<PAGE>
================================================================================

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

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

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


For the fiscal year ended December 31, 2002       Commission file number 1-13953


                                W. R. GRACE & CO.


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

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

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

                                                     NAME OF EACH EXCHANGE ON
       TITLE OF EACH CLASS                              WHICH REGISTERED

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


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

                                      None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]

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

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


The aggregate market value of W. R. Grace & Co. voting and non-voting common
equity held by non-affiliates as of June 30, 2002 (the last business day of the
registrant's most recently completed second fiscal quarter) was $162,603,000.

At February 28, 2003, 65,542,679 shares of W. R. Grace & Co. Common Stock, $.01
par value, were outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE
None.

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

<PAGE>


                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
<S>                                                                                                              <C>
PART I............................................................................................................1

         Item 1.      Business....................................................................................1
                           Availability Of SEC Reports............................................................1
                           Chapter 11 Filing......................................................................1
                           Business Overview......................................................................2
                           Products And Markets...................................................................4
                           Intellectual Property; Research Activities.............................................9
                           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..........................................................................................................16

         Item 5.      Market for Registrant's Common Equity and Related Shareholder Matters......................16
         Item 6.      Selected Financial Data....................................................................18
         Item 7.      Management's Discussion and Analysis of Results of Operations and Financial Condition......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.........................................................................................................18

         Item 10.     Directors and Executive Officers of the Registrant.........................................18
         Item 11.     Executive Compensation.....................................................................20
         Item 12.     Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
                      Matters....................................................................................27
         Item 13.     Certain Relationships and Related Transactions.............................................29
         Item 14      Controls and Procedures....................................................................29

PART IV..........................................................................................................29

         Item 15.     Exhibits, Financial Statement Schedules, and Reports on Form 8-K...........................29

SIGNATURES.......................................................................................................34


CERTIFICATIONS...................................................................................................35

FINANCIAL SUPPLEMENT............................................................................................F-1

</TABLE>


<PAGE>

                                     PART I

ITEM 1.   BUSINESS

AVAILABILITY OF SEC REPORTS

         W. R. Grace & Co.(1) maintains an Internet website at www.grace.com
Grace makes available (and made available throughout 2002), free of charge
through its website, its annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports, filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, as soon as reasonably practicable after such reports are
electronically filed with, or furnished to, the SEC. These reports may be
accessed through the website's investor information page.

CHAPTER 11 FILING

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

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

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

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

         As a consequence of the filing, pending litigation against Grace is
generally stayed (subject to certain exceptions in the case of governmental
authorities), and no party may take any action to realize its pre-petition
claims except pursuant to order of the Bankruptcy Court. Since the filing, all
motions necessary to conduct normal business activities have been approved by
the Bankruptcy Court.

         Grace intends to address all of its pending and future asbestos-related
claims and all other pre-petition claims in a plan of reorganization. Such a
plan of reorganization may include the establishment of a trust


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


<PAGE>


through which all pending and future asbestos-related claims would be channeled
for resolution. However, it is currently impossible to predict with any degree
of certainty the amount that would be required to be contributed to the trust,
how the trust would be funded, how other pre-petition claims would be treated or
what impact any reorganization plan may have on the shares of common stock of
Grace. The interests of Grace's shareholders could be substantially diluted or
cancelled under a plan of reorganization.

         Grace's asbestos-related litigation and Chapter 11 filing are further
discussed in Item 3 of this Report, and in Notes 1, 2 and 3 to Grace's
Consolidated Financial Statements as of December 31, 2002 and December 31, 2001
and for each of the three years ended December 31, 2002 ("Consolidated Financial
Statements") and "Management's Discussion and Analysis of Results of Operations
and Financial Condition" in the Financial Supplement to this Report.

BUSINESS OVERVIEW

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

    o    Davison Chemicals manufactures catalysts and silica-based products.
         Davison Chemicals' catalysts include (1) fluid cracking catalysts and
         additives used by petroleum refineries to convert distilled crude oil
         into transportation fuels and other petroleum-based products; (2)
         hydroprocessing catalysts that upgrade heavy oils and remove certain
         impurities; and (3) polyolefin catalysts and catalyst supports that are
         essential components in the manufacture of high density and linear low
         density polyethylene resins used in products such as plastic film,
         high-performance plastic pipe and plastic household containers. Davison
         Chemicals' silica gels, colloidal silicas, precipitated silicas, and
         zeolite adsorbents are used in a wide variety of industrial, consumer,
         biotechnology and pharmaceutical segments, such as ink jet paper,
         paints, toothpastes, precision investment casting, rubber compounds,
         insulated glass and separations/chromatography, as well as in edible
         oil refining and petrochemical processes. Davison Chemicals accounted
         for approximately 52% of Grace's 2002 sales.

    o    Performance Chemicals produces (1) specialty construction chemicals,
         including performance-enhancing concrete admixtures, cement additives
         and masonry products; (2) specialty building materials, including
         fireproofing and waterproofing materials and systems; and (3) sealants
         and coatings for packaging that protect food and beverages from
         bacteria and other contaminants, extend shelf life and preserve flavor.
         Performance Chemicals accounted for approximately 48% of Grace's 2002
         sales.

         Grace's principal executive offices are located at 7500 Grace Drive,
Columbia, Maryland 21044, telephone 410/531-4000. As of year-end 2002, Grace had
approximately 6,400 full-time employees worldwide in its continuing operations.

         Information concerning the net sales, pretax operating income and total
assets of Grace's continuing operations by business segment and information by
geographic area for 2002, 2001 and 2000 is contained in Note 19 to the
Consolidated Financial Statements in the Financial Supplement to this Report.

         Strategic Objectives and Actions. Grace's strategy has been, and will
continue to be, to seek to enhance enterprise value by profitably growing its
specialty chemicals businesses globally 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 high-performance
products and services and

                                       2
<PAGE>

enhancing manufacturing processes; (ii) implement process and productivity
improvements and cost-management initiatives (including the use of Six Sigma
processes) such as rigorous controls on working capital and capital spending;
and (iii) pursue selected acquisitions and alliances. These plans are designed
to make Grace a high-performance company focused on the strengths of its global
specialty chemicals businesses.

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

         Most significantly, Grace filed for protection under Chapter 11 on
April 2, 2001 as a result of a sharply increasing number of asbestos bodily
injury claims. See Item 3 of this Report, and Notes 1, 2 and 3 to Grace's
Consolidated Financial Statements and "Management's Discussion and Analysis of
Results of Operations and Financial Condition" in the Financial Supplement to
this Report, for a more detailed discussion of risks related to Grace's asbestos
liabilities.

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

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

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

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

o   greater than expected liabilities with respect to environmental remediation;

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

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

o   increases in prices of raw materials and energy costs;

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

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

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

o   slower than anticipated economic advances in less developed countries;

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

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

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

o   the acquisition (through theft or other means) and use by others of Grace's
    proprietary formulas and other know-how (particularly in the sealants and
    coatings business).

                                       3
<PAGE>

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

PRODUCTS AND MARKETS

         Specialty Chemicals Industry Overview. Specialty chemicals, such as
those produced by Grace, are high-value-added products used as catalysts,
intermediates, components or additives in a wide variety of products and
processes. They are 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 catalysts for the
processes in which they are used; consequently, they are tailored to meet
customer needs, which generally results in a close relationship between the
specialty chemicals producer and the customer. Rapid response to changing
customer needs and reliability of product and supply are important competitive
factors in specialty chemicals businesses.

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

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

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

         Davison's catalyst business has benefited from the increased use of FCC
units to produce selected petrochemical feedstocks. It has also benefited from
the passage of more stringent environmental regulations, which has increased
demand for FCC additives and other products that reduce environmental emissions.
Davison's business is affected by the capacity utilization of customers'
processing units - as capacity utilization increases, the customer frequently
uses a disproportionately greater amount of catalysts. Consolidation in the
refining industry may affect Davison's catalyst sales and margins, as the
purchasing power of its customers may increase, and the gain or loss of a
customer may have a greater impact on Davison's sales.

                                       4
<PAGE>

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

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

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

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

         Silica gels are used in coatings as matting agents (i.e., to reduce
gloss), in plastics to improve handling, in pharmaceuticals as a formulating
agent, in toothpastes as abrasives and whiteners, in foods to carry flavors and
prevent caking, and in the purification of edible oils and beer stabilization.
Davison is leveraging its materials science expertise, both internally and
through acquisitions, to develop and introduce new silica materials and
technologies, particularly for biotechnology separations applications. Davison
recently has developed a new colloidal-based product and silica formulations for
ink jet paper coatings to provide both glossy and matte functionality, expanding
its portfolio of digital media solutions for ink jet papers, photos, and
commercial wide-format printing. Davison has also introduced new products for
other coatings (where silica is used to reduce gloss), such as for thin film
applications, industrial wood coatings, and radiation-cured coatings. Davison
intends to introduce new products for chromatography columns and separations
media in 2003.

         Colloidal silicas are used primarily as binders in precision investment
casting and refractory applications. Precipitated silicas are used predominantly
in the manufacture of tires and other industrial rubber goods such as belts,
hoses and footwear. Zeolites, while not silica-based products, are based on
silica/alumina technology. Zeolite adsorbents are used between the two panes of
insulating glass to adsorb moisture and are also used in process applications to
adsorb water and separate certain chemical components from mixtures.

                                       5
<PAGE>

         The silicas and adsorbents business has a large, fragmented customer
base, reflecting the diverse markets served by its products. To better serve
these customers, Davison has introduced web-based initiatives, including online
ordering of packaged desiccants, process design formulas to assist customers in
determining their needs, and literature access and customer feedback tools.
Approximately half of Davison's silica and adsorbent sales are in Europe.

         Davison Financial and Other Business Information. Davison's net sales
were $945 million in 2002, $874 million in 2001, and $784 million in 2000; 41%
of Davison's 2002 net sales were generated in North America, 38% in Europe, 16%
in Asia Pacific, and 5% in Latin America. Sales of catalysts accounted for 37%
of total net sales of Grace in 2002, 36% in 2001, and 35% in 2000. Sales of
silica products and zeolite adsorbents accounted for 15% of Grace's total net
sales in 2002 and 2001, and 14% in 2000.

         At year-end 2002, Davison employed approximately 3,100 people worldwide
in 16 facilities (10 in the U.S., two in Germany, and one each in Canada,
Brazil, Sweden and Malaysia). Davison's principal U.S. manufacturing facilities
are located in Baltimore, Maryland and Lake Charles, Louisiana. Its largest
non-U.S. location is in Worms, Germany. Davison has a direct selling force and
distributes most of its products directly to approximately 12,000 customers (500
for catalysts and more than 11,000 for silicas/adsorbents), the largest of which
accounted for approximately 4% of Davison's 2002 sales.

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

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

         Construction Chemicals and Building Materials. Specialty construction
chemicals (principally concrete admixtures, cement additives and masonry
products) add strength, control corrosion and enhance the handling and
application of concrete, improve the manufacturing efficiency and performance of
cement, and improve the water resistance and other qualities of masonry wall and
paving systems. Grace has introduced a number of new construction chemicals
products and product enhancements in recent years. These include an admixture
that reduces concrete shrinkage and helps prevent cracking; a product that
enables contractors to obtain improved concrete set times in colder
temperatures; an admixture that inhibits corrosion and prolongs the life of
concrete structures; and an additive that improves cement processing efficiency
and product quality. Grace seeks to continuously improve and adapt these
products for different applications.

         In 2001, Grace introduced new fiber reinforcements for concrete and a
system for producing self-consolidating concrete (which improves the concrete's
conformity to the shape of a structure). In 2002, Grace acquired the masonry
admixtures business of Addiment Incorporated, which expanded Grace's position in
the U.S. paver segment.

                                       6
<PAGE>

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

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

         Construction chemicals and building materials are marketed under the
Grace(R) name to abroad range of customers, including cement manufacturers,
ready-mix and precast concrete producers, local contractors, specialty
subcontractors and applicators, masonry block manufacturers, building materials
distributors and other industrial manufacturers, as well as to architects and
structural engineers. For some of these customer groups (such as contractors),
cost and ease of application are key factors in making purchasing decisions; for
others (such as architects and structural engineers), product performance and
design versatility are the critical factors. In view of this diversity, and
because the construction chemicals and building materials businesses require
intensive sales and customer service efforts, Performance Chemicals maintains a
separate sales and technical support team for each of its product groups. These
sales and support teams sell products under global contracts, under U.S. or
regional contracts, and on a job-by-job basis. Consequently, Grace competes
globally with several large construction materials suppliers and regionally and
locally with numerous smaller competitors. In recent years, the cement and
concrete industry has experienced some consolidation, particularly in markets
outside of the U.S. Competition is based largely on technical support and
service, product performance, adaptability of the product and price.

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

         The raw materials used by the construction chemicals and building
materials product lines can be obtained from multiple sources, including
commodity chemical producers, petroleum companies and paper manufacturers. In
most instances, there are at least two alternative suppliers for each of the
principal raw materials used by these businesses.

         Sealants and Coatings. The Darex(R) sealants and coatings business
consists primarily of four product lines: can sealants and closure sealants for
rigid containers, coatings for metal packaging, and specialty barrier coatings
for flexible packaging. These products are used to assure the quality of
packaging and to preserve container contents. Can sealants ensure a hermetic
seal between the lid and the body of beverage, food, aerosol and other cans.
Closure sealants are used to seal pry-off and twist-off metal crowns, as well as
roll-on pilfer-proof and plastic closures for glass and plastic bottles and jars
used in beverage and food applications. Coatings are used in the manufacture of
cans and closures to protect the metal against corrosion, to protect the
contents against the influences of metal, to ensure proper adhesion of sealing
compounds to metal surfaces,

                                       7
<PAGE>

and to provide base coats for inks and for decorative purposes. These products
are principally sold to container manufacturers. Specialty barrier coatings are
used to improve the gas and/or vapor barrier performance of various packaging
materials. They are principally sold to manufacturers of oriented polypropylene
films for food packaging.

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

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

         Although raw materials used in the sealants and coatings business,
including resins, rubber and latices, are generally available from multiple
sources, many raw materials are purchased from single source suppliers. Some raw
materials are also subject to pricing pressures from time to time, particularly
certain specialty resins and commodity solvents, resins and plasticizers because
of market demand or the volatility of oil prices. Also, currency devaluations in
developing countries may adversely affect raw material costs and the prices the
business may charge for its products. Performance Chemicals has been successful
in establishing a supply chain organization focused on managing raw material
costs and flow to alleviate some of these pressures. The impact of seasonality
is not significant to the sealants and coatings business.

         Performance Chemicals Financial and Other Business Information. Net
sales of Grace's Performance Chemicals segment in 2002 totaled $872 million (57%
in North America, 23% in Europe, 14% in Asia Pacific, and 6% in Latin America),
versus $849 million in 2001 and $814 million in 2000. Sales of specialty
construction chemicals accounted for 22% of Grace's total net sales in 2002, 21%
in 2001 and 22% in 2000; sales of specialty building materials accounted for 13%
of Grace's total net sales in 2002, and 14% in 2001 and 2000; and sales of
Darex(R) products accounted for 13% of Grace's total net sales in 2002, 14%
in 2001 and 15% in 2000.

         At year-end 2002, Grace employed approximately 3,000 people at 64
Performance Chemicals production facilities (25 in North America, 19 in Asia
Pacific, 14 in Europe, and 6 in Latin America) and approximately 70 sales
offices worldwide. Most of Performance Chemicals' sales are direct sales to the
customer. Performance Chemicals' capital expenditures tend to be relatively
lower, and sales and marketing expenditures tend to be relatively higher, than
those of Davison Chemicals.

