts in each business unit 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 $42 million in 1997, $55 million in 1996 and $73 million in 1995
(including expenses incurred in funding external research projects). The amount
of research and development expenses relating to government- and
customer-sponsored projects (as opposed to projects sponsored by Grace) was not
material.

         See "Management's Discussion and Analysis of Results of Operations and
Financial Condition" in the Financial Supplement for additional information.

PATENTS AND OTHER INTELLECTUAL PROPERTY MATTERS

         Grace's products, processes and manufacturing equipment are protected
by numerous patents and patent applications, as well as know-how and other
proprietary information. As competition in the markets in which Grace does
business is often based on technological superiority and innovation, with new
products 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 that Grace's patents, patent applications
or other intellectual property will provide sufficient proprietary protection.



                                     - 8 -
<PAGE>   11


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.

ENVIRONMENTAL, HEALTH AND SAFETY MATTERS

         Manufacturers of specialty chemical 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 and disposition of hazardous wastes
and other materials. 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, and its
estimated expenditures in 1998 and 1999, for (i) the operation and maintenance
of environmental facilities and the disposal of wastes with respect to
continuing operations; (ii) capital expenditures for environmental control
facilities relating to continuing operations; and (iii) site remediation:

                    (i)                        (ii)                     (iii)

               Operation of
              Facilities and                 Capital                    Site
              Waste Disposal               Expenditures             Remediation
              --------------               ------------             -----------

                                          (in millions)
[S]                [C]                        [C]                      [C]
1995               $34                        $12                      $31
1996                33                         10                       20
1997                36                          7                       34
1998 (est.)         33                          8                       41
1999 (est.)         33                          7                       23



         Additional material environmental costs may arise as a result of future
legislation or other developments. Grace's earnings, competitive position and
other capital expenditures have not been, and are not expected to be, materially
adversely affected by compliance with environmental requirements. See Note 11 to
the Consolidated Financial Statements and "Management's Discussion and Analysis
of Results of Operations and Financial Condition" in the Financial Supplement.

         With the goal of continuously improving Grace's environmental, health
and safety ("EHS") performance, Grace established its Commitment to Care(TM)
initiative (based on the Responsible Care(R) program of the Chemical
Manufacturers Association) in 1994 as the program under which all Grace EHS
activities are to be implemented. To the extent applicable, Commitment to Care
extends the basic elements of Responsible Care to all Grace locations worldwide,
embracing specific performance


                                      - 9 -


<PAGE>   12

objectives in the key areas of product stewardship, employee health and safety,
community awareness and emergency response, distribution, process safety and
pollution prevention.

         See Item 3 below for information concerning environmental proceedings
to which Grace is a party and "Management's Discussion and Analysis of Results
of Operations and Financial Condition" in the Financial Supplement for
additional information concerning environmental matters.

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 two or more of Grace's business units,
and after the disposition of the Packaging Business, some plants and facilities
may also be shared with the combined business of Sealed Air and the Packaging
Business. Grace considers its major operating properties to be in good operating
condition and suitable for their current use. Although 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, it conducts ongoing, long-range forecasting of its capital
requirements to assure that additional capacity will be available when and as
needed. Accordingly, Grace does not anticipate that its operations or income
will be materially affected by the absence of available capacity. See Note 18 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.

         Additional information regarding Grace's properties is set forth in
Item 1 above and in Notes 1, 8 and 11 to the Consolidated Financial Statements.

ITEM 3.      LEGAL PROCEEDINGS.

         ASBESTOS LITIGATION. Grace is a defendant in property damage and
personal injury lawsuits relating to previously sold asbestos-containing
products and expects that it will be named as a defendant in additional
asbestos-related lawsuits in the future. Grace was a defendant in approximately
40,600 asbestos-related lawsuits at December 31, 1997 (18 involving claims for
property damage and the remainder involving approximately 96,900 claims for
personal injury), as compared to approximately 41,500 lawsuits at year-end 1996
(31 involving claims for property damage and the remainder involving
approximately 91,500 claims for personal injury). In most of these lawsuits,
Grace is one of many defendants.

         The plaintiffs in property damage lawsuits generally seek to have the
defendants absorb the cost of removing, containing or repairing the
asbestos-containing materials in the affected buildings. Through December 31,
1997, 139 asbestos property damage cases were dismissed without payment of any
damages or settlement amounts; judgments were entered in favor of Grace in nine
cases (excluding cases settled following appeals of judgments in favor of
Grace); judgments were entered in favor of the plaintiffs in seven cases for a
total of $60.3 million (none of which is on appeal); and 195 property damage
cases were settled for a total of $476.6 million.


                                     - 10 -


<PAGE>   13


         Included in the asbestos property damage cases pending against Grace
and others at December 31, 1997 were the following class actions: (i) an action,
conditionally certified by the U.S. Court of Appeals for the Fourth Circuit in
1993 and pending in the U.S. District Court for the District of South Carolina,
covering all public and private colleges and universities in the U.S. whose
buildings contain asbestos materials (CENTRAL WESLEYAN COLLEGE, ET AL. V. W. R.
GRACE, ET AL.); and (ii) a purported class action (ANDERSON MEMORIAL HOSPITAL,
ET AL. V. W. R. GRACE & CO., ET AL.), filed in 1992 in the Court of Common Pleas
for Hampton County, South Carolina, on behalf of all entities that own, in whole
or in part, any building containing asbestos materials manufactured by Grace or
one of the other named defendants, other than buildings subject to the class
action lawsuit described above and any building owned by the federal or any
state government. In July 1994, the claims of most class members in Anderson
Memorial Hospital, et al. v. W. R. Grace & Co., et al. were dismissed due to a
ruling that a South Carolina statute prohibits nonresidents from pursuing claims
in the South Carolina state courts with respect to buildings located outside the
state. The plaintiffs have requested that the court reconsider its decision.

         Through December 31, 1997, approximately 12,700 personal injury
lawsuits involving 29,300 claims were dismissed without payment of any damages
or settlement amounts (primarily on the basis that Grace products were not
involved), and approximately 38,900 such suits involving approximately 89,200
claims were disposed of for a total of $255.6 million. See "Insurance
Litigation" below.

         In 1991, the Judicial Panel on Multi-District Litigation consolidated
in the U.S. District Court for the Eastern District of Pennsylvania, for
pre-trial purposes, all asbestos personal injury cases pending in the U.S.
federal courts, including approximately 7,000 cases then pending against Grace;
3,600 new cases involving 7,200 claims against Grace have subsequently been
added to the consolidated cases. To date, no action has been taken by the court
handling the consolidated cases that would indicate whether the consolidation
will affect Grace's cost of disposing of these cases or its defense costs.

         Grace previously purchased insurance policies with respect to its
asbestos-related lawsuits and claims. Grace has settled with and been paid by
its primary insurance carriers with respect to both property damage and personal
injury cases and claims. Grace also has settled with its excess insurance
carriers that wrote policies available for property damage cases; those
settlements involve amounts paid and to be paid to Grace. In addition, Grace has
settled with many excess insurance carriers that wrote policies available for
personal injury claims. Grace is currently in litigation with certain remaining
excess insurance carriers whose policies generally represent layers of coverage
Grace has not yet reached. Such policies are believed by Grace to be available
for asbestos-related personal injury lawsuits. Insurance coverage for
asbestos-related liabilities has not been commercially available since 1985.

         Grace's aggregate accrual for asbestos liabilities at December 31,
1997, was $855.9 million; this amount reflects all asbestos-related property
damage and personal injury cases and claims then pending (except for two
property damage cases as to which liability is not yet estimable because Grace
has not yet been able to obtain sufficient information through discovery
proceedings), as well as personal injury claims expected to be filed through
2002. Grace's ultimate exposure with respect to its asbestos-related cases and
claims will depend on the number and nature of claims filed and the extent to
which insurance will cover damages for which it may be liable, amounts paid in
settlement and litigation costs. At December 31, 1997, Grace had recorded a
receivable of $282.4 million, the amount Grace estimated to



                                     - 11 -


<PAGE>   14



be the probable recovery from its insurance carriers with respect to pending and
projected asbestos cases and claims, as well as notes receivable from insurance
carriers of $31.3 million. A May 1994 decision of the U.S. Court of Appeals for
the Second Circuit limited the amount of insurance coverage available to Grace
with respect to property damage cases. Because Grace's insurance covers both
property damage and personal injury cases and claims, the May 1994 decision has
had the concomitant effect of reducing the insurance coverage available with
respect to Grace's asbestos personal injury claims. However, in Grace's opinion
(which is not based on a formal opinion of counsel), it is probable that
recoveries from its insurance carriers, along with other funds, will be
available to satisfy the property damage and personal injury cases and claims
pending at December 31, 1997, as well as personal injury claims expected to be
filed in the foreseeable future. Consequently, Grace believes that the
resolution of its asbestos-related litigation will not have a material adverse
effect on its consolidated financial position.

         See "Insurance Litigation" and Note 2 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. The following is a description of the
material environmental proceedings in which Grace is involved:

         Grace (together with certain other companies) has been designated a
"potentially responsible party" ("PRP") by the U.S. Environmental Protection
Agency ("EPA") with respect to absorbing the costs of investigating and
remediating pollution at various sites. At year-end 1997, proceedings were
pending with respect to approximately 30 sites as to which Grace has been
designated a PRP. U.S. federal law provides that all PRPs may be held jointly
and severally liable for the costs of investigating and remediating a site.
Grace is also conducting investigatory and remediation activities at sites under
the jurisdiction of state and/or local authorities.

         In November 1995, Grace received a letter from the U.S. Department of
Energy ("DOE") inquiring as to Grace's willingness to contribute to the
continued cleanup of a former Grace property located in Wayne, New Jersey. The
letter asserted that Grace has a legal duty to pay for the cleanup and that the
total cost of cleanup may exceed $100 million. The operations conducted by Grace
at the Wayne site (from 1955 to 1970) included work done on radioactive
materials under contract with the U.S. government. In 1975, the U.S. Nuclear
Regulatory Commission inspected the site, concluded that it was decontaminated
in accordance with applicable regulations and released it for unrestricted use.
In 1984, pursuant to a request from the DOE, Grace transferred the Wayne
property to the DOE and made a cash payment as a contribution towards the DOE's
cleanup efforts at the site, which was acknowledged by the DOE as fulfilling any
obligation Grace had to contribute to the DOE's cleanup effort while preserving
the rights and liabilities of the parties under other existing applicable laws.
Grace believes that the resolution of the DOE's claim (as well as related claims
by other U.S. governmental agencies) will not have a material adverse effect on
its consolidated financial position.

         Grace is 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


                                     - 12 -


<PAGE>   15

or private parties relating to past or future practices of Grace with respect to
the generation, storage, handling, discharge or disposition of hazardous wastes
and other materials.

         Grace believes that the liabilities for environmental remediation
costs, including costs relating to environmental proceedings, that have been
recorded in Grace's historical financial statements are adequate. In addition,
Grace is presently involved in litigation with its insurance carriers, seeking
reimbursement from them for certain amounts for which Grace may be held liable
with respect to such costs. The outcome of such litigation, as well as the
amounts of any recoveries that Grace may receive in connection therewith, is
presently uncertain. However, Grace believes that the resolution of pending
environmental proceedings will not have a material adverse effect on the
consolidated financial position or liquidity of Grace. For further information,
see "Environmental, Health and Safety Matters" under Item 1 above and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" in the Financial Supplement.

         INSURANCE LITIGATION. Grace is involved in litigation with certain of
its insurance carriers with respect to asbestos-related insurance claims and
environmental liabilities. The relief sought by Grace in these actions would
provide insurance that would partially offset Grace's estimated exposure with
respect to amounts previously expended, and that may be expended in the future,
by Grace to defend claims, satisfy judgments and fund settlements. Grace has
settled all of its asbestos-related insurance coverage actions, with the
exception of MARYLAND CASUALTY CO. V. W. R. GRACE & CO., pending in the U.S.
District Court for the Southern District of New York, in which Grace is
asserting claims for insurance coverage for its asbestos-related personal injury
liabilities.

         Pursuant to settlements with primary-level and excess-level insurance
carriers, Grace received payments totaling $310.9 million prior to 1995, as well
as payments totaling $257.3 million in 1995, $184.5 million in 1996 and $68.7
million in 1997. Grace expects to receive additional amounts from insurance
carriers and has recorded receivables to reflect the expected amounts, as
discussed above under "Asbestos Litigation." As a result of these settlements,
Grace's asbestos-related insurance claims have been dismissed as to the
primary-level product liability insurance coverage previously sold by the
relevant insurers to Grace, as well as to many of Grace's excess-level liability
insurers.

         Grace's only two environmental insurance coverage actions are pending
in the U.S. District Court for the Southern District of New York. The first is
styled MARYLAND CASUALTY CO. V. W. R. GRACE & CO. Litigation continues in this
case as to certain primary-level and excess-level carriers that have not settled
with respect to claims for environmental property damage. The second case,
entitled UNIGUARD V. W. R. GRACE, was filed on December 17, 1997. This
declaratory judgment action seeks a determination concerning the liability of
one excess carrier for bodily injury claims as a result of environmental
contamination.

         See "Management's Discussion and Analysis of Results of Operations and
Financial Condition" in the Financial Supplement for additional information.

         FUMED SILICA PLANT LITIGATION. In 1993, Grace and certain of its
subsidiaries initiated legal action in the Belgian courts against the Flemish
government to recover losses resulting from the closing of one subsidiary's
fumed silica plant in Puurs, Belgium. The action seeks damages in excess of four
billion Belgian francs (approximately $107.8 million at the December 31, 1997
exchange rate), plus interest and

                                     - 13 -




<PAGE>   16

lost profits. This claim was dismissed at the trial court level and is now being
appealed. The trial court also determined that a subsidiary should repay
approximately 239 million Belgian francs (approximately $6.4 million at the
December 31, 1997 exchange rate), plus interest, to the Flemish government for
previously received investment grants; this decision is also being appealed.

         U.S. JUSTICE DEPARTMENT LAWSUIT. The U.S. Justice Department has
intervened in a QUI TAM lawsuit, originally filed in June 1995, pending in the
U.S. District Court for the Northern District of California (UNITED STATES EX
REL. ROBERT COSTA AND RONALD THORNBURG, ET AL. V. BAKER & TAYLOR, INC., ET AL.).
The complaint in this lawsuit alleges that Baker & Taylor Books, a book
wholesaler sold by Grace in 1992, overcharged public schools, libraries and
federal agencies during the last ten years, including the period during which
Baker & Taylor Books was owned by Grace. Grace and Baker & Taylor, Inc. (the
entity that currently operates Baker & Taylor Books) have been named as
defendants. The lawsuit seeks unspecified damages, punitive damages and civil
penalties, as well as attorneys' fees and expenses and such other relief as the
Court may deem proper. At this time, Grace is unable to determine the liability,
if any, to which it may be subject as a result of this lawsuit.

         STOCKHOLDER LITIGATION. W. R. Grace & Co., a New York corporation
subsequently renamed Fresenius Medical Care Holdings, Inc. ("Grace New York"),
and former members of the Grace New York Board of Directors (as well as J. P.
Bolduc, who resigned as president and chief executive officer and a director of
Grace New York in March 1995) were named as defendants in a case entitled
WEISER, ET AL. V. GRACE, ET AL. pending in New York State Supreme Court, New
York County. The consolidated amended complaint in this lawsuit, which purports
to be a derivative action (i.e., an action brought on behalf of Grace New York),
alleges, among other things, that the individual defendants breached their
fiduciary duties to Grace New York (i) by providing J. Peter Grace, Jr. (the
chairman and a director of Grace New York until his death in April 1995) with
certain compensation arrangements upon his voluntary retirement as Grace New
York's chief executive officer in 1992 and (ii) by approving Mr. Bolduc's
severance arrangements, and that Messrs. Grace and Bolduc breached their
fiduciary duties by accepting such benefits and payments. The lawsuit seeks
unspecified damages, the cancellation of all allegedly improper agreements, the
cancellation of a retirement plan for nonemployee directors (which was
terminated by Grace in 1997), the return of all remuneration paid to the
directors who are defendants while they were in breach of their fiduciary duties
to Grace New York, attorneys' and experts' fees and costs, and such other relief
as the Court deems proper. A motion to intervene in the case by the California
Public Employees' Retirement System was granted by the Court in September 1996.
Grace appointed a special committee of independent directors to investigate the
allegations made in the WEISER action. In March 1998, the special committee
filed a motion to dismiss the WEISER action on the grounds that it is without
merit and that the prosecution of the action is not in the best interests of the
Company and its shareholders.

         Under the terms of the Distribution Agreement ("NMC Distribution
Agreement") entered into in connection with the reorganization of Grace New York
in September 1996 (the "NMC Transaction") described in Note 1 to the
Consolidated Financial Statements in the Financial Supplement, Grace remains
financially responsible for any liabilities incurred by Grace New York and
others as a result of this lawsuit, including the fees and disbursements of
counsel for Grace and, subject to certain conditions, counsel for the individual
defendants (including certain current and former directors of Grace). The
discussions of the NMC Distribution Agreement appearing above and in the
following paragraphs do not purport to be complete and are qualified in their
entirety by reference to the NMC Distribution




                                     - 14 -

<PAGE>   17

Agreement, which was filed as an exhibit to the Joint Proxy Statement-Prospectus
of Grace New York dated August 2, 1996.

         SECURITIES AND EXCHANGE COMMISSION INVESTIGATION. In April 1996, Grace
New York received a formal order of investigation issued by the U.S. Securities
and Exchange Commission ("SEC") directing an investigation into, among other
things, whether Grace New York violated the U.S. federal securities laws by
filing periodic reports with the SEC that contained false and misleading
financial information. Pursuant to this formal order of investigation, Grace and
Grace New York have provided information to the SEC relating to reserves (net of
applicable taxes) established by Grace New York and its subsidiary, National
Medical Care, Inc. ("NMC"), during the period from January 1, 1990 to 1996
("Covered Period"). In connection with the preparation of the NMC Form 10 filed
with the SEC in September 1995, Grace reversed previously unallocated reserves
established at NMC in 1990, 1991, 1992 and 1993 that are a subject of this
investigation. Also in connection with the preparation of such Form 10, Grace
established reserves in an approximately equal amount with respect to
investments in Cross Country Healthcare Personnel, Inc. and in NMC's German
renal products manufacturing facilities.

         Under the terms of the NMC Distribution Agreement, Grace remains
financially responsible for any liabilities incurred by Grace New York and
others as a result of the investigation described above, including the fees and
disbursements of counsel for Grace and, subject to certain conditions, counsel
for certain former directors and officers of Grace.

         CLAIMS RELATING TO NMC. Grace New York and certain of its officers and
directors were named as defendants in a lawsuit entitled MURPHY, ET AL. V. W. R.
GRACE & CO., ET AL., which is pending in the U.S. District Court for the
Southern District of New York. The first amended class action complaint in this
lawsuit, which purports to be a class action on behalf of all persons and
entities who purchased Grace New York's publicly traded securities during the
period from March 13, 1995 through October 17, 1995 (the "Class Period"),
generally alleges that the defendants concealed information, and issued
misleading public statements and reports, concerning NMC's financial position
and business prospects, a proposed spin-off of NMC and the matters that are the
subject of investigations of NMC by the Office of the Inspector General of the
U.S. Department of Health and Human Services (the "OIG"), in violation of U.S.
federal securities laws. The lawsuit seeks unspecified damages, attorneys' and
experts' fees and costs and such other relief as the Court deems proper.

         Grace New York and certain of its former officers and directors were
also named as defendants in a purported derivative action in the U.S. District
Court for the Southern District of New York (BENNETT V. BOLDUC, ET AL.),
alleging that such individuals breached their fiduciary duties by failing to
properly supervise the activities of NMC in the conduct of its business. The
BENNETT action seeks unspecified damages, attorneys' and experts' fees and costs
and such other relief as the Court deems proper. A third derivative action
relating to NMC, entitled BAUER V. BOLDUC, ET AL., was filed in October 1995 in
the Supreme Court of the State of New York for the County of New York. The Bauer
action has been stayed in favor of the BENNETT action.

         Grace and other defendants in the MURPHY, BENNETT AND BAUER actions
have agreed with the plaintiffs to settle those actions. The agreement provides
for the establishment of a fund of approximately $32 million (less plaintiffs'
attorneys' fees) to compensate a class of stockholders consisting of purchasers
of Grace New York stock during the Class Period. As part of the settlements, the
insurance carrier for the directors and officers will cause $10 million to be
paid to Grace on behalf of



                                     - 15 -

<PAGE>   18

the individual defendants named in the MURPHY, BENNETT and BAUER actions. The
settlements are contingent upon court approval. The net payment to be made by
Grace in connection with these settlements will be charged against previously
established reserves.

         Under the terms of the NMC Distribution Agreement, Grace remains
financially responsible for any liabilities incurred by Grace New York and
others as a result of the lawsuits described above, including the fees and
disbursements of counsel for Grace and, subject to certain conditions, counsel
for the individual defendants (including certain former directors and officers
of Grace). The NMC Distribution Agreement also provides generally for certain
cross-indemnities designed to place with Grace New York (which has become a
subsidiary of Fresenius AG, a German corporation not affiliated with Grace)
financial responsibility for the liabilities of the health care businesses
formerly owned by Grace New York (including, without limitation, all liabilities
relating to compliance or noncompliance with U.S. food and drug law, medical and
Medicare billing and reimbursement law and other health care matters) and to
place with Grace financial responsibility for the other liabilities of Grace New
York and its other subsidiaries (including, without limitation, liabilities
relating to the manufacture or sale of asbestos- containing materials by the
specialty chemicals businesses). Grace and Grace New York have asserted claims
against each other for indemnity with respect to claims asserted by third
parties pursuant to the terms of these provisions.

         See Note 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 concerning certain litigation
and proceedings involving NMC.

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 1997.

                                     PART II

ITEM 5.      MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
             STOCKHOLDER 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-29); under the heading "Quarterly Summary and Statistical Information -
Unaudited" opposite the captions "Dividends declared per common share" and
"Market price of common stock" (page F-28); and in Note 12 to the Consolidated
Financial Statements (page F-22).

         Each share of the Company's Common Stock, par value $.01 per share
("Common Stock"), has an attendant Preferred Stock Purchase Right ("Right"). The
Rights are not and will not become exercisable unless and until certain events
occur (as described below). 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 will become exercisable on the
earlier to occur of (a) 10 days after a person or group ("Acquiring Person") has
acquired beneficial ownership of 20% or more of the then outstanding shares of
Common Stock or (b) 10 business days (or such later date as may be fixed by the
Company's





                                     - 16 -


<PAGE>   19

Board of Directors) after an Acquiring Person commences (or announces the
intention to commence) a tender offer or exchange offer that would result in
such Acquiring Person becoming the beneficial owner of 20% or more of the then
outstanding shares of Common Stock. Holders of Rights, as such, have no rights
as stockholders of the Company; consequently, such holders have no rights to
vote or receive dividends, among other things.

         When the Rights become exercisable, each Right will initially entitle
the holder to buy from the Company one hundredth of a share of the Company's
Junior Participating Preferred Stock, par value $.01 per share ("Junior
Preferred Stock"), for $200, subject to adjustment ("exercise price"). If, at
any time after the Rights become exercisable, the Company is acquired in a
merger or other business combination or 50% or more of the Company's
consolidated assets or earning power is sold, 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. Alternatively, each Right not owned by an Acquiring Person would become
exercisable for Common Stock having a market value equal to twice the exercise
price.

         Shares of Junior Preferred Stock that may be purchased upon exercise of
the Rights will not be redeemable. 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 merger, consolidation or
other transaction in which the Common Stock is exchanged, 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.

         Because of the nature of the dividend, liquidation and voting rights of
the Junior Preferred Stock, the value of the one-hundredth interest in a share
of Junior Preferred Stock that may be purchased upon exercise of each Right
should approximate the value of one share of Common Stock.

         At any time after any person or group becomes an Acquiring Person, and
prior to the acquisition by such Acquiring Person of 50% or more of the
outstanding shares of Common Stock, the Company's Board of Directors may
exchange the Rights (other than Rights owned by such person or group, which will
become void after such person becomes an Acquiring Person) for Common Stock or
Junior Preferred Stock, in whole or in part, at an exchange ratio of one share
of Common Stock, or one hundredth of a share of Junior Preferred Stock (or of a
share of another series of the Company's Preferred Stock having equivalent
rights, preferences and privileges), per Right (subject to adjustment).

         At any time prior to the acquisition by a person or group of beneficial
ownership of 20% or more of the outstanding shares of Common Stock, the
Company's Board of Directors may redeem the Rights in whole, but not in part, at
a price of $.01 per Right.

         The terms of the Rights may be amended by the Company's Board of
Directors without the consent of the holders of the Rights, including an
amendment to lower (a) the threshold at which a person becomes an Acquiring
Person and (b) the percentage of Common Stock proposed to be acquired




                                     - 17 -

<PAGE>   20

in a tender or exchange offer that would cause the Rights to become exercisable,
to not less than the greater of (a) the sum of .001% plus the largest percentage
of the Company's outstanding Common Stock then known to the Company to be
beneficially owned by any person or group and (b) 10%, except that, from and
after such time as any person or group becomes an Acquiring Person, no such
amendment may adversely affect the interests of the holders of the Rights.

         The Rights are currently scheduled to expire in September 2006 (subject
to extension or the earlier redemption or exchange of the Rights). The Rights
will not become exercisable as a result of, and will be terminated in connection
with, the disposition of the Packaging Business described under "Introduction
and Overview -- Strategic Objectives and Actions" in Item 1 above, although New
Grace will have substantially identical rights.

         The foregoing 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 an exhibit to the Company's Form 8-K filed on October 10, 1996.

ITEM 6.      SELECTED FINANCIAL DATA.

         The information called for by this Item appears under the heading
"Financial Summary" (page F-29 of the Financial Supplement) and in Notes 3, 5,
6, 9 and 16 to the Consolidated Financial Statements (pages F-12, F-16, F-17,
F-19 and F-25 of the Financial Supplement). In addition, Exhibit 12 to this
Report (page F-40 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 1993-1997.

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

         The information called for by this Item appears on pages F-30 to F-38
of the Financial Supplement.

ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         The information called for by this Item appears in Note 10 to the
Consolidated Financial Statements (page F-20 of the Financial Supplement).

ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         See the Index to Consolidated Financial Statements and Financial
Statement Schedule and Exhibits on page F-1 of the Financial Supplement.

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.




                                     - 18 -

<PAGE>   21

                                    PART III

ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         BOARD OF DIRECTORS. Set forth below is information with respect to the
individuals who currently serve as directors of the Company. Under the
classified board provisions of the Company's Amended and Restated Certificate of
Incorporation and By-laws, these individuals were elected for terms expiring at
the annual meetings of shareholders in the years indicated.

         Upon the disposition of the Packaging Business described under
"Introduction and Overview -- Strategic Objectives and Actions" in Item 1 above,
it is anticipated that Messrs. Brown, Cheng and Phipps and Ms. Kamsky will
remain directors of the Company (which will be renamed "Sealed Air Corporation")
and that the other directors will become directors of New Grace. Messrs. Eckmann
and Holmes and Dr. Frick have agreed to resign from the New Grace Board of
Directors effective May 8, 1998, the date on which their terms as directors of
the Company would expire but for the disposition of the Packaging Business. It
is anticipated that, following completion of such disposition, the New Grace
Board of Directors (on the recommendation of its Nominating Committee) will
elect one or more individuals to serve as directors of New Grace, with a term
expiring at the Annual Meeting of Stockholders of New Grace to be held in 2001.

                   CLASS I DIRECTORS -- TERMS EXPIRING IN 1999
                   -------------------------------------------

Hank Brown
Director since March 1997
Age: 58

Mr. Brown is the Director of the Center for Public Policy at the University of
Denver, having served as a United States Congressman from 1981 until 1991 and as
a United States Senator from 1991 until January 1997. A 1961 graduate of the
University of Colorado, he served in the United States Navy from 1962 until
1966, and he subsequently received a law degree from the University of Colorado
and a master of laws from George Washington University; he is also a certified
public accountant. From 1969 to 1980, Mr. Brown held a number of professional
and executive positions with Monfort of Colorado, Inc., a meat processing and
livestock feeding company.

Albert J. Costello
Director since 1995
Age: 62

Mr. Costello is the chairman, president and chief executive officer of Grace,
positions he has held since May 1995. Before joining Grace, Mr. Costello served
as president of American Cyanamid Company from 1991 to March 1993 and as its
chairman of the board and chief executive officer from April 1993 to December
1994; he joined American Cyanamid Company in 1957. Mr. Costello received a B.S.
in chemistry from Fordham University and an M.S. in chemistry from New York
University. Mr. Costello is a director of Becton, Dickinson and Company and FMC
Corporation and a trustee of Fordham University and the American Enterprise
Institute for Public Policy Research.

                                     - 19 -


<PAGE>   22



Marye Anne Fox
Director since 1996
Age: 50

Dr. Fox is vice president for research and the Waggoner Regents chair in
chemistry of the University of Texas, positions she has held since 1994 and
1992, respectively; she has been on the faculty of the University of Texas since
1976. Dr. Fox received a B.S. in chemistry from Notre Dame College, an M.S. in
organic chemistry from Cleveland State University and a Ph.D. in organic
chemistry from Dartmouth College; she also holds an honorary doctoral degree
from Notre Dame College. Dr. Fox has served as vice chair of the National
Science Board and has received numerous honors and awards from a wide variety of
educational and professional organizations. She currently serves on the Texas
Governor's Science and Technology Council; she has also served on several
editorial boards and has authored approximately 300 publications, including
three books and more than 20 book chapters.