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

                                       8
<PAGE>

INTELLECTUAL PROPERTY; RESEARCH ACTIVITIES

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

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

         Research and development expenses relating to continuing operations
amounted to $52 million in 2002, $49 million in 2001, and $46 million in 2000.
These amounts include expenses incurred in funding external research projects.
The amount of research and development expenses relating to government- and
customer-sponsored projects (rather than projects sponsored by Grace) was not
material.

ENVIRONMENTAL, HEALTH AND SAFETY MATTERS

         Manufacturers of specialty chemicals products, including Grace, are
subject to stringent regulations under numerous U.S. federal, state and local
and foreign environmental, health and safety laws and regulations relating to
the generation, storage, handling, discharge, disposition and stewardship of
hazardous wastes and other materials. Grace has expended substantial funds to
comply with such laws and regulations 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 2003 and 2004, 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:

<TABLE>
<CAPTION>
                                                (i)                  (ii)                  (iii)
                                           Operation of
                                          Facilities and            Capital                Site
                                          Waste Disposal         Expenditures           Remediation
                                          --------------         ------------           -----------
                                                                (in $ millions)
<S>           <C>                                <C>                    <C>                  <C>
              2000                              $26                    $4                   $42
              2001                               32                     4                    27
              2002                               37                     6                    14
              2003 (est.)                        37                     7                     8
              2004 (est.)                        38                    10                    22
</TABLE>

         The decline in site remediation costs for 2002, and the estimated
decline for 2003 reflects reduced spending at non-owned sites due to Grace's
Chapter 11 status. The $22 million in estimated site remediation

                                       9
<PAGE>

expenditures in 2004 does not include possible additional spending or
reimbursement of remediation costs related to Grace's former vermiculite mining
and processing activities in the Libby, Montana area.

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

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

ITEM 2.   PROPERTIES

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

         Specific information regarding Grace's properties by business segment
is set forth in Item 1 above.

ITEM 3.   LEGAL PROCEEDINGS

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

     Grace was a defendant in 65,656 asbestos-related lawsuits on April 2, 2001,
the date of Grace's Chapter 11 filing. Seventeen of such lawsuits involve claims
for property damage, nine relating to Grace's former Zonolite attic insulation
("ZAI") product (one of which has since been dismissed) and eight relating to a
number of former asbestos-containing products (two of which also involve ZAI).
The remainder of such lawsuits involve 129,191 claims for bodily injury. As part
of the Chapter 11 process, the Bankruptcy Court established a bar date of March
31, 2003 for submission of additional asbestos-related property damage claims.
(The bar date does not apply to asbestos-related bodily injury claims or claims
related to ZAI, which will be addressed separately by the court.) As new claims
are filed, Grace will be cataloguing and assessing their validity.

         The plaintiffs in property damage lawsuits generally seek to have the
defendants pay the cost of removing, containing or repairing the
asbestos-containing materials in the affected buildings. Through April 2, 2001,
140 asbestos property damage cases were dismissed without payment of any damages
or settlement



                                       10
<PAGE>

amounts; judgments were entered in favor of Grace in nine cases (excluding cases
settled following appeals of judgments in favor of Grace); judgments were
entered in favor of the plaintiffs in eight cases for a total of $86.1 million
(one of which is on appeal); and 207 property damage cases were settled for a
total of $696.8 million.

         In February 2000 a purported class action lawsuit was filed in the U.S.
District Court for the Eastern District of Massachusetts against the Company
(Lindholm v. W. R. Grace & Co.) on behalf of all owners of homes containing ZAI,
a product formerly sold by Grace that may contain trace amounts of asbestos. The
action seeks damages and equitable relief, including the removal, replacement
and/or disposal of all such insulation. After Lindholm was filed, nine
additional purported class action ZAI lawsuits were initiated against Grace
prior to the Chapter 11 filing. The nine lawsuits were filed in various state
and federal courts asserting similar claims and seeking damages similar to those
in Lindholm. One of the purported federal class actions has been consolidated
with Lindholm.  As a result of the Chapter 11 filing, all of these cases have
been transferred to the U.S. Bankruptcy Court for the District of Delaware.

         The plaintiffs in the ZAI lawsuits assert that this product is in
millions of homes throughout the U.S. and that the cost of removal could be
several thousand dollars per home. While Grace has not completed its
investigation of the claims described in these lawsuits, testing and analysis of
this product by Grace and others supports Grace's belief that the product was
and continues to be safe for its intended purpose and poses little or no threat
to human health. In July 2002, the Bankruptcy Court approved special counsel to
represent the ZAI claimants, at Grace's expense, in a proceeding to determine
certain threshold scientific issues regarding ZAI. The court has set a
litigation schedule that would result in pretrial hearings on these issues in
the third quarter of 2003. At this time, Grace is not able to assess the extent
of any possible liability related to this matter.

         Cumulatively through April 2, 2001, 16,354 bodily injury lawsuits
involving 35,720 claims were dismissed without payment of any damages or
settlement amounts (primarily on the basis that Grace products were not
involved), and 55,489 lawsuits involving 163,698 claims were disposed of for a
total of $645.6 million.

         Based on Grace's experience and analysis of trends in asbestos bodily
injury litigation, Grace has endeavored to project the number and ultimate cost
of all present and future bodily injury claims expected to be asserted, based on
actuarial principles, and to measure probable and estimable liabilities under
generally accepted accounting principles. Grace has accrued $973.2 million at
December 31, 2002 as its estimate of the cost to resolve all asbestos-related
bodily injury cases and claims pending as well as those expected to be filed in
the future, and all pending property damage cases for which sufficient
information is available to form a reasonable estimate of the cost of
resolution. This estimate has been made based on historical facts and
circumstances prior to April 2, 2001. Grace does not expect to adjust this
estimate (other than for normal costs of continuing claims administration)
unless developments in the Chapter 11 proceeding provide a reasonable basis for
a revised estimate. Grace intends to use the Chapter 11 process to determine the
validity and ultimate amount of its aggregate liability for asbestos-related
claims. Due to the uncertainties of asbestos-related litigation, Grace's
ultimate liability for asbestos-related litigation could differ materially from
the recorded liability.

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

                                       11

<PAGE>


agreements. Grace has settled with excess insurance carriers that wrote policies
available for bodily injury claims in layers of insurance that Grace believes
may be reached based on its current estimates. Insurance coverage for
asbestos-related liabilities has not been commercially available since 1985.

         Pursuant to settlements with primary-level and excess-level insurance
carriers with respect to asbestos-related claims, Grace received payments
totaling $968.5 million prior to 2000, as well as payments totaling $85.6
million in 2000, $78.8 million in 2001, and $10.8 million in 2002. Under certain
settlements, Grace expects to receive additional amounts from insurance carriers
in the future and has recorded a receivable of $282.6 million to reflect the
amounts expected to be recovered in the future, based on projected payments
equal to the amount of the recorded asbestos-related liability.

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

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

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

         Environmental Proceedings. The following is a description of the
material environmental proceedings in which Grace is involved:

         Grace (together, in most cases, with many other companies) has been
designated a "potentially responsible party" ("PRP") by the U.S. Environmental
Protection Agency ("EPA") with respect to paying the costs of investigating and
remediating pollution at various sites. At year-end 2002, proceedings were
pending with respect to approximately 30 sites as to which Grace has been
designated a PRP by the EPA. U.S. law provides that all PRPs for a site may be
held jointly and severally liable for the costs of investigating and remediating
the site. Grace is also conducting investigatory and remediation activities at
sites under the jurisdiction of state and/or local authorities. During the
Chapter 11 proceeding, Grace does not expect to participate (except in a limited
number of special cases) in the joint funding of investigation and remediation,
or other settlements, at non-owned sites where it is a PRP. Grace's ultimate
liability with respect to such sites will be determined as part of its Chapter
11 proceeding.

         From the 1920's until 1990, Grace and previous owners conducted
vermiculite mining and related activities near Libby, Montana. The vermiculite
ore that was mined contained varying amounts of asbestos as a contaminant,
almost all of which was removed during processing. Expanded vermiculite from
Libby

                                       12
<PAGE>

was used in products such as fireproofing, insulation and potting soil. In
November 1999, Region 8 of the EPA began an investigation into alleged excessive
levels of asbestos-related disease in the Libby population related to these
former mining activities. This investigation led the EPA to undertake additional
investigative activity and to carry out response actions in and around Libby. On
March 30, 2001, the EPA filed a lawsuit in U.S. District Court for the District
of Montana, Missoula Division (United States v. W. R. Grace & Company, et al.)
under the Comprehensive Environmental Response, Compensation and Liability Act
for the recovery of costs allegedly incurred by the United States in response to
the release or threatened release of asbestos in the Libby, Montana area
relating to such former mining activities. These costs include cleaning and/or
demolition of contaminated buildings, the excavation and removal of contaminated
soil, health screening of Libby residents and former mine workers, and
investigation and monitoring costs. In this action, the EPA also sought a
declaration of Grace's liability that would be binding in future actions to
recover further response costs.

         In connection with its defense, Grace conducted its own investigation
to determine whether the EPA's actions and cost claims were justified and
reasonable. However, in December 2002, the District Court granted the United
States' motion for partial summary judgment on a number of issues that limited
Grace's ability to challenge the EPA's response actions. In January 2003, a
trial was held on the remainder of the issues, which primarily involved the
reasonableness and adequacy of documentation of the EPA's cost recovery claims
through December 31, 2001. No decision has yet been issued. The EPA's
Libby-related cost recovery claims through December 31, 2001 totaled
approximately $57 million. Based on the testimony of EPA witnesses deposed in
the lawsuit and other information, Grace believes that the EPA's total cost
recovery claims could reach, and potentially exceed, $100 million. This lawsuit
is not subject to the automatic stay provided under the Bankruptcy Code. Grace
has accrued a liability of $63 million as of December 31, 2002 with respect to
this lawsuit and future cost recovery claims expected to be made by the EPA,
which represents Grace's current best estimate of probable liability and defense
costs, pending the issuance of a decision by the trial court and the
availability of additional information about the EPA's 2002 costs and projected
future costs. Liabilities for recovery costs are subject to compromise, and any
payments would be subject to the outcome of the Chapter 11 proceedings.

         In February 2000, a purported class action lawsuit was filed in the
U.S. District Court for Montana, Missoula Division (Tennison, et al. v. W. R.
Grace & Co., et al.) against Grace on behalf of all owners of improved private
real property situated within 12 miles of Libby, Montana. The action alleges
that the class members have suffered harm in the form of environmental
contamination and loss of property rights resulting from Grace's former
vermiculite mining and processing operations. The complaint seeks remediation,
property damages and punitive damages. While Grace has not completed its
investigation of the claims, and, therefore, is not able to assess the extent of
any possible liability related to this lawsuit, Grace has no reason to believe
that its former activities caused damage to the environment or property. This
case has been stayed as a result of Grace's Chapter 11 filing.

         In October 2000, a purported class action lawsuit was filed in the U.S.
District Court for Minnesota, 4th Division (Chase v. W. R. Grace & Co.-Conn.)
alleging loss of property values of residents in the vicinity of a former Grace
vermiculite expanding plant in Minneapolis. This case has also been stayed as a
result of Grace's Chapter 11 filing. The EPA has remediated industrial property
in the area, including the former vermiculite expanding plant, at a cost of
$650,000. The EPA has also commenced and is continuing a program for removing
suspected vermiculite processing by-products from the yards and driveways of
houses near the plant. The EPA has reviewed approximately 1,640 residential
properties and has targeted 260 for cleanup. Of the 260 properties, the EPA has
taken action at 208, with the remaining 52 scheduled for removal actions in
2003. As of December 31, 2002, the EPA had spent $2.6 million on residential
cleanup actions.

         The EPA has compiled for investigation a list of 244 facilities that at
one time used, stored, or processed concentrate that originated from Grace's
former vermiculite mine at Libby, Montana. Included in

                                       13
<PAGE>

this list are 50 vermiculite expansion plants currently or formerly operated by
Grace. The EPA has listed 14 of these 50 sites as requiring additional action.
Corrective actions or investigations have been conducted by Grace at six of
these sites. The EPA has estimated that the cost of remediation for these 14
sites (exclusive of a Libby, Montana site) will be $6.6 million.

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

         Grace is a party to three pending environmental insurance coverage
actions. The first is styled Maryland Casualty Co. v. W. R. Grace & Co. (filed
in 1988). This litigation, involving Grace's coverage claims against a
primary-level carrier for environmental property damage, is currently the
subject of an appeal in the U.S. Court of Appeals for the Second Circuit. The
second case, entitled Uniguard v. W. R. Grace, was filed in 1997 in the U.S.
District Court for the Southern District of New York. This declaratory judgment
action seeks a determination concerning the liability of one excess carrier for
bodily injury claims as a result of environmental contamination. This case has
been stayed as a result of Grace's Chapter 11 filing. In June 2000, a separate
lawsuit was filed in the U.S. District Court for the Southern District of New
York against Grace by one of its former primary insurance carriers seeking
coverage determinations regarding 45 claims (Continental Casualty Company v. W.
R. Grace & Co. and W. R. Grace & Co.-Conn.). Most of these claims involve
alleged environmental property damage at sites once owned and operated by Grace
or at waste sites that allegedly received waste materials from plants operated
by Grace, including Grace's claims for coverage regarding certain claims
involving its former vermiculite mining operation in Libby, Montana. This case
has been stayed as a result of Grace's Chapter 11 filing. The outcome of these
cases, as well as the amounts of any recoveries that Grace may receive in
connection therewith, is presently uncertain.

         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. In addition, environmental liabilities related
to Libby, Montana in excess of the current recorded liability could be material,
though not currently estimable, if the proceedings described above are adversely
determined. Grace does not have sufficient information to determine how the
funding of environmental remediation activities will be affected by the Chapter
11 proceedings. 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.

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

         The Bankruptcy Court authorized the Official Committee of Asbestos
Personal Injury Claimants and the Official Committee of Asbestos Property Damage
Claimants to proceed with claims against Sealed Air

                                       14
<PAGE>

Corporation that the 1998 transaction involving Grace's former packaging
business and Sealed Air Corporation constituted a fraudulent conveyance. A trial
had been scheduled to begin on December 9, 2002. On November 29, 2002, Sealed
Air Corporation and Fresenius Medical Care AG each announced that they had
reached agreements in principle with representatives of the asbestos creditors
committees to resolve all of the current and future asbestos-related claims and
the pending fraudulent transfer claims made against them and their respective
affiliates. Under the terms of the proposed Sealed Air settlement, Sealed Air
would make a payment of $512.5 million (plus interest at 5.5% per annum,
commencing on December 21, 2002) and nine million shares of Sealed Air common
stock, valued at $335.7 million as of December 31, 2002, as directed by
Bankruptcy Court upon confirmation of Grace's plan of reorganization. Under the
terms of the proposed Fresenius settlement, as subsequently revised, Fresenius
would contribute $115 million to the Grace estate, or as otherwise directed by
the Bankruptcy Court, upon confirmation of a plan of reorganization. Both
settlements are subject to Bankruptcy Court approval. Upon the effectiveness of
these settlements the Abner and all similar actions will be dismissed. Grace is
unable to predict how these settlements may ultimately affect its plan of
reorganization.

         Tax Claims. Grace has received an Internal Revenue Service ("IRS")
examination report for the 1993 through 1996 tax periods asserting in the
aggregate approximately $114 million of proposed tax adjustments. The most
significant contested issue addressed in such report concerns corporate-owned
life insurance ("COLI") policies and is discussed in the next paragraph. Other
proposed IRS tax adjustments relate to Grace's tax positions regarding research
and development credits, reporting of certain divestitures and other
miscellaneous proposed adjustments. The tax audit for the 1993 through 1996 tax
period is currently under the jurisdiction of IRS Appeals, where Grace has filed
a protest. Grace's federal tax returns covering tax periods 1997 and forward are
either under examination by the IRS or open for future examination.

         In 1988 and 1990, Grace acquired COLI policies on the lives of certain
of its employees as part of a strategy to fund the cost of post-retirement
employee health care benefits and other long-term liabilities. COLI premiums
have been funded in part by loans issued against the cash surrender value of the
COLI policies. The IRS is challenging deductions of interest on loans secured by
the COLI policies for years prior to January 1, 1999. In 2000, Grace paid $21.2
million of tax and interest related to this issue for tax years 1990 through
1992. Subsequent to 1992, Grace deducted approximately $163.2 million in
interest attributable to COLI policy loans. Although Grace continues to believe
that the deductions were legitimate, the IRS has successfully challenged
interest deductions claimed by other corporations with respect to broad-based
COLI policies in all of the three litigated cases to date. Therefore, Grace
requested and was granted early referral to the IRS Office of Appeals for
consideration of possible settlement alternatives of the COLI interest deduction
issue.

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

         The IRS also has assessed additional federal income tax withholding and
Federal Insurance Contributions Act taxes plus interest and related penalties
for calendar years 1993 through 1995 against a Grace subsidiary that formerly
operated a temporary staffing business for nurses and other healthcare
personnel. The assessments, aggregating $21.8 million, were made in connection
with a meal and incidental

                                       15
<PAGE>

expense per diem plan for traveling healthcare personnel, which was in effect
through 1999. The IRS contends that certain per diem reimbursements should have
been treated as wages subject to employment taxes and federal income tax
withholding. Grace contends that its per diem and expense allowance plans were
in accordance with statutory and regulatory requirements, as well as other
published guidance from the IRS. Grace expects that the IRS will make additional
assessments for the 1996 through 1999 periods. The matter is pending in the
United States Court of Claims. Grace is currently in discussions with the
Department of Justice concerning possible settlement options.

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

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 2002.

                                     PART II

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

         Except as provided below, the information called for by this Item
appears in the Financial Supplement under the heading "Financial Summary"
opposite the caption "Other Statistics - Common shareholders of record" (page
F-35); under the heading "Quarterly Summary and Statistical Information -
Unaudited" opposite the caption "Market price of common stock" (page F-34); and
in Note 15 to the Consolidated Financial Statements (page F-29).

         On March 31, 1998, the Company paid a dividend, in respect of each
share of the Company's Common Stock, par value $.01 per share ("Common Stock"),
of one 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 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 or 20% or more of the then outstanding shares of Common Stock.
Holders of Rights, as such, have no rights as shareholders 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 $100, subject to adjustment ("exercise price"). If a
person or group becomes an Acquiring Person, each Right will entitle the holder
to receive upon exercise, in lieu of shares of Junior Preferred Stock, that
number of shares of Common Stock having a market value of two times the exercise
price of the Right. If, at any time after a person or group becomes an Acquiring
Person, 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.

                                       16
<PAGE>

         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 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 on March 31, 2008 (subject
to extension or the earlier redemption or exchange of the Rights). As a result
of Grace's Chapter 11 filing, the rights could be modified in a plan of
reorganization.

         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 4.1 to the Company's Form 8-K filed on April 9, 1998.

                                       17
<PAGE>

ITEM 6.   SELECTED FINANCIAL DATA

         The information called for by this Item appears under the heading
"Financial Summary" (page F-35 of the Financial Supplement) and in Notes 1, 2,
3, 4, 10, 13 and 14 to the Consolidated Financial Statements (pages F-10 through
F-20, and F-23 through F-28 of the Financial Supplement), which is incorporated
herein by reference. In addition, Exhibit 12 to this Report (page F-53) 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
1998-2002.

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

         The information called for by this Item appears on pages F-36 to F-52
of the Financial Supplement, which is incorporated herein by reference.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

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


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The Company's current directors and executive officers are listed
below. The Company's Certificate of Incorporation provides for the division of
the Board of Directors into three classes, each to serve for a three-year term
or until their respective successors are elected. In view of the Chapter 11
filing, the directors are expected to continue to serve beyond the expiration of
their respective current terms. Executive officers are elected to serve until
the following annual meeting of the Company's Board of Directors or until their
respective successors are elected.

<TABLE>
<CAPTION>
            Name and Age                               Office                                   First Elected
            ------------                               ------                                   -------------
<S>                                       <C>                                                      <C>
John F. Akers (68)                        Class II Director                                        05/09/97

H. Furlong Baldwin (71)                   Class I Director                                         01/16/02

Ronald C. Cambre (64)                     Class III Director                                       09/01/98

                                       18
<PAGE>

Marye Anne Fox (55)                       Class I Director                                         05/10/96

John J. Murphy (71)                       Class II Director                                        05/09/97

Paul J. Norris (55)                       Class III Director (Chairman)                            01/01/99
                                          President and Chief Executive Officer                    11/01/98

Thomas A. Vanderslice (71)                Class I Director                                         05/10/96

Robert J. Bettacchi (60)                  Senior Vice President                                    04/01/97

William M. Corcoran (53)                  Vice President                                           05/11/99

W. Brian McGowan (53)                     Senior Vice President                                    12/06/90*

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

Robert M. Tarola (52)                     Senior Vice President and                                05/11/99
                                          Chief Financial Officer
</TABLE>

*  Designated an Executive Officer on July 9, 1998

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

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

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

         Dr. Fox is Chancellor of North Carolina State University and
Distinguished Professor of Chemistry at that institution. She is also a director
of Boston Scientific Corporation, Red Hat, Inc. and Pre-Paid Legal Services,
Inc.

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

         Mr. Norris was Senior Vice President of AlliedSignal Incorporated and
President of its specialty chemicals business from January 1997 until he joined
Grace. He joined AlliedSignal in 1989 as President of its fluorine
products/chemicals and catalysts businesses. Mr. Norris is a director of Borden
Chemical, Inc. He also performs advisory services for Kolberg, Kravis Roberts &
Co., the principal shareholder of Borden.

                                       19
<PAGE>

         Mr. Vanderslice served as Chairman and Chief Executive Officer of
M/A-COM, Inc., a designer and manufacturer of radio frequency and microwave
components, devices and subsystems for commercial and defense applications, from
1989 until his retirement in 1995. He is a director of ChevronTexaco
Corporation.

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

         Mr. Corcoran previously served as Vice President of Business and
Regulatory Affairs for AlliedSignal Incorporated's specialty chemicals business
from 1997 until he joined Grace. For nine years prior to that, he served as Vice
President of Public Affairs in AlliedSignal's engineered materials sector.

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

         Section 16(a) Beneficial Ownership Reporting Compliance. Under Section
16 of the Securities Exchange Act of 1934, the Company's directors, certain of
its officers, and beneficial owners of more than 10% of the outstanding Common
Stock are required to file reports with the SEC and the New York Stock Exchange
concerning their ownership of and transactions in Common Stock; such persons are
also required to furnish the Company with copies of such reports. Based upon the
reports and related information furnished to the Company, the Company believes
that all such filing requirements were complied with in a timely manner during
and with respect to 2002.


ITEM 11.   EXECUTIVE COMPENSATION

         Summary Compensation Table. The following Summary Compensation Table
contains information concerning the compensation of (a) Paul J. Norris, Chief
Executive Officer; and (b) the other four most highly compensated executive
officers of Grace who were serving as such at year-end 2002. Certain information
has been omitted from the Summary Compensation Table because it is not
applicable or because it is not required under the rules of the Securities and
Exchange Commission ("SEC").



                                       20
<PAGE>


<TABLE>
<CAPTION>
                                    Annual Compensation                   Long-Term Compensation
                            ------------------------------------ -----------------------------------
                                                                       Awards            Payouts
                                                                 ------------------   --------------

                                                                    No. of Shares
                                                      Other           Underlying
 Name and Principal                                   Annual           Options             LTIP        All Other
      Position        Year    Salary      Bonus    Compensation        Granted           Payouts (a)  Compensation (b)
      --------        ----    ------      -----    ------------        -------           --------     ------------
<S>                   <C>    <C>         <C>             <C>          <C>                <C>          <C>
P. J. Norris          2002  $958,333  $1,010,000          ---             ---                 ---       $  587,808
Chairman, President   2001   887,500     936,250          ---         121,000                 ---        1,457,298
and Chief Executive   2000   812,500     526,800          ---         315,000                 ---           90,766
Officer


R. J. Bettacchi       2002   358,000     265,000          ---             ---                 ---           30,597
Senior Vice President 2001   345,340     275,000          ---          35,000                 ---          366,346
                      2000   332,344     125,000          ---          85,000            $102,670           42,171


W. M. Corcoran        2002   277,667     155,000          ---             ---                 ---           33,643
Vice President        2001   267,333     150,000          ---          12,300                 ---          283,428
                      2000   256,667     100,000          ---          40,000                 ---           16,532

D. B. Siegel          2002   408,000     265,000          ---             ---                 ---          244,448
Senior Vice           2001   370,000     240,000          ---          21,800                 ---          627,915
President and         2000   306,667     125,000          ---          60,000              75,832           22,205
General Counsel

R. M. Tarola          2002   388,000     250,000          ---             ---                 ---           33,147
Senior Vice           2001   374,500     250,000          ---          27,900                 ---          374,277
President and Chief   2000   359,000     155,000          ---          75,000                 ---           12,322
Financial Officer
</TABLE>


(a)      The amounts in this column represent payments made in 2000 under
         Grace's previous Long-Term Incentive Plan for the 1997-1999 Performance
         Period (to the extent not previously paid).

(b)      The amounts in this column for 2002 consist of the following:

         (i)    payments made to persons whose personal and/or Company
                contributions to Grace's Salaried Employees Savings and
                Investment Plan ("Savings Plan") would be subject to limitations
                under federal income tax law, as follows: Mr. Norris -- $74,658;
                Mr. Bettacchi -- $18,020; Mr. Corcoran -- $11,840; Mr. Siegel --
                $19,500; and Mr. Tarola -- $21,570;

         (ii)   Company contributions to the Savings Plan, as follows: Mr.
                Norris -- $12,000; Mr. Bettacchi -- $12,000; Mr. Corcoran --
                $12,000; Mr. Siegel -- $11,933; and Mr. Tarola -- $12,000;

         (iii)  the value of Company-provided personal liability insurance, as
                follows: Mr. Norris -- $1,150; Mr. Bettacchi -- $577; Mr.
                Corcoran -- $428; Mr. Siegel -- $577; and Mr. Tarola -- $577;

         (iv)   a $500,000 retention payment made to Mr. Norris under the terms
                of his employment agreement. See "Employment Agreements" for a
                description of Mr. Norris's employment agreement;

         (v)    for Mr. Corcoran, $9,375 of forgiveness of indebtedness income
                under the terms of a relocation loan, the balance of which has
                been reduced to zero; and

         (vi)   for Mr. Siegel, (A) $194,738 of expense reimbursements and
                payments made to Mr. Siegel under Grace's relocation program for
                employees relocating from Boca Raton, Florida to Columbia,
                Maryland, and (B) $17,700 of forgiveness of indebtedness income
                under the terms of a relocation loan, the balance of which was
                $57,300 as of December 31, 2002.

                                       21



<PAGE>

         Stock Options. Grace granted no stock options during 2002. No options
were exercised by the named individuals during 2002, and none of the options
held by them at year-end 2002 were "in the money" (i.e., the exercise price of
all options held by the individuals was above the market value of the Common
Stock at year-end 2002). The following table contains information concerning
unexercised options held at December 31, 2002.

                           No. of Shares Underlying Unexercised Options
          Name                 at 12/31/02 Exercisable/Unexercisable

P. J. Norris ...........                 979,359 / 185,667
R. J. Bettacchi ........                 605,596 / 51,668
W. M. Corcoran .........                  63,266 / 21,534
D. B. Siegel ...........                 345,461 / 34,534
R. M. Tarola ...........                 159,300 / 43,600

         Long-Term Incentive Program. The Company's long-term incentive plans
generally are designed to provide key employees with long-term incentives having
a value at the 60th percentile of long-term incentives offered by specialty
chemical companies of comparable size to Grace. In 2001, the Company's Board of
Directors approved a Long-Term Incentive Plan for key employees ("2001 LTIP")
for the 2001-2003 period. For each key employee, the targeted value of the 2001
LTIP award was split so that 50% of the value of the award was provided in the
form of a stock option grant, and 50% was in the form of cash compensation,
payable if the Company achieves certain pretax earnings targets over a three
calendar year period.

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

<TABLE>
<CAPTION>
                                                                                    Estimated Future Payouts
                                                                                  Under Non-Stock Price-Based
                                            Performance or Other                              Plans
                  No. of Shares, Units      Period Until Maturation                           -----
Name              Or Other Rights           or Payout                       Threshold(a)       Target       Maximum
----              ---------------           ---------------------------     ------------       ------       -------
<S>                  <C>                            <C>                    <C>               <C>          <C>
P. J. Norris         $1,452,000                     2002-2004              $0 or $ 24,248    $1,452,000   $2,904,000
R. J. Bettacchi         420,000                     2002-2004              $0 or $  7,014       420,000      840,000
W. M. Corcoran          150,000                     2002-2004              $0 or $  2,505       150,000      300,000
D. B. Siegel            335,000                     2002-2004              $0 or $  5,595       335,000      670,000
R. M. Tarola            335,000                     2002-2004              $0 or $  5,595       335,000      670,000
</TABLE>

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


                                       22
<PAGE>

         Pension Arrangements. Full-time salaried employees who are 21 or older
and who have one or more years of service are eligible to participate in the
Retirement Plan for Salaried Employees. Under this basic retirement plan,
pension benefits are based upon (a) the employee's average annual compensation
for the 60 consecutive months in which his or her compensation is highest during
the last 180 months of continuous participation, and (b) the number of years of
the employee's credited service. For purposes of this basic retirement plan,
compensation generally includes nondeferred base salary and annual incentive
compensation (bonus) awards; however, for 2002, federal income tax law limited
to $200,000 the annual compensation on which benefits under this plan may be
based.

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

         The following table shows the annual pensions payable under the basic
and supplemental plans for different levels of compensation and years of
credited service. The amounts shown have been computed on the assumption that
the employee retired at age 65 on January 1, 2001, with benefits payable on a
straight life annuity basis. Such amounts are subject to (but do not reflect) an
offset of 1.25% of an estimate of the employee's primary Social Security benefit
at retirement age for each year of credited service under the basic and
supplemental plans.

<TABLE>
<CAPTION>

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

</TABLE>

                                       23
<PAGE>

         At December 31, 2002, Messrs. Norris, Bettacchi, Corcoran, Siegel and
Tarola had 10.83, 31, 3.56, 25.75 and 3.56 years of credited service,
respectively, under the basic and supplemental retirement plans. (Mr. Norris'
years of credited service include his eligible service with Grace from 1975 to
1981.) For purposes of those plans, the 2002 compensation of such executive
officers was as follows: Mr. Norris -- $1,894,583; Mr. Bettacchi -- $633,000;
Mr. Corcoran -- $427,667; Mr. Siegel -- $648,000; and Mr. Tarola -- $638,000.
Messrs. Norris, Corcoran and Tarola are entitled to additional pension benefits
under their employment agreements (see "Employment Agreements").