Thomas A. Vanderslice
Director since 1996
Age: 66

Mr. Vanderslice began his career with General Electric Company, where he spent
23 years in various technical, management and executive positions, including
executive vice president and sector executive of General Electric's power
systems business. He subsequently served as president and chief operating
officer of GTE Corporation, as chairman and chief executive officer of Apollo
Computer, Inc., and, from 1989 to June 1995, 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. Mr. Vanderslice received a B.S. in chemistry and philosophy from
Boston College and a Ph.D. in chemistry and physics from Catholic University; he
holds several patents and has written numerous technical articles. He is a
director of Texaco Inc., a trustee of Boston College, and chairman of the
Massachusetts High Technology Council. He is also a member of the National
Academy of Engineering, the American Chemical Society and the American Institute
of Physics.

                  CLASS II DIRECTORS -- TERMS EXPIRING IN 2000
                  --------------------------------------------

John F. Akers
Director since January 1997
Age: 63

Mr. Akers served as chairman of the board and chief executive officer of
International Business Machines Corporation from 1985 until his retirement in
1993, completing a 33-year career with IBM. He is a director of Hallmark Cards,
Inc., Lehman Brothers Holdings, Inc., The New York Times Company, PepsiCo, Inc.
and Springs Industries, Inc. He also serves on the U.S. advisory board of Zurich
Insurance Company and on the advisory board of DIRECTORSHIP. A graduate of Yale
University with a B.S. in industrial administration, Mr. Akers formerly served
on the boards of trustees of the California Institute of Technology and the
Metropolitan Museum of Art, as chairman of the board of governors of United Way
of America, and as a member of President Bush's Education Policy Advisory
Committee.


                                     - 20 -
<PAGE>   23


Christopher Cheng
Director since March 1997
Age: 49

Mr. Cheng is chairman and managing director of the Wing Tai Group of Companies,
a garment manufacturer based in Hong Kong; he also serves as chairman of USI
Holdings Ltd., a diverse holding company listed on the Hong Kong Stock Exchange
with interests in garment manufacturing, property development, hospitality and
telecommunications. Mr. Cheng received a bachelor's degree in business
administration from the University of Notre Dame and an M.B.A. from Columbia
University. He is a director of The New World Infrastructure Limited (a company
listed on the Hong Kong Stock Exchange) and of The Gieves Group PLC (listed on
the London Stock Exchange), and he is active in numerous civic and educational
organizations, including the Hong Kong Trade Development Council, the Hong Kong
University of Science and Technology, and the Council for International Affairs
of Notre Dame. He is also an Officer of the Order of the British Empire.

Virginia A. Kamsky
Director since 1990
Age: 44

Ms. Kamsky is the founder, chairman and co-chief executive officer of Kamsky
Associates Inc., an advisory, consultancy and investment firm specializing in
The People's Republic of China. She graduated from Princeton University with an
honors degree in East Asian studies (with a concentration in Chinese and
Japanese language studies) and served as a lending officer with The Chase
Manhattan Bank in Tokyo, Beijing and New York City before forming Kamsky
Associates in 1980. Ms. Kamsky is a member of the Council on Foreign Relations,
a founding director of the Council's Hong Kong Committee, and a trustee of
Princeton-in-Asia. She previously served on Princeton's Board of Trustees,
including its Executive and Investment Committees. She is also a director of the
National Committee on United States-China Relations and a member of the advisory
committee of Americares.

John E. Phipps
Director since 1975
Age: 65

Mr. Phipps is a private investor. He is a general partner of Phipps Ventures and
a director of the Bessemer Group, Bessemer Securities Corporation, Bessemer
Trust Company, Bessemer Trust Company of Florida and Bessemer Trust Company,
N.A.

                  CLASS III DIRECTORS -- TERMS EXPIRING IN 1998
                  ---------------------------------------------

Harold A. Eckmann
Director since 1976
Age: 76

Mr. Eckmann retired in 1985 as chairman and chief executive officer of Atlantic
Mutual Insurance Company and Centennial Insurance Company -- The Atlantic
Companies. He was educated at the U.S.





                                     - 21 -

<PAGE>   24

Merchant Marine Academy and the University of California. Mr. Eckmann joined The
Atlantic Companies in 1949 and became president in 1970 and chairman and chief
executive officer in 1976.

James W. Frick
Director since 1984
Age: 73

Dr. Frick is president of James W. Frick Associates, a consulting firm to
private colleges and universities. He is also vice president emeritus of the
University of Notre Dame, having served the University in various capacities
from 1951 to 1987, including as a member of its board of trustees. Dr. Frick
holds three degrees from the University of Notre Dame. He is president emeritus
of the Community Foundation of St. Joseph County, Indiana, a former director of
Society Bank of South Bend and Society National Bank, Indiana, and a former
member of the board of trustees of Converse College. He also served a term as a
member of the board of the Department of Financial Institutions of the State of
Indiana.

Thomas A. Holmes
Director since 1989
Age: 74

Mr. Holmes served as acting president and chief executive officer of Grace from
March to May 1995. He was chairman, president and chief executive officer of
Ingersoll-Rand Company until his retirement in 1988, having spent his entire
business career with Ingersoll-Rand Company. He is a graduate of the University
of Missouri -- Rolla. Mr. Holmes is a director of Newmont Gold Co. and Newmont
Mining Corp.

John J. Murphy
Director since March 1997
Age: 66

Mr. Murphy retired in 1996 as chairman of the board of Dresser Industries, Inc.,
a supplier of products and technical services to the energy industry. He joined
Dresser as an engineer in 1952 and spent his entire career with Dresser, serving
as its chief executive officer from 1983 to 1995. Mr. Murphy is a director of
CARBO Ceramics, Inc., Kerr-McGee Corporation and PepsiCo, Inc.; a former trustee
of Southern Methodist University and St. Bonaventure University; a former member
of the board of the U.S.-Russia Business Council; and a member of The Business
Council. He received a bachelor's in mechanical engineering from Rochester
Institute of Technology, a masters of business administration from Southern
Methodist University and an honorary doctorate of commercial science from St.
Bonaventure University.
                                     - 22 -



<PAGE>   25

         Executive Officers. The Company's current executive officers are listed
below. Executive officers are elected to serve until the following annual
meeting of the Company's Board of Directors.
<TABLE>
<CAPTION>

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

<S>                                               <C>                                            <C>
Robert H. Beber (64)                              Executive Vice President                       05/10/93
                                                  and General Counsel                            09/01/91

Robert J. Bettacchi (55)                          Senior Vice President                          04/01/97

Albert J. Costello (62)                           Chairman,                                      05/10/95
                                                  President and Chief                            05/01/95
                                                  Executive Officer

Larry Ellberger (50)                              Senior Vice President and                      07/06/95
                                                  Chief Financial Officer                        11/14/96

James R. Hyde (59)                                Senior Vice President                          07/06/95

J. Gary Kaenzig, Jr. (52)                         Senior Vice President                          10/05/95
</TABLE>

         All the above executive officers have been actively engaged in Grace's
business for the past five years, other than Mr. Costello (see "Board of
Directors" above) and Mr. Ellberger. Mr. Ellberger was a corporate vice
president and director of corporate development and planning of American
Cyanamid Company from 1991 until 1995. Mr. Ellberger served as the Company's
acting chief executive officer from October 11, 1997, when Mr. Costello suffered
a heart attack, until January 5, 1998.

         Upon the disposition of the Packaging Business described under
"Introduction and Overview -- Strategic Objectives and Actions" in Item 1 above,
it is anticipated that the current executive officers, other than Mr. Kaenzig,
will become executive officers of New Grace and that Mr. Kaenzig will remain an
executive officer of the Company (which will be renamed "Sealed Air
Corporation").

         OWNERSHIP AND TRANSACTIONS REPORTS. 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 Company's 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; such persons are also
required to furnish the Company with copies of such reports. Based solely 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 1997, except that one report regarding the purchase
of shares of Common Stock by Dr. Frick's wife was filed late.

ITEM 11.          EXECUTIVE COMPENSATION.

         The information called for by this Item will be provided by amendment.



                                     - 23 -
<PAGE>   26

ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT.

         The following table sets forth the Common Stock beneficially owned,
directly or indirectly, as of December 31, 1997, by: (a) each person known to
Grace to be the beneficial owner of more than five percent of the then
outstanding shares of the Common Stock; (b) current directors and each of the
executive officers named in the Summary Compensation Table set forth in the
Company's 1997 Proxy Statement (other than those who have resigned); and (c) all
directors and executive officers of the Company as a group. The table includes
shares owned by (i) those persons and their spouses, minor children and certain
relatives, (ii) trusts and custodianships for their benefit and (iii) trusts and
other entities as to which the persons have the power to direct the voting or
investment of securities (including shares as to which the persons disclaim
beneficial ownership). The table also includes shares in accounts under Grace's
Savings and Investment Plan and shares covered by currently exercisable stock
options; it does not reflect shares covered by unexercisable stock options. The
Common Stock owned by directors and executive officers as a group (excluding
option shares) as of December 31, 1997 represents less than 1% of the Common
Stock outstanding as of that date.
<TABLE>
<CAPTION>

                                                                                  SHARES OF
                                                                                GRACE COMMON
                                                                                    STOCK
                           BENEFICIAL OWNER                                  BENEFICIALLY OWNED
------------------------------------------------------------------------    ----------------------
<S>                                                                             <C>
FMR Corp. (1)...........................................................        5,561,540
   82 Devonshire Street
   Boston, Massachusetts  02109
Lincoln Capital Management Company (2)..................................        7,904,700
   200 South Wacker Drive, Suite 2100
   Chicago, Illinois  60606
Tiger Management L.L.C. ................................................        6,895,600
   and Tiger Performance L.L.C. (3)
   101 Park Avenue
   New York, NY  10178
J.F. Akers..............................................................            1,205
                                                                                      504(T)
R.H. Beber..............................................................            7,673
                                                                                  198,338(O)
H. Brown................................................................            1,139
                                                                                      153(T)
C. Cheng................................................................              139
                                                                                      140(T)
A.J. Costello...........................................................           32,776
                                                                                   31,123(T)
                                                                                  336,375(O)
H.A. Eckmann............................................................            3,690
                                                                                    1,997(T)
L. Ellberger............................................................            1,662
                                                                                   14,502(T)
                                                                                   91,132(O)
M.A. Fox ...............................................................              964
                                                                                      135(T)
J.W. Frick..............................................................            3,489
                                                                                       76(T)
</TABLE>
                                     - 24 -





<PAGE>   27
<TABLE>
<CAPTION>

                                                                                  SHARES OF
                                                                                GRACE COMMON
                                                                                    STOCK
                          BENEFICIAL OWNER                                   BENEFICIALLY OWNED
------------------------------------------------------------------------    ----------------------
<S>                                                                                 <C>
T.A. Holmes.............................................................            4,421
                                                                                    1,261(T)
J.R. Hyde...............................................................            9,090
                                                                                  184,127(O)
V.A. Kamsky.............................................................            2,931
J.J. Murphy.............................................................            1,139
                                                                                      414(T)
J.E. Phipps.............................................................           11,921
                                                                                   17,450(T)(S)
                                                                                    3,860(T)
T.A. Vanderslice........................................................            1,731
                                                                                    1,058(T)
Various directors, executive officers and others, as Trustees...........            2,696(T)(S)
Directors and executive officers as a group.............................           89,911
                                                                                   65,244(T)
                                                                                   20,146(T)(S)
                                                                                  965,123(O)
</TABLE>

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

(1)  The shares owned by FMR Corp. represent approximately 7.5% of the Common
     Stock outstanding as of December 31, 1997. The ownership information set
     forth in the table is based in its entirety on material contained in a
     Schedule 13G, dated February 14, 1998, filed with the SEC by FMR Corp.,
     which stated that the securities were not acquired for the purpose of
     changing or influencing the control of Grace. With respect to the shares
     held, such shareholder stated in such Schedule 13G that it has sole voting
     power as to 356,440 shares and sole dispositive power as to 5,561,540
     shares.

(2)  The shares owned by Lincoln Capital Management Company represent
     approximately 10.6% of the Common Stock outstanding as of December 31,
     1997. The ownership information set forth in the table is based in its
     entirety on material contained in a Schedule 13G, filed with the SEC on
     February 26, 1998 by Lincoln Capital Management Company, which stated that
     the securities were not acquired for the purpose of changing or influencing
     the control of Grace. With respect to the shares held, such shareholder
     stated in such Schedule 13G that it has sole voting power as to 4,060,700
     shares and sole dispositive power as to 7,904,700 shares.

(3)  The shares owned by Tiger Management L.L.C. and Tiger Performance L.L.C.
     represent approximately 9.3% of the Common Stock outstanding as of December
     31, 1997. The ownership information set forth in the table is based in its
     entirety on material contained in a Schedule 13G, dated February 13, 1998,
     filed with the SEC by Tiger Management L.L.C. and Tiger Performance L.L.C.,
     which stated that the securities were not acquired for the purpose of
     changing or influencing the control of Grace. With respect to the shares
     held, such shareholders stated in such Schedule 13G that they have sole
     voting power and sole dispositive power as to 6,895,600 shares.

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

(O)  Shares covered by stock options exercisable on or within 60 days after
     December 31, 1997.

(S)  Shares as to which the person shares voting and/or investment power with
     others.

ITEM 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The information called for by this Item will be provided by amendment.



                                     - 25 -
<PAGE>   28

                                     PART IV

ITEM 14.       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 Exhibits on page F-1
of the Financial Supplement.

         REPORTS ON FORM 8-K. The Company filed the following Reports on Form
8-K during the fourth quarter of 1997 and the beginning of 1998:

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

October 17, 1997          Announcement concerning the condition of Albert J.
                          Costello, the Company's Chairman, President and Chief
                          Executive Officer.

November 4, 1997          Announcement of 1997 third quarter results.

February 9, 1998          Announcement of 1997 fourth quarter and full year
                          results.

         EXHIBITS. The exhibits to this Report are listed below. Other than
exhibits that are filed herewith, all exhibits listed below are incorporated
herein 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.
<TABLE>
<CAPTION>

Exhibit                                                                      Where Located
-------                                                                      -------------
<S>                                                                         <C>
Form of Distribution Agreement, by and among                                Annex B to the Joint Proxy
W. R. Grace & Co., W. R. Grace & Co.-Conn. and                              Statement/Prospectus dated
Grace Specialty Chemicals, Inc.                                             February 13, 1998 included in
                                                                            Form S-4 (filed 2/13/98)

Amended and Restated Certificate of Incorporation of                        Exhibit 4.1 to Form 8-K
W. R. Grace & Co.                                                           (filed 10/10/96)

Amended and Restated By-laws of                                             Exhibit 4.2 to Form 8-K
W. R. Grace & Co.                                                           (filed 10/10/96)

Rights Agreement by and between W. R. Grace & Co.                           Exhibit 4.3 to Form 8-K
and The Chase Manhattan Bank, as Rights Agent                               (filed 10/10/96)

Indenture dated as of September 29, 1992 among                              Exhibit 4.2 to Form 10-K
W. R. Grace & Co.-Conn., W. R. Grace & Co. and                              (filed 3/26/93)
Bankers Trust Company
</TABLE>



                                     - 26 -





<PAGE>   29



<TABLE>
<CAPTION>

<S>                                                                         <C>
Supplemental Indenture dated as of September 24,                            Exhibit 4.4 to Form 8-K
1996, among W. R. Grace & Co.-Conn., W. R. Grace                            (filed 10/10/96)
& Co., Grace Holding, Inc., and Bankers Trust
Company, to Indenture dated as of September 29,
1992

Indenture dated as of January 28, 1993 among                                Exhibit 4.4 to Form 10-K
W. R. Grace & Co.-Conn., W. R. Grace & Co. and                              (filed 3/26/93)
The Bank of New York (successor to NationsBank of
Georgia, N.A.)

Supplemental Indenture dated as of September 24,                            Exhibit 4.5 to Form 8-K
1996, among W. R. Grace & Co.-Conn., W. R. Grace                            (filed 10/10/96)
& Co., Grace Holding, Inc., and The Bank of New
York, to Indenture dated as of January 28, 1993

364-Day Credit Agreement, dated as of May 16, 1997,                         Exhibit 10.1 to Form 10-Q (filed
among W. R. Grace & Co.-Conn., W. R. Grace &                                8/12/97)
Co., the several banks parties thereto, NationsBank,
N.A. (South), as documentation agent, and The Chase
Manhattan Bank, as administrative agent for such
banks

Amended and Restated Credit Agreement, dated as of                          Exhibit 10.2 to Form 10-Q
May 16, 1997, among W. R. Grace & Co.-Conn.,                                (filed 8/12/97)
W. R. Grace & Co., the several banks parties thereto
and The Chase Manhattan Bank, as administrative
agent for such banks

W. R. Grace & Co. 1996 Stock Incentive Plan, as                             Exhibit 10.1 to Form 10-Q (filed
amended                                                                     5/13/97)*

W. R. Grace & Co. 1996 Stock Retainer Plan for                              Exhibit 10.2 to Form 8-K
Nonemployee Directors                                                       (filed 10/10/96)*

W. R. Grace & Co. Supplemental Executive                                    Exhibit 10.03 to Form 10-K
Retirement Plan, as amended                                                 (filed 3/28/97)*

W. R. Grace & Co. Executive Salary Protection Plan,                         Exhibit 10.04 to Form 10-K
as amended                                                                  (filed 3/28/97)*

W. R. Grace & Co. 1981 Stock Incentive Plan, as                             Exhibit 10.3 to Form 8-K
amended                                                                     (filed 10/10/96)*

W. R. Grace & Co. 1986 Stock Incentive Plan, as                             Exhibit 10.4 to Form 8-K
amended                                                                     (filed 10/10/96)*

W. R. Grace & Co. 1989 Stock Incentive Plan, as                             Exhibit 10.5 to Form 8-K
amended                                                                     (filed 10/10/96)*
</TABLE>




                                     - 27 -

<PAGE>   30




<TABLE>
<CAPTION>

<S>                                                                         <C>
W. R. Grace & Co. 1994 Stock Incentive Plan, as                             Exhibit 10.6 to Form 8-K
amended                                                                     (filed 10/10/96)*

Forms of Stock Option Agreements                                            Exhibit 10(h) to Form 10-K
                                                                            (filed 3/28/92)*

Information concerning W. R. Grace & Co. Incentive                          Pages 7-12 and 26-36 of Proxy
Compensation Program, Deferred Compensation                                 Statement (filed 4/7/97)*
Program and Long-Term Incentive Program

Form of Long-Term Incentive Program Award                                   Exhibit 10.13 to Registration
                                                                            Statement on Form S-1
                                                                            (filed 8/2/96)*

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

W. R. Grace & Co. Retirement Plan for Outside                               Exhibit 10.13 to Form 10-K
Directors, as amended                                                       (filed 3/28/97)*

Form of Executive Severance Agreement between                               Exhibit 10.22 to Registration
W. R. Grace & Co. and officers elected prior to May                         Statement on Form S-1
1996                                                                        (filed 8/2/96)*

Form of Executive Severance Agreement between                               Exhibit 10.23 to Registration
W. R. Grace & Co. and officers elected in or after                          Statement on Form S-1
May 1996                                                                    (filed 8/2/96)*

Form of Executive Severance Agreement between                               Exhibit 10.20 to Form 10 of
W. R. Grace & Co. and officers                                              Grace Specialty Chemicals, Inc.
                                                                            (filed 3/13/98)*

Consulting Agreement dated June 1, 1992 between                             Exhibit 10.29 to Form 10-K
W. R. Grace & Co. and Kamsky Associates, Inc.                               (filed 3/26/93)*

Employment Agreement dated as of May 1, 1995                                Exhibit 10.1 to Form 10-Q (filed
between W. R. Grace & Co. and Albert J. Costello                            8/14/95)*

Amendment dated August 9, 1996 to Employment                                Exhibit 10.7 to Form 8-K
Agreement, dated as of May 1, 1995, between                                 (filed 10/10/96)*
W. R. Grace & Co. and Albert J. Costello

Option Agreement between W. R. Grace & Co. and                              Exhibit 10.8 to Form 8-K
Albert J. Costello, dated May 1, 1995, as amended                           (filed 10/10/96)*

Option Agreement between W. R. Grace & Co. and                              Exhibit 10.37 to Registration
Albert J. Costello, dated March 6, 1996                                     Statement on Form S-1
                                                                            (filed 8/2/96)*
</TABLE>



                                     - 28 -

<PAGE>   31
<TABLE>
<CAPTION>

<S>                                                                         <C>
Option Agreement between W. R. Grace & Co. and                              Exhibit 10.25 to Form 10 of
Albert J. Costello, dated March 5, 1997                                     Grace Specialty Chemicals, Inc.
                                                                            (filed 3/13/98)*

Employment Agreement dated May 15, 1995 between                             Exhibit 10.28 to Form 10-K
W. R. Grace & Co. and Larry Ellberger                                       (filed 3/28/97)*

Restricted Stock Award Agreement dated June 6,                              Exhibit 10.29 to Form 10-K
1995 between W. R. Grace & Co. and Larry Ellberger,                         (filed 3/28/97)*
as amended by letter agreement dated August 26,
1996 between Larry Ellberger and W. R. Grace & Co.

Letter Agreement dated December 10, 1996 between                            Exhibit 10.30 to Form 10-K
W. R. Grace & Co. and Larry Ellberger                                       (filed 3/28/97)*

Distribution Agreement by and among W. R. Grace &                           Exhibit 2 to Form 8-K (filed
Co., a New York corporation subsequently renamed                            2/6/96)
Fresenius Medical Care Holdings, Inc., W. R. Grace
& Co.-Conn., and Fresenius AG dated February 4,
1996

Form of Indemnification Agreement between                                   Exhibit 10.39 to Registration
W. R. Grace & Co. and certain directors                                     Statement on Form S-1
                                                                            (filed 8/2/96)*

Form of Indemnification Agreement between                                   Exhibit 10.37 to Form 10-K
W. R. Grace & Co. and certain officers and directors                        (filed 3/28/97)*

Agreement and Plan of Merger dated as of August 14,                         Exhibit 2.1 to Form 8-K
1997 among W. R. Grace & Co., Sealed Air                                    (filed August 19, 1997)
Corporation and Packco Acquisition Corp.

Computation of Ratio of Earnings to Fixed Charges                           Filed herewith (in Financial
and Combined Fixed Charges and Preferred Stock                              Supplement to Form 10-K)
Dividends

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

Consent of Independent Certified Public Accountants                         Filed herewith (in Financial
                                                                            Supplement to Form 10-K)

Powers of Attorney                                                          Filed herewith
</TABLE>





                                     - 29 -


<PAGE>   32



                                   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, thereunto duly authorized.

                                                     W. R. GRACE & CO.


                                                     By  /s/ L. Ellberger
                                                         ---------------------
                                                            L. Ellberger
                                                     (Senior Vice President and
                                                       Chief Financial Officer)

Date: March 30, 1998

       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 30, 1998.
<TABLE>
<CAPTION>

                      Signature                                    Title
                      ---------                                    -----
<S>               <C>                   <C>               <C>
                  A. J. Costello*                         President and Director
                                                          (Principal Executive Officer)

       J. F. Akers*                     T. A. Holmes*              }
       H. Brown*                        V. A. Kamsky*              }
       C. Cheng*                        J. J. Murphy*              }       Directors
       H. A. Eckmann*                   J. E. Phipps*              }
       M. A. Fox*                       T. A. Vanderslice*         }
       J. W. Frick*

         /s/ L. Ellberger                                        Senior Vice President
       -----------------------                              (Principal Financial Officer)
           (L. Ellberger)

         /s/ K. A. Browne                                 Vice President and Controller
       -----------------------                            (Principal Accounting Officer)
           (K. A. Browne)
</TABLE>

-------
*   By signing his name hereto, Robert B. Lamm 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/ Robert B. Lamm
                                                  ------------------------
                                                  Robert B. Lamm
                                                  (Attorney-in-Fact)


                                     - 30 -


<PAGE>   33

                              FINANCIAL SUPPLEMENT


                               W. R. GRACE & CO.
                           ANNUAL REPORT ON FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 1997


<PAGE>   34


                              FINANCIAL SUPPLEMENT

                                       to

         Annual Report on Form 10-K for the Year Ended December 31, 1997

                       W. R. GRACE & CO. AND SUBSIDIARIES
                   Index to Consolidated Financial Statements
                  and Financial Statement Schedule and Exhibits
                  ---------------------------------------------
<TABLE>
<CAPTION>

                                                                                                               Page
<S>                                                                                                             <C>
Report of Independent Certified Public Accountants on Financial Statement Schedule .............................F-2
Consent of Independent Certified Public Accountants.............................................................F-2
Report of Independent Certified Public Accountants..............................................................F-3
Consolidated Statement of Operations for the three years in the
  period ended December 31, 1997................................................................................F-4
Consolidated Statement of Cash Flows for the three years in the
  period ended December 31, 1997................................................................................F-5
Consolidated Balance Sheet at December 31, 1997 and 1996........................................................F-6
Consolidated Statement of Shareholders' Equity for the three
  years in the period ended December 31, 1997...................................................................F-7
Notes to Consolidated Financial Statements......................................................................F-8-F-27
Quarterly Summary and Statistical Information - Unaudited ......................................................F-28
Financial Summary          .....................................................................................F-29
Management's Discussion and Analysis of Results of Operations
  and Financial Condition.......................................................................................F-30
Financial Statement Schedule
         Schedule II  -   Valuation and Qualifying Accounts and
                          Reserves..............................................................................F-39

Exhibit 12:  Computation of Ratio of Earnings to Fixed Charges and
         Combined Fixed Charges and Preferred Stock Dividends...................................................F-40

</TABLE>
         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 50%- or less-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-1


<PAGE>   35


              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 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 February 3, 1998, except for "Packaging Business Transaction," as
discussed in Notes 1 and 3, as to which the date is March 23, 1998, appearing on
page F-3 of this 1997 Annual Report on Form 10-K of W. R. Grace & Co. also
included an audit of the Financial Statement Schedule listed on page F-1 in the
Index to Consolidated Financial Statements and Financial Statement Schedule and
Exhibits 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/ PRICE WATERHOUSE LLP

PRICE WATERHOUSE LLP
Ft. Lauderdale, Florida
February 3, 1998, except for "Packaging Business Transaction,"
         as discussed in Notes 1 and 3, as to which the date is March 23, 1998

               CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We hereby consent to the incorporation by reference in the Prospectuses
constituting parts of the Registration Statements on Form S-8 (Nos. 333-13637,
333-13639, 333-13641, 333-13643, 333-14101, 333-13645, 333-13647, 333-16401 and
333-27057) of W. R. Grace & Co. of our report dated February 3, 1998, except for
"Packaging Business Transaction," as discussed in Notes 1 and 3, as to which the
date is March 23, 1998, appearing on page F-3 of this 1997 Annual Report on Form
10-K of W. R. Grace & Co. We also consent to the incorporation by reference of
our report on the Financial Statement Schedule, which appears above.

/s/ PRICE WATERHOUSE LLP

PRICE WATERHOUSE LLP
Ft. Lauderdale, Florida
March 30, 1998

                                       F-2


<PAGE>   36




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
generally accepted accounting principles and accordingly includes certain
amounts that represent management's best estimates and judgments. Actual amounts
could differ from those estimates.

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

     The Audit Committee of the Board of Directors, which is comprised of
directors who are neither officers nor employees of nor consultants to Grace,
meets regularly with Grace's senior financial personnel, internal auditors and
independent certified public accountants to review audit plans and results, as
well as the actions taken by management in discharging its responsibilities for
accounting, financial reporting and internal control systems. The Audit
Committee reports its findings and recommends the selection of independent
certified public accountants to the Board of Directors. Grace's management,
internal auditors and independent certified public accountants have direct and
confidential access to the Audit Committee at all times.

     The independent certified public accountants are engaged to conduct the
audits of and report on the Consolidated Financial Statements in accordance with
generally accepted auditing standards. These standards require a review of the
systems of internal controls and tests of transactions to the extent considered
necessary by the independent certified public accountants for purposes of
supporting their opinion as set forth in their report.

Albert J. Costello                                     Larry Ellberger
Chairman, President and                                Senior Vice President and
Chief Executive Officer                                Chief Financial Officer



REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

PRICE WATERHOUSE LLP                     February 3, 1998, except for "Packaging
One East Broward Boulevard               Business Transaction," as discussed in
Ft. Lauderdale, FL  33301                Notes 1 and 3, as to which the date is
                                         March 23, 1998

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

In our opinion, the consolidated financial statements appearing on pages F-4
through F-27 of this report present fairly, in all material respects, the
financial position of W. R. Grace & Co. and subsidiaries at December 31, 1997
and 1996, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of 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 generally accepted auditing standards, 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 the opinion expressed above.