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

         Under the 1998 Agreement, during his post-2002 employment term, Mr.
Norris will continue to be entitled to an annual base salary of not less than
$875,000. In addition, he will continue to participate in Grace's annual
incentive compensation program, under which his targeted award will be at least
75% of his annual base salary. (Mr. Norris' annual base salary as of January 1,
2003 is $1,000,000.)

         Under the terms of the Letter Agreement, on December 31, 2003, Mr.
Norris will receive a $1,235,000 retention bonus for services performed during
2003; and on December 31, 2004, Mr. Norris will receive an additional retention
bonus of $1,235,000 for services performed during 2004. Mr. Norris will not
receive a retention bonus, if prior to the payment date of a retention bonus, he
is terminated by Grace for cause. In addition, Mr. Norris will not receive a
retention bonus, if prior to the payment date, he resigns his employment with
Grace, unless such resignation is on the basis of constructive discharge. If Mr.
Norris' employment is terminated on the basis of constructive discharge (or as a
result of his death or disability) during 2003 or 2004, then he (or his
beneficiary, in the case of death) will be entitled to a payment of a pro-rated
portion of the retention bonus for the calendar year of termination, based on
the portion of such calendar year that he remained an employee of Grace.

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

         Under the Letter Agreement, Mr. Norris is obligated to provide Grace
with at least 180 days written prior notice of his intention to resign his
employment with Grace in order to receive certain benefits and payments upon
termination, which were originally specified under the 1998 Agreement.
Specifically, if Mr. Norris provides such timely notice, he will receive the
following benefits and payments upon termination: (1) an award under Grace's
annual incentive compensation program for the calendar year of termination,
which will be pro-rated based on the portion of such calendar year that he
remained an employee of Grace, (2) a supplemental pension payment (described
below), (3) principal residence relocation assistance (described below), and (4)
a payment of the cash component of any award made to Mr. Norris under Grace's
long-term incentive plans, which will be pro-rated based on the portion of the
applicable 3-year performance period that he remained an employee of Grace.
Under the Letter Agreement, Mr. Norris will also be entitled to these benefits
and payments if his employment terminates for any reason except cause. If Mr.
Norris' employment is terminated for cause, he will not be entitled to those
benefits and payments.

                                       24
<PAGE>

         If Mr. Norris becomes entitled to a supplemental pension payment as
referenced above, then in determining the benefits payable to Mr. Norris under
Grace's basic and supplemental retirement plans, his years of service with Grace
and his prior employer will be recognized as if those years were continuous
service with Grace, with an offset for any retirement benefits payable from his
prior employer's retirement plans. In addition, the "final average compensation"
used to determine his retirement benefits payable under Grace's basic and
supplemental retirement plans will only consider compensation earned by Mr.
Norris from and after his commencement of his current term of employment with
Grace on November 1, 1998. Such payment would be made in a lump sum immediately
after Mr. Norris' date of termination.

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

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

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

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

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

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

                                       25
<PAGE>

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

         Change-in-Control Severance Agreements. In addition to the severance
provisions described under "Retention Agreements" below, Grace has severance
agreements with all of its executive officers, which renew automatically unless
the Board of Directors of the Company elects not to renew them. These agreements
generally provide that in the event of the involuntary termination of the
individual's employment without cause (including constructive termination caused
by a material reduction in his or her authority or responsibility or by certain
other circumstances) following a "change in control" of Grace, he or she will
generally receive a severance payment equal to three times the sum of his or her
annual base salary plus target annual incentive compensation (bonus), subject to
pro rata reduction in the case of an officer who is within 36 months of normal
retirement age (65). For purposes of the severance agreements, "change in
control" means the acquisition of 20% or more of the Common Stock (but not if
such acquisition is the result of the sale of Common Stock by Grace that has
been approved by the Board), the failure of Board-nominated directors to
constitute a majority of any class of the Board of Directors, the occurrence of
a transaction in which the shareholders of Grace immediately preceding such
transaction do not own more than 50% of the combined voting power of the company
resulting from such transaction, or the liquidation or dissolution of Grace.
This description of the severance agreements does not purport to be complete and
is qualified in its entirety by reference to the form of such agreement, which
has been filed with the SEC as Exhibit 10.17 to this Report. As a result of
Grace's Chapter 11 filing, the following events will not constitute a "change in
control": (i) the acquisition by a trust of Common Stock, established for
purposes of administering asbestos-related claims pursuant to a plan of
reorganization, and (ii) a corporate transaction pursuant to Section 363 of the
U.S. Bankruptcy Code or a plan of reorganization.

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

                                       26
<PAGE>

officer becomes entitled to severance under both the terms of the retention
agreement and such other agreement, then the officer would only receive
severance pay under the retention agreement, unless the other agreement provides
for a greater amount of severance pay (in which case, the officer would only
receive severance pay under such other agreement).

         Grace has implemented a new retention program for 2003 and 2004 under
which each executive officer (except Mr. Norris, whose retention arrangement for
those years is covered by his employment agreement) would be entitled to receive
a payment equal to a designated percentage of his base salary if the officer
remains employed with Grace for the entire year. For 2003, the percentage is 65%
of base salary. The payment of the retention bonus will be made to each eligible
executive officer at the end of the calendar year to which the payment relates.
These retention payments are not considered compensation for purposes of any
Grace benefit or compensation plans or programs.

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

         Effect of Chapter 11 Filing. The U.S. Bankruptcy Court has approved the
employment agreements and the continuation of the executive compensation and
benefit agreements and programs described above. The continuation of these
agreements and programs, and the establishment of new programs may be affected
by the Chapter 11 proceedings.

         Directors' Compensation. Under the compensation program for nonemployee
directors in effect for 2002, each nonemployee director received an annual
retainer of $50,000, 50% of which was paid in cash and 50% of which was paid in
the form of Common Stock. In addition, directors received $4,000 ($5,000 for
directors holding a committee chair) in cash for each meeting date in respect of
the Board meeting and all committee meetings held on such date. The same
compensation program will be effective during 2003. Grace reimburses nonemployee
directors for expenses they incur in attending Board and committee meetings.
Grace also maintains business travel accident insurance coverage for them.

         Compensation Committee Interlocks and Insider Participation. During
2002, the Compensation Committee of the Board was comprised of Messrs. Akers
(Chair), Baldwin, Cambre, Murphy and Vanderslice, and Dr. Fox. None of such
persons is a current or former officer or employee of Grace or any of its
subsidiaries, nor did any of such persons have any reportable transactions with
Grace or any of its subsidiaries.

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

         Security Ownership. The following table sets forth the Common Stock
beneficially owned, directly or indirectly, as of January 31, 2003 by (1) each
person known to Grace to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock, and (2) each current director, each of the
executive officers named in the Summary Compensation Table set forth in Item 11
above, and such directors and all executive officers as a group.

                                       27
<PAGE>

<TABLE>
<CAPTION>
                                                    Shares of Common Stock
Beneficial Owner                                      Beneficially Owned                Percent
----------------                                      ------------------                -------

<S>                                                       <C>                            <C>
Peninsula Partners, L.P. (1)........................      10,765,600                     16.43%
404B East Main Street, 2nd Floor
Charlottesville, VA 22902

J. F. Akers ........................................          29,737                        *
                                                              74,535    (O)
                                                              15,196    (T)


H. F. Baldwin ......................................          12,659                        *

R. J. Bettacchi ....................................         617,264    (O)                 *
                                                              24,675    (T)


R. C. Cambre .......................................          54,876                        *


W. M. Corcoran .....................................          10,000                        *
                                                              67,367    (O)
                                                               1,265    (T)

M. A. Fox ..........................................          31,987                        *
                                                               8,942    (T)


J. J. Murphy .......................................          29,671                        *
                                                              15,528    (O)
                                                              18,629    (T)

P. J. Norris .......................................         138,822                      2.39%
                                                           1,458,719    (O)
                                                               1,071    (T)


D. B. Siegel .......................................          15,100                        *
                                                             352,187    (O)
                                                              20,832    (T)


R. M. Tarola .......................................          15,000                        *
                                                             168,600    (O)
                                                                  50    (T)

T. A. Vanderslice ..................................          30,263                        *
                                                              69,876    (O)
                                                              14,932    (T)

Directors and executive officers as a group ........         378,115                      5.29%
                                                           3,134,589    (O)
                                                             122,010    (T)
</TABLE>

*   Indicates less than 1%

(O) Shares covered by stock options exercisable on or within 60 days after
    January 31, 2003.

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

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


                                       28
<PAGE>

         Equity Compensation Plan Information. The following table sets forth
information as of December 31, 2002 with respect to Grace's compensation plans
under which shares of Common Stock are authorized for issuance upon the exercise
of options, warrants or other rights. The only such compensation plans in effect
are stock incentive plans providing for the issuance of stock options. All such
plans have been approved by Grace's shareholders.


<TABLE>
<CAPTION>
                                                                                     Number of securities remaining
                               Number of securities to      Weighted-average       available for future issuance under
                               be issued upon exercise     exercise price of      equity compensation plans (excluding
       Plan category            of outstanding options    outstanding options      securities reflected in column (a))
                                         (a)                      (b)                              (c)

<S>                                   <C>                        <C>                            <C>
       Equity compensation            10,199,610                 $11.90                         4,468,504
       plans approved by
       security holders

</TABLE>



ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Commercial Transactions. During 2002, no director, executive officer
(or any member of any of their respective immediate families) or, to the
Company's knowledge, any holder of more than 5% of the Common Stock, had a
direct or indirect material interest in any transaction (or any proposed
transaction) to which the Company was (or will become) a party.

         Loans to Officers. In April 2002, the Company made a $75,000
interest-free loan to Mr. Siegel under the terms of Grace's relocation policy
covering employees relocating from Boca Raton, Florida to Columbia, Maryland.
The loan is forgiven over a three year period so long as Mr. Siegel remains with
the Company. The balance of such loan as of December 31, 2002 was $57,300.

         Legal Proceedings; Indemnification. During 2002 there were no legal
proceedings pending in which any current officers or directors of the Company
were parties adverse to, or had a material interest adverse to, the Company.


ITEM 14.  CONTROLS AND PROCEDURES

         The information called for by this Item appears under the heading
"Controls and Procedures" on page F-55 of the Financial Supplement, which is
incorporated herein by reference.

                                     PART IV

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

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

                                       29
<PAGE>

         Reports on Form 8-K. The Company did not file any Reports on Form 8-K
during the fourth quarter of 2002.

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

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

<TABLE>
<CAPTION>
EXHIBIT
  NO.                                 EXHIBIT                                             WHERE LOCATED
  ---                                 -------                                             -------------

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

  3.1         Restated Certificate of Incorporation of                      Exhibit 3.1 to Form 8-K (filed 4/9/98)
              W. R. Grace & Co.


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

  4.1         Rights Agreement dated as of March 31, 1998 between W.        Exhibit 4.1 to Form 8-K (filed 4/8/98)
              R. Grace & Co. and The Chase Manhattan Bank, as Rights
              Agent

  4.2         Credit Agreement dated as of May 14, 1998, among W. R.        Exhibit 4.1 to Form 10-Q (filed 8/14/98)
              Grace & Co.-Conn., W. R. Grace & Co., the several
              banks parties thereto; the co-agents signatories
              thereto; The Chase Manhattan Bank, as administrative
              agent for such banks; and Chase Securities Inc., as
              arranger

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

  4.4         First Amendment to 364-Day Credit Agreement dated as          Exhibit 4 to Form 10-Q (filed 8/15/00)
              of May 5, 1999 among W. R. Grace & Co.-Conn.; W. R.
              Grace & Co.; the several banks

                                       30
<PAGE>

              parties thereto; Bank of America National Trust and
              Savings Association, as document agent; The Chase
              Manhattan Bank, as administrative agent for such banks;
              and Chase Securities, Inc., as bank manager

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

 10.1         Form of Employee Benefits Allocation Agreement, by and        Filed herewith
              among Old Grace, W. R. Grace & Co.-Conn. and Grace
              Specialty Chemicals, Inc. (now named W. R. Grace & Co.)

 10.2         Form of Tax Sharing Agreement, by and among Old Grace,        Filed herewith
              W. R. Grace & Co.-Conn. and Grace Specialty Chemicals,
              Inc. (now named W. R. Grace & Co.)

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

 10.4         W. R. Grace & Co. 1998 Stock Incentive Plan                   Filed herewith*

 10.5         W. R. Grace & Co. 1998 Stock Plan for Nonemployee             Filed herewith*
              Directors

 10.6         W. R. Grace & Co. 1996 Stock Incentive Plan, as amended       Exhibit 10.4 to Form 10-Q (filed
                                                                            5/15/98)*

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

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

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

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

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

                                       31
<PAGE>

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

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

 10.14        Form of Stock Option Agreements                               Exhibit 10.5 to Form 10-Q (filed
                                                                            5/15/98)*

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

 10.16        Form of 2002-2004 Long-Term Incentive                         Filed herewith*
              Program Award

 10.17        Form of Executive Severance Agreement between W. R.           Filed herewith*
              Grace & Co. and officers

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

 10.19        Amendment dated November 6, 2002 to Employment                Filed herewith*
              Agreement between W. R. Grace & Co. and Paul J. Norris

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

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

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

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

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

 10.25        Form of Retention Agreement for 2003-2004                     Filed herewith*

 10.26        Annual Incentive Compensation Program                         Filed herewith*


                                       32
<PAGE>


  12          Computation of Ratio of Earnings to Fixed Charges and         Filed herewith in Financial Supplement
              Combined Fixed Charges and Preferred Stock Dividends          to Grace's 2002 Form 10-K

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

  23          Consent of Independent Accountants                            Filed herewith in Financial Supplement
                                                                            to Grace's 2002 Form 10-K

  24          Powers of Attorney                                            Filed herewith


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

 99.2         Certification of Periodic Report by Chief Financial           Filed herewith
              Officer under Section 906 of the Sarbanes-Oxley Act of
              2002
</TABLE>



                                       33
<PAGE>

                                   SIGNATURES

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

                                           W. R. GRACE & CO.


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

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

Dated: March 13, 2003

         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 13, 2003.

         Signature                        Title

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


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


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

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


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

                                       34
<PAGE>



                                  CERTIFICATION

I, Paul J. Norris, certify that:

1.  I have reviewed this annual report on Form 10-K of W. R. Grace & Co.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     a) designed such disclosure controls and procedures to ensure that material
     information relating to the registrant, including its consolidated
     subsidiaries, is made known to us by others within those entities,
     particularly during the period in which this annual report is being
     prepared;

     b) evaluated the effectiveness of the registrant's disclosure
     controls and procedures as of a date within 90 days prior to the
     filing date of this annual report (the "Evaluation Date"); and

     c) presented in this annual report our conclusions about the
     effectiveness of the disclosure controls and procedures based on
     our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):

     a) all significant deficiencies in the design or operation of internal
     controls which could adversely affect the registrant's ability to record,
     process, summarize and report financial data and have identified for the
     registrant's auditors any material weaknesses in internal controls; and

     b) any fraud, whether or not material, that involves management
     or other employees who have a significant role in the
     registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.


Date:  March 13, 2003

                                                /s/ Paul J. Norris
                                                -----------------------
                                                Paul J. Norris
                                                Chairman, President and
                                                Chief Executive Officer


                                       35
<PAGE>


                                  CERTIFICATION


I, Robert M. Tarola, certify that:

1.  I have reviewed this annual report on Form 10-K of W. R. Grace & Co.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     a) designed such disclosure controls and procedures to ensure that material
     information relating to the registrant, including its consolidated
     subsidiaries, is made known to us by others within those entities,
     particularly during the period in which this annual report is being
     prepared;

     b) evaluated the effectiveness of the registrant's disclosure controls and
     procedures as of a date within 90 days prior to the filing date of this
     annual report (the "Evaluation Date"); and

     c) presented in this annual report our conclusions about the effectiveness
     of the disclosure controls and procedures based on our evaluation as of the
     Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):

     a) all significant deficiencies in the design or operation of internal
     controls which could adversely affect the registrant's ability to record,
     process, summarize and report financial data and have identified for the
     registrant's auditors any material weaknesses in internal controls; and

     b) any fraud, whether or not material, that involves management or other
     employees who have a significant role in the registrant's internal
     controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.


Date:  March 13, 2003

                                            /s/ Robert M. Tarola
                                            --------------------
                                            Robert M. Tarola
                                            Senior Vice President and
                                            Chief Financial Officer


                                       36
<PAGE>










                              FINANCIAL SUPPLEMENT


                                W. R. GRACE & CO.
                           ANNUAL REPORT ON FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 2002





                                      F-1
<PAGE>


                              FINANCIAL SUPPLEMENT
                                       TO
         ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002

                       W. R. GRACE & CO. AND SUBSIDIARIES

                   Index to Consolidated Financial Statements
                  and Financial Statement Schedule and Exhibit



<TABLE>
<CAPTION>
<S>                                                                                   <C>
Management's Responsibility for Financial Reporting................................   F-3
Report of Independent Accountants..................................................   F-4
Report of Independent Accountants on Financial Statement Schedule..................   F-5
Consent of Independent Accountants.................................................   F-5
Consolidated Statement of Operations for the three years in the
      period ended December 31, 2002...............................................   F-6
Consolidated Statement of Cash Flows for the three years in the
      period ended December 31, 2002...............................................   F-7
Consolidated Balance Sheet at December 31, 2002 and 2001...........................   F-8
Consolidated Statement of Shareholders' Equity (Deficit) for the three
      years in the period ended December 31, 2002..................................   F-9
Consolidated Statement of Comprehensive (Loss) Income for the three
      years in the period ended December 31, 2002..................................   F-9
Notes to Consolidated Financial Statements.........................................   F-10 - F-34
Financial Summary..................................................................   F-35
Management's Discussion and Analysis of Results of Operations
      and Financial Condition......................................................   F-36 - F-52

Financial Statement Schedule
      Schedule II  - Valuation and Qualifying Accounts and Reserves................   F-53

Exhibit 12:  Computation of Ratio of Earnings to Fixed Charges and
      Combined Fixed Charges and Preferred Stock Dividends.........................   F-54


Report on Internal Controls and Procedures ........................................   F-55
</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 less than majority-owned persons and other
persons accounted for by the equity method have been omitted as provided in Rule
3-09 of Securities and Exchange Commission Regulation S-X. Financial Statement
Schedules not included have been omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements or Notes
thereto.

                                      F-2
<PAGE>


MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING


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

         Management maintains internal 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. For 2002, a
Disclosure Committee was established to oversee Grace's public financial
reporting process; and executives and certain managers were required to confirm
their compliance with Grace's policies and internal control systems. 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
and appropriate disclosures are made. The concept of reasonable assurance is
based on the recognition that there are limitations in all systems of internal
control and that the costs of such systems should not exceed their benefits.

         The Audit Committee of the Board of Directors, which is comprised
solely of independent directors, meets regularly with Grace's senior financial
management, internal auditors and independent 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 to the Board of Directors. The
Audit Committee is responsible for the selection of the independent accountants.
Grace's financial management, internal auditors and independent accountants have
direct and confidential access to the Audit Committee at all times.

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




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

March 13, 2003



                                      F-3
<PAGE>


REPORT OF INDEPENDENT ACCOUNTANTS

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

         In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, of cash flows, of shareholders'
equity (deficit) and of comprehensive loss, present fairly, in all material
respects, the financial position of W. R. Grace & Co. and its subsidiaries at
December 31, 2002 and 2001, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.


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



/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Baltimore, Maryland
January 29, 2003



                                      F-4
<PAGE>



        REPORT OF INDEPENDENT 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 January 29, 2003, which was modified as to a matter raising substantial
doubt about the Company's ability to continue as a going concern, appearing on
page F-4 of this 2002 Annual Report on Form 10-K of W. R. Grace & Co. also
included an audit of the Financial Statement Schedule listed on page F-2 in the
Index to Consolidated Financial Statements and Financial Statement Schedule and
Exhibit of this Form 10-K. In our opinion, this Financial Statement Schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.


/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Baltimore, Maryland
January 29, 2003





                       CONSENT OF INDEPENDENT ACCOUNTANTS


We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-37024, 333-49083, 333-49507, 333-49509,
333-49511, 333-49513, 333-49515, 333-49703 and 333-49705) of W. R. Grace & Co.
of our report dated January 29, 2003 appearing on page F-4 of this 2002 Annual
Report on Form 10-K of W. R. Grace & Co. We also consent to the incorporation by
reference of our report dated January 29, 2003 relating to the Financial
Statement Schedule, which appears above in this Form 10-K.


/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Baltimore, Maryland
March 13, 2003





                                      F-5
<PAGE>



CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
=====================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS                                                   YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------------------------
Amounts in millions, except per share amounts                                        2002        2001        2000
                                                                                  ----------  ----------  ----------
<S>                                                                               <C>           <C>           <C>
Net sales ....................................................................    $  1,817.2  $  1,723.2  $  1,597.4
Other income .................................................................          23.2        31.2        49.5
                                                                                  ----------  ----------  ----------
                                                                                     1,840.4     1,754.4     1,646.9
                                                                                  ----------  ----------  ----------

Cost of goods sold, exclusive of depreciation and amortization
      shown separately below .................................................       1,148.9     1,079.4       973.9
Selling, general and administrative expenses .................................         362.4       332.2       312.7
Research and development expenses ............................................          51.7        49.4        45.7
Depreciation and amortization ................................................          94.6        89.0        87.8
Interest expense and related financing costs .................................          20.0        37.1        28.1
Provision for environmental remediation ......................................          70.7         5.8        10.4
Provision for asbestos-related litigation, net of insurance ..................            --          --       208.0
                                                                                  ----------  ----------  ----------
                                                                                     1,748.3     1,592.9     1,666.6
                                                                                  ----------  ----------  ----------

Income (loss) before Chapter 11 expenses, income taxes, and
      minority interest ......................................................          92.1       161.5       (19.7)
Chapter 11 reorganization expenses, net ......................................         (30.1)      (15.7)         --
Provision for income taxes ...................................................         (38.0)      (63.7)      (70.0)
Minority interest in consolidated entities ...................................          (1.9)       (3.5)         --
                                                                                  ----------  ----------  ----------
      NET INCOME (LOSS) ......................................................    $     22.1  $     78.6  $    (89.7)
=====================================================================================================================

BASIC EARNINGS (LOSS) PER SHARE:
      Net income (loss) ......................................................    $     0.34  $     1.20  $    (1.34)

Weighted average number of basic shares ......................................          65.4        65.3        66.8

DILUTED EARNINGS (LOSS) PER SHARE:
      Net income (loss) ......................................................    $     0.34   $    1.20  $    (1.34)

Weighted average number of diluted shares ....................................          65.5        65.4        66.8
=====================================================================================================================
</TABLE>


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


                                      F-6
<PAGE>


<TABLE>
<CAPTION>
================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS                                                               YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------------------------------
Dollars in millions                                                                          2002          2001          2000
                                                                                           --------      --------      --------
<S>                                                                                        <C>           <C>           <C>
OPERATING ACTIVITIES
Income (loss) before Chapter 11 expenses, income taxes, and minority interest ..........   $   92.1      $  161.5      $  (19.7)
Reconciliation to cash provided by operating activities:
      Depreciation and amortization ....................................................       94.6          89.0          87.8
      Interest accrued on pre-petition debt subject to compromise ......................       14.5          23.2          --
      Gain on sales of investments .....................................................       (1.2)         (7.9)        (19.0)
      Gain on disposals of assets ......................................................       (0.7)         (1.8)         (5.5)
      Provision for environmental remediation ..........................................       70.7           5.8          10.4
      Provision for asbestos-related litigation, net of insurance ......................       --            --           208.0
      Income from life insurance policies, net .........................................       (4.7)         (5.4)         (6.4)
      Changes in assets and liabilities, excluding effect of businesses
            acquired/divested and foreign currency translation:
        Decrease (increase) in working capital items ...................................       23.1         (60.9)        (28.7)
        Increase in accounts receivable due to termination of securitization program ...       --           (65.3)         --
        Expenditures for asbestos-related litigation ...................................      (13.1)       (109.6)       (281.8)
        Proceeds from asbestos-related insurance .......................................       10.8          78.8          85.6
        Expenditures for environmental remediation .....................................      (20.0)        (24.9)        (36.8)
        Expenditures for postretirement benefits .......................................      (21.5)        (22.3)        (23.0)
        Net expenditures for retained obligations of discontinued operations ...........       (5.3)        (13.1)        (34.9)
        Changes in accruals and other non-cash items ...................................       15.0           7.3         (51.4)
                                                                                           --------      --------      --------
      NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES BEFORE INCOME TAXES
      AND CHAPTER 11 REORGANIZATION EXPENSES ...........................................      254.3          54.4        (115.4)
Chapter 11 reorganization expenses paid, net ...........................................      (27.1)        (11.8)         --
Income taxes paid, net of refunds ......................................................      (31.8)        (27.9)        (28.3)
                                                                                           --------      --------      --------
      NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES .............................      195.4          14.7        (143.7)
                                                                                           --------      --------      --------

INVESTING ACTIVITIES
Capital expenditures ...................................................................      (91.1)        (62.9)        (64.8)
Businesses acquired in purchase transactions, net of cash acquired .....................      (28.5)        (84.4)        (49.0)
Investments in life insurance policies .................................................      (16.4)        (17.6)        (29.8)
Proceeds from life insurance policies ..................................................       19.4          18.0          18.7
Proceeds from sales of investments .....................................................        0.9           7.9          19.0
Proceeds from disposals of assets ......................................................        5.0           7.6          11.9
                                                                                           --------      --------      --------
      NET CASH USED FOR INVESTING ACTIVITIES ...........................................     (110.7)       (131.4)        (94.0)
                                                                                           --------      --------      --------

FINANCING ACTIVITIES
Proceeds from loans secured by cash value of life insurance, net of repayments .........       (5.1)         33.7          (5.2)
Borrowings under credit facilities, net of repayments ..................................       (3.1)         93.5         311.3
Borrowings under debtor-in-possession facility, net of fees ............................       19.0          71.5          --
Repayments of term debt ................................................................       --            --           (24.7)
Repayments of borrowings under debtor-in-possession facility ...........................      (20.0)        (75.0)         --
Exercise of stock options ..............................................................       --            --             5.8
Purchase of treasury stock .............................................................       --            (0.6)        (47.3)
                                                                                           --------      --------      --------
      NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES .............................       (9.2)        123.1         239.9
                                                                                           --------      --------      --------
Effect of currency exchange rate changes on cash and cash equivalents ..................       16.1          (6.9)        (10.1)
                                                                                           --------      --------      --------
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................................       91.6          (0.5)         (7.9)
      CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ...................................      191.4         191.9         199.8
                                                                                           --------      --------      --------
      CASH AND CASH EQUIVALENTS, END OF PERIOD .........................................   $  283.0      $  191.4      $  191.9
================================================================================================================================
</TABLE>

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

                                      F-7
<PAGE>


<TABLE>
<CAPTION>
====================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET                                                          DECEMBER 31,
---------------------------------------------------------------------------------------------------
Amounts in millions, except par value and shares                                2002        2001
                                                                             ----------  ----------
<S>                                                                          <C>         <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................................   $    283.0  $    191.4
Accounts and other receivables, net ......................................        311.3       302.1
Inventories ..............................................................        172.4       180.0
Deferred income taxes ....................................................         28.0        22.5
Asbestos-related insurance expected to be realized within one year .......         --           9.7
Other current assets .....................................................         35.7        30.2
                                                                             ----------  ----------
      TOTAL CURRENT ASSETS ...............................................        830.4       735.9

Properties and equipment, net of accumulated depreciation and
      amortization of $1,069.8 (2001 - $995.3) ...........................        620.8       589.0
Goodwill .................................................................         65.2        55.8
Cash value of life insurance policies, net of policy loans ...............         82.4        75.6
Deferred income taxes ....................................................        566.7       502.9
Asbestos-related insurance expected to be realized after one year ........        282.6       283.7
Other assets .............................................................        239.6       275.5
                                                                             ----------  ----------
      TOTAL ASSETS .......................................................   $  2,687.7  $  2,518.4
                                                                             ==========  ==========

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE
CURRENT LIABILITIES
Debt payable within one year .............................................   $      3.4  $      6.3
Accounts payable .........................................................         98.2        86.3
Income taxes payable .....................................................         11.4        14.4
Other current liabilities ................................................        130.3       126.3
                                                                             ----------  ----------
      TOTAL CURRENT LIABILITIES ..........................................        243.3       233.3

Deferred income taxes ....................................................         30.5        20.8
Other liabilities ........................................................        301.3        94.5
                                                                             ----------  ----------
      TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE ........................        575.1       348.6
                                                                             ----------  ----------
LIABILITIES SUBJECT TO COMPROMISE - NOTE 2 ...............................      2,334.7     2,311.5
                                                                             ----------  ----------
      TOTAL LIABILITIES ..................................................      2,909.8     2,660.1
                                                                             ----------  ----------
COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY (DEFICIT)
Common stock issued, par value $.01; 300,000,000 shares authorized;
       outstanding: 2002 - 65,466,725 (2001 - 65,399,600) ................          0.8         0.8
Paid-in capital ..........................................................        433.0       433.0
Retained earnings (accumulated deficit) ..................................       (115.7)     (137.8)
Treasury stock, at cost: shares: 2002 - 11,513,035; (2001 - 11,500,800) ..       (137.0)     (137.0)
Accumulated other comprehensive loss .....................................       (403.2)     (300.7)
                                                                             ----------  ----------
      TOTAL SHAREHOLDERS' EQUITY (DEFICIT) ...............................       (222.1)     (141.7)
                                                                             ----------  ----------
      TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) ...............   $  2,687.7  $  2,518.4
====================================================================================================
</TABLE>

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


                                      F-8
<PAGE>

<TABLE>
<CAPTION>
====================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
------------------------------------------------------------------------------------------------------------------------------------
                                     Common Stock     Retained                                    Accumulated
                                          and         Earnings        Deferred                       Other             TOTAL
                                        Paid-in     (Accumulated    Compensation     Treasury    Comprehensive      SHAREHOLDERS'
Dollars in millions                     Capital       Deficit)         Trust          Stock           Loss         EQUITY (DEFICIT)
                                     -----------------------------------------------------------------------------------------------
<S>                                  <C>           <C>            <C>              <C>          <C>              <C>
BALANCE, DECEMBER 31, 1999.......    $    423.4    $   (126.7)    $        (0.6)   $   (89.1)   $         (95.9) $        111.1
Net loss ........................          --           (89.7)             --           --                 --             (89.7)
Purchase of common stock ........          --            --                --          (47.3)              --             (47.3)
Shares issued under stock plans..           9.4          --                --           --                 --               9.4
Rabbi trust activity.............           0.2          --                (0.8)        --                 --              (0.6)
Rabbi trust obligations..........          --            --                 1.4         --                 --               1.4
Other comprehensive loss.........          --            --                --           --                (55.6)          (55.6)
                                     -----------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000.......    $    433.0    $   (216.4)    $        --      $  (136.4)   $        (151.5) $        (71.3)
                                     ===============================================================================================

Net income ......................    $     --      $     78.6     $        --      $    --      $          --    $         78.6
Purchase of common stock.........          --            --                --           (0.6)              --              (0.6)
Shares issued under stock plans..           0.8          --                --           --                 --               0.8
Other comprehensive loss ........          --            --                --           --               (149.2)         (149.2)
                                     -----------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001.......    $    433.8    $   (137.8)    $        --      $  (137.0)   $        (300.7) $       (141.7)
                                     ===============================================================================================

Net income ......................    $     --      $     22.1     $        --      $    --      $         --     $         22.1
Other comprehensive loss.........          --            --                --           --               (102.5)         (102.5)
                                     -----------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002.......    $    433.8    $   (115.7)    $        --      $  (137.0)   $        (403.2) $       (222.1)
====================================================================================================================================
</TABLE>

<TABLE>
<CAPTION>

====================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS                                                YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------------------------------------

Dollars in millions                                                                2002               2001              2000
                                                                             -------------------------------------------------------
<S>                                                                          <C>                 <C>              <C>
NET INCOME (LOSS).......................................................     $      22.1         $      78.6      $     (89.7)
                                                                             -------------------------------------------------------

OTHER COMPREHENSIVE LOSS:
   Foreign currency translation adjustments.............................            45.3               (24.6)           (34.1)
   Net unrealized losses on investments, net of income taxes............            (0.1)               (0.2)           (17.7)
   Minimum pension liability adjustments, net of income taxes...........          (147.7)             (124.4)            (3.8)
                                                                             -------------------------------------------------------
Total other comprehensive loss..........................................          (102.5)             (149.2)           (55.6)
                                                                             -------------------------------------------------------
COMPREHENSIVE LOSS......................................................     $     (80.4)        $     (70.6)     $    (145.3)
====================================================================================================================================
</TABLE>

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

                                      F-9
<PAGE>




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions unless otherwise stated)

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

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

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

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

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

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

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

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

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

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

As provided by the Bankruptcy Code, the Debtors had the exclusive right to
propose a plan of reorganization for a 120-day period following the Filing Date.
The

                                      F-10
<PAGE>

Debtors have received an extension of their exclusivity period during which
to file a plan of reorganization through August 1, 2003, and an extension of the
Debtors' exclusive rights to solicit acceptances of a reorganization plan
through October 1, 2003.