Price Waterhouse LLP

                                       F-3
<PAGE>   37



CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
W. R. Grace & Co. and Subsidiaries

CONSOLIDATED STATEMENT OF OPERATIONS

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

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

Dollars in millions, except per share amounts                                   1997         1996         1995
-----------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>            <C>          <C>
Sales and revenues.......................................................   $   1,479.7    $ 1,718.7    $ 1,860.5
Other income.............................................................          45.2         30.9         36.9
                                                                            -----------    ---------    ---------
     Total...............................................................       1,524.9      1,749.6      1,897.4
                                                                            -----------    ---------    ---------
Cost of goods sold and operating expenses................................         908.3        999.8      1,127.0
Selling, general and administrative expenses.............................         374.0        456.8        647.4
Depreciation and amortization............................................          92.9         95.4        113.8
Interest expense and related financing costs.............................          19.2         21.5         26.9
Research and development expenses........................................          42.4         55.4         73.2
Restructuring costs and asset impairments................................          47.8         34.7        151.3
Provision relating to asbestos-related liabilities and
   insurance coverage....................................................            --        229.1        275.0
Gain on sales of businesses..............................................        (103.1)      (326.4)          --
                                                                            -----------    ---------    ---------
     Total...............................................................       1,381.5      1,566.3      2,414.6
                                                                            -----------    ---------    ---------
Income/(loss) from continuing operations before income taxes.............         143.4        183.3       (517.2)
Provision for/(benefit from) income taxes................................          55.2         70.4       (192.4)
                                                                            -----------    ---------    ---------

     Income/(loss) from continuing operations...........................           88.2        112.9       (324.8)
Income/(loss) from discontinued operations..............................          172.8      2,744.8         (1.1)
                                                                            -----------    ---------    ---------
     Net income/(loss)..................................................    $     261.0    $ 2,857.7    $  (325.9)
                                                                            ===========    =========    =========
Earnings/(loss) per share:
     Continuing operations
         Basic..........................................................    $       1.19   $     1.22   $    (3.39)
         Diluted........................................................            1.17         1.20        (3.39)
     Net earnings/(loss)
         Basic..........................................................    $       3.53   $    31.06   $    (3.40)
         Diluted........................................................            3.45        30.57        (3.40)

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

The Notes to Consolidated Financial Statements, pages F-8 to F-27, are integral
parts of these statements.




                                      F-4
<PAGE>   38



CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>

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

In millions                                                                               1997          1996         1995
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>           <C>          <C>
Operating Activities(1)
Income/(loss) from continuing operations before income taxes.....................     $   143.4     $  183.3     $ (517.2)
Reconciliation to cash provided by operating activities:
     Depreciation and amortization...............................................          92.9         95.4        113.8
     Provision relating to asbestos-related liabilities and insurance coverage...           --         229.1        275.0
     Restructuring costs and asset impairments...................................          47.8         34.7        151.3
     Gain on sales of businesses.................................................        (103.1)      (326.4)         --
     Changes in assets and liabilities, excluding effect of businesses
        acquired/divested and foreign currency exchange:
          Increase in notes and accounts receivable, net.........................         (70.2)      (126.4)       (44.7)
          (Increase)/decrease in inventories.....................................          (7.9)        51.9        (62.1)
          Proceeds from asbestos-related insurance settlements...................          68.7        184.5        257.3
          Payments made for asbestos-related litigation settlements, judgments
             and defense costs....................................................       (142.8)      (186.6)      (160.3)
          Decrease in accounts payable............................................        (26.3)       (36.4)       (48.3)
          Other...................................................................        (36.7)       (74.6)       (40.6)
                                                                                      ---------     --------     --------
     Net pretax cash (used for)/provided by operating activities of continuing
        operations...............................................................         (34.2)        28.5        (75.8)
Net pretax cash provided by operating activities of discontinued operations......         339.6        365.6        419.7
                                                                                      ---------     --------     --------
     Net pretax cash provided by operating activities............................         305.4        394.1        343.9
Income taxes paid................................................................         (69.0)      (170.8)      (236.9)
                                                                                      ---------     --------     --------
     Net cash provided by operating activities...................................         236.4        223.3        107.0
                                                                                      ---------     --------     --------
Investing Activities (1)
Capital expenditures.............................................................        (258.7)      (456.6)      (537.6)
Businesses acquired in purchase transactions, net of cash acquired and debt
   assumed.......................................................................         (17.2)       (32.1)       (37.4)
Net investing activities of discontinued operations..............................         (70.7)      (192.9)      (295.2)
Net proceeds from divestments....................................................         695.5      2,720.3         56.7
Proceeds from disposals of assets................................................          21.2         36.6         17.9
Other............................................................................           --          (2.4)        (6.0)
                                                                                      ---------     --------     --------
     Net cash provided by/(used for) investing activities........................         370.1      2,072.9       (801.6)
                                                                                      ---------     --------     --------
Financing Activities (1)
Dividends paid...................................................................         (41.2)       (46.0)      (112.6)
Repayments of borrowings having original maturities in excess of three months....        (162.9)      (196.1)       (68.1)
Increase in borrowings having original maturities in excess of three months......            .6           .6        148.5
Net (repayments of)/increase in borrowings having original maturities
   of three months or less.......................................................        (142.0)      (344.3)       414.9
Exercise of stock options........................................................          60.1         70.7        164.1
Net financing activities of discontinued operations..............................           --        (136.7)       120.8
Purchase of treasury stock.......................................................        (335.9)    (1,319.3)       (12.1)
Repurchase of limited partnership interest.......................................           --        (297.0)         --
Other............................................................................           --            .3           .2
                                                                                      ---------     --------     --------
     Net cash (used for)/provided by financing activities........................        (621.3)    (2,267.8)       655.7
                                                                                      ---------     --------     --------
Effect of exchange rate changes on cash and cash equivalents.....................          (5.9)         (.7)         1.2
                                                                                      ---------     --------     --------
(Decrease)/increase in cash and cash equivalents.................................         (20.7)        27.7        (37.7)
                                                                                      ---------     --------     --------
     Cash and cash equivalents, beginning of year................................          68.3         40.6         78.3
                                                                                      ---------     --------     --------
     Cash and cash equivalents, end of year......................................     $    47.6     $   68.3     $   40.6
                                                                                      =========     ========     ========

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

The Notes to Consolidated Financial Statements, pages F-8 to F-27, are integral
parts of these statements.

(1)  See Notes 1 and 3 for supplemental information.


                                      F-5
<PAGE>   39

CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
================================================================================================================================
Dollars in millions, except par value                                                      1997        1996
--------------------------------------------------------------------------------------------------------------------------------
ASSETS

<S>                                                                                     <C>           <C>
Current Assets
Cash and cash equivalents........................................................        $   47.6     $   68.3
Notes and accounts receivable, net...............................................           353.1        831.4
Inventories......................................................................           129.6        376.1
Net assets of discontinued operations............................................         1,424.0        297.4
Deferred income taxes............................................................           209.6        183.9
Other current assets.............................................................            11.6         17.8
                                                                                         --------     --------
     Total Current Assets........................................................         2,175.5      1,774.9

Properties and equipment, net....................................................           663.3      1,871.3
Goodwill.........................................................................            42.9         40.6
Asbestos-related insurance receivable............................................           215.9        296.3
Deferred income taxes............................................................           238.1        309.2
Other assets.....................................................................           437.3        653.5
                                                                                         --------     --------
     Total Assets................................................................        $3,773.0     $4,945.8
                                                                                         ========     ========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
Short-term debt..................................................................        $  413.6     $  315.2
Accounts payable.................................................................           106.5        274.7
Income taxes.....................................................................           175.6        123.3
Other current liabilities........................................................           662.0        773.9
                                                                                         --------     --------
     Total Current Liabilities...................................................         1,357.7      1,487.1

Long-term debt...................................................................           658.7      1,073.0
Deferred income taxes............................................................            20.2         43.5
Noncurrent liability for asbestos-related litigation.............................           619.4        859.1
Other liabilities................................................................           649.1        850.7
                                                                                         --------     --------
     Total Liabilities...........................................................         3,305.1      4,313.4
                                                                                         --------     --------

Commitments and Contingencies (Notes 2, 3, 9 and 11)

Shareholders' Equity
Common stock, par value $.01; 300,000,000 shares authorized;
     outstanding:  1997 - 74,540,000; 1996 - 78,493,000..........................              .7           .8
Paid in capital..................................................................           563.4        524.1
Retained earnings................................................................           108.3        172.6
Cumulative translation adjustments...............................................          (198.8)       (64.6)
Deferred compensation trust, at market...........................................            (5.7)          --
Treasury stock, at cost:  1996 - 10,000 common shares............................              --          (.5)
                                                                                         --------     --------
     Total Shareholders' Equity..................................................           467.9        632.4
                                                                                         --------     --------
     Total Liabilities and Shareholders' Equity..................................        $3,773.0     $4,945.8
                                                                                         ========     ========

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

The Notes to Consolidated Financial Statements, pages F-8 to F-27, are integral
parts of these statements.



                                      F-6
<PAGE>   40



CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>

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

In millions                                                              1997        1996         1995
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>         <C>           <C>
Preferred Stocks
Balance, beginning of year.........................................    $    --     $     7.4      $    7.4
Retirement of preferred stocks.....................................         --          (7.4)           --
                                                                       -------     ---------      --------
     Balance, end of year..........................................         --            --           7.4
                                                                       -------     ---------      --------

Common Stock
Balance, beginning of year.........................................         .8          97.4          94.1
Issuance/delivery of shares under stock plans......................         --           1.4           3.3
Retirement of treasury stock.......................................        (.1)         (9.9)           --
Change in par value of common stock................................         --         (88.1)           --
                                                                       -------     ---------      --------
     Balance, end of year..........................................         .7            .8          97.4
                                                                       -------     ---------      --------
Paid in Capital
Balance, beginning of year.........................................      524.1         459.8         308.8
Issuance/delivery of shares under stock plans......................       86.8          98.5         151.1
Retirement of treasury stock.......................................      (47.5)       (122.3)           --
Change in par value of common stock................................         --          88.1            --
Other..............................................................         --            --           (.1)
                                                                       -------     ---------      --------
     Balance, end of year..........................................      563.4         524.1         459.8
                                                                       -------     ---------      --------

Retained Earnings
Balance, beginning of year.........................................      172.6         709.0       1,147.5
Net income/(loss)..................................................      261.0       2,857.7        (325.9)
Dividends paid.....................................................      (41.2)        (46.0)       (112.6)
Dividend of common equity interest in health care business.........         --      (2,172.3)           --
Retirement of preferred stock......................................         --           7.4            --
Retirement of treasury stock.......................................     (284.1)     (1,183.2)           --
                                                                       -------     ---------      --------
     Balance, end of year..........................................      108.3         172.6         709.0
                                                                       -------     ---------      --------

Cumulative Translation Adjustments
Balance, beginning of year.........................................      (64.6)        (39.4)        (53.3)
Translation adjustments............................................     (134.2)        (25.2)         13.9
                                                                       -------     ---------      --------
     Balance, end of year..........................................     (198.8)        (64.6)        (39.4)
                                                                       -------     ---------      --------

Deferred Compensation Trust
Balance, beginning of year.........................................         --            --            --
Issuance/delivery of shares under stock plans, at market value.....       (5.7)           --            --
                                                                       -------     ---------      --------
     Balance, end of year..........................................       (5.7)           --            --
                                                                       -------     ---------      --------

Treasury Stock
Balance, beginning of year.........................................        (.5)         (2.4)           --
Purchase of common stock...........................................     (335.9)     (1,319.3)        (12.1)
Delivery of shares under stock plans...............................        4.7           5.8           9.7
Retirement of treasury stock.......................................      331.7       1,315.4            --
                                                                       -------     ---------      --------
     Balance, end of year..........................................         --           (.5)         (2.4)
                                                                       -------     ---------      --------

     Total Shareholders' Equity....................................    $ 467.9     $   632.4      $1,231.8
                                                                       =======     =========      ========

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

The Notes to Consolidated Financial Statements, pages F-8 to F-27, are integral
parts of these statements.



                                      F-7
<PAGE>   41


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Dollars in millions, except per share amounts
-------------------------------------------------------------------------------

1.  Basis of Presentation and Summary of Significant Accounting and Financial
    Reporting Policies
-------------------------------------------------------------------------------

W. R. Grace & Co., through its subsidiaries, is primarily engaged in specialty
chemicals businesses on a worldwide basis. These businesses (Specialty Chemicals
Businesses) consist of catalysts and silica-based products (Grace Davison),
specialty construction chemicals and building materials (Grace Construction
Products) and container sealants and coatings (Darex Container Products). W. R.
Grace & Co. has classified certain other businesses as discontinued operations,
the most significant of which is its flexible packaging business (Packaging
Business). W. R. Grace & Co. also owns businesses and investments involved in
health care services, the development of bioartificial organs and other products
and services. As used in these notes, the term "Company" refers to Grace New
York (as defined below) through September 27, 1996, and thereafter to W. R.
Grace & Co., a Delaware corporation. The term "Grace" refers to the Company
and/or one or more of its subsidiaries.

Packaging Business Transaction: On March 20, 1998, the Company's shareholders
approved a transaction to combine the Packaging Business with Sealed Air
Corporation (Sealed Air). This transaction was also approved by Sealed Air's
shareholders on March 23, 1998. As a result of these approvals, Grace has
classified the Packaging Business as a discontinued operation as of December 31,
1997 and, accordingly, has classified all balance sheet information relating to
the Packaging Business for the year ended December 31, 1997 under the caption
"Net assets of discontinued operations" in the Consolidated Balance Sheet and
all income and expense activity of the Packaging Business for the years ended
December 31, 1997, 1996 and 1995 under the caption "Income/(loss) from
discontinued operations" in the Consolidated Statement of Operations. The Notes
to the Consolidated Financial Statements reflect the classification of the
Packaging Business as a discontinued operation.

     Grace will effect the transaction with Sealed Air by transferring the
Specialty Chemicals Businesses to a new Delaware corporation, Grace Specialty
Chemicals, Inc. (New Grace); spinning off New Grace to Grace shareholders
(Spin-off); and merging a subsidiary of the Company with Sealed Air (Merger).
For further information, see the Company's Joint Proxy Statement/Prospectus
dated February 13, 1998, New Grace's Information Statement dated February 13,
1998, and Note 3.

1996 Reorganization: On September 28, 1996, W. R. Grace & Co., a New York
corporation subsequently renamed Fresenius Medical Care Holdings, Inc. (Grace
New York), distributed all of the Company's outstanding common stock (which has
a par value of $.01 per share) to the holders of Grace New York common stock
(which had a par value of $1.00 per share) on a one-for-one basis. As a result
of the distribution, Grace New York's principal remaining asset was the
outstanding capital stock of National Medical Care, Inc. (NMC), a health care
company that was classified as a discontinued operation in the second quarter of
1995. On September 29, 1996, a wholly owned subsidiary of Fresenius Medical Care
AG (FMC), a German corporation, merged with and into Grace New York, resulting
in the combination of NMC with the worldwide dialysis business of Fresenius AG
(Fresenius), a German health care corporation and the principal shareholder of
FMC.
     The Grace New York preferred stock issued and outstanding at the time of
the above distribution remained outstanding, and the treasury shares held by
Grace New York at the time of the distribution were retained by Grace New York.
Accordingly, the distribution was treated as a retirement of preferred stocks
and a retirement of treasury stock within the Consolidated Statement of
Shareholders' Equity for the year ended December 31, 1996.
     For further information, see the Grace New York Joint Proxy
Statement/Prospectus dated August 2, 1996, the Prospectus of Grace Holding, Inc.
(a predecessor of the Company) dated August 2, 1996, and Notes 3 and 12.

Principles of Consolidation: The Consolidated Financial Statements include the
accounts of Grace and majority-owned companies. Intercompany transactions and
balances are eliminated in consolidation. Investments in affiliated companies as
to which the Company does not exercise significant control over operating and
financial policies are accounted for under the equity method.

Reclassifications: Certain amounts in prior years' Consolidated Financial
Statements have been reclassified to conform to the 1997 presentation and as
required with respect to discontinued operations.

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

Cash Equivalents: Cash equivalents consist of liquid instruments with maturities
of three months or less when purchased. The recorded amounts approximate fair
value because of the short maturities of these investments.




                                      F-8
<PAGE>   42
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 the lower of
cost or fair value. 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 10
years for machinery and equipment and 5 to 10 years for furniture and fixtures.
Interest is capitalized in connection with major project expenditures and
amortized, generally on a straight-line basis, over the estimated useful life of
the asset. 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 income. 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 transactions and is amortized
using the straight-line method over appropriate periods not exceeding 40 years.
Grace reviews its goodwill for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be fully recoverable.

Research and Development Costs: Research and development costs are charged to
expense as incurred.

Consolidated Statement of Cash Flows: For periods prior to the date of
classification of a business as a discontinued operation, balance sheet
information relating to the business is not classified under the caption "Net
assets of discontinued operations." Accordingly, "Net pretax cash provided by
operating activities of discontinued operations" excludes the effects of changes
in working capital of discontinued operations prior to their classification as
such. The net investing and financing activities of discontinued operations
represent cash flows of discontinued operations subsequent to the respective
dates of such classifications.

Income Taxes: Grace applies Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes," which specifies an asset and liability
approach requiring the recognition of 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; resulting translation adjustments are reported as a component
of shareholders' equity. The financial statements of subsidiaries located in
countries with highly inflationary economies are remeasured as if the functional
currency were the U.S. dollar; the remeasurement creates translation adjustments
that are reflected in net income.

Financial Instruments: 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.
     The cash differentials paid or received under interest rate swap agreements
are accrued and recognized as adjustments to interest expense. The related
amounts payable to or receivable from the counterparties are included in "Other
current liabilities" or "Notes and accounts receivable, net." Cash flows related
to interest rate swap agreements are classified within "Operating Activities" in
the Consolidated Statement of Cash Flows, consistent with the interest payments
on the underlying debt. The fair values of interest rate swap agreements are not
recognized in the Consolidated Financial Statements, as these agreements modify
the interest rate basis (i.e., fixed or floating rate) of debt instruments of
similar face amounts and tenor.
     Gains or losses resulting from the settlement of interest rate swap
agreements prior to maturity are either deferred (recorded as "Other
liabilities" or "Other assets") and amortized to "Interest expense and related
financing costs" over a period relevant to the agreement (if the underlying debt
remains outstanding) or recognized immediately (if the underlying debt has been
repaid or retired).
     Grace has entered into foreign currency forward and option contracts to
hedge transactions and firm commitments denominated in foreign currencies and
net investments in foreign subsidiaries. Gains or losses on hedges of
transactional exposures are recorded as adjustments to gains or losses on the
underlying transactions. Gains or losses on hedges of foreign
currency-denominated firm commitments are deferred and recorded as part of the
basis in the transaction in the period in which the transaction is consummated.
Gains and losses on forward contracts that hedge net investments in foreign
subsidiaries are recorded in "Cumulative translation adjustments" in
Shareholders' Equity. Cash flows related to foreign currency forward and option
contracts are classified within "Operating Activities" in the Consolidated
Statement of Cash Flows.

Other Income: Other income consists of interest income, equity in earnings of
affiliated companies, gains on sales of investments and other items.


                                      F-9
<PAGE>   43



Earnings Per Share: Effective December 31, 1997, Grace adopted SFAS No. 128,
"Earnings per Share," which supersedes Accounting Principles Board Opinion (APB)
No. 15, "Earnings per Share," and establishes new standards for computing
earnings per share. SFAS No. 128 requires the presentation of basic and diluted
earnings per share in place of primary and fully diluted earnings per share. At
December 31, 1997, all prior periods were restated to reflect the new basic and
diluted earnings per share amounts required by SFAS No. 128.

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

2.  Asbestos and Related Insurance Litigation

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

Grace is a defendant in property damage and personal injury lawsuits relating to
previously sold asbestos-containing products and expects that it will be named
as a defendant in additional asbestos-related lawsuits in the future. Grace was
a defendant in approximately 40,600 asbestos-related lawsuits at December 31,
1997 (18 involving claims for property damage and the remainder involving
approximately 96,900 claims for personal injury), as compared to approximately
41,500 lawsuits at December 31, 1996 (31 involving claims for property damage
and the remainder involving approximately 91,500 claims for personal injury).

Property Damage Litigation
The plaintiffs in property damage lawsuits generally seek to have the defendants
absorb the cost of removing, containing or repairing the asbestos-containing
materials in the affected buildings. Each property damage case is unique in that
the age, type, size and use of the building, and the difficulty of asbestos
abatement, if necessary, vary from structure to structure. Thus, the amounts
involved in prior dispositions of property damage cases are not necessarily
indicative of the amounts that may be required to dispose of cases in the
future. Information regarding product identification, the amount of product in
the building, the age, type, size and use of the building, the jurisdictional
history of prior cases and the court in which the case is pending provide
meaningful guidance as to the range of potential costs. Some of this information
is not yet available in the property damage cases currently pending against
Grace. Accordingly, it is not possible to estimate with precision the costs of
defending against and disposing of these cases. In accordance with SFAS No. 5,
"Accounting for Contingencies," Grace has recorded an accrual for all existing
property damage cases for which sufficient information is available to form a
range of estimated exposure. At December 31, 1997, estimates were not accrued
for two cases, due to insufficient information. Grace believes that the number
of property damage cases to be filed in the future and the costs associated with
such filings are not estimable.
     Through December 31, 1997, 139 asbestos property damage cases were
dismissed without payment of any damages or settlement amounts; judgments were
entered in favor of Grace in nine cases (excluding cases settled following
appeals of judgments in favor of Grace); judgments were entered in favor of the
plaintiffs in seven cases (none of which is on appeal) for a total of $60.3; and
195 property damage cases were settled for a total of $476.6. Property damage
case activity for 1997 and 1996 was as follows:
<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------
                                                                                    1997       1996
---------------------------------------------------------------------------------------------------
<S>                                                                                 <C>         <C>
Cases outstanding, beginning of year............................................     31          47
New cases filed.................................................................      1           1
Settlements.....................................................................     (9)         (9)
Dismissals......................................................................     (4)         (5)
Judgments.......................................................................     (1)         (3)
                                                                                   ----        ----
     Cases outstanding, end of year.............................................     18          31
                                                                                   ====        ====
---------------------------------------------------------------------------------------------------
</TABLE>

Personal Injury Litigation
Personal 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 is influenced by numerous
variables, including the solvency of other former asbestos producers,
cross-claims by co-defendants, the rate at which new claims are filed, the
jurisdiction in which the filings are made, and the defense and disposition
costs associated with these claims.
     Through December 31, 1997, approximately 12,700 asbestos personal injury
lawsuits involving 29,300 claims were dismissed without payment of any damages
or settlement amounts (primarily on the basis that Grace products were not
involved), and approximately 38,900 lawsuits involving 89,200 claims were
disposed of for a total of $255.6. Personal injury claim activity for 1997 and
1996 was as follows:

<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------
                                                                                      1997           1996
----------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>            <C>
Claims outstanding, beginning of year............................................    91,511         92,436
New claims.......................................................................    27,029         30,274
Claims under amended complaints..................................................     3,310          8,298 (1)
Settlements......................................................................   (22,957)       (36,630)
Dismissals.......................................................................    (1,955)        (2,866)
Judgments........................................................................        (5)            (1)
                                                                                    -------        -------
     Claims outstanding, end of year.............................................    96,933         91,511
                                                                                    =======        =======
----------------------------------------------------------------------------------------------------------
</TABLE>

(1)  Of the 8,298 claims shown, approximately 1,500 were filed under amended
     complaints in 1996.  The remaining claims relate to disputed filings that
     were submitted to local counsel in prior years but were not reported to
     Grace until 1996, when a majority of such claims was settled.




                                      F-10
<PAGE>   44



Asbestos-Related Liability
Based upon and subject to the factors discussed above, Grace estimates that its
probable liability with respect to the defense and disposition of asbestos
property damage and personal injury cases and claims was as follows at December
31, 1997 and 1996:

<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------
                                                                                        1997(1)     1996(2)
-----------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>          <C>
Current liability for asbestos-related litigation (3)...........................       $236.5 (4)   $135.0
Noncurrent liability for asbestos-related litigation............................        619.4        859.1
                                                                                       ------       ------
     Total asbestos-related liability...........................................       $855.9 (5)   $994.1
                                                                                       ======       ======
-----------------------------------------------------------------------------------------------------------
</TABLE>
(1)  Reflects property damage and personal injury cases and claims pending at
     December 31, 1997, as well as personal injury claims expected to be filed
     through 2002. See discussion below.
(2)  Reflects property damage and personal injury cases and claims pending at
     December 31, 1996, as well as personal injury claims expected to be filed
     through 2001. See discussion below.
(3)  Included in "Other current liabilities" in the Consolidated Balance Sheet.
(4)  The increase versus 1996 primarily relates to a 1997 property damage
     settlement to be paid in 1998 and personal injury group settlements to be
     paid in 1998.
(5)  Excludes two property damage cases at December 31, 1997 as to which the
     liability is not yet estimable because Grace has not yet been able to
     obtain sufficient information through discovery proceedings.

Prior to 1995, Grace recorded noncash charges to reflect its estimated costs of
defending against and disposing of the asbestos property damage and personal
injury cases and claims then pending. In the fourth quarter of 1995, Grace
determined that it had adequate experience to reasonably estimate the costs of
defending against and disposing of asbestos personal injury claims to be filed
during the three-year period 1996-1998 and recorded a noncash charge of $260.0
($169.0 after-tax), primarily to reflect such anticipated filings. Based on
certain developments during 1996, Grace determined in the 1996 fourth quarter
that it had adequate experience to reasonably estimate the costs of defending
against and disposing of asbestos personal injury claims to be filed during the
five-year period 1997-2001 and recorded a noncash charge of $348.4 ($226.4
after-tax), primarily to reflect such anticipated filings. The 1996 provision
also reflected increases in the estimated costs of defending against and
disposing of personal injury claims pending at year-end 1996, and the 1995
provision also reflected increases in the estimated costs of defending against
and disposing of certain property damage cases pending at year-end 1995 and
personal injury claims filed during 1995. Based on developments and trends in
1997, Grace concluded that no additional charge would be necessary to cover the
estimated costs of defending against and disposing of asbestos-related personal
injury claims to be filed during the five-year period 1998-2002. However, as
discussed above, these estimates are not necessarily indicative of actual costs.
Based on the factors discussed above, Grace does not believe that it can
reasonably estimate the number and defense and disposition costs of personal
injury claims that may be brought against Grace after 2002. The accruals
recorded for future cases and claims are not discounted to their present values;
further, the actual cash payments related to future cases and claims are
expected to continue beyond 2002.

Asbestos-Related Insurance Receivable
Grace previously purchased insurance policies with respect to its
asbestos-related lawsuits and claims. Activity in Grace's notes receivable from
insurance carriers and asbestos-related insurance receivable during 1997 and
1996 was as follows:

<TABLE>
<CAPTION>

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

                                                                                                          1997         1996

--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                  <C>            <C>
Notes Receivable
Notes receivable from insurance carriers, beginning of year, net of discount of
     $7.4 in 1997 (1996 - $11.6).................................................................     $   48.5     $  118.4
Proceeds received under asbestos-related insurance settlements...................................        (19.8)       (93.3)
Current year asbestos-related insurance settlements..............................................          --          19.2
Current year amortization of discount............................................................          2.6          4.2
                                                                                                      --------     --------
     Notes receivable from insurance carriers, end of year, net of discount of
     $4.8 (1996 - $7.4) (1)......................................................................     $   31.3     $   48.5
                                                                                                      --------     --------
Insurance Receivable
Asbestos-related insurance receivable, beginning of year.........................................     $  331.3     $  321.2
Proceeds received under asbestos-related insurance settlements...................................        (48.9)       (91.2)
Adjustments to asbestos-related insurance receivable (2).........................................          --         119.3
Transfers from asbestos-related insurance receivable to notes receivable from insurance carriers.          --         (19.2)
Other............................................................................................          --           1.2
                                                                                                      --------     --------
     Asbestos-related insurance receivable, end of year (1)......................................     $  282.4     $  331.3
                                                                                                      --------     --------

     Total amounts due from insurance carriers...................................................     $  313.7     $  379.8
                                                                                                      ========     ========

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

(1)  See Note 7 for classification between current portion (classified in "Notes
     and accounts receivable, net") and noncurrent portion (classified in "Other
     assets") in the Consolidated Balance Sheet.
(2)  Reflects noncash adjustments to receivable in conjunction with increases in
     asbestos-related liability. See discussion below.



                                      F-11
<PAGE>   45



Notes receivable from insurance carriers represent amounts due from insurance
carriers in reimbursement for amounts previously paid by Grace in defending
against and disposing of asbestos cases and claims; payments under these notes
will be received through 2001. These notes do not bear stated interest rates
and, therefore, have been discounted using a weighted average interest rate of
6.7%. Installments due in 1998 are classified as "current" in the Consolidated
Balance Sheet.
     The asbestos-related insurance receivable at December 31, 1997
predominantly represents amounts expected to be received from carriers under
settlement agreements in reimbursement for defense and disposition costs to be
paid by Grace in the future in connection with property damage and personal
injury cases and claims pending at year-end 1997 and personal injury claims
expected to be filed through 2002 (through 2001 at December 31, 1996).
     In the fourth quarter of 1996, Grace recorded a noncash pretax benefit of
$119.3 ($77.5 after-tax), primarily representing the additional insurance
proceeds Grace expects to receive in reimbursement for the cash outflows
associated with personal injury claims expected to be filed against Grace
through 2001.
     As a result of fourth quarter 1995 insurance settlements and a reassessment
of its insurance receivable, Grace recorded a noncash net pretax charge of $15.0
($9.7 after-tax) during the fourth quarter of 1995. This charge reflected a
reduction in the receivable, primarily due to lower than estimated proceeds from
settlements with insurance carriers (caused by the reduced coverage available
for certain years) and a discount on notes receivable received in connection
with prior settlements, partially offset by an increase in expected future
reimbursements of costs to defend against and dispose of property damage cases
pending at year-end 1995 and personal injury claims to be filed through 1998.
     Certain of Grace's insurance carriers have become insolvent. From time to
time, Grace has been successful in collecting funds from insolvent carriers.
However, since recovery from these carriers is not probable, Grace has not
accrued a related receivable.

Insurance Litigation
Grace has settled with and been paid by its primary insurance carriers with
respect to both property damage and personal injury cases and claims. Grace has
also settled with its excess insurance carriers that wrote policies available
for property damage cases; those settlements involve amounts paid and to be paid
to Grace. In addition, Grace has settled with many excess insurance carriers
that wrote policies available for personal injury claims. Grace is currently in
litigation with certain remaining excess insurance carriers whose policies
generally represent layers of coverage Grace has not yet reached. Such policies
are believed by Grace to be available for asbestos-related personal injury
lawsuits. Insurance coverage for asbestos-related liabilities has not been
commercially available since 1985.
     Grace's ultimate exposure with respect to its asbestos-related cases and
claims will depend on the extent to which its insurance will cover damages for
which it may be held liable, amounts paid in settlement and litigation costs. In
Grace's opinion, it is probable that recoveries from its insurance carriers
(including amounts reflected in the receivable discussed above), along with
other funds, will be available to satisfy the property damage and personal
injury cases and claims pending at December 31, 1997, as well as personal injury
claims expected to be filed in the foreseeable future. Consequently, Grace
believes that the resolution of its asbestos-related litigation will not have a
material adverse effect on its consolidated financial position.

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

3.  Discontinued Operations
-------------------------------------------------------------------------------

Packaging Business Transaction
In August 1997, Grace and Sealed Air entered into a definitive agreement to
combine the Packaging Business with Sealed Air (see Note 1). The Company's
shareholders and Sealed Air's shareholders approved this transaction on March
20, 1998 and March 23, 1998, respectively. As a result, Grace classified the
Packaging Business as a discontinued operation as of December 31, 1997.
Accordingly, the operations of the Packaging Business are included in
"Income/(loss) from discontinued operations" in the Consolidated Statement of
Operations. The separation of the Packaging Business from the Specialty
Chemicals Businesses, the Spin-off and the Merger (all of which are expected to
be completed by March 31, 1998) will consist of the following steps:
*    Grace will separate the Packaging Business and the Specialty Chemicals
     Businesses into separate groups of subsidiaries.
*    The Company and a Packaging Business subsidiary will borrow funds under a
     new credit agreement and will make a cash transfer of $1,200 (subject to
     adjustment) to W. R. Grace & Co.-Conn. (Grace Connecticut), a subsidiary of
     the Company that owns and operates the Specialty Chemicals Businesses.
     Grace Connecticut will use the transferred funds to repay substantially all
     of its debt (see Note 9). The Company and the Packaging Business subsidiary
     will remain responsible for the borrowings under the new credit agreement.
*    The Company will transfer the stock of Grace Connecticut to New Grace,
     making Grace Connecticut a subsidiary of New Grace.
*    The Company will distribute the shares of New Grace common stock to the
     Company's shareholders, completing the Spin-off.
*    The Company (then owning only the Packaging Business) will be
     recapitalized, so that each share of the Company's common stock will be
     exchanged for a fraction of a share of common stock and a fraction of a
     share of convertible preferred stock.
*    Immediately following the recapitalization, a wholly owned subsidiary of
     the Company will be merged into Sealed Air, so that the Company will become
     the parent company of both Sealed Air and the Packaging Business. For
     accounting purposes, the Merger will be accounted for under the purchase
     method of accounting, with the Company treated as the acquirer of Sealed
     Air, and New Grace will record the assets and liabilities of the Specialty
     Chemicals Businesses at their historical values. Immediately following the
     Merger, New Grace will change its name to "W. R. Grace & Co." and the
     Company will change its name to "Sealed Air Corporation" (New Sealed Air).




                                      F-12
<PAGE>   46



As a result of the transactions described above, the shareholders of the Company
will own (a) 100% of the Specialty Chemicals Businesses, through their ownership
of New Grace common stock, and (b) a 63% interest in the Packaging Business and
the business of Sealed Air, through their ownership of New Sealed Air common and
convertible preferred stock. The above transactions are expected to be tax-free
to the Company and its shareholders for U.S. federal income tax purposes.
     For further information, see the Company's Joint Proxy Statement/Prospectus
dated February 13, 1998 and the New Grace Information Statement dated February
13, 1998.

Health Care
NMC
As discussed in Note 1, Grace New York completed the distribution of the
Company's common stock and the combination of NMC with the worldwide dialysis
business of Fresenius in September 1996. Prior to the completion of these
transactions, Grace received a tax-free distribution from NMC of approximately
$2,300 (consisting of cash and the assumption of debt). As part of these
transactions, for each Grace New York common share outstanding at the close of
trading on September 27, 1996, Grace New York shareholders received one share of
a new class of Grace New York preferred stock and 1.04909 American Depositary
Shares (ADS), each representing one-third of an ordinary share of FMC (which ADS
collectively represented approximately 44.8% of FMC's common equity).
     The distribution of approximately $2,300, along with the 44.8% common
equity interest in FMC, valued at approximately $2,200 (based upon the number of
ADS and their initial price per share on September 30, 1996), resulted in a
transaction valued at approximately $4,500. That amount, less Grace New York's
investment in NMC and transaction costs, resulted in a tax-free gain to Grace of
approximately $2,500, in discontinued operations. The 44.8% common equity
interest in FMC is reflected as a dividend of approximately $2,200 in the
Consolidated Statement of Shareholders' Equity.
     Under the terms of the transactions, NMC remains responsible for all
liabilities, if any, resulting from the previously reported investigation by the
Office of the Inspector General (OIG) of the U.S. Department of Health and Human
Services and certain related matters. In July 1996, an agreement was entered
into with the U.S. government under which, subject to certain conditions and
limitations, (a) FMC and Grace New York guaranteed the payment of the
obligations, if any, of NMC to the U.S. government in respect of the OIG
investigation and another proceeding; (b) NMC delivered a standby letter of
credit in the principal amount of $150.0 in favor of the U.S. government to
support its payment of such obligations; and (c) Grace Connecticut guaranteed
the obligations of FMC under the foregoing guarantee with respect to acts and
transactions that took place prior to the consummation of the transaction (but
only if such obligations become due and payable and remain uncollected for 120
days).
     In addition, under the terms of the NMC transaction, Grace Connecticut
remains financially responsible for any liabilities incurred by Grace New York
in connection with certain lawsuits relating to NMC, including the fees and
disbursements of counsel for Grace Connecticut and, subject to certain
conditions, counsel for individual defendants. The agreements governing the NMC
transaction also provide for certain cross-indemnities designed to place with
Grace New York financial responsibility for the liabilities of the health care
business (including, without limitation, all liabilities relating to compliance
or noncompliance with U.S. food and drug law, medical and Medicare billing and
reimbursement law and other health care matters) and to place with Grace
Connecticut financial responsibility for the remaining liabilities of Grace New
York and its subsidiaries. Grace Connecticut and Grace New York have asserted
claims against each other for indemnity with respect to claims asserted by third
parties pursuant to the terms of these provisions.

Amicon
On December 31, 1996, Grace completed the sale of its worldwide separations
science business (Amicon) for total proceeds of $126.1 (including debt assumed
and a post-closing adjustment), resulting in a pretax gain of $70.4 ($40.0
after-tax).

Cocoa
Grace's cocoa business was classified as a discontinued operation in 1993.
During the fourth quarter of 1995, Grace revised the divestment plan for the
business and, as a result, recorded an additional provision of $151.3 (net of an
applicable tax effect of $48.7) related to the cocoa business and other
remaining discontinued operations. In December 1996, Grace entered into a
definitive agreement to sell the cocoa business to Archer-Daniels-Midland
Company (ADM). As a result, in the fourth quarter of 1996, Grace reassessed its
estimated loss on the divestment of the business and reversed previously
recorded provisions of $31.9 (net of an applicable tax effect of $18.1) in
discontinued operations. In February 1997, Grace sold its cocoa business to ADM
for total proceeds of $477.6 (including debt assumed by the buyer), subject to
adjustment. The pretax and after-tax effects of the divestment were consistent
with prior estimates and were charged against previously established reserves.
In October 1997, ADM paid Grace an additional $7.9 (including $.4 of interest
income) in settlement of the purchase price adjustment. In anticipation of this
settlement, in the third quarter of 1997 Grace reversed previously recorded
provisions of $12.4 (net of an applicable tax effect of $6.6) in discontinued
operations.

Other
In the fourth quarter of 1996, Grace classified its thermal and emission control
systems business (TEC Systems) as a discontinued operation and recorded a
provision of $4.6 (net of an applicable tax benefit of $2.4) related to TEC
Systems' anticipated net operating results through the expected date of
divestment, as well as the loss anticipated on the divestment. In August 1997,
Grace sold TEC Systems to Sequa Corporation for total proceeds of $18.4, subject
to adjustment. The loss on this sale was consistent with prior estimates and was
charged against previously established reserves.
     In May 1996, Grace completed the sale of the transgenic plant business of
its Agracetus subsidiary to the Monsanto Company for $150.0, resulting in a
pretax gain of $129.0 ($79.4 after-tax). Additionally, in March 1996 Grace sold
its microwave business for gross proceeds of $3.9, and in February 1995 Grace
sold its composite materials business for gross proceeds of $3.0.




                                      F-13
<PAGE>   47



Results of Discontinued Operations
Results of Grace's discontinued operations that were not charged against
previously established reserves, the reversal of previously recorded provisions,
the gain on the May 1996 sale of Grace's transgenic plant business and the
September 1996 separation of NMC were as follows:

<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------------------
                                                                                           1997          1996          1995
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>           <C>           <C>
Packaging Business
Sales and revenues...................................................................   $ 1,833.1     $ 1,735.4     $ 1,692.1
                                                                                        ---------     ---------     ---------
Income from operations before taxes (1)..............................................   $   258.6     $   165.3     $   233.0
Income tax provision.................................................................        98.2          64.4          87.8
                                                                                        ---------     ---------     ---------
     Income from discontinued packaging operations...................................   $   160.4     $   100.9     $   145.2
                                                                                        ---------     ---------     ---------
Health Care (through 1996 third quarter)
Sales and revenues...................................................................   $      --     $ 1,666.9     $ 2,076.8
                                                                                        ---------     ---------     ---------
Income from operations before taxes (1)..............................................   $      --     $    60.3     $   104.6
Income tax provision.................................................................          --          35.5          82.6
                                                                                        ---------     ---------     ---------
     Income from discontinued health care operations.................................   $      --     $    24.8     $    22.0
                                                                                        ---------     ---------     ---------
TEC Systems (prior to classification as a discontinued operation at December 31, 1996)

Sales and revenues...................................................................   $      --     $   102.5     $   112.9
                                                                                        ---------     ---------     ---------
Loss from operations before taxes....................................................   $      --     $   (18.5)    $   (28.3)
Income tax benefit...................................................................          --          (7.2)        (11.3)
                                                                                        ---------     ---------     ---------
     Loss from discontinued TEC Systems operations...................................   $      --     $   (11.3)    $   (17.0)
                                                                                        ---------     ---------     ---------
     Total operating results.........................................................   $   160.4     $   114.4     $   150.2

Net gain/(loss) on dispositions of businesses........................................        19.0       2,716.1        (200.0)
Provision for/(benefit from) income taxes on
   dispositions of businesses........................................................         6.6          85.7         (48.7)
                                                                                        ---------     ---------     ---------
     Total income/(loss) from discontinued operations................................   $   172.8     $ 2,744.8     $    (1.1)
                                                                                        =========     =========     =========
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  Reflects an allocation of interest expense based on the ratio of the net
     assets of the Packaging Business and health care businesses as compared to
     Grace's total capital. The above operating results include interest expense
     allocations of $59.4 for 1997, $126.4 for 1996 and $137.9 for 1995.

Losses from TEC Systems, the cocoa business and other discontinued operations
(other than the Packaging Business and health care businesses), subsequent to
their classification as such, were $3.0 in 1997, $11.6 in 1996 and $45.2 in
1995. These amounts have been charged against established reserves, as adjusted
in 1997, 1996 and 1995, and are therefore not reflected in the Consolidated
Statement of Operations.
     The net assets of Grace's remaining discontinued operations (excluding
intercompany assets) at December 31, 1997 were as follows:

<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------
                                                                                     1997
-------------------------------------------------------------------------------------------
<S>                                                                                <C>
Current assets..................................................................   $  540.1
Properties and equipment, net...................................................    1,077.7
Other assets....................................................................      129.4
                                                                                   --------
     Total assets...............................................................   $1,747.2
                                                                                   --------
Current liabilities.............................................................   $  191.2
Other liabilities...............................................................      132.0
                                                                                   --------
     Total liabilities..........................................................   $  323.2
                                                                                   --------
     Net assets of discontinued operations......................................   $1,424.0
                                                                                   ========
-------------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
4.  Restructuring Costs and Asset Impairments

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

Restructuring Costs
In the fourth quarter of 1997, Grace recorded a restructuring charge of $20.3
($13.0 after-tax) in continuing operations, reflecting employee termination
costs relating to staff reductions resulting from the Spin-off and Merger (see
Notes 1 and 3). The staff reductions include approximately 190 employees at
corporate headquarters and approximately 150 employees at various international
locations, and are expected to be completed in 1998. The employee termination
costs represent severance pay and other employee benefits, including amounts
paid over time.



                                      F-14
<PAGE>   48



     In the second quarter of 1997, Grace recorded a restructuring charge of
$4.0 ($2.6 after-tax) in continuing operations. This charge primarily consisted
of corporate costs resulting from the restructuring of the Packaging Business
from a group of regional units into an integrated global organization, and was
primarily comprised of the cost of employee terminations (expected to be
completed in 1998) and asset write-downs for certain corporate research
facilities.
     Grace recorded restructuring charges of $29.6 in 1996 and $118.7 in 1995
($19.3 and $78.5 after-tax, respectively) in continuing operations. These
charges related to a worldwide program, implemented in 1995, to streamline
processes and reduce general and administrative expenses, factory administration
costs and noncore corporate research and development expenses. The program was
substantially completed in 1997.
     The components of the restructuring charges recorded in 1997, 1996 and 1995
(including amounts recorded in discontinued operations), spending and other
activity during those years, and the remaining reserve balances included in
"Other current liabilities" at December 31, 1997, were as follows:

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------
                                                        Employee
                                                       Termination   Plant/Office      Asset           Other
                                                          Costs        Closures     Write-downs        Costs       Total
                                                       -----------   ------------   -----------        -----       -----
<S>                                                       <C>            <C>          <C>            <C>           <C>
1995
Provisions recorded in continuing operations........      $64.5          $12.9        $ 18.6         $  22.7       $118.7
Provisions recorded in discontinued operations......        9.8            0.5            --             0.8         11.1
Cash payments.......................................      (13.0)          (3.5)           --            (3.1)       (19.6)
Noncash activity....................................        --              --          (4.3)           (1.5)        (5.8)
                                                          -----          -----        ------         -------       ------
    Restructuring reserve at December 31, 1995......      $61.3          $ 9.9        $ 14.3         $  18.9       $104.4

1996
Provisions recorded in continuing operations........       29.6            --             --             --          29.6
Provisions recorded in discontinued operations......       39.7            6.1            --             --          45.8
Cash payments.......................................      (57.8)           (.6)           --           (16.0)       (74.4)
Noncash activity....................................        --              --         (14.3)            --         (14.3)
                                                          -----          -----        ------         -------      -------
    Restructuring reserve at December 31, 1996......      $72.8          $15.4        $   --         $   2.9      $  91.1

1997
Provisions recorded in continuing operations........       17.0            4.5           2.8             --          24.3
Provisions recorded in discontinued operations......        3.2           (1.4)           --             1.3          3.1
Cash payments.......................................      (63.3)          (0.8)           --            (4.2)       (68.3)
Noncash activity....................................        --             --           (2.8)            --          (2.8)
Reclassification of reserves to net assets of
    discontinued operations (1)....................        (9.0)          (2.8)           --             --         (11.8)
                                                          -----          -----        ------         -------       ------

    Restructuring reserve at December 31, 1997......      $20.7          $14.9        $   --         $    --       $ 35.6
                                                          =====          =====        ======         =======       ======

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

(1)  Represents reserves attributable to the restructuring activities of the
     Packaging Business, which have been reclassified to "Net assets of
     discontinued operations."

Asset Impairments
During 1997, 1996 and 1995, Grace determined that, due to various events and
changes in circumstances, certain long-lived assets were impaired. As a result,
in the fourth quarters of 1997, 1996 and 1995, Grace recorded noncash charges of
$23.5, $5.1 and $32.6, respectively ($15.0, $3.3 and $21.5 after-tax,
respectively). The primary components of the 1997 charge were (a) $14.4 of
capitalized software, due to Grace's decision to eliminate certain software
applications as a result of the Spin-off and Merger, (b) $5.6 of systems costs
previously capitalized for business process reengineering activity, (c) $3.3 for
certain corporate research facilities to be demolished and (d) $.2 of other
assets. The components of the 1996 charge were (a) $2.5 of long-term investments
and (b) $2.6 of other assets. The components of the 1995 charge were (a) $18.1
of properties and equipment, (b) $4.4 of goodwill and other intangible assets,
(c) $4.2 of long-term investments and (d) $5.9 of other assets. Grace determined
the amounts of the charges based on various valuation techniques, including
discounted cash flow, replacement cost and net realizable value for assets to be
disposed of, as prescribed by SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."




                                      F-15
<PAGE>   49



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

5.  Income Taxes
-------------------------------------------------------------------------------

The components of "Income/(loss) from continuing operations before income taxes"
and the related "Provision for/(benefit from) income taxes" are as follows:
<TABLE>
<CAPTION>

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

Continuing Operations                                                            1997      1996        1995
------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>       <C>         <C>
Income/(loss) from continuing operations before income taxes:
     Domestic...............................................................   $  64.9    $   5.1     $(515.8)
     Foreign................................................................      78.5      178.2        (1.4)
                                                                               -------    -------     -------
                                                                               $ 143.4    $ 183.3     $(517.2)
                                                                               =======    =======     =======
Provision for/(benefit from) income taxes:
     Federal - current......................................................   $  (8.6)   $ (26.2)    $   (.3)
     Federal - deferred.....................................................      30.7       41.7      (148.0)
     State and local - current..............................................       1.0       (5.8)       (7.6)
     Foreign - current......................................................      34.5       23.8        14.4
     Foreign - deferred.....................................................      (2.4)      36.9       (50.9)
                                                                               -------    -------     -------
                                                                               $  55.2    $  70.4     $(192.4)
                                                                               =======    =======     =======

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

The components of income/(loss) from consolidated operations before income taxes
and the related provision for/(benefit from) income taxes are as follows:
<TABLE>
<CAPTION>

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

Consolidated Operations                                                          1997        1996        1995
--------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>        <C>          <C>
Income/(loss) from consolidated operations before income taxes:
     Domestic...............................................................   $ 196.0    $2,847.1     $(480.5)
     Foreign................................................................     225.1       259.4        72.7
                                                                               -------    --------     -------
                                                                               $ 421.1    $3,106.5     $(407.8)
                                                                               =======    ========     =======

Provision for/(benefit from) income taxes:
     Federal - current.......................................................  $  18.2    $   75.6     $ 105.6
     Federal - deferred......................................................     47.7        57.0      (226.3)
     State and local - current...............................................     10.4        18.9        21.7
     Foreign - current.......................................................     75.9        60.9        68.5
     Foreign - deferred......................................................      7.9        36.4       (51.4)
                                                                               -------    --------     -------
                                                                               $ 160.1    $  248.8     $ (81.9)
                                                                               =======    ========     =======

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

At December 31, 1997 and 1996, net deferred tax assets consisted of the
following items:
<TABLE>
<CAPTION>

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

Net Deferred Tax Assets                                                                                 1997        1996
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                    <C>         <C>
Provision relating to asbestos-related expenses, net...............................................    $199.7      $240.4
Reserves not yet deductible for tax purposes.......................................................     209.1       167.8
Research and development expenses..................................................................      51.8       102.7
Postretirement benefits other than pensions........................................................      78.0        95.2
Deferred state taxes...............................................................................      80.8        70.1
Foreign net operating loss carryforwards...........................................................       6.6        37.0
Pension and insurance reserves.....................................................................      30.1        31.9
Foreign tax credit carryforwards...................................................................      57.4        31.9
Capitalized inventory costs and inventory reserves.................................................       5.1        11.0
Other..............................................................................................      12.9        39.8
                                                                                                       ------      ------
     Total deferred tax assets.....................................................................     731.5       827.8
                                                                                                       ======      ======
Depreciation and amortization......................................................................      54.2       154.0
Prepaid pension cost...............................................................................      68.4        76.8
Other..............................................................................................      43.0        75.0
                                                                                                       ------      ------
     Total deferred tax liabilities................................................................     165.6       305.8
                                                                                                       ======      ======

Valuation allowance for deferred tax assets........................................................     138.2        72.4
                                                                                                       ------      ------
     Net deferred tax assets.......................................................................    $427.7      $449.6
                                                                                                       ======      ======

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




                                      F-16
<PAGE>   50
The valuation allowance shown above arises from uncertainty as to the
realization of certain deferred tax assets, primarily foreign tax credit
carryforwards and state and local net operating loss carryforwards. The increase
in the valuation allowance during 1997 related primarily to uncertainty as to
Grace's ability to use foreign tax credit carryforwards. Based upon anticipated
future results, Grace has concluded that it is more likely than not that the
remaining balance of the net deferred tax assets, after consideration of the
valuation allowance, will be realized.
     At December 31, 1997, there were $57.4 of tax credit carryforwards with
expiration dates through 2002. Additionally, there were foreign net operating
loss carryforwards, with a tax benefit of $6.6, having various expiration dates.
     The federal corporate tax/(benefit) rate reconciles to the effective
tax/(benefit) rate for continuing operations as follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------

Continuing Operations                                                                          1997        1996       1995
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                                            <C>         <C>       <C>
Federal corporate tax/(benefit) rate.................................................          35.0%       35.0%     (35.0)%
Increase/(decrease) in tax rate resulting from:
   Nontaxable income/nondeductible expenses..........................................          (2.1)       (3.4)       (.5)
   State and local income taxes, net of federal income tax benefit...................            .4          .7         .1
   Federal and foreign taxes on foreign operations...................................         (24.5)        5.9        4.2
   Valuation allowance for deferred tax assets.......................................          29.7          --       (7.9)
   Other, net........................................................................           --           .2        1.9
                                                                                               ----        ----      -----
Effective tax/(benefit) rate.........................................................          38.5%       38.4%     (37.2)%
                                                                                               ====        ====      =====
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

Federal, state, local and foreign taxes have not been provided on approximately
$267.5 of undistributed earnings of certain foreign subsidiaries, as such
earnings are expected to be retained indefinitely by such subsidiaries for
reinvestment. The distribution of these earnings would result in additional
foreign withholding taxes of approximately $27.6 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.

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

6.  Acquisitions and Divestments
--------------------------------------------------------------------------------

Acquisitions
During 1997, Grace made acquisitions totaling $20.5 (including cash acquired and
debt assumed), including the April 1997 acquisition of Schurpack, Inc., a
manufacturer of flexible food packaging located in St. Joseph, Missouri, and two
construction chemicals manufacturing businesses, one located in Australia and
one in Spain.
     In July 1996, Grace acquired Cypress Packaging, Inc., a U.S. manufacturer
of flexible packaging, primarily for the retail pre-cut produce market segment.
In August 1996, Grace acquired Bayem S.A. de C.V. (Bayem), a Mexican
manufacturer of can coatings and closure sealants for the rigid container
industry. Additionally, prior to its disposition in September 1996, NMC
purchased kidney dialysis centers. Grace's total acquisitions in 1996 amounted
to $122.1 in cash.
     In 1995, Grace made acquisitions totaling $260.8, all of which involved
cash purchases of kidney dialysis centers and medical imaging facilities by NMC.
Acquisitions in the first quarter of 1995, prior to the classification of NMC as
a discontinued operation (see Note 3), totaled $41.1 (including cash acquired
and debt assumed). Acquisitions by NMC after the first quarter of 1995 are
presented as an investing activity and are included in "Net investing activities
of discontinued operations" in the Consolidated Statement of Cash Flows for 1996
and 1995.

Divestments
In 1997, Grace realized gross proceeds of $878.9 from divestments, including
debt assumed by the buyers and payments received in connection with divestments
completed in prior years. In addition to the sale of TEC Systems and the Grace
cocoa business (see Note 3), Grace sold its specialty polymers business to
National Starch and Chemical Company (National Starch) for $148.0, subject to
adjustment. The sales and revenues of this business from January 1 through May
1, 1997 (the date of sale) were $24.8 ($72.6 and $77.5 for the years ended
December 31, 1996 and 1995, respectively); its financial position and results of
operations were not significant to Grace. In October 1997, Grace paid National
Starch $1.9 in settlement of the purchase price adjustment. The sale of this
business resulted in a pretax gain of $103.1 ($63.0 after-tax) in continuing
operations.
     During 1996, Grace completed divestments for gross proceeds totaling
$5,394.0 (including debt assumed by buyers). In addition to the disposition of
NMC (see Notes 1 and 3), Grace sold its water treatment and process chemicals
business (Dearborn) to Betz Laboratories, Inc. for cash proceeds of $636.4, the
final $100.0 of which was paid in January 1997, plus the assumption of certain
liabilities. Dearborn's sales and revenues were $201.2 for the six months ended
June 30, 1996 and $398.5 for the year ended December 31, 1995; its financial
position and results of operations were not significant for those periods. The
divestments of Dearborn and Grace's biopesticides business resulted in a pretax
gain of $326.4 ($210.1 after-tax) in continuing operations. In 1996, Grace also
divested Amicon and the transgenic plant business of its Agracetus subsidiary.
These businesses had previously been classified as discontinued operations.


                                      F-17
<PAGE>   51



     In 1995, Grace realized gross proceeds of $58.8 from divestments, including
debt assumed by the buyers and payments received in connection with divestments
completed in prior years. The operations divested consisted of three small units
of Grace's construction products business, the composite materials business,
Grace's transportation services business and various investments.
     See Note 3 for a discussion of divestment activity related to discontinued
operations.

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

7.  Other Balance Sheet Items

-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                        1997          1996
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                   <C>          <C>
Notes and Accounts Receivable, net
Trade receivables, less allowances of $4.5 (1996 - $11.3)........................................     $  248.7     $   501.7
Notes receivable from dispositions of businesses.................................................          --          215.6
Asbestos-related insurance receivable - current..................................................         66.5          35.0
Notes receivable from insurance carriers - current, net of discounts of $2.5 (1996 - $2.5).......         13.3          17.2
Other receivables, less allowances of $.1 (1996 - $.2)...........................................         24.6          61.9
                                                                                                      --------     ---------
                                                                                                      $  353.1     $   831.4
                                                                                                      ========     =========
----------------------------------------------------------------------------------------------------------------------------
Inventories (1)
Raw materials....................................................................................    $    47.9     $   100.9
In process.......................................................................................         10.3          67.6
Finished products................................................................................         78.8         179.0
General merchandise..............................................................................         20.2          73.4
Less: Adjustment of certain inventories to a last-in/first-out (LIFO) basis......................        (27.6)        (44.8)
                                                                                                      --------     ---------
                                                                                                      $  129.6     $   376.1
                                                                                                      ========     =========

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

----------------------------------------------------------------------------------------------------------------------------
Goodwill
Goodwill, gross..................................................................................     $   48.7 (2) $    59.2
Less:  Accumulated amortization..................................................................         (5.8)        (18.6)
                                                                                                      --------     ---------
                                                                                                      $   42.9     $    40.6
                                                                                                      ========     =========

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

----------------------------------------------------------------------------------------------------------------------------
Other Assets
Prepaid pension costs............................................................................     $  245.2     $   275.1
Deferred charges.................................................................................         60.4         102.4
Long-term receivables, less allowances of $16.1 (1996 - $42.7)...................................         48.4         152.9
Long-term investments............................................................................         56.4          57.4
Notes receivable from insurance carriers - noncurrent, net of discounts of $2.3 (1996 - $4.9)....         18.0          31.3
Other............................................................................................          8.9          34.4
                                                                                                      --------     ---------
                                                                                                      $  437.3     $   653.5
                                                                                                      ========     =========

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

----------------------------------------------------------------------------------------------------------------------------
Other Current Liabilities
Liability for asbestos-related litigation........................................................     $  236.5     $   135.0
Reserves for divested businesses.................................................................        123.5         212.9
Accrued compensation.............................................................................        121.9         110.8
Restructuring reserves...........................................................................         35.6          91.1
Environmental reserves...........................................................................         38.8          23.0
Accrued interest.................................................................................         22.5          21.6
Other............................................................................................         83.2         179.5
                                                                                                      --------     ---------
                                                                                                      $  662.0     $   773.9
                                                                                                      ========     =========

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

----------------------------------------------------------------------------------------------------------------------------
Other Liabilities
Other postretirement benefits....................................................................     $  214.8     $   242.9
Environmental reserves...........................................................................        191.4         233.4
Pension benefits.................................................................................         91.0         108.6
Deferred compensation............................................................................         58.4          85.6
Long-term self insurance reserve.................................................................         31.6          20.3
Other............................................................................................         61.9         159.9
                                                                                                      --------     ---------
                                                                                                      $  649.1     $   850.7
                                                                                                      ========     =========
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  Inventories valued at LIFO cost comprised 30.4% of total inventories at
     December 31, 1997 and 26.6% at December 31, 1996. The liquidation of prior
     years' LIFO inventory layers in 1997, 1996 and 1995 did not materially
     affect the cost of goods sold in any of these years.
(2)  Includes goodwill of a health care services business reclassified to
     continuing operations during 1997.