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

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

At a hearing on April 22, 2002, the Bankruptcy Court entered an order
establishing a bar date of March 31, 2003 for claims of general unsecured
creditors, asbestos property damage claims and medical monitoring claims related
to asbestos. The bar date does not apply to asbestos-related bodily injury
claims or claims related to Zonolite(R) attic insulation ("ZAI"), which will be
addressed separately. Grace has distributed notices and run media announcements
of the bar date under a program approved by the Bankruptcy Court. Rust
Consulting, the court-approved claims handling agent for the Chapter 11 Cases,
is maintaining a register of all claims filed. Grace is cataloguing claims as
filed and assessing their validity. At this time, it is not possible to estimate
the value of all claims that will ultimately be allowed by the Bankruptcy Court,
due to the uncertainties of the Chapter 11 process, the in-progress state of
Grace's investigation of submitted claims, and the lack of documentation
submitted in support of many claims.

In July 2002, the Bankruptcy Court approved special counsel to represent the ZAI
claimants, at the Debtors' expense, in a proceeding to determine certain
threshold scientific issues regarding ZAI. The court has set a litigation
schedule that would result in pretrial hearings on these issues in the third
quarter of 2003.

On November 29, 2002, Sealed Air Corporation ("Sealed Air") and Fresenius
Medical Care AG ("Fresenius") each announced that they had reached agreements in
principle with the Official Committee of Asbestos Personal Injury Claimants and
the Official Committee of Asbestos Property Damage Claimants to settle asbestos
and fraudulent conveyance claims related to the 1998 transaction involving
Grace's former packaging business and Sealed Air, and the 1996 transaction
involving Grace's former medical care business and Fresenius, respectively.
Under the terms of the proposed Sealed Air settlement, Sealed Air would make a
payment of $512.5 million (plus interest at 5.5% per annum commencing on
December 21, 2002) and nine million shares of Sealed Air common stock, valued at
$335.7 million as of December 31, 2002, as directed by the Bankruptcy Court upon
confirmation of Grace's plan of reorganization. Under the terms of the proposed
Fresenius settlement, as subsequently revised, Fresenius would contribute $115.0
million to the Grace estate, or as otherwise directed by the Bankruptcy Court,
upon confirmation of a plan of reorganization. The Sealed Air and Fresenius
settlements are subject to the approval of the Bankruptcy Court. Grace is unable
to predict how these settlements may ultimately affect its plan of
reorganization.

Impact on Debt Capital - All of the Debtors' pre-petition debt is in default due
to the Filing. The accompanying Consolidated Balance Sheet as of December 31,
2002 reflects the classification of the Debtors' pre-petition debt within
"liabilities subject to compromise."

The Debtors have entered into a debtor-in-possession post-petition loan and
security agreement with Bank of America, N. A. (the "DIP facility") in the
aggregate amount of $250 million. The DIP facility has a term expiring on April
1, 2003 and bears interest under a formula based on the London Inter-Bank
Offered Rate ("LIBOR") plus 2.00 to 2.25 percentage points depending on the
level of loans outstanding. The Debtors have filed a motion with the Bankruptcy
Court seeking approval to extend the term of the DIP facility for an additional
three years and to modify certain other provisions.

                                      F-11
<PAGE>

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

Pursuant to SOP 90-7, Grace's pre-petition liabilities that are subject to
compromise are required to be reported separately on the balance sheet at an
estimate of the amount that will ultimately be allowed by the Bankruptcy Court.
As of December 31, 2002, such pre-petition liabilities include fixed obligations
(such as debt and contractual commitments) as well as estimates of costs related
to contingent liabilities (such as asbestos-related litigation, environmental
remediation and other claims). The recorded amounts of such liabilities
generally reflect accounting measurements as of the Filing Date, adjusted as
warranted, for changes in facts and circumstances and/or rulings under Grace's
Chapter 11 proceedings subsequent to the Filing. (See Note 2 to the Consolidated
Financial Statements for detail of the liabilities subject to compromise as of
December 31, 2002, and as of the Filing Date.) Obligations of Grace subsidiaries
not covered by the Filing continue to be classified on the Consolidated Balance
Sheet based upon maturity dates or the expected dates of payment. SOP 90-7 also
requires separate reporting of certain expenses, realized gains and losses, and
provisions for losses related to the Filing as reorganization items.

PRINCIPLES OF CONSOLIDATION: The Consolidated Financial Statements include the
accounts of the Company and entities as to which the Company exercises control
over operating and financial policies. Intercompany transactions and balances
are eliminated in consolidation. Investments in affiliated companies as to which
the Company does not exercise control over operating and financial policies are
accounted for under the equity method, unless the Company's investment is
determined to be temporary, in which case the investment is accounted for under
the cost method.

RECLASSIFICATIONS: Certain amounts in prior years' Consolidated Financial
Statements have been reclassified to conform to the 2002 presentation.

EFFECT OF NEW ACCOUNTING STANDARDS: In January 2003, the Financial Accounting
Standards Board ("FASB") issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). Grace has elected to early adopt the
provisions of FIN 46. The adoption of FIN 46 required Grace to consolidate
Advanced Refining Technologies LLC. The impact of this consolidation was
insignificant.

In December 2002, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure, an amendment of SFAS Statement No. 123." SFAS No. 148 amends SFAS
No. 123 to provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. Grace adopted the provisions of
SFAS No. 148 in December 2002. The adoption had no material impact on the
Consolidated Financial Statements.

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements of Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). The disclosure provisions of FIN
45 are effective for Grace's 2002 Consolidated Financial Statements. (See Note
14 for required disclosures.)

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS 146 addresses significant issues
relating to the recognition, measurement, and reporting of costs associated with
exit and disposal activities, including restructuring activities. SFAS No. 146
is effective for Grace in 2003 and is not expected

                                      F-12
<PAGE>

to have a material impact on the Consolidated Financial Statements.

In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 supersedes
Accounting Principles Board Opinion ("APB") No. 16, "Business Combinations." The
provisions of SFAS No. 141: (1) require that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001, (2) provide
specific criteria for the initial recognition and measurement of intangible
assets apart from goodwill, and (3) require that unamortized negative goodwill
be written off immediately as an extraordinary gain instead of being deferred
and amortized. Grace adopted SFAS No. 141 in July 2001.

SFAS No. 142 supersedes APB 17, "Intangible Assets," and is effective for fiscal
years beginning after December 15, 2001. SFAS No. 142 primarily addresses the
accounting for goodwill and intangible assets subsequent to their initial
recognition. The provisions of SFAS No. 142: (1) prohibit the amortization of
goodwill and indefinite-lived intangible assets, (2) require that goodwill and
indefinite-lived intangible assets be tested annually for impairment, (3)
require that reporting units be identified for the purpose of assessing
potential future impairments of goodwill, and (4) remove the 40 year limitation
on the amortization period of intangible assets that have finite lives.

Grace adopted the provisions of SFAS No. 142 in the first quarter ended March
31, 2002. Grace has identified its reporting units as catalyst products
("Catalysts"), silica products ("Silicas"), specialty construction chemicals
("SCC"), specialty building materials ("SBM") and specialty sealants and
coatings ("SSC") for purposes of measuring impairment under the provisions of
SFAS No. 142. All amounts of goodwill, intangible assets, other assets, and
liabilities have been appropriately classified and allocated to these reporting
units. Amortization expense on goodwill for the year ended December 31, 2001 was
insignificant. The adoption of SFAS No. 142 did not have a material impact on
the Consolidated Financial Statements.

SFAS No. 142 requires that goodwill and certain intangible assets be tested
annually for impairment. In connection with the adoption of SFAS No. 142 and as
of November 30, 2002, Grace evaluated its goodwill and other intangible assets
that have indefinite useful lives, with no impairment charge required.


In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 143 requires the accrual
of asset retirement obligations by increasing the initial carrying amount of the
related long-lived asset, and systematically expensing the cost of such
obligations over the asset's useful life. The standard is effective for Grace in
2003. Grace does not expect SFAS No. 143 to have a material effect on the
Consolidated Financial Statements. SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets to Be Disposed Of," and
expands the scope of discontinued operations. SFAS No. 144 was effective for
Grace in 2002 and did not have a material impact on the Consolidated Financial
Statements.

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

o   Contingent liabilities such as asbestos-related matters, environmental
    remediation, income taxes and retained obligations of divested businesses.

o   Pension and post-retirement liabilities that depend on assumptions regarding
    discount rates and/or total returns on invested funds.

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

o   Realization values of various assets such as trade receivables, inventories,
    insurance receivables, income taxes and goodwill.

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

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

SALE OF ACCOUNTS RECEIVABLE: Prior to the Filing, Grace entered into a program
to sell certain of its trade

                                      F-13
<PAGE>

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

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

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

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

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

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

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

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

FINANCIAL INSTRUMENTS: From time to time, Grace enters into interest rate swap
agreements and foreign exchange forward and option contracts to manage exposure
to fluctuations in interest and foreign currency exchange rates. Grace does not
hold or issue derivative financial instruments for trading purposes. At December
31, 2002, Grace did not hold and had not issued any derivative financial
instruments.

                                      F-14
<PAGE>
--------------------------------------------------------------------------------
2. CHAPTER 11 RELATED FINANCIAL INFORMATION
--------------------------------------------------------------------------------

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

Components of liabilities subject to compromise are as follows:

==================================================================
                                                        Filing
                        DECEMBER 31,    December 31,     Date
(Dollars in millions)       2002            2001      (Unaudited)
==================================================================

Debt, pre-petition
  plus accrued
  interest ............ $    538.8      $  524.5     $    511.5
Asbestos-related
  liability ...........      973.2         996.3        1,002.8
Income taxes ..........      227.8         216.6          210.1
Environmental
  remediation .........      201.1         153.1          164.8
Postretirement
 benefits other than
 pensions .............      147.2         169.1          185.4
Special pension
  arrangements ........       74.9          72.5           70.8
Retained obligations
  of divested
  business ............       55.3          80.5           75.5
Accounts
 payable ..............       32.4          31.7           43.0
Other accrued
  liabilities .........       84.0          67.2          102.1
                        ------------------------------------------
                        $  2,334.7      $2,311.5     $  2,366.0
==================================================================

Set forth below is a reconciliation of the changes in pre-filing date liability
balances for the period from the Filing Date through December 31, 2002.

================================================================================
                                                               Cumulative Since
(Dollars in millions) (Unaudited)                                  Filing
================================================================================
Balance, Filing Date......................................     $   2,366.0
Cash disbursements and/or reclassifications under
   Bankruptcy Court orders:
   Freight and distribution order.........................            (5.7)
   Trade accounts payable order...........................            (9.1)
Other court orders including employee wages and benefits,
   sales and use tax and customer programs................          (145.1)

Expense/(income) items:
   Interest on pre-petition debt..........................            35.5
   Current period employment-related accruals.............            14.7
   Change in estimate of environmental contingencies......            76.5
   Change in estimate of income tax contingencies.........            20.5
Balance sheet reclassifications...........................           (18.6)
                                                               -----------------
Balance, end of period....................................     $   2,334.7
================================================================================

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

The Debtors recorded Chapter 11 reorganization expenses for 2002 consisting of:

================================================================================
(Dollars in millions)                                     2002        2001
================================================================================

Legal and financial advisory fees..................  $     30.6    $   16.6
Interest income....................................        (0.5)       (0.9)
                                                     ---------------------------
Chapter 11 reorganization expenses, net............  $     30.1    $   15.7
================================================================================

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


                                      F-15
<PAGE>

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

=========================================================================
W. R. GRACE & CO. - CHAPTER 11 FILING        JANUARY 1,       APRIL 2,
ENTITIES                                       2002             2001
DEBTOR-IN-POSSESSION STATEMENT OF               TO                TO
OPERATIONS (UNAUDITED) DOLLARS IN           DECEMBER 31,     DECEMBER 31,
MILLIONS                                       2002             2001
=========================================================================
Net sales, including intercompany ......... $    985.2       $  768.7
Other income ..............................       61.3           38.5
                                            -----------------------------
                                               1,046.5          807.2
                                            -----------------------------
Cost of goods, including intercompany,
   exclusive of depreciation and
   amortization shown separately below ....      632.1          480.0
Selling, general and administrative
   expenses ...............................      236.4          153.6
Research and development expenses .........       41.2           30.6
Depreciation and amortization .............       60.7           43.4
Interest expense and related financing
   costs ..................................       19.4           26.9
Provision for environmental remediation ...       70.7            5.8
                                            -----------------------------
                                               1,060.5          740.3
                                            -----------------------------
Income before Chapter 11 reorganization
   expenses, income taxes, and equity
   in net income of non-filing entities ...      (14.0)          66.9
Chapter 11 reorganization expenses, net ...      (30.1)         (12.7)
Provision for income taxes ................       (3.3)         (35.5)
Equity in net income of non-filing
   entities ...............................       69.5           45.2
                                            -----------------------------
   NET INCOME ............................. $     22.1       $   63.9
=========================================================================