                                      F-18
<PAGE>   52



-------------------------------------------------------------------------------
8.  Properties and Equipment
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------
                                                                                       1997           1996
-------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>            <C>
Land ............................................................................   $     23.4      $    51.5
Buildings........................................................................        298.0          622.6
Machinery, equipment and other...................................................      1,039.5        2,088.1
Projects under construction......................................................         91.8          545.7
                                                                                    ----------      ---------
     Properties and equipment, gross.............................................      1,452.7        3,307.9
Accumulated depreciation and amortization........................................       (789.4)      (1,436.6)
                                                                                    ----------      ---------
     Properties and equipment, net...............................................   $    663.3      $ 1,871.3
                                                                                    ==========      =========
-------------------------------------------------------------------------------------------------------------
</TABLE>

Interest costs are incurred in connection with the financing of certain assets
prior to placing them in service. The Company capitalized interest costs for
continuing operations of $1.7 in 1997, $3.0 in 1996 and $3.7 in 1995.
     Depreciation and lease amortization expense relating to properties and
equipment amounted to $91.4 in 1997, $92.2 in 1996 and $110.6 in 1995.
     Grace's rental expense for operating leases amounted to $11.7 in 1997,
$13.5 in 1996 and $14.2 in 1995. See Note 11 for information regarding
contingent rentals.
     At December 31, 1997, minimum future payments for operating leases were:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------

     <S>                                                                  <C>
     1998..........................................................       $  8.9
     1999..........................................................          5.7
     2000..........................................................          4.0
     2001..........................................................          3.2
     2002..........................................................         (0.3)
     Later years...................................................          6.2
                                                                           -----
     Total minimum lease payments..................................        $27.7
                                                                           =====
-------------------------------------------------------------------------------------------------------------
</TABLE>

The above minimum lease payments are net of anticipated sublease income of $13.9
in 1998, $13.6 in 1999, $14.1 in 2000, $14.2 in 2001, $14.2 in 2002 and a total
of $6.0 in later years.

--------------------------------------------------------------------------------
9.  Debt
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
                                                                                      1997          1996
------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>            <C>
Short-Term Debt
Bank borrowings (6.3% and 6.1% weighted average interest rates at
  December 31, 1997 and 1996, respectively) (1).................................... $ 370.2        $  178.7
Commercial paper (6.1% weighted average interest rate at December 31, 1997) (1)....    34.0              --
Current maturities of long-term debt...............................................      .5           105.5
Other short-term borrowings (2)....................................................     8.9            31.0
                                                                                    -------        --------
                                                                                    $ 413.6        $  315.2
                                                                                    =======        ========
Long-Term Debt
Commercial paper (5.8% weighted average interest rate at December 31, 1996) (1).... $    --        $   77.8
Bank borrowings (6.1% weighted average interest rate at December 31, 1996) (1).....      --           272.2
8.0% Notes Due 2004 (3)............................................................   276.0           276.0
7.4% Notes Due 2000 (3)............................................................   248.7           248.7
7.75% Notes Due 2002 (3)...........................................................   119.0           119.0
Medium-Term Notes, Series A (7.0% and 6.9% weighted average interest rates at
     December 31, 1997 and 1996, respectively) (4).................................     8.5             8.5
Sundry indebtedness with various maturities through 2002...........................     6.5            70.8
                                                                                    -------        --------
                                                                                    $ 658.7        $1,073.0
                                                                                    =======        ========

Full-year weighted average interest rates on total debt (5)........................     7.0%            7.3%

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

 (1) Under bank revolving credit agreements in effect at December 31, 1997,
     Grace may borrow up to $1,000.0 at interest rates based upon the prevailing
     prime, federal funds and/or Eurodollar rates. Of that amount, $650.0 is
     available under short-term facilities expiring in May 1998, unless
     extended, and $350.0 is available under a long-term facility expiring in
     May 2002. These agreements also support the issuance of commercial paper
     and bank borrowings, of which $404.2 was outstanding at December 31, 1997.
     The aggregate amount of net unused and unreserved borrowings under
     short-term and long-term facilities at December 31, 1997 was $595.8.
     Grace's ability to borrow under its existing facilities is subject to
     compliance with various covenants, including covenants requiring
     maintenance of debt and interest coverage ratios.
(2)  Represents borrowings under various lines of credit and other miscellaneous
     borrowings, primarily of non-U.S. subsidiaries.
(3)  During 1994, Grace sold $300.0 of 8.0% Notes Due 2004 at an initial public
     offering price of 99.794% of par, to yield 8.0%; during 1993, Grace sold at
     par $300.0 of 7.4% Notes Due 2000; and during 1992, Grace sold at par
     $150.0 of 7.75% Notes Due 2002. Interest on these notes is payable
     semiannually, and the notes may not be redeemed prior to maturity; however,
     Grace has repurchased notes from time to time in response to unsolicited
     offers. Also see discussion below.
(4)  The Medium-Term Notes (MTNs) bear interest at either fixed or floating
     rates and have maturity dates through July 19, 1999. Interest on the
     fixed-rate MTNs is payable semiannually, and interest the floating-rate
     MTNs is payable quarterly. Also see discussion below.
(5)  Computation includes interest expense allocated to discontinued operations.




                                      F-19
<PAGE>   53



Scheduled maturities of long-term debt outstanding at December 31, 1997 are:
1998 - $.5; 1999 - $12.9; 2000 - $249.3; 2001 - $.5; 2002 - $119.6; and
thereafter - $276.4. Payment of a majority of Grace's borrowings may be
accelerated, and its principal borrowing agreements terminated, upon the
occurrence of a default under other Grace borrowings.
     Total interest expense and related financing costs, including amounts
allocated to discontinued operations, were $78.6 for 1997, $147.9 for 1996 and
$164.8 for 1995. Including amounts allocated to discontinued operations,
interest payments amounted to $82.0 in 1997, $154.4 in 1996 and $183.1 in 1995.
     Grace Connecticut is to receive a cash transfer of approximately $1,200 in
the transaction with Sealed Air (see Notes 1 and 3) and intends to use the cash
to repay substantially all of its debt, including the 8.0% Notes Due 2004, the
7.4% Notes Due 2000 and the 7.75% Notes Due 2002 (collectively, Notes), as well
as the MTNs. On March 10, 1998, Grace Connecticut offered to purchase the Notes.
Such offer is conditioned upon the consummation of the Merger, and it is not
possible to predict whether or to what extent the Notes will be purchased. The
prices to be paid for the Notes and MTNs represent premiums over their principal
amounts. Grace expects to incur an aggregate of approximately $70.0 for these
premiums and other costs related to the purchase of the Notes and MTNs
(including the costs of settling the related interest rate swap agreements,
discussed in Note 10). The amount will vary depending upon the extent to which
Notes and MTNs are purchased. Sealed Air is to reimburse Grace Connecticut for a
portion of these costs.


--------------------------------------------------------------------------------
10. Financial Instruments

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

Debt and Interest Rate Swap Agreements
Grace's debt and interest rate management objective is to reduce the cost of
borrowing over the long term. Grace's debt management strategy emphasizes
maintaining borrowing liquidity by developing and maintaining access to a
variety of long-term and short-term capital markets. Its interest rate
management strategy is to use interest rate swap agreements to modify the rate
profile of the underlying debt. Most of Grace's interest rate swap agreements
currently have the effect of converting fixed-rate debt into floating-rate debt
based on LIBOR. Grace enters into only standard swap agreements that have
readily quantifiable impacts on interest cost and are characterized by broad
market liquidity. The maturities and notional amounts of interest rate swap
agreements generally match the underlying debt, resulting in changes in the fair
value of these interest rate swap agreements being substantially offset by
changes in the fair value of the debt. Grace does not use derivative financial
instruments (interest rate or foreign currency) for trading purposes and is not
a party to leveraged instruments.
     Grace realized negative cash flows from interest rate swap agreements of
$5.0 in 1997, $13.5 in 1996 and $16.5 in 1995. Interest expense was reduced by
$5.4 in 1997, $8.9 in 1996 and $11.1 in 1995 due to the amortization of deferred
gains on interest rate swap agreements. Unamortized net gains as of December 31,
1997 and 1996 were $17.4 and $22.8, respectively.
     Grace Connecticut intends to purchase the Notes and MTNs (see Note 9) and
will settle the related interest rate swap agreements when and to the extent
Notes and MTNs are purchased.

Fair Value of Debt and Other Financial Instruments
At December 31, 1997 and 1996, the fair values of Grace's long-term debt were
$690.6 and $1,207.1, respectively (as compared to recorded values of $659.2 and
$1,178.5, respectively). Fair value is determined based on expected future cash
flows (discounted at market interest rates), quotes from financial institutions
and other appropriate valuation methodologies. The estimates of fair value are
not necessarily indicative of the costs of the offer to purchase the Notes and
the purchase of the MTNs. At December 31, 1997 and 1996, 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.

Foreign Currency Contracts
Grace conducts business in a wide variety of currencies and consequently enters
into foreign exchange forward and option contracts to manage its exposure to
fluctuations in foreign currency exchange rates. These contracts generally
involve the exchange of one currency for another at a future date. At December
31, 1997, no contracts to buy or sell foreign currencies in the future were
outstanding. At December 31, 1996, the notional amount of outstanding contracts
approximated $50.2.

Credit Risk
Grace is exposed to credit risk to the extent of potential nonperformance by
counterparties to financial instruments. The counterparties to Grace's interest
rate swap agreements and foreign exchange contracts comprise a diversified group
of major financial institutions, all of which are rated investment grade. Credit
risk is further reduced by bilateral netting agreements between Grace and its
counterparties. At December 31, 1997, Grace's credit exposure was not
significant and was limited to the fair values of these instruments; Grace
believes the risk of incurring losses due to credit risk is remote.



                                      F-20
<PAGE>   54



Market Risk
Exposure to market risk on financial instruments results from fluctuations in
interest and currency rates during the periods in which the contracts are
outstanding. The mark-to-market valuations of interest rate and foreign exchange
agreements and associated underlying exposures are closely monitored at all
times. Grace uses portfolio sensitivities and stress tests to monitor risk.
Overall financial strategies and the effects of using derivatives are reviewed
periodically.
     The following table indicates the notional amounts, weighted average
interest rates and amounts Grace would be required to pay or receive to settle
interest rate swap agreements outstanding at December 31, 1997 (fair value).
Notional amounts are used in calculating the amounts paid or received under
interest rate swap agreements but do not represent assets or liabilities of
Grace or provide a meaningful estimate of risk. The maturities and notional
amounts of the interest rate swap agreements closely match underlying debt;
therefore, changes in the fair value of interest rate swap agreements are
substantially offset by changes in the fair value of the debt. The average
floating rates in the table below are based on rates implied in the interest
rate yield curve at December 31, 1997. In connection with the offer to purchase
Notes and the purchase of MTNs, Grace Connecticut will settle its interest rate
swap agreements at a cost approximating the fair value shown below.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Interest Rate Swap Agreements                                      Maturity Dates
                                               ---------------------------------------------------------
                                               1998      1999        2000         2001   2002 and Beyond
                                               ----      ----        ----         ----   ---------------
<S>                                            <C>       <C>        <C>           <C>        <C>
Fixed-to-floating rate swaps
   Notional amount..........................   $--       $3.5       $275.0        $--        $426.0
   Fair value...............................   $--       $ .7       $ (5.5)       $--        $(10.7)
   Average receive (fixed) rate.............    --%       7.4%         5.3%        --%          5.7%
   Average pay (floating) rate..............    --%       5.8%         6.0%        --%          6.1%

Floating to-fixed rate swaps
   Notional amount..........................   $--       $ --       $ 23.0        $--        $307.0
   Fair value...............................   $--       $ --       $   .1        $--        $ (9.5)
   Average receive (floating) rate..........    --%        --%         6.0%        --%          6.1%
   Average pay (fixed) rate.................    --%        --%         5.8%        --%          6.8%

--------------------------------------------------------------------------------------------------------
</TABLE>
-------------------------------------------------------------------------------
11.  Commitments and Contingent Liabilities

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

Environmental
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
investigatory and remediation efforts where an assessment has indicated that a
liability has been incurred and the amount of loss can be reasonably estimated.
These accruals do not take into account any discounting for the time value of
money. At December 31, 1997, Grace's liability for environmental investigatory
and remediation costs related to continuing and discontinued operations totaled
$230.2, as compared to $256.4 at December 31, 1996. These amounts reflect a
provision of $77.0 ($50.0 after-tax) recorded in the fourth quarter of 1995
(reflected in the Consolidated Statement of Operations in "Cost of goods sold
and operating expenses"), related principally to increased cost estimates
associated with five former manufacturing sites.
     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 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. As some of these issues are decided (the
outcomes of which are subject to uncertainties) or new sites are assessed and
costs can be reasonably estimated, Grace will continue to review and analyze the
need for adjustments to the recorded accruals. However, Grace believes that it
is adequately reserved for all probable and estimable environmental exposures.
Grace's classification of its environmental reserves between current and
noncurrent liabilities is considered appropriate in relation to expected future
cash outlays.
     Grace is in litigation with certain excess insurance carriers 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 (except in one
instance where Grace settled with a carrier).
     Grace made cash payments of $33.9 in 1997, $20.3 in 1996 and $31.3 in 1995
to remediate environmentally impaired sites. These amounts have been charged
against previously established reserves.




                                      F-21
<PAGE>   55



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 $181.1, offset by
$180.7 of 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 tenants and
subtenants. Grace believes that the risk of significant loss from these lease
obligations is remote. However, a significant portion of the rental income and
other expenses is payable by tenants and subtenants that have filed for
bankruptcy protection or are otherwise experiencing financial difficulties.
Further, as a result of unforeseen developments, Grace may incur losses that
cannot be reasonably estimated.

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

12.  Shareholders' Equity
-------------------------------------------------------------------------------

Under its Certificate of Incorporation, the Company is authorized to issue
300,000,000 shares of common stock, $.01 par value. Of the common stock unissued
at December 31, 1997, approximately 10,938,000 shares were reserved for issuance
pursuant to stock options and other stock incentives. The Certificate of
Incorporation also authorizes 53,000,000 shares of preferred stock, $.01 par
value, none of which has been issued. 3,000,000 of such shares have been
designated as Series A Junior Participating Preferred Stock and are reserved for
issuance in connection with the Company's Preferred Stock Purchase Rights
(Rights). A Right trades together with each outstanding share of common stock
and entitles the holder to purchase one hundredth of a share of Series A Junior
Participating Preferred Stock under certain circumstances and subject to certain
conditions. The Rights are not and will not become exercisable unless and until
certain events occur, and at no time will the Rights have any voting power. The
Rights will not become exercisable as a result of, and will be terminated in
connection with, the transaction with Sealed Air (see Notes 1 and 3), although
New Grace will have substantially identical rights.
     Grace New York initiated a share repurchase program in April 1996. Through
September 27, 1996, Grace New York acquired 9,864,800 shares of common stock
under this program for $727.1, or an average price of approximately $73.70 per
share. From September 28, 1996 (see Note 1) through December 31, 1996, the
Company acquired 11,193,700 shares of common stock for $592.2, or an average
purchase price of $52.90 per share. Prior to year-end 1996, the Company retired
substantially all of its treasury stock using the cost method. During the first
quarter of 1997, the Company substantially completed the share repurchase
program initiated in 1996 by acquiring 6,306,300 additional shares of common
stock for $335.9, or an average price of $53.26 per share. Prior to year-end
1997, the Company retired all of its treasury stock using the cost method. The
weighted average number of shares of common stock outstanding during 1997 was
73,993,000 (1996 - 91,976,000; 1995 - 95,822,000).
     Dividends paid on the Grace New York preferred stocks issued and
outstanding prior to the NMC transaction (see Notes 1 and 3) amounted to $.4 in
1996 and $.5 in 1995.
     In 1997, Grace established a trust to fund certain deferred employee
incentive compensation and nonemployee director compensation and benefits. The
shares held in the trust are valued at the closing market price at the end of
each reporting period. The trust held 71,476 shares at December 31, 1997.

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

13.  Earnings Per Share
-------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------------------
                                                                                             1997          1996          1995
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                        <C>           <C>          <C>
Numerator:
Income/(loss) from continuing operations.............................................      $ 88.2        $112.9       $(324.8)
Preferred stock dividends............................................................         --            (.4)          (.5)
                                                                                           ------        ------       -------
     Numerator for basic and diluted earnings/(loss) per share.......................      $ 88.2        $112.5       $(325.3)
                                                                                           ======        ======       =======
Denominator:
Weighted average common shares - basic calculation...................................        74.0          92.0          95.8

Effect of dilutive securities:
     Employee stock options..........................................................         1.7           1.5            --(1)
                                                                                           ------        ------       -------

Weighted average common shares - diluted calculation.................................        75.7          93.5          95.8
                                                                                           ======        ======       =======

Basic earnings/(loss) per share......................................................       $1.19         $1.22        $(3.39)
                                                                                           ======        ======       =======

Diluted earnings/(loss) per share....................................................       $1.17         $1.20        $(3.39)
                                                                                           ======        ======       =======

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

(1)  As a result of the loss from continuing operations, the assumed exercise of
     employee stock options had an antidilutive effect and therefore is not
     included in the calculation.




                                      F-22
<PAGE>   56



On a weighted average basis, options to purchase 340,850 shares of common stock
at an average price of $54.08 per share were outstanding during the first half
of 1997. These options were not included in weighted average common shares for
the calculation of diluted earnings per share because their exercise prices were
greater than the average market price of the common shares.

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

14.  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
a committee of the Company's Board of Directors and may have terms of up to ten
years and one month; the options outstanding at December 31, 1997 had a weighted
average life of 7.1 years. In connection with the NMC transaction described in
Notes 1 and 3, the number of shares covered by outstanding options and the
exercise prices of such options were adjusted to preserve their economic value.
The following table sets forth information relating to such options, as so
adjusted:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
                                                     1997                          1996                        1995
                                            ----------------------        ---------------------        --------------------
                                                           Average                      Average                     Average
                                              Number      Exercise          Number     Exercise         Number     Exercise
                                            of Shares       Price         of Shares      Price         of Shares     Price
---------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>             <C>           <C>            <C>         <C>             <C>
Balance at beginning of year.............   6,139,766       $30.92        8,833,450      $26.06      11,819,009      $24.53
Options granted..........................     659,350        54.12        1,009,818       51.47       2,645,693       30.05
                                           ----------                    ----------                  ----------
                                            6,799,116                     9,843,268                  14,464,702
Options exercised........................  (2,261,122)       26.47       (3,331,555)      24.56      (5,513,119)      24.67
Options terminated or canceled...........     (29,323)       43.27         (371,947)      28.21        (118,133)      27.23
                                           ----------                    ----------                  ----------
     Balance at end of year..............   4,508,671        36.47        6,139,766       30.92       8,833,450       26.06
                                           ==========                    ==========                  ==========
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

At December 31, 1997, options covering 3,063,918 shares (1996 - 3,994,828; 1995
- 6,477,637) were exercisable and 6,241,692 shares (1996 - 6,975,000; 1995 -
2,970,186) were available for additional grants. Currently outstanding options
expire on various dates through June 2007.
     Concurrent with the Spin-off and Merger (see Notes 1 and 3), outstanding
options to purchase the Company's common stock that are held by employees of the
Packaging Business will be converted into options to purchase common stock of
New Sealed Air. All other options will be converted into options to purchase
common stock of New Grace. The number of shares covered by the options and the
exercise prices of such options will be adjusted to preserve their economic
value.
     The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." As permitted by SFAS No. 123, the Company continues to follow the
measurement provisions of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and does 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 methodology prescribed by SFAS No.
123, the Company's net income and related basic earnings per share for 1997,
1996 and 1995 would have been reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
                                                                                      1997           1996          1995
------------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>            <C>           <C>
Net income:
     As reported................................................................    $   261.0      $2,857.7      $(325.9)
     Pro forma..................................................................    $   254.0      $2,854.0      $(334.3)

Basic earnings per share:

     As reported................................................................   $     3.53     $   31.06     $  (3.40)
     Pro forma..................................................................   $     3.43     $   31.02     $  (3.49)

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

These pro forma amounts may not be indicative of future income and earnings per
share.
     To determine compensation cost under SFAS No. 123, the fair value of each
option is estimated on the date of grant using the Black-Scholes option pricing
model, with the following historical weighted average assumptions applied to
grants in 1997, 1996 and 1995:

<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------------
                                                                                         1997          1996          1995
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                                        <C>           <C>           <C>
Dividend yield..................................................................           1%            1%            3%
Expected volatility.............................................................          29%           26%           25%
Risk-free interest rate.........................................................           6%            6%            7%
Expected life (in years)........................................................           4             4             4

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

Based upon the above assumptions, the weighted average fair value of each option
granted was $16.34 per share for 1997, $14.00 per share for 1996 and $7.00 per
share for 1995.





                                      F-23
<PAGE>   57

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

15.  Pension Plans

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

Grace maintains defined benefit pension plans covering employees of certain
units who meet age and service requirements. Benefits are generally based on
final average salary and years of service. Grace funds its U.S. pension plans in
accordance with U.S. federal laws and regulations. Non-U.S. pension plans are
funded under a variety of methods, as required under differing local laws and
customs, and therefore cannot be summarized. Approximately 64% of U.S. and
non-U.S. plan assets at December 31, 1997 were common stocks, with the remainder
primarily fixed-income securities. During 1997, certain Grace U.S. pension plans
were amended to enhance benefits to future retirees. These amendments increased
the projected benefit obligation by $14.8 and will be amortized over the average
remaining service period for active participants expected to receive benefits
under the plans.
     Net pension (benefit)/cost is comprised of the following components:

<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------------------------
                                                               1997                      1996                   1995
                                                      ---------------------     --------------------   --------------------
                                                         U.S.      Non-U.S.       U.S.      Non-U.S.     U.S.      Non-U.S.
---------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>          <C>          <C>         <C>       <C>          <C>
Service cost on benefits earned during the year.....  $   13.9     $   5.5      $  14.9     $   6.4   $   14.4     $   6.8
Interest cost on benefits earned in prior years.....      57.3        12.6         55.0        15.4       50.1        14.7
Actual return on plan assets........................    (103.8)      (31.8)       (97.7)      (24.7)    (131.8)      (34.6)
Deferred gain.......................................      31.4        13.2         30.4         5.3       71.1        17.8
Amortization of net (gain)/loss and prior service costs   (4.3)          --          --          .2        (.8)        (.4)
Net curtailment and settlement loss/(gain) (1)......        --         3.7         (1.3)       (2.4)        --          --
                                                      --------     -------      -------     -------   --------     -------
     Net pension (benefit)/cost.....................  $   (5.5)    $   3.2      $   1.3     $    .2   $    3.0     $   4.3
                                                      ========     =======      =======     =======   ========     =======

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

(1)  As a result of the closure of a major European office, Grace recognized net
     curtailment and settlement losses of $2.5 during 1997. As a result of
     selling Dearborn (see Note 6), Grace's U.S. and non-U.S. plans recognized
     curtailment gains of $1.3 and $6.3, respectively, in 1996.

The funded status of these plans was as follows:
<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------------------------
                                                               U.S.                                  Non-U.S.
                                               ----------------------------------       -----------------------------------
                                                 Assets Exceed       Accumulated         Assets Exceed       Accumulated
                                                  Accumulated         Benefits            Accumulated         Benefits
                                                   Benefits         Exceed Assets          Benefits         Exceed Assets
                                               ----------------------------------------------------------------------------
                                                1997      1996      1997      1996       1997    1996      1997      1996
---------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>       <C>      <C>       <C>         <C>     <C>      <C>       <C>
Actuarial present value of benefit obligation:
Vested.....................................    $741.3    $655.4   $  56.7   $  55.6     $119.3  $161.8   $  64.1   $  75.2
                                               ======    ======   =======   =======     ======  ======   =======   =======
Accumulated benefit obligation.............    $746.1    $659.3   $  56.8   $  55.7     $119.4  $162.5   $  69.9   $  82.8
                                               ======    ======   =======   =======     ======  ======   =======   =======
Total projected benefit obligation.........    $774.7    $680.8   $  59.6   $  57.0     $124.2  $183.2   $  80.2   $ 103.3
Plan assets at fair value..................     881.3     822.2       --        --       204.5   313.4       2.3       6.1
                                               ------    ------   -------   -------     ------  ------   -------   -------
Plan assets in excess of/(less than)
   projected benefit obligation............     106.6     141.4     (59.6)    (57.0)      80.3   130.2     (77.9)    (97.2)
Unamortized net (gain)/loss at initial
 adoption..................................     (48.7)    (60.4)      3.5       4.2       (2.1)   (4.7)      2.9       3.8
Unamortized prior service cost.............      44.9      34.3      12.1      13.7        3.1     4.1        --        --
Unrecognized net loss/(gain)...............      70.2      47.5      10.4       8.9       (9.1)  (17.3)     17.6      15.0
                                               ------    ------   -------   -------     ------  ------   -------   -------
   Prepaid/(accrued) pension cost..........    $173.0    $162.8    $(33.6)   $(30.2)    $ 72.2  $112.3    $(57.4)  $ (78.4)
                                               ======    ======   =======   =======     ======  ======   =======   =======

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

The following significant assumptions were used in 1997, 1996 and 1995:
<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------------------------
                                                               1997                     1996                    1995
                                                          ----------------        ----------------      ------------------
                                                          U.S.    Non-U.S.        U.S.     Non-U.S.     U.S.      Non-U.S.
--------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>    <C>              <C>     <C>            <C>    <C>
Discount rate at December 31,......................       7.3%   2.3 -  7.5%      8.0%    3.4 -  8.7%    7.3%   5.1 - 11.6%
Expected long-term rate of return..................       9.0    6.0 - 10.5       9.0     6.0 - 10.5     9.0    6.0 - 10.5
Rate of compensation increase......................       4.5    2.0 -  5.0       4.5     2.5 -  7.5     4.5    4.0 -  7.5
--------------------------------------------------------------------------------------------------------------------------
</TABLE>




                                      F-24
<PAGE>   58



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

16.  Other Postretirement Benefit Plans

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

Grace provides certain other postretirement health care and life insurance
benefits for retired employees of specified U.S. units. The retiree medical
insurance plans provide 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. Included in "Other liabilities" at December 31,
1997 and 1996 were the following:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
                                                                                      1997         1996
--------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>          <C>
Accumulated postretirement benefit obligation:
     Retirees....................................................................    $196.7       $199.9
     Fully eligible participants.................................................       7.0          6.4
     Active ineligible participants..............................................      27.3         43.7
                                                                                     ------       ------
                                                                                      231.0        250.0
     Unrecognized net loss.......................................................     (37.0)       (39.9)
     Unrecognized prior service benefit..........................................      20.8         32.8
                                                                                     ------       ------
Accrued postretirement benefit obligation........................................    $214.8       $242.9
                                                                                     ======       ======
--------------------------------------------------------------------------------------------------------
</TABLE>


Net periodic postretirement benefit cost for 1997, 1996 and 1995 is comprised of
the following components:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
                                                                                1997         1996          1995
---------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>          <C>          <C>
Service cost.................................................................  $  1.1       $  1.2       $  1.0
Interest cost on accumulated postretirement benefit obligation...............    17.5         18.1         17.7
Amortization of net loss.....................................................      .6          1.8           .2
Amortization of prior service benefit........................................    (2.6)        (2.7)        (3.3)
Curtailment gain.............................................................     --           (.9)          --
                                                                               ------       ------       ------
     Net periodic postretirement benefit cost................................  $ 16.6       $ 17.5       $ 15.6
                                                                               ======       ======       ======
---------------------------------------------------------------------------------------------------------------
</TABLE>

During 1996, Grace's retiree medical plans were amended to enhance benefits to
retirees effective January 1, 1997. This amendment, together with previous
amendments, had the net effect of decreasing the accumulated postretirement
benefit obligation by $32.8 at December 31, 1996 and will be amortized over an
average remaining future service life of approximately 10 years.
     Medical care cost trend rates were projected at 8.7% in 1997, declining to
5.0% through 2001 and remaining level thereafter. An increase of one percentage
point in each year's assumed medical care cost trend rate, holding all other
assumptions constant, would increase the annual net periodic postretirement
benefit cost by $1.4 and the accumulated postretirement benefit obligation by
$18.2. The discount rates at December 31, 1997, 1996 and 1995 were 7.3%, 8.0%
and 7.3%, respectively.
     Grace applies SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," which requires accrual accounting for nonaccumulating postemployment
benefits. Grace's primary postemployment obligation is for disabled workers'
medical benefits; these are currently included in accrued postretirement costs
under SFAS No. 106.