=============================================================================
W. R. GRACE & CO. - CHAPTER 11 FILING            JANUARY 1,       APRIL 2,
ENTITIES                                           2002             2001
DEBTOR-IN-POSSESSION STATEMENT OF                   TO                TO
OPERATIONS (UNAUDITED) DOLLARS IN               DECEMBER 31,     DECEMBER 31,
MILLIONS                                           2002             2001
=============================================================================
OPERATING ACTIVITIES
Net income.................................     $     22.1       $   63.9
Reconciliation to net cash provided by
   operating activities:
Non-cash items, net........................           71.8           67.1
Increase in accounts receivable due to
   termination of securitization program ..           --            (98.4)
Decrease in subordinated interest of
   accounts receivable sold................           --             33.1
Changes in other assets and liabilities,
   excluding the effect of businesses
   acquired/divested.......................           18.2           --
                                               -------------------------------

NET CASH PROVIDED BY OPERATING ACTIVITIES..          112.1           65.7


NET CASH USED FOR INVESTING ACTIVITIES.....          (66.0)         (20.0)


NET CASH USED FOR FINANCING ACTIVITIES.....          (27.3)         (16.3)
                                               -------------------------------

NET INCREASE IN CASH AND CASH EQUIVALENTS..           18.8           29.4

Cash and cash equivalents, beginning of
   period..................................           38.0            8.6
                                               -------------------------------
Cash and cash equivalents, end of period...       $   56.8       $   38.0
==============================================================================


                                      F-16
<PAGE>





======================================================================
W. R. GRACE & CO. - CHAPTER 11 FILING
ENTITIES
DEBTOR-IN-POSSESSION BALANCE SHEET          DECEMBER 31,  DECEMBER 31,
(UNAUDITED) DOLLARS IN MILLIONS                 2002           2001
======================================================================
ASSETS
CURRENT ASSETS
Cash and cash equivalents ............      $   56.8      $     38.0
Notes and accounts receivable, net ...         115.0           128.2
Receivables from non-filing entities,
   net ...............................          41.3            33.8
Inventories ..........................          70.5            89.5
Other current assets..................          53.0            78.6
                                            --------------------------
   TOTAL CURRENT ASSETS ..............         336.6           368.1

Properties and equipment, net.........         389.7           384.9
Cash value of life insurance policies,
   net of policy loans................          82.4            75.6
Deferred income taxes ................         567.0           502.6
Asbestos-related insurance expected to
   be realized after one year.........         282.6           283.7
Loans receivable from non-filing
   entities, net .....................         444.4           388.0
Investment in non-filing entities ....         241.4           153.5
Other assets .........................          97.4           156.8
                                            --------------------------
   TOTAL ASSETS ......................      $2,441.5      $  2,313.2
======================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
   (DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE
Current liabilities ..................      $   99.3      $     94.5
Debt payable after one year ..........          --               1.6
Other liabilities ....................         229.6            47.3
                                            --------------------------
   TOTAL LIABILITIES NOT SUBJECT TO
   COMPROMISE.........................         328.9           143.4

LIABILITIES SUBJECT TO COMPROMISE ....       2,334.7         2,311.5
                                            --------------------------
   TOTAL LIABILITIES..................       2,663.6         2,454.9

   SHAREHOLDERS' EQUITY (DEFICIT) ....        (222.1)         (141.7)
                                            --------------------------
   TOTAL LIABILITIES AND SHAREHOLDERS'
      EQUITY (DEFICIT) ...............      $2,441.5      $  2,313.2
======================================================================

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

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

Grace is a defendant in property damage and bodily injury lawsuits relating to
previously sold asbestos-containing products. On April 2, 2001, Grace filed
voluntary petitions for reorganization under Chapter 11 to use the
court-supervised reorganization process to develop and implement a plan for
addressing pending and future asbestos-related claims. (See Note 1 for further
discussion.)

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

PROPERTY DAMAGE LITIGATION

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

                                      F-17
<PAGE>

estimate of such exposure. (See "Asbestos-Related Liability" below.)

Through December 31, 2002, out of 380 asbestos property damage cases filed, 140
were dismissed without payment of any damages or settlement amounts; judgments
were entered in favor of Grace in nine cases (excluding cases settled following
appeals of judgments in favor of Grace); judgments were entered in favor of the
plaintiffs in eight cases (one of which is on appeal) for a total of $86.1
million; 207 property damage cases were settled for a total of $696.8 million;
and 16 cases remain outstanding (including the one on appeal). Of the 16
remaining cases, eight relate to ZAI and eight relate to a number of former
asbestos-containing products (two of which also involve ZAI). Additional
asbestos property damage claims (other than claims with respect to ZAI) are to
be filed as part of the Chapter 11 claims process and are subject to the March
31, 2003 bar date established by the Bankruptcy Court.

The ZAI cases were filed as class action lawsuits in 2000 and 2001 on behalf of
owners of homes containing ZAI. These cases seek damages and equitable relief,
including the removal, replacement and/or disposal of all such insulation. The
plaintiffs assert that this product is in millions of homes throughout the U.S.
and that the cost of removal could be several thousand dollars per home. As a
result of the Filing, these cases have been transferred to the U.S. Bankruptcy
Court. While Grace has not completed its investigation of the claims described
in these lawsuits, testing and analysis of this product by Grace and others
supports Grace's belief that the product was and continues to be safe for its
intended purpose and poses little or no threat to human health. At this time,
Grace is not able to assess the extent of any possible liability related to this
matter. In July 2002, the Bankruptcy Court approved special counsel to represent
the ZAI claimants, at the Debtors' expense, in a proceeding to determine certain
threshold scientific issues regarding ZAI. The court has set a litigation
schedule that would result in pretrial hearings on these issues in the third
quarter of 2003.

BODILY INJURY LITIGATION

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

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

ASBESTOS-RELATED LIABILITY

Asbestos-related litigation is stayed by the Chapter 11 Cases. Ongoing costs are
generally limited to claims administration costs and to defense costs incurred
in connection with litigation permitted by the Bankruptcy Court. Any other
adjustments to the recorded liability is based on developments in the Chapter 11
Cases. For periods prior to and as of the Filing Date, Grace's estimated
property damage and bodily injury liabilities were based on its experience with,
and recent trends in, asbestos litigation. Its recorded liabilities covered
indemnity and defense costs for pending property damage cases and for pending
and projected future bodily injury claims. However, due to the Filing and the
uncertainties of asbestos-related litigation, actual amounts could differ
materially from the recorded liability. Since the Filing, Grace is aware that
bodily injury claims have continued to be filed against co-defendant companies,
and at higher than historical rates. Grace believes that had it not filed for
Chapter 11 reorganization, it likely would have received thousands more claims
than it had previously projected.

The total asbestos-related liability balances as of December 31, 2002 and 2001
were $973.2 million and $996.3 million, respectively. The decrease in the
liability is primarily due to the payment of normal post-Filing administrative
costs relating to claims management. The remaining decrease is due to the
satisfaction of pre-petition settlements through draws on letters of credit
securing such settlements. These draws were reclassified to "other accrued
liabilities"

                                      F-18
<PAGE>

in "liabilities subject to compromise" as payables to the issuing banks. The
recorded asbestos-related liability is included in "liabilities subject to
compromise."

ASBESTOS INSURANCE

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

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

Activity in the asbestos-related insurance receivable during 2002 and 2001 was
as follows:

================================================================================
ESTIMATED INSURANCE RECOVERY ON ASBESTOS-RELATED
LIABILITIES
(Dollars in millions)                                    2002           2001
--------------------------------------------------------------------------------
INSURANCE RECEIVABLE
Asbestos-related insurance receivable,
   beginning of year ...........................     $  293.4        $ 369.3
Proceeds received under asbestos-related
   insurance settlements .......................        (10.8)         (75.9)
--------------------------------------------------------------------------------
Asbestos-related insurance receivable, end of
   year ........................................        282.6          293.4
--------------------------------------------------------------------------------
Expected to be realized within one year ........         --             (9.7)
--------------------------------------------------------------------------------
Expected to be realized after one year .........     $  282.6       $  283.7
================================================================================

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

The components of income (loss) from consolidated operations before income taxes
and the related provision for income taxes for 2002, 2001, and 2000 are as
follows:

================================================================================
INCOME TAXES - CONSOLIDATED
OPERATIONS (Dollars in millions)         2002         2001           2000
--------------------------------------------------------------------------------
Income (loss) before income taxes:
   Domestic......................    $    (44.6)  $     67.1    $    (94.7)
   Foreign.......................         104.7         75.2          75.0
                                     -------------------------------------------
                                     $     60.1   $    142.3    $    (19.7)
                                     ===========================================
(Provision) benefit for income taxes:
   Federal - current.............    $      8.1   $     (7.7)   $    (66.2)
   Federal - deferred............         (11.0)       (27.5)         39.4
   State and local - current.....          (1.0)        (3.2)        (20.0)
   Foreign - current.............         (27.6)       (22.2)        (21.8)
   Foreign - deferred............          (6.5)        (3.1)         (1.4)
                                     -------------------------------------------
                                     $    (38.0)  $    (63.7)   $    (70.0)
================================================================================

At December 31, 2002 and 2001, the tax attributes in the Consolidated Balance
Sheet giving rise to deferred tax assets and liabilities consisted of the
following items:

================================================================================
DEFERRED TAX ANALYSIS
(Dollars in millions)                                 2002           2001
--------------------------------------------------------------------------------
Liability for asbestos-related litigation.....   $     340.6    $     348.7
Net operating loss/tax credit
   carryforwards..............................         155.1          155.9
Deferred state taxes..........................         117.7          105.3
Liability for environmental remediation.......          70.4           53.6
Other post-retirement benefits................          51.5           59.2
Deferred charges..............................          46.1           50.2
Reserves and allowances.......................          27.1           38.2
Research and development......................          35.0           40.0
Pension liabilities...........................         172.6           84.8
Foreign loss/credit carryforwards.............          14.8           23.3
Other.........................................          12.4            9.9
--------------------------------------------------------------------------------
Total deferred tax assets.....................   $   1,043.3    $     969.1
--------------------------------------------------------------------------------
Asbestos-related insurance receivable.........        (103.6)        (106.9)
Pension assets................................         (91.7)         (85.8)
Properties and equipment......................         (71.7)         (56.3)
Other.........................................         (60.4)         (58.3)
--------------------------------------------------------------------------------
Total deferred tax liabilities................        (327.4)        (307.3)
--------------------------------------------------------------------------------
Valuation allowance ..........................        (152.5)        (158.0)
--------------------------------------------------------------------------------
Net deferred tax assets.......................   $     563.4    $     503.8
================================================================================

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. Based upon
anticipated future results, Grace has concluded that it is more likely than not
that the balance of the net deferred tax assets, after consideration of the
valuation allowance, will be realized. Because of the nature of the items that
make up this balance, the realization period is likely to extend over a number
of years.


                                      F-19
<PAGE>

At December 31, 2002, there were $307.8 million of net operating loss
carryforwards, representing deferred tax assets of $107.7 million, with
expiration dates through 2022; $6.2 million of foreign tax credit carryforwards
with expiration dates through 2006; $6.6 million of general business credit
carryforwards with expiration dates through 2011; and $34.6 million of
alternative minimum tax credit carryforwards with no expiration dates.

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

================================================================================
INCOME TAX (PROVISION) BENEFIT
ANALYSIS   (Dollars in millions)                2002        2001        2000
--------------------------------------------------------------------------------
Tax (provision) benefit at federal
   corporate rate......................      $  (21.0)   $  (49.8)    $   6.9
Change in provision resulting from:
Nontaxable income/non-deductible
   expenses............................          (1.0)       (1.6)       (1.6)
State and local income taxes, net of
   federal income tax benefit..........          (0.7)       (1.7)       (1.8)

Federal and foreign taxes on foreign
   operations..........................           1.6         1.3         1.5
Chapter 11 reorganization expenses
   (non-deductible)....................         (10.5)       (5.5)       --
Tax and interest relating to tax
   deductibility of interest on COLI
   policy loans (See note 14)..........          (6.4)       (6.4)      (75.0)
                                             -----------------------------------
Income tax provision from continuing
   operations..........................      $  (38.0)   $  (63.7)    $ (70.0)
================================================================================

Federal, state, local and foreign taxes have not been accrued on approximately
$316.5 million 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 $22.5 million and additional federal
income taxes to the extent they are not offset by foreign tax credits. It is not
practicable to estimate the total tax liability that would be incurred upon such
a distribution.

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

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

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

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

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

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

In 2001, Grace completed three business combinations for a total cash cost of
$84.4 million as follows:

o   In March 2001, Grace acquired The Separations Group, a manufacturer of
    chromatography columns and separations media.

o   In March 2001, Grace's German subsidiary acquired the precipitated silicas
    business of Akzo-PQ Silicas.

o   In July 2001, Grace's French subsidiary acquired Pieri S.A., a leading
    supplier of specialty construction chemicals in Europe.

Goodwill recognized in those transactions amounted to $23.6 million, which was
assigned to the Davison Chemicals and Performance Chemicals segments in the
amounts of $10.8 million and $12.8 million, respectively.

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

On March 1, 2001, Grace and Chevron formed ART to develop and market
hydroprocessing catalysts globally. ART conducts business through two
distribution companies and one operating company. ART has agreements with both
Grace and Chevron under which each provides certain administrative and research
and development services to ART. Although structured as a joint venture with
shared governance, Grace is the primary manufacturer of ART products, Grace
appoints the Chief Operating Officer and Grace is entitled to 55% of the
economic benefits and assumes 55% of the

                                      F-20
<PAGE>

economic risks. Accordingly, ART is consolidated for Grace's financial reporting
purposes.

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

Components of other income are as follows:

================================================================================
OTHER INCOME
(Dollars in millions)                 2002             2001           2000
--------------------------------------------------------------------------------
Investment income............     $      4.7      $      5.4     $      6.4
Interest income..............            3.9             4.6            9.7
Gain on sale of investments..            1.2             7.9           19.0
Net gain on dispositions of
   assets....................            0.7             1.8            5.5
Tolling revenue..............            3.1             3.1            1.2
Equity in net income of
   affiliates................            0.7             0.4            0.6
Other miscellaneous income ..            8.9             8.0            7.1
--------------------------------------------------------------------------------
Total other income...........     $     23.2      $     31.2     $     49.5
================================================================================

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

Grace adopted SFAS No. 142, "Goodwill and Other Intangible Assets" on January 1,
2002 and ceased the amortization of goodwill. The pro forma impact on pre-tax
income and earnings per share was immaterial. SFAS No. 142 requires that
goodwill and indefinite life intangible assets be tested for impairment on an
annual basis. For the purpose of measuring impairment under the provisions of
SFAS No. 142, Grace has identified its reporting units as Catalysts and Silicas
(Davison Chemicals) and SCC, SBM and SSC (Performance Chemicals). In connection
with the adoption of SFAS No. 142 and as of November 30, 2002, Grace evaluated
its goodwill and other intangible assets that have indefinite useful lives, with
no impairment charge required.