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

17.  Year 2000 Computer Systems Compliance

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

Grace has reviewed the software systems and related applications used in each of
its business segments and geographic regions to assess its requirements
regarding the "Year 2000 Issue" which, if unresolved, could have a significant
impact on Grace's operations. Grace has made and will continue to make the
expenditures necessary to ensure that its software systems and applications
continue to function properly before, during and after the year 2000. These
expenditures, which are expensed as incurred, have not been and are not expected
to be material to Grace's financial position or results of operations. For
further information, see "Management's Discussion and Analysis of Results of
Operations and Financial Condition -- Year 2000 Computer Systems Compliance."




                                      F-25
<PAGE>   59



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

18.  Business Segment Information

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

Effective December 31, 1997, Grace adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 supersedes SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise," and
establishes new standards for reporting information about business segments and
related disclosures about products and services, geographic areas and major
customers.
     Grace is a global producer of specialty chemicals. It generates revenues
from three business segments: Grace Davison, Grace Construction Products and
Darex Container Products. Management has determined these to be Grace's business
segments based primarily on the nature of their products. Grace Davison produces
a variety of catalysts and silica-based products. Grace Construction Products
produces specialty construction chemicals and building materials. Darex
Container Products produces container sealants and coatings. Grace evaluates
segment performance based on profit and loss. The accounting policies of the
segments are as described in Note 1. Intersegment sales, eliminated in
consolidation, are not material. The table below presents information related to
Grace's business segments for 1997, 1996 and 1995; in connection with the
adoption of SFAS No. 131, Grace has restated pretax operating results for all
periods presented to exclude previously allocated corporate expenses from the
results of each business segment.

<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------------
                                                                                      1997          1996          1995
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>            <C>          <C>
Sales and Revenues
   Grace Davison.............................................................      $  711.6       $  732.2     $  699.9
   Grace Construction Products...............................................         477.8          435.0        397.2
   Darex Container Products..................................................         264.1          274.7        279.9
                                                                                   --------       --------     --------
Total........................................................................      $1,453.5       $1,441.9     $1,377.0
                                                                                   ========       ========     ========

Pretax Operating Income
   Grace Davison.............................................................      $  104.0       $  112.9     $  107.2
   Grace Construction Products...............................................          45.7           42.6         23.6
   Darex Container Products..................................................          25.0           31.5         31.6
                                                                                   --------       --------     --------
Total........................................................................      $  174.7       $  187.0     $  162.4
                                                                                   ========       ========     ========

Depreciation and Amortization
   Grace Davison.............................................................      $   58.7       $   52.4     $   46.7
   Grace Construction Products...............................................          16.0           11.2         10.7
   Darex Container Products..................................................          13.5           12.2         10.5
                                                                                   --------       --------     --------
Total........................................................................      $   88.2       $   75.8     $   67.9
                                                                                   ========       ========     ========

Capital Expenditures
   Grace Davison.............................................................      $   59.3       $   68.4     $  108.3
   Grace Construction Products...............................................          33.8           21.7         22.1
   Darex Container Products..................................................          11.4           11.4         15.5
                                                                                   --------       --------     --------
Total........................................................................      $  104.5       $  101.5     $  145.9
                                                                                   ========       ========     ========

Total Assets
   Grace Davison.............................................................      $  587.6      $   606.0
   Grace Construction Products...............................................         259.7          236.9
   Darex Container Products..................................................         185.6          188.7
                                                                                   --------       --------
Total........................................................................      $1,032.9       $1,031.6
                                                                                   ========       ========

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





                                      F-26
<PAGE>   60



The table below presents information related to the geographic areas in which
Grace operated in 1997, 1996 and 1995.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
                                                                                      1997          1996          1995
------------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>              <C>          <C>
Sales and Revenues
   North America.............................................................     $   777.3       $  720.3     $  694.3
   Europe....................................................................         402.4          435.6        422.1
   Asia Pacific..............................................................         206.7          226.9        212.7
   Latin America.............................................................          67.1           59.1         47.9
                                                                                  ---------       --------     --------
Total........................................................................     $ 1,453.5       $1,441.9     $1,377.0
                                                                                  =========       ========     ========

Total Assets

   North America.............................................................     $   564.8       $  534.0
   Europe....................................................................         268.0          307.2
   Asia Pacific..............................................................         134.4          139.7
   Latin America.............................................................          65.7           50.7
                                                                                  ---------       --------
Total........................................................................     $ 1,032.9       $1,031.6
                                                                                  =========       ========

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

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

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
                                                                                      1997          1996          1995
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>            <C>          <C>
Sales and revenues - operating segments......................................     $ 1,453.5      $ 1,441.9     $1,377.0
Other........................................................................          26.2 (2)      276.8 (3)    483.5 (3)
                                                                                  ---------      ---------     --------
   Total sales and revenues..................................................     $ 1,479.7      $ 1,718.7     $1,860.5
                                                                                  =========      =========     ========
----------------------------------------------------------------------------------------------------------------------------
Pretax operating income - operating segments.................................     $   174.7      $   187.0     $  162.4
Gain on sales of businesses..................................................         103.1          326.4          --
Interest expense and related financing costs.................................         (19.2)         (21.5)       (26.9)
Corporate expenses...........................................................         (75.7)         (69.8)      (134.0)
Restructuring costs and asset impairments....................................         (47.8)         (34.7)      (151.3)
Provision relating to asbestos-related liabilities and insurance coverage....            --         (229.1)      (275.0)
Provision for corporate governance...........................................            --            --         (30.0)
Provision for environmental liabilities at former manufacturing sites........            --            --         (77.0)
Other income, net............................................................           8.3           25.0         14.6
                                                                                  ---------      ---------     --------
   Income/(loss) from continuing operations before income taxes..............     $   143.4      $   183.3     $ (517.2)
                                                                                  =========      =========     ========

----------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization - operating segments...........................     $    88.2     $     75.8     $   67.9
Depreciation and amortization - divested businesses..........................            .7 (2)       10.7 (3)     18.5 (3)
Depreciation and amortization - corporate....................................           4.0            8.9         27.4
                                                                                  ---------      ---------     --------
   Total depreciation and amortization.......................................     $    92.9     $     95.4     $  113.8
                                                                                  =========      =========     ========

-----------------------------------------------------------------------------------------------------------------------------
Capital expenditures - operating segments....................................     $   104.5      $   101.5     $  145.9
Capital expenditures - corporate.............................................          31.9           57.0         49.0
Capital expenditures - discontinued operations (1)...........................         122.2          278.3        329.8
Other........................................................................            .1 (2)       19.8 (3)     12.9 (3)
                                                                                  ---------      ---------     --------
   Total capital expenditures................................................     $   258.7      $   456.6     $  537.6
                                                                                  =========      =========     ========

-----------------------------------------------------------------------------------------------------------------------------
Total assets - operating segments............................................      $1,032.9       $1,031.6
Total assets - divested businesses...........................................            --           43.7 (3)
Total assets - corporate.....................................................         802.7        1,279.5
Total assets - Packaging Business............................................            --        1,673.4 (4)
Asbestos-related receivables and net deferred tax assets.....................         513.4          620.2
Net assets of discontinued operations........................................       1,424.0          297.4
                                                                                  ---------      ---------
   Total assets..............................................................      $3,773.0       $4,945.8
                                                                                  =========      =========

-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)  Represents capital expenditures of discontinued operations prior to their
     classification as such.
(2)  Primarily includes Grace's specialty polymers business, divested in May
     1997.
(3)  Primarily includes Grace's specialty polymers business, divested in May
     1997, and Dearborn, divested in June 1996.
(4)  Represents assets of the Packaging Business prior to its classification as
     a discontinued operation.



                                      F-27
<PAGE>   61




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

Quarterly Summary and Statistical Information (1)  Unaudited - dollars in
millions, except per share

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

Quarter Ended                                                   March 31           June 30       September 30        December 31
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>              <C>               <C>                 <C>
1997
Sales and revenues.....................................         $  363           $    379          $   372             $  366
Cost of goods sold and operating expenses..............            223                231              224                230
Net income ............................................             46                118               71                 26
Net earnings per share: (2)
     Basic.............................................         $  .62           $   1.61          $   .97             $  .35
     Diluted...........................................            .60               1.57              .93                .35

Dividends declared per common share....................         $ .125           $   .145          $  .145             $ .145

Market price of common stock: (3)
     High..............................................         $57 1/2          $   60 1/8        $    74             $   81 1/8
     Low...............................................          46 1/2              44 3/8             54 7/8             63 1/2
     Close.............................................          47 3/8              55 1/8             73 5/8             80 7/16

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

1996
Sales and revenues.....................................        $   453           $   498           $   386            $  382
Cost of goods sold and operating expenses..............            262               287               235               216
Net income/(loss)......................................             63               334             2,518               (57)
Net earnings/(loss) per share: (2)
     Basic.............................................        $   .65           $  3.45           $ 27.66            $ (.70)
     Diluted...........................................            .64              3.39             26.99              (.70)

Dividends declared per common share....................        $  .125           $  .125           $  .125            $  .125

Market price of common stock: (3) (4)
     High..............................................        $ 52 3/16         $  53 5/16        $    52            $    56 1/4
     Low...............................................          34 3/4             45 5/8              33 1/16            46 1/4
     Close.............................................          50 5/8             45 5/8              52                 51 3/4

--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)  The quarterly summary and statistical information presented above has been
     restated to reflect the classification of the Packaging Business as a
     discontinued operation.
(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.
(4)  The stock prices for the first nine months of 1996 have been adjusted so
     that they are on a basis comparable to the stock prices following the
     disposition of NMC.

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





                                      F-28
<PAGE>   62
--------------------------------------------------------------------------------
Financial Summary (1)  Dollars in millions, except per share amounts
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                  1997              1996               1995            1994              1993
------------------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>              <C>                  <C>            <C>            <C>
Statement of Operations
Sales and revenues..........................   $1,479.7          $1,718.7            $1,860.5       $1,711.0       $   1,568.6
Cost of goods sold and
  operating expenses........................      908.3             999.8             1,127.0          988.4             953.0
Depreciation and amortization...............       92.9              95.4               113.8          105.8             101.1
Interest expense and related
  financing costs...........................       19.2              21.5                26.9           20.7              20.5
Research and development expenses...........       42.4              55.4                73.2           65.7              68.0
Income/(loss) from continuing
  operations before income taxes............      143.4             183.3              (517.2)        (306.3)           (162.2)
Income/(loss) from continuing
  operations................................       88.2             112.9              (324.8)        (185.4)           (106.7)
Income/(loss) from discontinued
  operations (2)............................      172.8           2,744.8                (1.1)         268.7             132.7
Net income/(loss)...........................      261.0           2,857.7              (325.9)          83.3              26.0
------------------------------------------------------------------------------------------------------------------------------------
Financial Position
Current assets..............................   $2,175.5          $1,774.9             $1,681.3       $2,228.9      $   2,077.6
Current liabilities.........................    1,357.7           1,487.1              2,214.2        2,231.5          1,992.6
Properties and equipment, net...............      663.3           1,871.3              1,736.1        1,730.1          1,454.1
Total assets................................    3,773.0           4,945.8              6,360.6        6,230.6          6,108.6
Total debt..................................    1,072.3           1,388.2              1,933.8        1,529.7          1,706.1
Shareholders' equity - common stock.........      467.9             632.4              1,224.4        1,497.1          1,510.2
------------------------------------------------------------------------------------------------------------------------------------
Data Per Common Share
Earnings/(loss) from continuing
  operations................................  $    1.19          $   1.22             $ (3.39)    $    (1.98)      $     (1.17)
Net earnings/(loss).........................       3.53             31.06               (3.40)           .88               .28
Dividends...................................        .56               .50               1.175           1.40               1.40
Average common shares
  outstanding (thousands)...................     73,993            91,976              95,822          93,936           91,461
------------------------------------------------------------------------------------------------------------------------------------
Other Statistics
Income/(loss) from continuing
  operations before special items (3).......  $    55.8          $   74.3            $   22.5       $   13.6        $      (6.7)
Dividends paid on common stock..............       41.2              45.6               112.1          131.5             127.9
Capital expenditures........................      258.7             456.6               537.6          444.6             309.6
Common shareholders of record...............     15,945            17,415              19,496         18,501            19,358
Common stock price range (4)................ 81 1/8-44 3/8     56 1/4-33 1/16    45 7/8-24 13/16  29 15/16-23 3/16  26 9/16-22 5/16
Number of employees - continuing
  operations (thousands)....................        6.3               7.1                10.4           11.1              11.3
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  Certain prior-year amounts have been reclassified to conform to the 1997
     presentation.
(2)  Comprised of income from discontinued operations of $160.4 in 1997, $114.4
     in 1996, $150.2 in 1995, $268.7 in 1994 and $237.7 in 1993. 1997 also
     includes the partial reversal of a previously recorded provision relating
     to the sale of Grace's cocoa business. 1996 also includes (a) a gain of
     $2,603.1 on the dispositions of NMC, Amicon and the transgenic plant
     business and (b) a $31.9 reversal of a previously recorded provision for
     Grace's cocoa business, partially offset by (c) a charge of $4.6 recorded
     in connection with the classification of TEC Systems as a discontinued
     operation. 1995 includes a provision of $151.3 relating to Grace's
     remaining discontinued operations, primarily Grace's cocoa business. 1993
     includes a provision of $105.0 relating to the expected losses on the
     divestment of Grace's cocoa, battery separators and engineered materials
     and systems businesses. See Note 3 to the Consolidated Financial
     Statements.
(3)  Income/(loss) from continuing operations reconciles to income/(loss) from
     continuing operations before special items as follows:
<TABLE>
<CAPTION>

                                                            1997            1996          1995           1994        1993
                                                          -------         ------        -------        -------     --------
<S>                                                       <C>             <C>           <C>            <C>         <C>
      Income/(loss) from continuing operations..........  $  88.2         $112.9        $(324.8)       $(185.4)    $ (106.7)
      Special items (after-tax):
       Gain on sales of businesses......................    (63.0)        (210.1)            --             --           --
       Restructuring costs and asset impairments/other
         activities ....................................     30.6           22.6          100.0             --           --
       Provision relating to asbestos-related liabilities
         and insurance coverage.........................       --          148.9          178.7          200.0        100.0
       Provision for corporate governance...............       --             --           18.6            --            --
       Provision for environmental liabilities at former
         manufacturing sites............................       --             --           50.0           26.0           --
       Gain on sale of remaining interest in The
         Restaurant Enterprises Group, Inc..............       --             --             --           (27.0)         --
                                                          -------        -------       --------        --------    --------
      Income/(loss) from continuing operations before
         special items..................................  $  55.8        $  74.3       $   22.5        $   13.6    $   (6.7)
                                                          =======        =======       ========        ========    ========
</TABLE>

     Although "Income from continuing operations before special items" is a
     measure not recognized under generally accepted accounting principles and
     may be inconsistent with similar measures presented by other companies,
     Grace management believes that the presentation of this measure enhances
     the comparability of Grace's operating results from period to period.
(4)  The stock prices for 1995 - 1993 and the first nine months of 1996 have
     been adjusted so that they are on a basis comparable to the stock prices
     following the disposition of NMC.


                                      F-29
<PAGE>   63

        Management's Discussion and Analysis of Results of Operations and
                               Financial Condition

Review of Operations

Overview
--------

Sales and revenues of Grace's operating business segments (Grace Davison, Grace
Construction Products and Darex Container Products) increased .8% in 1997 versus
1996 and 4.7% in 1996 versus 1995. Total sales and revenues decreased 13.9% in
1997 versus 1996 and 7.6% in 1996 versus 1995.

     Pretax income/(loss) from continuing operations was $143.4 million in 1997,
$183.3 million in 1996 and $(517.2) million in 1995. As indicated in the notes
to the table below, pretax operating income/(loss) from continuing operations
was affected by various special items in all three years. Grace's 1997 pretax
operating income before special items of $183.0 million decreased 13.7% as
compared to 1996, and 1996 pretax operating income before special items of
$212.0 million increased 19.8% over 1995. In connection with the adoption of
SFAS No. 131, Grace has restated pretax operating results for all periods
presented to exclude previously allocated corporate expenses from the results of
each operating business segment.

<TABLE>
<CAPTION>
                                                                                        (Dollars in millions)
W. R. Grace & Co. and Subsidiaries                                              ----------------------------------
Pretax Operating Results - Continuing Operations                                  1997          1996          1995
----------------------------------------------------------------------            ----          ----          ----
<S>                                                                             <C>           <C>           <C>
Sales and revenues - operating business segments......................         $ 1,453.5     $ 1,441.9     $ 1,377.0
Sales and revenues - other (1)........................................              26.2         276.8         483.5
                                                                               ---------     ---------     ---------
      Sales and revenues..............................................         $ 1,479.7     $ 1,718.7     $ 1,860.5
                                                                               =========     =========     =========
Operating income/(loss) before divested businesses....................         $   234.5     $   260.8     $  (367.7)
Operating income - divested businesses (1)............................               3.8          13.8          11.4
                                                                               ---------     ---------     ---------
      Operating income/(loss) (2).....................................         $   238.3     $   274.6     $  (356.3)

Other expenses
     Interest expense and related financing costs (3).................             (19.2)        (21.5)        (26.9)
     Corporate expenses (4)...........................................             (75.7)        (69.8)       (134.0)
                                                                               ---------     ---------     ---------
      Income/(loss) from continuing operations........................         $   143.4     $   183.3     $  (517.2)
                                                                               =========     =========     =========

--------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)  Primarily reflects Grace's specialty polymers business, divested in May
     1997, and Dearborn, divested in June 1996.
(2)  A reconciliation of operating income/(loss) to operating income before
     special items is as follows:

<TABLE>
<CAPTION>

                                                                                  1997          1996         1995
                                                                               ---------     ---------    ----------
     <S>                                                                       <C>           <C>          <C>
     Operating income/(loss)..........................................         $   238.3     $   274.6    $   (356.3)
     Special items:
       Gain on sales of businesses....................................            (103.1)       (326.4)           --
       Restructuring costs and asset impairments......................              47.8          34.7         151.3
       Provision relating to asbestos-related liabilities and
         insurance coverage...........................................                --         229.1         275.0
       Provision for corporate governance.............................                --            --          30.0
       Provision for environmental liabilities at former
         manufacturing sites..........................................                --            --          77.0
                                                                               ---------     ---------     ---------
     Operating income before special items............................         $   183.0     $   212.0     $   177.0
                                                                               =========     =========     =========

</TABLE>

     Although "Operating income before special items" is a measure not
     recognized under generally accepted accounting principles and may be
     inconsistent with similar measures presented by other companies, Grace
     management believes that the presentation of this measure enhances the
     comparability of Grace's operating results from period to period.
(3)  Interest expense and related financing costs are not reflected in operating
     income/(loss) from continuing operations because significant financing
     decisions are centralized at the corporate level.
(4)  Reflects general corporate overhead and research expenses and certain other
     income and expense items that can be identified with continuing operations.
     Also includes interest income of $7.5 in 1996 and $9.8 in 1995 relating to
     the settlement of prior years' federal income tax returns.

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



                                      F-30
<PAGE>   64
Sales and Revenues
------------------
<TABLE>
<CAPTION>
                                                                      (Dollars in millions)               Percentage Change
W. R. Grace & Co. and Subsidiaries                             ----------------------------------      ------------------------
Sales and Revenues - Operating Business Segments                 1997          1996          1995      '97 vs. '96  '96 vs. '95
------------------------------------------------               --------    ---------     ---------     -----------   ----------
<S>                                                            <C>          <C>           <C>           <C>           <C>
Grace Davison...........................................       $  711.6     $  732.2      $  699.9        (2.8)%        4.6%
Grace Construction Products.............................          477.8        435.0         397.2         9.8          9.5
Darex Container Products................................          264.1        274.7         279.9        (3.9)        (1.9)
                                                               --------     --------      --------
    Sales and revenues - operating business segments....       $1,453.5     $1,441.9      $1,377.0          .8%         4.7%
                                                               ========     ========      ========
</TABLE>

<TABLE>
<CAPTION>

                                                      1997 as a Percentage of 1996        1996 as a Percentage of 1995
                                                  -----------------------------------   ----------------------------------
Sales and Revenues Estimated Variance Analysis    Volume Price/Mix Translation  Total   Volume Price/Mix Translation Total
-------------------------------------------------------------------------------------   ----------------------------------
<S>                                                <C>      <C>        <C>      <C>      <C>     <C>        <C>       <C>
Grace Davison..............................        8.0%     (5.8)%     (5.0)%   (2.8)%   7.2%    (1.3)%     (1.3)%    4.6%
Grace Construction Products................        9.9       1.3       (1.4)     9.8     8.8       .9        (.2)     9.5
Darex Container Products...................        3.6      (1.4)      (6.1)    (3.9)    1.0      (.3)      (2.6)    (1.9)
    Sales and revenues - operating business
       segments............................        7.7%     (2.8)%     (4.1)%     .8%    6.4%     (.5)%     (1.2)%    4.7%
</TABLE>

The following discussion of sales and revenues of the operating business
segments excludes the effect of currency translation.

Grace Davison
     Fluid cracking catalyst (FCC) sales decreased 4.3% in 1997 compared to
1996. The factors contributing to the decrease were price reductions in all
geographic areas and volume declines in Asia Pacific, partially offset by volume
increases in North America and Europe. Volumes in Asia Pacific were below 1996
primarily due to the loss of two customers, as well as depressed refinery
margins caused by the devaluation of Asian currencies. Volume increases in North
America and Europe were primarily due to record refinery utilization rates,
partially offset by a large number of refinery turnarounds in the first quarter
of 1997. The FCC market continued to recover during the second half of 1997,
with larger sales volumes and price stability in North America and Europe.
     Silica/adsorbent sales increased 7.0% in 1997 compared to 1996 due to
volume increases in all geographic regions. North America experienced volume
increases as a result of strong sales of dentifrice; Europe experienced
increased sales of coatings and gels for paints and plastics; and Asia Pacific
was favorably impacted by sales generated by Grace's new silica plant in
Kuantan, Malaysia, as well as large orders placed by customers in the fourth
quarter of 1997 in anticipation of price increases in response to depreciating
currencies. Increased volumes were partially offset by unfavorable price/mix
variances.
     The strength of the plastics industry continues to benefit the polyolefin
catalyst business. Polyolefin catalyst sales increased 14.8% in 1997 compared to
1996 due to favorable price/mix and volume variances. The volume increase was
primarily due to regaining two customers in the 1997 second quarter and the
start-up of another customer's new petrochemical refinery in Asia Pacific.
     1996 sales of catalysts and other silica-based products, as compared to
1995 sales, benefited from continued expansion into new markets and the
introduction of higher-value-added products and new technologies, partially
offset by competitive pricing pressures. Volumes increased in all regions,
especially in Asia Pacific due to an increase in market share in refinery
catalysts. However, in Europe and North America, refinery catalyst sales were
negatively impacted by competitive pricing pressures. Polyolefin catalyst sales
were positively impacted by the strong plastics industry, and silica/adsorbent
sales benefited from new product applications in Europe and Asia Pacific.

Grace Construction Products
Sales and revenues in 1997 were $477.8 million, an 11.2% increase over 1996. The
increase reflects the introduction of new value-added products and increased
market acceptance of existing value-added products, as well as other factors
within its product groups, as described below.
     Sales of specialty construction chemicals increased 14.0% in 1997 over
1996, primarily due to volume increases and, to a lesser extent, price/mix
variances in North America. A mild winter in the northeastern U.S., which
allowed greater than normal construction activity, drove increases in the first
four months of the year, while market penetration of value-added cement
additives and concrete admixtures, the overall strength of the U.S. economy and
market share gains contributed to the sales increase throughout the year. Sales
of specialty construction chemicals in Asia Pacific increased over 1996 as a
result of infrastructure building activity, market share gains and penetration
of value-added products, partially offset in the latter half of the year by
economic downturns in certain developing countries. Sales in Latin America grew
strongly as a result of market share gains and improving construction industry
practices, while sales in Europe increased moderately, overcoming
weather-related construction delays at the beginning of the year.
     Sales of specialty building materials increased 7.5% in 1997 over 1996,
primarily due to volume increases and price/mix variances in North America. The
increase in North America resulted from strong sales of fireproofing products
and new value-added waterproofing products, supported by the favorable U.S.
market and weather conditions discussed above, market share gains in
fireproofing, and heavy re-roofing activity due to damage from the 1995-1996
winter. In Europe, sales of specialty building materials also increased, mainly
due to volume increases in premium waterproofing products. Easier to apply and
more durable than competitors' products, Grace's premium waterproofing products
gained market share in Europe, especially in countries

                                      F-31
<PAGE>   65

where construction labor is more expensive. Sales in Asia Pacific showed a
slight decrease as a result of unfavorable price/mix variances, mainly due to
lower sales of industrial, acoustic and petrochemical fireproofing, reflecting
reduced activity in certain economies.
     Sales of specialty construction chemicals and building materials increased
9.7% in 1996 over 1995, driven primarily by volume increases. Sales increased in
all regions, especially in North America, where volumes in both specialty
construction chemicals and building materials benefited from growth in housing
starts and infrastructure projects. Also significantly contributing to the
increase was the positive impact of growth in market share for fire protection
and concrete products in Asia Pacific. Sales also rose due to the introduction
and penetration of value-added products.

Darex Container Products
Darex Container Products' sales increased 2.2% in 1997 as compared to 1996. This
increase was entirely attributable to the August 1996 acquisition of Bayem.
Excluding the Bayem acquisition, Darex Container Products' 1997 sales were
slightly lower than 1996 sales.
     European volumes were negatively affected in 1997 by an unseasonably cool
spring and summer, which resulted in decreased beverage consumption. Also,
during 1997, two European customers reverted to manufacturing their own closure
sealants, and Darex Container Products sold a small niche segment of the
coatings business. European price/mix in can sealing was negatively affected in
1997 by a continued customer shift from solvent-based products to water-based
products.
     Asia Pacific volumes in 1997 were unfavorably affected by the depletion of
customers' excess inventory in China, competitive pricing pressures, weather
conditions that adversely impacted beverage consumption, a decline in market
demand due to the depressed Japanese economy and the increased penetration of
alternative forms of containers, such as plastic and glass. These factors,
however, were fully offset by volume increases, especially in can sealants in
the Philippines (due to increased market demand for canned fish and meat) and in
coatings in China (due to market share gains, as a customer began using Darex
Container Products coatings).
     Latin American volume growth (excluding the impact of the Bayem
acquisition) was dampened by poor economic conditions in Venezuela and Brazil,
coupled with a decline in fish canning on the west coast of South America as a
result of poor weather conditions.
     Sales for 1996 increased .7% versus 1995, with increased sales in all
regions, except for Asia Pacific. Asia Pacific volumes were lower in can
sealants due to poor weather conditions that adversely impacted the canning of
fruit and fish in Southeast Asia, a depressed Japanese economy and excess can
capacity in China. Additionally, some market share losses were incurred in
closure sealants. Offsetting the lower volumes in Asia Pacific were higher
volumes in North America and Europe due to higher sales of can sealing
compounds. In addition, Latin America volumes increased due to a growing can
market and higher coating volumes resulting from the Bayem acquisition.

Operating Results
-----------------

Cost management programs initially implemented in 1995 continued to favorably
impact pretax operating income across all geographic regions and operating
business segments, as well as corporate expenses, in 1996 and 1997.
Significantly offsetting the favorable impact of the cost management programs
were accruals relating to Grace's long-term incentive compensation program
(LTIP). Grace's stock price as of the close of each quarter is one of the
primary factors used in calculating the LTIP accrual. Since Grace's stock
appreciated 55% during 1997, significant additional charges were required at
both the operating business segment and corporate levels. For operating business
segment disclosure, Grace has charged each operating business segment with only
those expenses that are directly attributable to its businesses and has excluded
previously allocated corporate expenses from the results of the operating
business segments.
<TABLE>
<CAPTION>
                                                                     (Dollars in millions)                 Percentage Change
W. R. Grace & Co. and Subsidiaries                            ------------------------------------      -----------------------
Pretax Operating Income - Operating Business Segments            1997          1996         1995        '97 vs. '96 '96 vs. '95
-----------------------------------------------------         ---------     ---------    ---------      ---------- ------------
<S>                                                           <C>           <C>          <C>             <C>          <C>
Grace Davison...........................................      $   104.0     $   112.9    $   107.2       (7.9)%       5.3 %
Grace Construction Products.............................           45.7          42.6         23.6        7.3        80.5
Darex Container Products................................           25.0          31.5         31.6      (20.6)        (.3)
                                                              ---------     ---------    ---------
Operating income - operating business segments..........      $   174.7     $   187.0    $   162.4       (6.6)%      15.1 %
                                                              =========     =========    =========
</TABLE>

The following is a discussion of the pretax operating results of Grace's
operating business segments.

Grace Davison
Grace Davison's 1997 pretax operating income was $104.0 million, a 7.9% decrease
compared to 1996. The primary causes of the decrease were the unfavorable
effects of currency translation, difficult market conditions for FCCs, which
resulted in depressed selling prices and reduced margins, and lower than
expected volumes of FCCs in Asia Pacific, as discussed above. Price/mix
variances also had an unfavorable effect upon operating income. Further, unusual
items contributed to the decrease in operating income in 1997, principally the
large number of refinery turnarounds in the first quarter of 1997 (as discussed
above) and increased repair and maintenance costs caused by harsh winter weather
at Grace Davison's Lake Charles, Louisiana facility. These factors were offset
by manufacturing efficiencies and ongoing cost reduction efforts.


                                      F-32
<PAGE>   66



     Pretax operating income increased 5.3% in 1996 as compared to 1995, as cost
management programs continued to favorably impact results across all regions.
European results were favorably impacted by volume increases in
silicas/adsorbents. Improved results in Asia Pacific reflected volume increases
in refinery and polyolefin catalysts. These increases were partially offset by a
decline in refinery catalyst sales in North America and higher expenses
associated with the start-up of the silicas plant in Kuantan, Malaysia.

Grace Construction Products
Grace Construction Products' pretax operating income in 1997 was $45.7 million,
an increase of 7.3% over 1996. The increase was primarily due to the 9.8%
increase in sales and revenues in 1997, as discussed above. Improvements in
manufacturing processes, production rates and material costs, as well as
overhead cost containment efforts, also contributed to earnings growth.
Partially offsetting the increase was a noncash charge of $5.7 million, taken in
the fourth quarter of 1997, to reduce the carrying value of certain equipment.
     Pretax operating income in 1996 was $42.6 million, an increase of 80.5%
over 1995. The improvement in income reflected higher sales volumes, as well as
expense reductions resulting from cost management programs. Specifically,
certain manufacturing operations were consolidated and selling and research
functions were restructured, generating significant cost savings.

Darex Container Products
Darex Container Products' operating income decreased 20.6%, from $31.5 million
in 1996 to $25.0 million in 1997, with a significant portion of the decrease
attributable to the currency devaluation experienced in Southeast Asia, higher
expenses associated with the integration of Bayem, and lower sales, as described
above. In addition, operating income was negatively affected by raw material
price increases, write-downs of obsolete inventory in Latin America and Asia
Pacific, and customers' continued shift towards lower margin products.
     Darex Container Products' operating income remained relatively flat in 1996
as compared to 1995. Except for Asia Pacific, all regions experienced increased
operating income as a result of the volume increases discussed above, in
addition to continued cost containment efforts. The lower operating income in
Asia Pacific was primarily due to the sales declines discussed above.

Statement of Operations
-----------------------

Interest Expense and Related Financing Costs
Interest expense and related financing costs for continuing operations of $19.2
million in 1997 decreased 10.7% compared to $21.5 million in 1996, which
decreased 20.1% compared to 1995. Including interest expense and related
financing costs allocated to discontinued operations, interest expense and
related financing costs amounted to $78.6 million in 1997, a 46.8% decrease as
compared to $147.9 million in 1996, which decreased 10.2% as compared to 1995.
The decrease in 1997 was primarily due to lower average debt levels (as a result
of debt repayments made with the proceeds from the September 1996 separation of
Grace's principal health care business and other divestments); the decrease in
1996 was primarily due to lower than average short-term interest rates.
     Grace's debt and interest rate management objective is to reduce the cost
of borrowing over the long term. Grace's debt management strategy emphasizes
maintaining borrowing liquidity by developing and maintaining access to a
variety of long-term and short-term capital markets. Its interest rate
management strategy is to use interest rate swap agreements to modify the rate
profile of the underlying debt. Most of Grace's interest rate swap agreements
currently have the effect of converting fixed-rate debt into floating-rate debt.
These agreements have readily quantifiable impacts on interest cost and are
characterized by broad market liquidity.
     See "Financial Condition -- Liquidity and Capital Resources" below and Note
10 to the Consolidated Financial Statements for further information on
borrowings and interest rate agreements.

Research and Development Expenses
Research and development (R&D) spending decreased 23.5% in 1997 versus 1996 and
24.3% in 1996 versus 1995. While Grace continues to invest in R&D, with the
goals of introducing new value-added products and services and enhancing
manufacturing processes, the overall decreases reflected the continued positive
impact of cost management programs implemented in 1995 and 1996. These programs
included the elimination of Grace's corporate research organization, the
transfer of core R&D activities to the operating business segments, and the
termination of R&D activities not related to Grace's continuing operations. The
decreases were also attributable to the elimination of R&D spending related to
Dearborn, divested in June 1996, and Grace's specialty polymers business,
divested in May 1997.

Restructuring Costs, Asset Impairments and Other Costs
Restructuring Costs
In the fourth quarter of 1997, Grace recorded a restructuring charge of $20.3
million ($13.0 million after-tax) in continuing operations, reflecting employee
termination costs relating to staff reductions resulting from the Spin-off and
Merger (see Notes 1 and 3 to the Consolidated Financial Statements). The staff
reductions include approximately 190 employees at corporate headquarters and
approximately 150 employees at various international locations, and are expected
to be completed in 1998. The employee termination costs represent severance pay
and other employee benefits, including amounts paid over time.




                                      F-33
<PAGE>   67



     In the second quarter of 1997, Grace recorded a restructuring charge of
$4.0 million ($2.6 million after-tax) in continuing operations. This charge
primarily consisted of corporate costs resulting from the restructuring of the
Packaging Business from a group of regional units into an integrated global
organization, and was primarily comprised of the cost of employee terminations
(expected to be completed in 1998) and asset write-downs for certain corporate
research facilities.
     Grace recorded restructuring charges of $29.6 million in 1996 and $118.7
million in 1995 ($19.3 million and $78.5 million after-tax, respectively), in
continuing operations. These charges related to a worldwide program, implemented
in 1995, to streamline processes and reduce general and administrative expenses,
factory administration costs and noncore corporate research and development
expenses. The program was substantially completed in 1997.

Asset Impairments
During 1997, 1996 and 1995, Grace determined that, due to various events and
changes in circumstances, certain long-lived assets were impaired. As a result,
in the fourth quarters of 1997, 1996 and 1995, Grace recorded noncash charges of
$23.5 million, $5.1 million and $32.6 million, respectively ($15.0 million, $3.3
million and $21.5 million after-tax, respectively). The primary components of
the 1997 charge were (a) $14.4 million of capitalized software, due to Grace's
decision to eliminate certain software applications as a result of the Spin-off
and Merger, (b) $5.6 million of systems costs previously capitalized for
business process reengineering activity, (c) $3.3 million for certain corporate
research facilities to be demolished and (d) $.2 million of other assets. The
components of the 1996 charge were (a) $2.5 million of long-term investments and
(b) $2.6 million of other assets. The components of the 1995 charge were (a)
$18.1 million of properties and equipment, (b) $4.4 million of goodwill and
other intangible assets, (c) $4.2 million of long-term investments and (d) $5.9
million of other assets. Grace determined the amounts of the charges based on
various valuation techniques, including discounted cash flow, replacement cost
and net realizable value for assets to be disposed of, as prescribed by SFAS No.
121.

Other Costs
In the fourth quarter of 1995, Grace recorded pretax charges totaling $40.5
million ($25.9 million after-tax) relating to the write-down of corporate assets
($27.0 million) and working capital assets ($13.5 million). These amounts are
included in "Cost of goods sold and operating expenses" in the Consolidated
Statement of Operations.

Income Taxes
Grace's effective tax/(benefit) rates were 38.5% in 1997, 38.4% in 1996 and
(37.2)% in 1995. Excluding the special items shown in the table under "Review of
Operations -- Overview" above, Grace's effective tax/(benefit) rates were 36.7%
in 1997, 38.4% in 1996 and (39.8)% in 1995. The lower effective tax rate in 1997
compared to 1996 resulted primarily from reductions in taxes on foreign
operations and lower state income taxes, partially offset by an increase in the
valuation allowance. The change in the effective tax rate in 1996 compared to
the tax benefit in 1995 was primarily due to a reversal in 1995 of a valuation
allowance on foreign net operating losses, partially offset by higher taxes on
foreign operations.
     Grace has provided a valuation allowance relating to uncertainty as to the
realization of certain deferred tax assets, primarily foreign tax credit
carryforwards and state and local net operating loss carryforwards. Based on
anticipated future results, Grace has concluded that it is more likely than not
that the remaining balance of the net deferred tax assets, after consideration
of the valuation allowance, will be realized.

Discontinued Operations
-----------------------
Packaging Business
As discussed in Notes 1 and 3 to the Consolidated Financial Statements, in
August 1997, Grace and Sealed Air entered into a definitive agreement to combine
Grace's Packaging Business with Sealed Air. Grace's shareholders and Sealed
Air's shareholders approved this transaction on March 20, 1998 and March 23,
1998, respectively. As a result, Grace classified its Packaging Business as a
discontinued operation as of December 31, 1997. Accordingly, the operations of
the Packaging Business are included in "Income/(loss) from discontinued
operations" in the Consolidated Statement of Operations. For further information
regarding this transaction, see the Company's Joint Proxy Statement/Prospectus
dated February 13, 1998, the New Grace Information Statement dated February 13,
1998 and Notes 1 and 3 to the Consolidated Financial Statements.
     In 1997, sales and revenues of the Packaging Business increased 5.6% to
$1.8 billion compared to $1.7 billion in 1996. The increase resulted from
favorable volume variances, estimated at 10.0%, which were partially offset by
the effect of a strengthening dollar against foreign currencies, estimated at
4.0%, and to a lesser degree, unfavorable price/mix variances, estimated at .4%.
Acquisitions accounted for approximately 22% of the overall sales increase in
1997. 1997 sales also increased due to the consolidation in January 1997 of a
flexible packaging joint venture accounted for under the equity method in 1996.
Excluding the effects of these acquisitions and currency translation, bag sales
increased 11.0% in 1997 compared to 1996, laminate sales increased 8.1% in 1997
compared to 1996, and 1997 film sales increased 7.4% as compared to 1996, with
all three product lines experiencing growth in all geographic regions.




                                      F-34
<PAGE>   68



     Pretax operating income of the Packaging Business increased 15.2% in 1997
compared to 1996, primarily due to the sales increases discussed above,
favorable manufacturing rates, continued efforts to reduce operating costs and a
shift toward sales of higher-margin products. However, these favorable variances
were partially offset by increased prices for certain raw materials, coupled
with competitive pressures on laminate pricing in North America and a trend by
customers to convert from bags to laminates in Latin America. Overall, Grace's
ongoing cost containment efforts contributed favorably to pretax operating
income in 1997. However, these improvements were partially offset by increased
expenses (primarily depreciation and amortization expenses) associated with the
packaging plant in Kuantan, Malaysia that began operations in the fourth quarter
of 1996 and an increase in research and development expenses as a result of the
continued emphasis on new product development.
     1996 sales and revenues increased 2.6% over 1995. 1996 sales growth in bags
was modest overall; 1996 laminate sales increased in all regions; and 1996 film
sales were flat.
     Pretax operating income of the Packaging Business decreased 2.4% in 1996
compared to 1995, primarily due to higher indirect manufacturing costs,
including depreciation resulting from the completion of certain major expansion
projects begun in 1995, that were not offset by increased sales. Additionally,
operating income decreased due to changes in price/mix and an increase in
research and development costs in 1996. These unfavorable variances were
partially offset by certain lower raw material costs and cost savings realized
from the restructuring programs initiated in 1995.

Health Care
During 1996, Grace completed the separation of NMC and sold its Amicon
separations science business. These businesses, representing Grace's principal
health care businesses, had been classified as discontinued operations in 1995.
1996 income from discontinued operations of $2.7 billion includes income of
$24.8 million ($60.3 million pretax) from health care operations, a tax-free
gain of approximately $2.5 billion on the NMC transaction, and a gain of $40.0
million ($70.4 million pretax) on the sale of Amicon. Loss from discontinued
operations of $1.1 million in 1995 includes income from health care operations
of $22.0 million ($104.6 million pretax).

Cocoa
Grace's cocoa business was classified as a discontinued operation in 1993.
During the fourth quarter of 1995, Grace revised the divestment plan for the
business and, as a result, recorded an additional provision of $151.3 million
(net of an applicable tax effect of $48.7 million) related to the cocoa business
and other remaining discontinued operations. In December 1996, Grace entered
into a definitive agreement to sell the cocoa business to ADM. As a result, in
the fourth quarter of 1996, Grace reassessed its estimated loss on the
divestment of the business and reversed previously recorded provisions of $31.9
million (net of an applicable tax effect of $18.1 million) in discontinued
operations. In February 1997, Grace sold its cocoa business to ADM for total
proceeds of $477.6 million (including debt assumed by the buyer), subject to
adjustment. In October 1997, ADM paid Grace an additional $7.9 million
(including $.4 million of interest income) in settlement of the purchase price
adjustment. In anticipation of this settlement, in the third quarter of 1997
Grace reversed previously recorded provisions of $12.4 million (net of an
applicable tax effect of $6.6 million) in discontinued operations.

Other
In the fourth quarter of 1996, Grace classified TEC Systems as a discontinued
operation and recorded a provision of $4.6 million (net of an applicable tax
benefit of $2.4 million) related to TEC Systems' anticipated net operating
results through the expected date of divestment, as well as the loss anticipated
on the divestment. In August 1997, Grace sold TEC Systems to Sequa Corporation
for total proceeds of $18.4 million, subject to adjustment. The loss on the sale
and the 1997 operating losses were charged against previously established
reserves.
     In May 1996, Grace completed the sale of the transgenic plant business of
its Agracetus subsidiary to the Monsanto Company for $150.0 million, resulting
in a pretax gain of $129.0 million ($79.4 million after-tax). Additionally, in
March 1996 Grace sold its microwave business for gross proceeds of $3.9 million,
and in February 1995 Grace sold its composite materials business for gross
proceeds of $3.0 million.

Financial Condition
-------------------

Liquidity and Capital Resources
Grace's continuing operating activities used net pretax cash of $34.2 million in
1997, as compared to providing $28.5 million in 1996 and using $75.8 million in
1995. The 1997 increase in cash used for operating activities of continuing
operations was primarily due to the expenditure of $74.1 million for the defense
and disposition of asbestos-related litigation, net of amounts received from
settlements with certain insurance carriers in connection with such litigation,
as compared to the net expenditure of $2.1 million for asbestos-related
litigation in 1996. The increase in cash provided by operating activities of
continuing operations in 1996 was mainly due to the pretax income generated from
continuing operations in 1996 versus the pretax loss incurred by continuing
operations in 1995. After giving effect to the net pretax cash provided by
operating activities of discontinued operations and to payments of income taxes,
the net cash provided by operating activities was $236.4 million in 1997, $223.3
million in 1996 and $107.0 million in 1995.




                                      F-35
<PAGE>   69
     Cash flows provided by investing activities were $370.1 million in 1997,
compared to $2.1 billion in 1996 and a use of $801.6 million in 1995. 1997 cash
flows provided by investing activities largely reflect the receipt of net cash
proceeds of $479.9 million from divestments (primarily the sale of Grace's
specialty polymers, TEC Systems and cocoa businesses) and the receipt of $215.6
million in January 1997 on the 1996 divestments of Dearborn and Amicon. In 1996,
cash flows from divestments totaled $2.7 billion, primarily reflecting proceeds
from the separation of Grace's principal health care business. The use of $801.6
million in 1995 for investing activities primarily reflects capital expenditures
of $537.6 million, more than 75% of which related to the Packaging Business and
Grace Davison. In 1997, Grace made capital expenditures of $258.7 million, of
which $122.2 million related to the Packaging Business and $59.3 million related
to Grace Davison. Total Grace capital expenditures for 1998 are not expected to
exceed $110.0 million, substantially all of which will be directed toward the
Specialty Chemicals Businesses.
     Net cash used for financing activities in 1997 was $621.3 million,
primarily relating to reductions in debt, the repurchase of stock (discussed
below), and the payment of dividends, partially offset by proceeds from the
exercise of employee stock options. Total debt was $1,072.3 million at December
31, 1997, a decrease of $315.9 million from December 31, 1996.
     Grace initiated a share repurchase program in April 1996. Through September
27, 1996, Grace had acquired 9,864,800 shares of common stock under this program
for $727.1 million (or an average price of approximately $73.70 per share,
before adjustment for the effect of the NMC transaction). Following the NMC
transaction, Grace implemented a second program to repurchase up to 20% of the
shares then outstanding. From September 28, 1996 through December 31, 1996,
Grace acquired 11,193,700 shares of common stock for $592.2 million, or an
average purchase price of $52.90 per share. Prior to year-end 1996, Grace
retired substantially all of its treasury stock using the cost method. During
the first quarter of 1997, Grace substantially completed the share repurchase
program initiated in 1996 by acquiring 6,306,300 additional shares of common
stock for $335.9 million, or an average price of $53.26 per share. Prior to
year-end 1997, Grace retired all of its treasury stock using the cost method.
     Grace has targeted a ratio of debt to EBITDA (earnings before interest,
taxes, depreciation and amortization, restructuring charges and gain on sales of
businesses) of 1.6 to 2.0. This ratio has represented a long-term target that
could be exceeded to meet specific needs on a short-term basis. At December 31,
1997, the debt/EBITDA ratio was 1.7, excluding the effect of classifying the
Packaging Business as a discontinued operation.
     In connection with the transaction with Sealed Air, Grace will receive $1.2
billion in cash (subject to adjustment), which will be used to repay
substantially all of its debt. Subsequent to the transaction, Grace intends to
use financial leverage more conservatively, reflecting its smaller size.
Debt/EBITDA will be targeted at less than 1.0, although, Grace will continue to
have the flexibility to exceed this target as business needs dictate.
     At December 31, 1997, Grace had committed borrowing facilities totaling
$1.0 billion, consisting of $650.0 million under a 364-day facility expiring in
May 1998 (extendible for successive 364-day periods at the discretion of Grace
and the lenders) and $350.0 million under a long-term facility expiring in May
2002. These facilities also support the issuance of commercial paper and bank
borrowings, of which $404.2 million was outstanding at December 31, 1997. The
aggregate amount of net unused and unreserved borrowings under short-term and
long-term facilities at December 31, 1997 was $595.8 million. Grace intends to
renegotiate and reduce the size of its committed borrowing facilities following
completion of the Sealed Air transaction.
     Grace intends to use the cash proceeds from the transaction with Sealed Air
to repay substantially all of its debt, including the Notes and MTNs. On March
10, 1998, Grace Connecticut offered to purchase the Notes. Such offer is
conditioned upon the consummation of the Merger, and it is not possible to
predict whether or to what extent the Notes will be purchased. The prices to be
paid for the Notes and MTNs represent premiums over their principal amounts.
Grace expects to incur an aggregate amount of approximately $70.0 million for
these premiums and other costs related to the purchase of the Notes and MTNs
(including the costs of settling the related interest rate swap agreements). The
amount will vary depending upon the extent to which Notes and MTNs are
purchased. Sealed Air is to reimburse Grace Connecticut for a portion of these
costs.
     Grace believes that cash flow generated from future operations and
committed borrowing facilities will be sufficient to meet its cash requirements
for the foreseeable future.

Asbestos-Related Matters
Grace is a defendant in lawsuits relating to previously sold asbestos-containing
products. In 1997, Grace paid $74.1 million for the defense and disposition of
asbestos-related property damage and personal injury litigation, net of amounts
received under settlements with insurance carriers. During the fourth quarter of
1996, Grace recorded a noncash pretax charge of $229.1 million ($148.9 million
after-tax), primarily to reflect the estimated costs of defending against and
disposing of personal injury claims expected to be filed through 2001. The
estimated costs used to determine the amount of this charge were not discounted
to their present values, and the time period over which the associated cash is
actually expended is likely to extend beyond 2001. Based on developments and
trends in 1997, Grace concluded that no additional charge would be necessary to
cover the estimated costs of defending against and disposing of asbestos-related
personal injury claims to be filed during the five-year period 1998-2002. The
balance sheet at December 31, 1997 includes a receivable of $282.4 million due
from insurance carriers. Grace also has recorded notes receivable of $36.1
million ($31.3 million after discounts) for amounts to be received from 1998 to
2001, pursuant to settlement agreements previously entered into with insurance
carriers.


                                      F-36
<PAGE>   70
     Although the total amount to be paid in 1998 with respect to
asbestos-related claims (after giving effect to payments to be received from
insurance carriers) cannot be precisely estimated, Grace expects that it will be
required to expend approximately $150-$170 million (pretax) in 1998 to defend
against and dispose of such claims (after giving effect to anticipated insurance
recoveries). The 1998 expenditures include a 1997 property damage settlement to
be partially paid in 1998 and personal injury group settlements, effected in
1997, to be paid in 1998. The amounts with respect to the probable cost of
defending against and disposing of asbestos-related claims and probable
recoveries from insurance carriers represent estimates and are on an
undiscounted basis; the outcomes of such claims cannot be predicted with
certainty.
     In May 1997, the Texas legislature adopted legislation that had the effect
of making it more difficult for out-of-state residents to file asbestos personal
injury claims in Texas state courts. Although the rate of filing asbestos claims
in Texas during the second half of 1997 was lower than that of the first half of
1997, the effect of this legislation on Grace's ultimate exposure with respect
to its asbestos-related cases and claims cannot be predicted with certainty.
     In December 1997, Grace and the U.S. Department of Energy's Brookhaven
National Laboratory announced the development of a new product capable of
dissolving asbestos in installed fireproofing material previously produced by
Grace without diminishing the existing fire-resistive performance of the
fireproofing material on columns and beams. It is anticipated that the new
product will create significant cost savings in comparison to current asbestos
abatement techniques. The new product is expected to be commercially available
in early 1998. Grace is not yet able to determine the effect the new product
will have on its exposure with respect to its property damage litigation cases.
     See Note 2 to the Consolidated Financial Statements for further information
concerning asbestos-related lawsuits and claims.

Environmental Matters
Grace is subject to loss contingencies resulting from extensive and evolving
federal, state, local and foreign environmental laws and regulations relating to
the generation, storage, handling, discharge and disposition of hazardous wastes
and other materials. Worldwide expenses of continuing operations related to the
operation and maintenance of environmental facilities and the disposal of
hazardous and nonhazardous wastes totaled $35.8 million in 1997, $32.7 million
in 1996 and $34.0 million in 1995. Such costs are estimated to be $33.1 million
in 1998 and $33.2 million in 1999. In addition, worldwide capital expenditures
for continuing operations relating to environmental protection totaled $7.2
million in 1997, compared to $10.4 million in 1996 and $12.2 million in 1995.
Capital expenditures to comply with environmental initiatives in future years
are estimated to be $8.3 million in 1998 and $7.3 million in 1999. Grace also
has incurred costs to remediate environmentally impaired sites. These costs were
$33.9 million in 1997, $20.3 million in 1996 and $31.3 million in 1995. These
amounts have been charged against previously established reserves. Future cash
outlays for remediation costs are expected to total $41.0 million in 1998 and
$23.0 million in 1999. Expenditures have been funded from internal sources of
cash and are not expected to have a significant effect on liquidity.
     Grace accrues for anticipated costs associated with investigatory and
remediation efforts where an assessment has indicated that a liability has been
incurred and the amount of loss can be reasonably estimated. In the fourth
quarter of 1995, Grace recorded a pretax provision of $77.0 million ($50.0
million after-tax) related principally to increased cost estimates associated
with five former manufacturing sites. At December 31, 1997, Grace's liability
for environmental investigatory and remediation costs related to continuing and
discontinued operations totaled $230.2 million, as compared to $256.4 million at
December 31, 1996. 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 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. As some of these issues are decided (the
outcomes of which are subject to uncertainties) or new sites are assessed and
costs can be reasonably estimated, Grace will continue to review and analyze the
need for adjustments to the recorded accruals. However, Grace believes that it
is adequately reserved for all probable and estimable environmental exposures.
     Grace is in litigation with certain excess insurance carriers regarding the
applicability of the carriers' policies to environmental remediation costs. The
outcome of such litigation, as well as the amounts of any recoveries that Grace
may receive, is presently uncertain. Accordingly, Grace has not recorded a
receivable with respect to such insurance coverage (except in one instance where
Grace settled with the carriers).

Year 2000 Computer Systems Compliance
-------------------------------------

Grace has reviewed the software systems and related applications used in each of
its operating business segments and geographic regions to assess its
requirements regarding the "Year 2000 Issue," which generally refers to the
inability of systems hardware and software to correctly identify two-digit
references to specific calendar years, beginning with 2000. The Year 2000 Issue
can affect a company directly (i.e., in its internal data-based operations or
processing) or indirectly (e.g., if its suppliers' and customers' systems are
not "Year 2000-Compliant"). As a result of its review, Grace is (1) purchasing
and implementing new software applications that a major international supplier
of financial and business information software systems has certified to be Year
2000-Compliant, (2) upgrading existing systems by installing new software
releases that are similarly certified and (3) using Grace personnel, or
contracting with outside programming services, to modify coding and to make
other changes necessary to achieve compliance.

                                      F-37
<PAGE>   71



     Grace Construction Products and Darex Container Products have completed the
implementation of new software in North America and expect to complete their
implementation in other geographic regions, excluding Europe, by the second
quarter of 1999. Grace Davison plans to implement the new software in
conjunction with Grace Construction Products and Darex Container Products in
Latin America and Asia Pacific. In North America, Grace Davison will install new
software releases to upgrade existing systems and will contract with outside
programming services to resolve its Year 2000 Issue, with completion expected by
the second quarter of 1999. In Europe, Grace's operating business segments are
installing new software releases to upgrade existing systems and using Grace
personnel to modify coding and to make other changes to address the Year 2000
Issue; these activities are expected to be completed by December 1998. Grace's
corporate financial and certain other management systems are currently Year
2000-Compliant, and the remaining management systems are expected to be
compliant by the end of 1998. Grace plans to initiate discussions with major
suppliers and customers during 1998 to determine the status of their year
2000-compliance efforts.
     Grace's total cost for the year 2000 effort is not expected to exceed $10.0
million (excluding the purchase and implementation of the new software from the
international supplier referred to above, which is expected to total $70.0
million). Grace expects to use its internal workforce to address approximately
60% of the necessary work and to retain outside contract labor for the balance.
Grace has completed approximately 75% of all software system testing for year
2000 compliance and expects all year 2000 enhancements to be in place by the
second quarter of 1999 without any significant business disruptions.






                                      F-38
<PAGE>   72
                                                                     SCHEDULE II



                       W. R. GRACE & CO. AND SUBSIDIARIES
                VALUATION AND QUALIFYING ACCOUNTS AND RESERVES*
                                 (in millions)


                               For the Year 1997


<TABLE>
<CAPTION>
                                                                        Additions (deductions)
                                                                       ------------------------
                                                                          Charged
                                                         Balance at    (credited) to                     Balance
                                                         beginning       costs and         Other,        at end
             Description                                 of period       expenses          net**        of period
             -----------                                 ---------     -------------      -------       ---------
<S>                                                       <C>             <C>             <C>              <C>
Valuation and qualifying accounts deducted from assets:
  Allowances for notes and accounts receivable.........   $ 11.5          $   1.4         $  (8.3)         $  4.6
                                                          ------          -------         -------          ------

  Allowances for long-term receivables................    $ 42.7          $ (22.9)        $  (3.7)         $ 16.1
                                                          ------          -------         -------          ------

  Securities of divested businesses...................    $  3.9          $  (3.9)        $    --          $   --
                                                          ------          -------         -------          ------

  Valuation allowance for deferred tax assets.........    $ 72.4          $  42.6         $  23.2          $138.2
                                                          ------          -------         -------          ------
Reserves:
  Reserves for diversified businesses.................    $212.9          $ (73.6)        $ (15.8)         $123.5
                                                          ------          -------         -------          ------

</TABLE>

                               For the Year 1996
<TABLE>
<CAPTION>
                                                                        Additions (deductions)
                                                                       ------------------------
                                                                          Charged
                                                         Balance at    (credited) to                     Balance
                                                         beginning       costs and         Other,        at end
             Description                                 of period       expenses          net**        of period
             -----------                                 ---------     -------------      -------       ---------
<S>                                                       <C>             <C>             <C>              <C>
Valuation and qualifying accounts deducted from assets:
  Allowances for notes and accounts receivable........    $ 12.9          $   4.9         $  (6.3)         $ 11.5
                                                          ------          -------         -------          ------

  Allowances for long-term receivables................    $ 24.7          $   3.7         $  14.3          $ 42.7
                                                          ------          -------         -------          ------

  Securities of divested businesses...................    $  3.5          $    --         $    .4          $  3.9
                                                          ------          -------         -------          ------

  Valuation allowance for deferred tax assets.........    $ 97.7          $ (25.3)        $    --          $ 72.4
                                                          ------          -------         -------          ------
Reserves:
  Reserves for diversified businesses.................    $366.7          $(105.7)        $ (48.1)         $212.9
                                                          ------          -------         -------          ------

</TABLE>

                               For the Year 1995
<TABLE>
<CAPTION>
                                                                        Additions (deductions)
                                                                       ------------------------
                                                                          Charged
                                                         Balance at    (credited) to                     Balance
                                                         beginning       costs and         Other,        at end
             Description                                 of period       expenses          net**        of period
             -----------                                 ---------     -------------      -------       ---------
<S>                                                       <C>             <C>             <C>              <C>
Valuation and qualifying accounts deducted from assets:
  Allowances for notes and accounts receivable........    $ 95.2          $ 131.2         $(213.5)         $ 12.9
                                                          ------          -------         -------          ------

  Allowances for long-term receivables................    $ 20.6          $   3.7         $    .4          $ 24.7
                                                          ------          -------         -------          ------

  Securities of divested businesses...................    $  4.9          $    --         $  (1.4)         $  3.5
                                                          ------          -------         -------          ------

  Valuation allowance for deferred tax assets.........    $137.0          $ (32.0)        $  (7.3)         $ 97.7
                                                          ------          -------         -------          ------
Reserves:
  Reserves for diversified businesses.................    $239.3          $ 127.4         $    --          $366.7
                                                          ------          -------         -------          ------

</TABLE>

 *  Certain amounts in 1996 and 1995 have been restated to conform to the 1997
    presentation.
**  Consists of additions and deductions applicable to businesses acquired,
    disposals of businesses, bad debt write-offs, foreign currency translation,
    reclassifications (including the deconsolidation of amounts relating to
    discontinued operations) and miscellaneous other adjustments.



                                      F-39
<PAGE>   73

                                                                     Exhibit 12

                       W. R. GRACE & CO. AND SUBSIDIARIES

              COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
            COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (a)
                          (in millions, except ratios)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                               Years Ended December 31, (c)
                                                              -----------------------------------------------------------
                                                              1997 (d)      1996 (e)     1995 (f)   1994 (g)     1993 (h)
                                                              -------       --------     --------   --------     --------
<S>                                                            <C>          <C>         <C>          <C>          <C>
Net income/(loss) from continuing operations..............   $  88.2       $ 112.9     $ (324.8)    $ (185.4)     $(106.7)
    Add/(deduct):
    Provision for/(benefit from) income taxes.............      55.2          70.4       (192.4)      (120.9)       (55.5)

    Income taxes of 50%-owned companies...................        --            --           --           --           .1

    Equity in unremitted (earnings)/losses
      of less than 50%-owned companies....................      (7.0)          (.4)          .8          (.6)         (.5)

    Interest expense and related financing costs,
      including amortization of capitalized interest......      87.6         160.8        179.8        138.5        122.7

    Estimated amount of rental expense
      deemed to represent the interest factor.............       6.9           8.4          8.5         10.1         11.3
                                                             -------       -------     --------     --------      -------
Income/(loss) as adjusted.................................   $ 230.9       $ 352.1     $ (328.1)    $ (158.3)     $ (28.6)
                                                             =======       =======     ========     ========      =======

Combined fixed charges and preferred stock dividends:
    Interest expense and related financing costs,
      including capitalized interest......................   $  92.4       $ 177.1     $  195.5     $  143.2      $ 122.8
    Estimated amount of rental expense
      deemed to represent the interest factor.............       6.9           8.4          8.5         10.1         11.3
                                                             -------       -------     --------     --------      -------
Fixed charges.............................................      99.3         185.5        204.0        153.3        134.1
Preferred stock dividend requirements (b).................        --            .6           .5           .5           .8
                                                             -------       -------     --------     --------      -------
Combined fixed charges and preferred
    stock dividends.......................................   $  99.3       $ 186.1     $  204.5     $  153.8      $ 134.9
                                                             =======       =======     ========     ========      =======
Ratio of earnings to fixed charges........................      2.33          1.90       (i)          (i)            (i)
                                                             =======       =======     ========     ========      =======
Ratio of earnings to combined fixed charges and
    preferred stock dividends.............................      2.33          1.89       (i)          (i)            (i)
                                                             =======       =======     ========     ========      =======

</TABLE>

     (a)  Grace's preferred stocks were retired in 1996; see Note 1 to the
          Consolidated Financial Statements.
     (b)  For each period with an income tax provision, the preferred stock
          dividend requirements have been increased to an amount representing
          the pretax earnings required to cover such requirements based on
          Grace's effective tax rate.
     (c)  Certain amounts have been restated to conform to the 1997
          presentation.
     (d)  Includes a pretax gain of $103.1 on sales of businesses, offset by a
          pretax provision of $47.8 for restructuring costs and asset
          impairments.
     (e)  Includes a pretax gain of $326.4 on sales of businesses, offset by
          pretax provisions of $229.1 for asbestos-related liabilities and
          insurance coverage and $34.7 for restructuring costs and asset
          impairments.
     (f)  Includes pretax provisions of $275.0 for asbestos-related liabilities
          and insurance coverage; $151.3 relating to restructuring costs, asset
          impairments and other activities; $77.0 for environmental liabilities
          at former manufacturing sites; and $30.0 for corporate governance
          activities.
     (g)  Includes a pretax provision of $316.0 relating to asbestos-related
          liabilities and insurance coverage.
     (h)  Includes a pretax provision of $159.0 relating to asbestos-related
          liabilities and insurance coverage.
     (i)  As a result of the losses incurred for the years ended December 31,
          1995, 1994 and 1993, Grace was unable to fully cover the indicated
          fixed charges.



                                      F-40

<PAGE>   74

                                                                      Exhibit 21

                        W. R. GRACE & CO. SUBSIDIARY LIST

     Attached is a list of subsidiaries of W. R. Grace & Co. ("Grace") at
December 31, 1997.

     U.S. Subsidiaries (including those in Puerto Rico and the Virgin Islands)
are listed alphabetically indicating the state of incorporation, ownership (by
whom) and any notes that may pertain to the subsidiary. W. R. Grace & Co.-Conn.
("Grace-Conn") is the sole owner of the stock of each subsidiary listed unless
otherwise noted or indicated by an "A," which means that the subsidiary is owned
either (1) jointly by Grace-Conn. and one or more of its U.S. or non-U.S. wholly
owned subsidiaries or (2) solely by one or more of those subsidiaries.

     Non-U.S. Subsidiaries are listed by country and also indicate the ownership
(percentage and by whom) and any notes that may pertain to the subsidiary.

     Also attached is a list of partnerships/joint ventures in which Grace-Conn.
and/or one or more of its subsidiaries is a partner and a list of investments
(at least 20% but not more than 50%) held by W. R. Grace & Co. or Grace-Conn.
and/or one or more of its subsidiaries.


<PAGE>   75



                                                                       12/31/97

                    W. R. GRACE & CO., a Delaware corporation
                                U.S. SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                   STATE OF
                     SUBSIDIARY NAME                             INCORPORATION             OWNERSHIP          NOTES
---------------------------------------------------------- -------------------------  -------------------- ------------
<S>                                                        <C>                        <C>                   <C>
A-1 Bit & Tool Co., Inc.                                   De                         A
---------------------------------------------------------- -------------------------  -------------------- ------------
Alewife Boston Ltd.                                        MA                         A
---------------------------------------------------------- -------------------------  -------------------- ------------
Alewife Land Corporation                                   MA                         A
---------------------------------------------------------- -------------------------  -------------------- ------------
Amicon, Inc.                                               DE                         A
---------------------------------------------------------- -------------------------  -------------------- ------------
CCHP, Inc.                                                 DE                         A
---------------------------------------------------------- -------------------------  -------------------- ------------
Circe Biomedical, Inc.                                     DE
---------------------------------------------------------- -------------------------  -------------------- ------------
Coalgrace, Inc.                                            DE                         A
---------------------------------------------------------- -------------------------  -------------------- ------------
Coalgrace II, Inc.                                         DE                         A
---------------------------------------------------------- -------------------------  -------------------- ------------
Construction Products Dubai, Inc.                          DE
---------------------------------------------------------- -------------------------  -------------------- ------------
Creative Food 'N Fun Company                               DE
---------------------------------------------------------- -------------------------  -------------------- ------------
Cryovac, Inc.                                              DE
---------------------------------------------------------- -------------------------  -------------------- ------------
Cryovac International holdings, Inc.                       DE
---------------------------------------------------------- -------------------------  -------------------- ------------
Cryovac Poland Holdings, Inc.                              DE
---------------------------------------------------------- -------------------------  -------------------- ------------
Darex Puerto Rico, Inc                                     DE
---------------------------------------------------------- -------------------------  -------------------- ------------
Del Taco Restaurants, Inc.                                 DE
---------------------------------------------------------- -------------------------  -------------------- ------------
Dewey and Almy Company                                     MA
---------------------------------------------------------- -------------------------  -------------------- ------------
Ecarg, Inc.                                                NJ
---------------------------------------------------------- -------------------------  -------------------- ------------
E & C Liquidating Corp.                                    DE
---------------------------------------------------------- -------------------------  -------------------- ------------
Five Alewife Boston Ltd.                                   MA                         A
---------------------------------------------------------- -------------------------  -------------------- ------------
GC Holding Inc.                                            DE
---------------------------------------------------------- -------------------------  -------------------- ------------
G C Limited Partners I, Inc.                               DE
---------------------------------------------------------- -------------------------  -------------------- ------------
G C Management, Inc.                                       DE
---------------------------------------------------------- -------------------------  -------------------- ------------
GEC Management Corporation                                 DE                         A
---------------------------------------------------------- -------------------------  -------------------- ------------
GN Holdings, Inc.                                          DE                                              6
---------------------------------------------------------- -------------------------  -------------------- ------------
GPC Thomasville Corp.                                      DE                         A
---------------------------------------------------------- -------------------------  -------------------- ------------
Gloucester New Communities Company, Inc.                   NJ                         A
---------------------------------------------------------- -------------------------  -------------------- ------------
Grace A-B Inc.                                             DE                         A
---------------------------------------------------------- -------------------------  -------------------- ------------
Grace A-B II Inc.                                          DE                         A
---------------------------------------------------------- -------------------------  -------------------- ------------
Grace Asia Pacific, Inc.                                   DE
---------------------------------------------------------- -------------------------  -------------------- ------------
Grace Chemicals, Inc.                                      DE
---------------------------------------------------------- -------------------------  -------------------- ------------
Grace Chemical Company of Cuba                             IL                                              5
---------------------------------------------------------- -------------------------  -------------------- ------------
Grace Collections, Inc.                                    DE
---------------------------------------------------------- -------------------------  -------------------- ------------
Grace Communications, Inc.                                 DE
---------------------------------------------------------- -------------------------  -------------------- ------------
Grace Culinary Systems, Inc.                               MD
---------------------------------------------------------- -------------------------  -------------------- ------------
</TABLE>


                                        2


<PAGE>   76
<TABLE>
<CAPTION>




---------------------------------------------------------- -------------------------  -------------------- ------------
<S>                                                        <C>                        <C>                  <C>
Grace Drilling Company                                     DE                         A
---------------------------------------------------------- -------------------------  -------------------- ------------
Grace Energy Corporation                                   DE
---------------------------------------------------------- -------------------------  -------------------- ------------
Grace Environmental, Inc.                                  DE
---------------------------------------------------------- -------------------------  -------------------- ------------
Grace Europe, Inc.                                         DE
---------------------------------------------------------- -------------------------  -------------------- ------------
Grace Germany Holdings, Inc.                               DE
---------------------------------------------------------- -------------------------  -------------------- ------------
Grace H-G Inc.                                             DE                         A
---------------------------------------------------------- -------------------------  -------------------- ------------
Grace H-G II Inc.                                          DE                         A
---------------------------------------------------------- -------------------------  -------------------- ------------
Grace Hotel Services Corporation                           DE
---------------------------------------------------------- -------------------------  -------------------- ------------
Grace International Holdings, Inc.                         DE
---------------------------------------------------------- -------------------------  -------------------- ------------
Grace JVH, Inc.                                            DE
---------------------------------------------------------- -------------------------  -------------------- ------------
Grace Logistics Services, Inc.                             DE
---------------------------------------------------------- -------------------------  -------------------- ------------
Grace Management Services, Inc.                            DE
---------------------------------------------------------- -------------------------  -------------------- ------------
Grace Offshore Company                                     LA                         A
---------------------------------------------------------- -------------------------  -------------------- ------------
Grace PAR Corporation                                      DE
---------------------------------------------------------- -------------------------  -------------------- ------------
Grace Petroleum Libya Incorporated                         DE
---------------------------------------------------------- -------------------------  -------------------- ------------
Grace Specialty Chemicals, Inc.                            DE                                              4
---------------------------------------------------------- -------------------------  -------------------- ------------
Grace Tarpon Investors, Inc.                               DE
---------------------------------------------------------- -------------------------  -------------------- ------------
Grace Ventures Corp.                                       DE
---------------------------------------------------------- -------------------------  -------------------- ------------
Grace Washington, Inc.                                     DE
---------------------------------------------------------- -------------------------  -------------------- ------------
W. R. Grace Capital Corporation                            NY                         A
---------------------------------------------------------- -------------------------  -------------------- ------------
W. R. Grace Land Corporation                               NY
---------------------------------------------------------- -------------------------  -------------------- ------------
W. R. Grace & Co.-Conn.                                    CT                                              4
---------------------------------------------------------- -------------------------  -------------------- ------------
Gracoal, Inc.                                              DE                         A
---------------------------------------------------------- -------------------------  -------------------- ------------
Gracoal II, Inc.                                           DE                         A
---------------------------------------------------------- -------------------------  -------------------- ------------
Guanica-Caribe Land Development Corporation                DE
---------------------------------------------------------- -------------------------  -------------------- ------------
Hanover Square Corporation                                 DE
---------------------------------------------------------- -------------------------  -------------------- ------------
Homco International, Inc.                                  DE                         A
---------------------------------------------------------- -------------------------  -------------------- ------------
Ichiban Chemical Co., Inc.                                 DE
---------------------------------------------------------- -------------------------  -------------------- ------------
L B Realty, Inc.                                           DE
---------------------------------------------------------- -------------------------  -------------------- ------------
Monolith Enterprises, Incorporated                         DC
---------------------------------------------------------- -------------------------  -------------------- ------------
Monroe Street, Inc.                                        DE
---------------------------------------------------------- -------------------------  -------------------- ------------
Packco Acquisition Corp.                                   DE                                              4
---------------------------------------------------------- -------------------------  -------------------- ------------
Southern Oil, Resin & Fiberglass, Inc.                     FL
---------------------------------------------------------- -------------------------  -------------------- ------------
Water Street Corporation                                   DE
---------------------------------------------------------- -------------------------  -------------------- ------------
Woolwich Sewer Company, Inc.                               NJ                         A
---------------------------------------------------------- -------------------------  -------------------- ------------
Woolwich Water Co., Inc.                                   NJ                         A
---------------------------------------------------------- -------------------------  -------------------- ------------
</TABLE>




                                        3


<PAGE>   77



                              NON-U.S. SUBSIDIARIES
<TABLE>
<CAPTION>

                                                                                              Ownership
                                                                                               % / By
           Country                                  Subsidiary Name                              Whom          Noes
-----------------------------  ---------------------------------------------------------- ----------------- -----------
<S>                            <C>                                                        <C>               <C>
Argentina                      W. R. Grace Argentina S.A.                                 100 / A
                               WRG Argentina, S.A.                                        100 / A
                               Grace Argentina, S.A.                                      100 / A
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Australia                      Grace Australia Pty. Ltd.
                               W. R. Grace Australia Limited                              100 / A
                               Omicron Proprietary Limited                                100 / A
                               Omipac Pty. Ltd.                                           100 / A
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Belgium                        Grace N.V.                                                 100 / A
                               Grace Silica N.V.                                          100 / A
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Brazil                         Cryovac Brasil Ltda.                                       100 / A
                               Cryovac-Brasil Holding Ltda.                               100 / A
                               Grace Brasil S.A.                                          100 / A
                               PEADCO-Engenharia, Comercio Industria Ltda.                100 / A
                               International Holdings Ltda.                               100 / A
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Canada                         GEC Divestment Corporation Ltd.                            100 / A
                               W. R. Grace & Co. of Canada Ltd.                           100
                               W. R. Grace Finance (NRO) Ltd.                             100
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Cayman Islands                 Grace China Holdings I, Inc.                               100
                               Grace Davison China, Inc.                                  100
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Chile                          Grace Quimica Compania Limitada                            100 / A
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Colombia                       Grace Colombia, S.A.                                       100 / A
                               W R G Colombia S.A.                                        100 / A
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Cuba                           Envases Industriales y Comerciales, S.A.                   100               5
                               Papelera Camagueyana, S.A.                                 100               5
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Czech Republic                 Grace Spol. s r.o.                                         100
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Denmark                        W. R. Grace A/S                                            100
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Finland                        W. R. Grace Oy                                             100 / A
-----------------------------  ---------------------------------------------------------- ----------------- -----------
France                         Grace S.A.                                                 100
                               W. R. Grace SAS                                            100/A
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Germany                        A-1 Bit & Tool Co. G.m.b.H.                                100
                               Chomerics G.m.b.H.                                         100 / A
                               Cryovac Verpackungen GmbH                                  100               7
                               EAP Akustic GmbH                                           100 / A
                               Emerson & Cuming G.m.b.H.                                  100 / A           1
                               Grace Darex GmbH                                           100
                               Grace G.m.b.H.                                             100 / A
                               Grace Multiflex GmbH                                       100 / A
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Greece                         Grace Hellas E.P.E.                                        100
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Guatemala                      Grace Central America, S.A.                                100
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Hong Kong                      Cryovac Hong Kong Limited                                  100 / A
                               Cryovac Systems (Hong Kong) Limited                        100 / A           1
                               W. R. Grace Southeast Asia Holdings Limited                100
                               W. R. Grace (Hong Kong) Limited                            100
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Hungary                        Grace kft.                                                 100 / A
-----------------------------  ---------------------------------------------------------- ----------------- -----------
India                          W. R. Grace & Co. (India) Private Limited                  100
                               Cryovac India Private Limited                              100 / A
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Indonesia                      P. T. Grace Specialty Chemicals Indonesia                  100 / A
-----------------------------  ---------------------------------------------------------- ----------------- -----------
</TABLE>


                                        4


<PAGE>   78


<TABLE>
<CAPTION>


-----------------------------  ---------------------------------------------------------- ----------------- -----------
<S>                            <C>                                                        <C>               <C>
Ireland                        Amicon Ireland Limited                                     100 / A
                               W. R. Grace (Ireland) Ltd.                                 100 / A
                               Trans-Meridian Insurance (Dublin) Ltd.                     100
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Italy                          Grace Italiana S.p.A.                                      100 / A
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Japan                          Cryovac Japan K. K.                                        100/A
                               Grace Japan Kabushiki Kaisha                               100
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Korea                          Grace Korea Inc.                                           100
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Malaysia                       W. R. Grace (Malaysia) Sendiran Berhad                     100 / A
                               W. R. Grace Packaging (Malaysia) Sdn. Bhd.                 100
                               W. R. Grace Specialty Chemicals (Malaysia)                 100
                               Sdn. Bhd.
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Mexico                         Invertol S. A. de C. V.                                    100 / A
                               Grace Container, S. A. de C. V.                            100 / A
                               Grace Holdings, S. A. de C. V.                             100
                               Grace Mexico, S. A. de C. V.                               100 / A
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Netherlands                    Amicon B.V.                                                100
                               Denac Nederland B.V.                                       100 / A
                               Grace B.V.                                                 100
                               Storm van Bentem & Kluyver B.V.                            100 / A
                               W. R. Grace B.V.                                           100
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Netherlands Antilles           W. R. Grace N.V.                                           100
-----------------------------  ---------------------------------------------------------- ----------------- -----------
New Zealand                    W. R. Grace (N.Z.) Limited                                 100 / A
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Norway                         W. R. Grace A/S                                            100 / A
-----------------------------  ---------------------------------------------------------- ----------------- -----------
People's Republic of           Grace China Ltd.                                           100
China
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Philippines                    W. R. Grace (Philippines) Inc.                             100 / A
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Poland                         W. R. Grace Sp. z.O.O.                                     100
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Portgual                       Grace Portuguesa (Productos Quimicos e                     100
                                  Plsticos) Ltda.
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Russia                         W. R. Grace LLC                                            100 / A
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Singapore                      W. R. Grace (Singapore) Private Limited                    100 / A
-----------------------------  ---------------------------------------------------------- ----------------- -----------
South Africa                   Cryovac Africa (Pty) Ltd.                                  100 / A
                               W. R. Grace Africa (Pty.) Limited                          100
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Spain                          Grace, S.A.                                                100
                               Teroson Espanola, S.L.                                     100 / A           3
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Sweden                         Cryovac Sweden AB                                          100
                               Grace AB                                                   100               3
                               Grace Sweden AB                                            100 / A
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Switzerland                    Grace A.G.                                                 100 / A
                               Syncrete S.A.                                              100               1
                               Neue Transvac Maschinen A.G.                               99.99%
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Taiwan                         W. R. Grace Taiwan Inc.                                    100 / A
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Thailand                       W. R. Grace (Thailand) Ltd.                                100 / A           3
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Turkey                         Grace TLS                                                  100 / A           1
-----------------------------  ---------------------------------------------------------- ----------------- -----------
</TABLE>


                                        5


<PAGE>   79



<TABLE>
<CAPTION>

-----------------------------  ---------------------------------------------------------- ----------------- -----------
<S>                            <C>                                                        <C>               <C>
United Kingdom                 A.A. Consultancy & Cleaning Company Limited                100 / A           3
                               Cormix Limited                                             100 / A           3
                               Borndear 1 Limited                                         100 / A           3
                               Borndear 2 Limited                                         100 / A           3
                               Cryovac UK Limited                                         100
                               Darex UK Limited                                           100
                               Chasmbridge Limited                                        100
                               Grace Construction Products Ltd.                           100 / A
                               Servicised Ltd.                                            100 / A           3
                               W. R. Grace Limited                                        100
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Uruguay                        W. R. Grace Uruguay S.A.                                   100
-----------------------------  ---------------------------------------------------------- ----------------- -----------
Venezuela                      Cryovac de Venezuela, S.A.                                 100 / A
                               Grace Venezuela, S.A.                                      100 / A
                               Inversiones GSC, S.A.                                      100               1
-----------------------------  ---------------------------------------------------------- ----------------- -----------

</TABLE>


                                        6


<PAGE>   80



                             U.S. AND NON-U.S. NOTES

1      In liquidation

2      Inactive

3      Dormant, assets sold

4      Owned by W. R. Grace & Co.

5      Assets and business expropriated by Cuban Government

6      Owned 95% by W. R. Grace & Co.-Conn.

7      Owned by W. R. Grace & Co.-Conn., as majority shareholder, and
       W. R. Grace & Co., as minority shareholder.


                                        7


<PAGE>   81
                          PARTNERSHIPS & JOINT VENTURES

A/O Grace Kaustik
     a Joint stock company, 46% owned by Grace Italiana S.p.A., 5% owned by W.
     R. Grace Ltd., 49% owned by A/O Kaustik

A/O Grace Kriz
     a Russia joint venture, owned 20% by Grace S.A., 31% by W. R. Grace Limited
     and 49% by A/O Kriz

Axial Basin Ranch Company
     a Delaware partnership, owned 50% by Grace A-B Inc., 50% Grace A-B II
     Inc.

Carbon Dioxide Slurry Systems L.P.
      a Delaware partnership, owned 50% by W. R. Grace & Co.-Conn.

Cormix Middle East LLC
     a Dubai LLC, owned 49% by Construction Products Dubai, Inc., 51% Sheikh
     Hasher Maktoum Juma Al Maktoum

Cross Country Staffing
     a Delaware general partnership, owned 64% by CCHP, Inc. and 36% by MRA
     Staffing Systems, Inc.

Dearborn I.E.I. Ltd.
     an India joint venture, owned 51% by W. R. Grace & Co.-Conn. and 49% by Ion
     Exchange India

Emirates Chemicals LLC
     a Dubai LLC, owned 49% Construction Products Dubai, Inc., 51% Sheikh Hasher
     Maktoum Juma Al Maktoum

G C Associates
     a Delaware general partnership, the partners of which are W. R. Grace &
     Co.-Conn., GC Holding, Inc., G C Management, Inc. and G C Ventures

G C Ventures
     a Delaware general partnership, the partners of which are G C Limited
     Partners I, Inc. and W.R. Grace & Co.-Conn.

Grace Offshore Turnkey
     a Texas partnership, owned 50% by Grace Offshore Company

Grace Yapi Kimyasallari Sanayi ve Ticaret A.S.
     a Turkish joint venture, owned 50% by Construction Products Dubai, Inc. and
     50% by Sezai Turkes Feyzi Akkaya Holding A.S.

Grace Packaging Gaoming Co. Ltd.
     a China joint venture, owned 77.89% by Grace China Holdings I, Inc. and
     22.11% by Sanzhou Economic Development General Company

Hayden-Gulch West Coal Company
     a Delaware partnership, owned 50% by Grace H-G Inc., 50% by Grace H-G II,
     Inc.

H-G Coal Company
     a Delaware partnership, owned 50% by Coalgrace, Inc., 50% by Coalgrace II,
     Inc.

Metreon
     an Ohio joint venture/partnership, owned 50% by Grace JVH, Inc., 50% by
     Englehard MC, Inc.

Parade & Omicron Sdn Bhd
     a Malaysia Joint Venture, owned 51% by Omipac Proprietary Ltd. and 49% by
     Parade Industries Pte. Ltd.

Paramont Coal Company
     a Virginia partnership, owned 50% by Grace PAR Corporation


                                        8


<PAGE>   82


                                   INVESTMENTS
                (holdings of at least 20% but not more than 50%)
<TABLE>
<CAPTION>

               Company Name                            Jurisdiction                Ownership Percent          Notes
-------------------------------------------  -------------------------------- ---------------------------- ------------
<S>                                          <C>                                                     <C>    <C>
Arral & Partners                             British Virgin Islands                                  25.8%

-------------------------------------------  -------------------------------- ---------------------------- ------------
Asian Food Investment Limited                British Virgin Islands                                    40%
-------------------------------------------  -------------------------------- ---------------------------- ------------
Colowyo Coal Company L.P.                    Delaware                                                      1
-------------------------------------------  -------------------------------- ---------------------------- ------------
Denka Grace K.K.                             Japan                                                     45%
-------------------------------------------  -------------------------------- ---------------------------- ------------
GKA Company Limited                          Hong Kong                                                 25%
-------------------------------------------  -------------------------------- ---------------------------- ------------
Noxso Corporation                            Virginia                                                23.1%
-------------------------------------------  -------------------------------- ---------------------------- ------------
Tarpon Investors, L.P.                       Delaware                                                      2
-------------------------------------------  -------------------------------- ---------------------------- ------------
</TABLE>

Notes:

1    Limited partnership interests are owned by Gracoal, Inc. and Gracoal II,
     Inc.
2    Limited partnership interest is owned by Grace Tarpon Investors, Inc.



                                        9


<PAGE>   83


                                                                      Exhibit 24

                                POWER OF ATTORNEY

     The undersigned hereby appoints KATHLEEN A. BROWNE, LARRY ELLBERGER and
ROBERT B. LAMM as his/her true and lawful attorneys-in-fact for the purpose of
signing the Annual Report on Form 10-K of W. R. GRACE & CO. for the year ended
December 31, 1997, and all amendments thereto, to be filed with the Securities
and Exchange Commission.  Each of such attorneys-in-fact is appointed with full
power to act without the other.

         /s/ J. F. Akers                             /s/ J. W. Frick
         /s/ H. Brown                                /s/ T. A. Holmes
         /s/ C. Cheng                                /s/ V. A. Kamsky
         /s/ A. J. Costello                          /s/ J. J. Murphy
         /s/ H. A. Eckmann                           /s/ J. E. Phipps
         /s/ M. A. Fox                               /s/ T. A. Vanderslice




Dated:  March 30, 1998


<PAGE>   84
[ARTICLE] 5
[MULTIPLIER] 1,000
<TABLE>
<S>                             <C>
[PERIOD-TYPE]                   12-MOS
[FISCAL-YEAR-END]                          DEC-31-1997
[PERIOD-START]                             JAN-01-1997
[PERIOD-END]                               DEC-31-1997
[CASH]                                          47,600
[SECURITIES]                                         0
[RECEIVABLES]                                  357,700
[ALLOWANCES]                                     4,600
[INVENTORY]                                    129,600
[CURRENT-ASSETS]                             2,175,500<F1>
[PP&E]                                       1,452,700
[DEPRECIATION]                                 789,400
[TOTAL-ASSETS]                               3,773,000<F1>
[CURRENT-LIABILITIES]                        1,357,700
[BONDS]                                              0
[PREFERRED-MANDATORY]                                0
[PREFERRED]                                          0
[COMMON]                                           700
[OTHER-SE]                                     467,200
[TOTAL-LIABILITY-AND-EQUITY]                 3,773,000
[SALES]                                      1,479,700<F2>
[TOTAL-REVENUES]                             1,524,900
[CGS]                                          908,300
[TOTAL-COSTS]                                  908,300
[OTHER-EXPENSES]                                     0
[LOSS-PROVISION]                                     0
[INTEREST-EXPENSE]                              19,200<F3>
[INCOME-PRETAX]                                143,400<F4>
[INCOME-TAX]                                    55,200
[INCOME-CONTINUING]                             88,200<F4>
[DISCONTINUED]                                 172,800<F5>
[EXTRAORDINARY]                                      0
[CHANGES]                                            0
[NET-INCOME]                                   261,000
[EPS-PRIMARY]                                     3.53<F6>
[EPS-DILUTED]                                     3.45
<FN>
<F1>Includes net assets of discontinued operations of $1,424,000.
<F2>Excludes sales of $1,833,100 of the Packaging Business, which was classified as
a discontinued operation as of December 31, 1997.
<F3>Excludes interest expense allocated to Grace's discontinued operations of
$59,400 ($38,600 after-tax).
<F4>Includes a pretax gain of $103,100 ($63,000 after-tax) on the sale of Grace's
specialty polymers business and a pretax provision of $47,800 ($30,600
after-tax) relating to restructuring costs and asset impairments.
<F5>Includes income from operations of the Packaging Business of $258,600
($160,400 after-tax) and a $19,000 ($12,400 after-tax) reversal of previously
recorded provisions for Grace's cocoa business.
<F6>Grace's basic EPS was $3.53. In accordance with SFAS NO. 128, Grace no
longer reports primary EPS.
</FN>
</TABLE>