At December 31, 2002 and December 31, 2001, Grace had goodwill balances of $65.2
million and $55.8 million, respectively. The carrying amount of goodwill
attributable to each reporting unit and the changes in those balances during the
year ended December 31, 2002 are as follows:

================================================================================
                                          Davison       Performance      Total
(Dollars in millions)                    Chemicals       Chemicals       Grace
================================================================================
Balance as of December 31, 2001 ...      $   12.5         $   43.3     $   55.8
Goodwill acquired during the year..           0.9              2.9          3.8
Reclass of other intangible
   assets..........................           1.7             (1.2)         0.5
Foreign currency translation
   adjustment......................           1.9              3.2          5.1
                                         ---------------------------------------
Balance as of December 31, 2002 ...      $   17.0         $   48.2     $   65.2
================================================================================

Grace's book value of other intangible assets at December 31, 2002 and December
31, 2001 was $63.3 million and $57.5 million, respectively, including
unamortizable intangible assets (primarily trademarks) of $6.9 million and $5.8
million, respectively. The composition of the remaining net amortizable
intangible assets of $56.4 million and $51.7 million as of December 31, 2002 and
December 31, 2001, respectively, was as follows:

================================================================================
(Dollars in millions)                         As of December 31, 2002
================================================================================
                                  Gross Carrying           Accumulated
                                      Amount               Amortization
                                  ----------------------------------------------
Technology ...................    $     34.6                $    4.6
Patents.......................          15.3                    13.6
Customer lists................          24.1                     3.3
Other.........................           5.0                     1.1
                                  ----------------------------------------------
Total.........................    $     79.0                $   22.6
================================================================================

================================================================================
(Dollars in millions)                         As of December 31, 2001
================================================================================
                                  Gross Carrying           Accumulated
                                      Amount               Amortization
                                  ----------------------------------------------
Technology ...................    $     29.9                $     1.7
Patents.......................          15.3                     12.2
Customer lists................          20.0                      1.0
Other.........................           1.8                      0.4
                                  ----------------------------------------------
Total.........................    $     67.0                $    15.3
================================================================================

At December 31, 2002, estimated future annual amortization expenses were
(dollars in millions):

==========================================================================
ESTIMATED AMORTIZATION EXPENSE
--------------------------------------------------------------------------
    2003...........................................     $      6.1
    2004...........................................            4.9
    2005...........................................            4.7
    2006...........................................            4.6
    2007...........................................            4.4
==========================================================================

--------------------------------------------------------------------------------
8. COMPREHENSIVE LOSS
--------------------------------------------------------------------------------

The tables below present the pre-tax, tax and after tax components of Grace's
other comprehensive loss for the years ended December 31, 2002, 2001 and 2000:

================================================================================
YEAR ENDED                                                           AFTER
DECEMBER 31, 2002                       Pre-Tax         Tax           TAX
(Dollars in millions)                    Amount       Benefit        AMOUNT
--------------------------------------------------------------------------------
Change in unrealized appreciation
   during the year................     $   (0.1)     $     --      $     (0.1)
Minimum pension liability
   adjustments ...................       (227.2)         79.5          (147.7)
Foreign currency translation
   adjustments....................         45.3            --            45.3
                                       -----------------------------------------
Other comprehensive loss..........     $ (182.0)     $   79.5      $   (102.5)
================================================================================

                                      F-21
<PAGE>


================================================================================
YEAR ENDED                                               Tax           After
DECEMBER 31, 2001                         Pre-Tax      (Expense)        Tax
(Dollars in millions)                      Amount       Benefit       Amount
--------------------------------------------------------------------------------
Change in unrealized appreciation
   during the year................     $     (0.4)   $      0.2    $     (0.2)
Minimum pension liability
   adjustments ...................         (191.4)         67.0        (124.4)
Foreign currency translation
   adjustments....................          (24.6)         --           (24.6)
                                       -----------------------------------------
Other comprehensive loss..........     $   (216.4)   $     67.2    $   (149.2)
================================================================================

================================================================================
YEAR ENDED                                               Tax          After
DECEMBER 31, 2000                         Pre-Tax      (Expense)       Tax
(Dollars in millions)                      Amount       Benefit       Amount
--------------------------------------------------------------------------------
Change in unrealized appreciation
   during the year................     $    (27.0)   $      9.3    $    (17.7)
Minimum pension liability
   adjustments ...................           (2.2)         (1.6)         (3.8)
Foreign currency translation
   adjustments....................          (34.1)         --           (34.1)
                                       -----------------------------------------
Other comprehensive loss..........     $    (63.3)   $      7.7    $    (55.6)
================================================================================

The decline in value of the U.S. and global equity markets, coupled with a
decline in interest rates, during 2002 and 2001 created a shortfall between the
accounting measurement of Grace's obligations under certain of its qualified
pension plans for U.S. employees and the market value of dedicated pension
assets. This condition required Grace to record a minimum pension liability for
these plans equal to the funding shortfall and to offset related deferred costs
against shareholders' equity (deficit) at December 31, 2002 and 2001. (See Note
18.)

================================================================================
COMPOSITION OF ACCUMULATED OTHER COMPREHENSIVE LOSS
(Dollars in millions)                                    2002          2001
--------------------------------------------------------------------------------
Foreign currency translation....................    $    (119.5)    $  (164.8)
Minimum pension liability.......................         (283.7)       (136.0)
Securities available for sale...................           --             0.1
                                                    ----------------------------
Accumulated other comprehensive loss............    $    (403.2)    $  (300.7)
================================================================================

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

================================================================================
(Dollars in millions)                                    2002          2001
--------------------------------------------------------------------------------
ACCOUNTS AND OTHER RECEIVABLES, NET
Trade receivables, less allowance of $3.7
   (2001 - $5.7)................................    $     297.3     $   276.4
Other receivables, less allowances of $1.7
   (2001 - $1.9)................................           14.0          25.7
                                                    ----------------------------
                                                    $     311.3     $   302.1
================================================================================
INVENTORIES (1)
Raw materials ..................................    $      39.2     $    39.2
In process .....................................           30.3          27.6
Finished products ..............................          109.6         113.3
General merchandise ............................           26.8          25.8
Less:  Adjustment of certain inventories to a
   last-in/first-out (LIFO) basis(2) ...........          (33.5)        (25.9)
                                                    ----------------------------
                                                    $     172.4     $   180.0
================================================================================

(1) Inventories valued at LIFO cost comprised 48.5% of total inventories at
    December 31, 2002 and 51.9% at December 31, 2001

(2) During 2002, a reduction in U.S. LIFO inventory levels resulted in product
    valued at costs pertaining to prior years being reflected in 2002 cost of
    sales. This so-called LIFO liquidation had the effect of increasing pre-tax
    income for the Davison segment and Grace by $0.5 million.

================================================================================
OTHER ASSETS
Deferred pension costs..........................    $     104.2     $     143.3
Deferred charges ...............................           38.3            44.9
Long-term receivables, less allowances of $0.8
   (2001 - $0.6) ...............................            2.0             2.8
Investments in unconsolidated affiliates........            0.4             3.0
Patents, licenses and other intangible assets,
    net ........................................           63.3            57.5
Pension-unamortized prior service cost ........            26.4            19.7
Other assets ...................................            5.0             4.3
                                                    ----------------------------
                                                    $     239.6     $     275.5
================================================================================
OTHER CURRENT LIABILITIES
Accrued compensation ...........................    $      40.0     $      39.4
Accrued interest ...............................            6.4             4.8
Deferred tax liability .........................            0.8             0.8
Customer volume rebates ........................           21.2            19.2
Accrued commissions ............................            6.0             6.1
Accrued reorganization fees ....................            9.4             6.4
Other accrued liabilities ......................           46.5            49.6
                                                    ----------------------------
                                                    $     130.3     $     126.3
================================================================================
OTHER LIABILITIES
Pension-underfunded plans ......................    $     295.1     $      85.8
Other accrued liabilities ......................            6.2             8.7
                                                    ----------------------------
                                                    $     301.3     $      94.5
================================================================================

                                      F-22
<PAGE>

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

--------------------------------------------------------------------------------
PROPERTIES AND EQUIPMENT
(Dollars in millions)                                  2002           2001
--------------------------------------------------------------------------------
Land...........................................    $      20.5    $      17.7
Buildings......................................          367.2          335.1
Information technology and equipment...........           99.8          104.4
Machinery, equipment and other.................        1,137.0        1,076.0
Projects under construction....................           66.2           51.1
                                                   -----------------------------
Properties and equipment, gross................        1,690.7        1,584.3
Accumulated depreciation and amortization......       (1,069.9)        (995.3)
                                                   -----------------------------
Properties and equipment, net..................    $     620.8    $     589.0
================================================================================

Interest costs are capitalized for significant, extended construction projects.
The amounts were insignificant for the periods presented. Depreciation and lease
amortization expense relating to properties and equipment amounted to $89.6
million in 2002, $84.0 million in 2001 and $84.6 million in 2000. Grace's rental
expense for operating leases amounted to $15.1 million in 2002, $14.2 million in
2001 and $14.2 million in 2000. (See Note 14 for information regarding
contingent rentals.)

At December 31, 2002, minimum future payments for operating leases were (dollars
in millions):

================================================================================
MINIMUM FUTURE PAYMENTS UNDER OPERATING LEASES
--------------------------------------------------------------------------------
    2003....................................................    $     16.0
    2004....................................................          13.5
    2005....................................................          11.7
    2006....................................................           7.8
    2007....................................................           6.5
    Thereafter..............................................          12.0
================================================================================
    Total minimum lease payments............................    $     67.5
================================================================================

The above minimum lease payments are net of anticipated sublease income of $1.6
million in 2003, $1.5 million in 2004, $1.4 million in 2005, $1.4 million in
2006 and $1.3 million in 2007.

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

Grace is the beneficiary of life insurance policies on certain current and
former employees with a net cash surrender value of $82.4 million and $75.6
million at December 31, 2002 and 2001, respectively. The policies were acquired
to fund various employee benefit programs and other long-term liabilities and
are structured to provide cash flow (primarily tax-free) over an extended number
of years. The following table summarizes activity in these policies for 2002,
2001 and 2000:


================================================================================
LIFE INSURANCE - ACTIVITY SUMMARY
(Dollars in millions)                    2002          2001            2000
--------------------------------------------------------------------------------
Earnings on policy assets........    $    39.4     $    40.3       $    36.8
Interest on policy loans.........        (34.7)        (34.9)          (30.4)
Premiums.........................          2.4           2.5             2.5
Proceeds from policy loans.......         --           (48.7)           --
Policy loan repayments...........          5.1          15.0             5.2
Net investing activity...........         (5.4)         (2.9)            8.6
                                     -------------------------------------------
Change in net cash value.........    $     6.8     $   (28.7)      $    22.7
                                     ===========================================
Gross cash value.................    $   471.3     $   477.5       $   452.4
Principal - policy loans.........       (365.4)       (377.6)         (325.8)
Accrued interest - policy loans .        (23.5)        (24.3)          (22.3)
                                     -------------------------------------------
Net cash value...................    $    82.4     $    75.6       $   104.3
================================================================================
Insurance benefits in force......    $ 2,240.8     $ 2,291.0       $ 2,286.0
================================================================================
Tax-free proceeds received.......    $    19.4     $    18.0       $    18.7
================================================================================

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

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

================================================================================
COMPONENTS OF DEBT
(Dollars in millions)                             2002             2001
--------------------------------------------------------------------------------
DEBT PAYABLE WITHIN ONE YEAR
Other short-term borrowings (1)..............   $    3.4         $    6.3
                                                --------------------------------
                                                $    3.4         $    6.3
                                                ================================
DEBT PAYABLE AFTER ONE YEAR
DIP facility (2).............................   $   --           $   --

DEBT SUBJECT TO COMPROMISE
Bank borrowings (3)..........................   $  500.0         $  500.0
Other borrowings (4).........................        1.0              1.3
Accrued interest (5).........................       37.8             23.2
                                                --------------------------------
                                                $  538.8         $  524.5
                                                ================================
Full-year weighted average interest rates on
   total debt (6)............................        2.8%             5.8%
================================================================================

(1) Represents borrowings under various lines of credit and other miscellaneous
    borrowings, primarily of non-U.S. subsidiaries.

(2) In 2001, the Debtors entered into a debtor-in-possession post-petition loan
    and security agreement with Bank of America, N.A. (the "DIP facility") in
    the aggregate amount of $250 million. The DIP facility has a term of two
    years, is secured by priority liens on substantially all assets of the
    Debtors, and bears interest based on LIBOR plus 2.00 to 2.25 percentage
    points. As of December 31, 2002, the Debtors had no outstanding borrowings
    under the DIP facility. However, $13.7 million of standby letters of credit
    were issued and outstanding under the facility as of December 31, 2002,
    which were issued mainly for trade-related matters such as performance
    bonds, as well as certain insurance and environmental matters. The
    outstanding amount of standby letters of credit issued under the DIP
    facility reduces the borrowing availability by a corresponding amount. Under
    the DIP facility, the Debtors are required to maintain $50 million of
    liquidity, a combination of cash, cash equivalents and the cash value of
    life insurance policies. As of December 31, 2002, the cash value of life
    insurance policies exceeds the $50 million requirement.

(3) Under bank revolving credit agreements in effect prior to the Filing, Grace
    could borrow up to $500 million at interest rates based upon the
    prevailing prime, federal funds and/or Eurodollar rates. Of that amount,
    $250 million was available under short-term facilities expiring in May
    2001, and $250 million was available under a long-term facility expiring
    in May 2003. As a result of the Filing,




                                      F-23
<PAGE>

    Grace was in default under the bank revolving credit agreements, and
    accordingly, the balance as of the Filing Date was reclassified to debt
    subject to compromise in the Consolidated Balance Sheet.

(4) Miscellaneous borrowings primarily consisting of U.S. mortgages.

(5) Grace is continuing to accrue interest expense on its pre-petition debt at
    the pre-petition contractual rate of LIBOR plus 100 basis points.

(6) Computation excludes interest expense and financing costs related to Grace's
    receivables securitization program, which was terminated in May 2001.

The Debtors have filed a motion with the Bankruptcy Court seeking approval to
extend the term of the DIP facility for an additional three years and to modify
certain other provisions.

Interest payments amounted to $1.1 million in 2002, $9.5 million in 2001 and
$23.7 million in 2000.

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

DEBT AND INTEREST RATE SWAP AGREEMENTS

Grace was not a party to any financial derivative instruments at December 31,
2002 and December 31, 2001.

FAIR VALUE OF DEBT AND OTHER FINANCIAL INSTRUMENTS

At December 31, 2002, the fair value of Grace's debt payable within one year not
subject to compromise approximated the recorded value of $3.4 million. Fair
value is determined based on expected future cash flows (discounted at market
interest rates), quotes from financial institutions and other appropriate
valuation methodologies. At December 31, 2002, the recorded values of other
financial instruments such as cash, short-term investments, trade receivables
and payables and short-term debt approximated their fair values, based on the
short-term maturities and floating rate characteristics of these instruments.
The fair value of debt subject to compromise is undeterminable; the ultimate
value of such debt will be determined by the outcome of the Chapter 11
proceedings.

SALE OF ACCOUNTS RECEIVABLE

Prior to the Filing, Grace sold, on an ongoing basis, approximately a $100
million pool of its eligible trade accounts receivable to a multi-seller
receivables company (the "conduit") through a wholly owned special purpose
subsidiary (the "SPS"). Upon sale of the receivables, the SPS held a
subordinated retained interest in the receivables. Under the terms of the
agreement, new receivables were added to the pool as collections reduced
previously sold receivables. Grace serviced, administered and collected the
receivables on behalf of the SPS and the conduit. The proceeds were used for the
reduction of other short-term obligations and are reflected as operating cash
flows in the Consolidated Statement of Cash Flows for the years ended December
31, 2001 and 2000. Grace has recorded net losses of $1.2 and $5.0 million in
2001 and 2000, respectively, from the corresponding sales to the conduit. As a
result of the Filing, which constituted an event of default under the program,
the amount outstanding under the program, approximately $65.3 million, was
satisfied through the use of pre-petition trade receivables collected by the SPS
during the period from the Filing Date to early May 2001. The program was
terminated effective May 14, 2001.

CREDIT RISK

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

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

ASBESTOS-RELATED LITIGATION - SEE NOTE 3

ENVIRONMENTAL REMEDIATION

General Matters and Discussion

Grace is subject to loss contingencies resulting from extensive and evolving
federal, state, local and foreign environmental laws and regulations relating to
the generation, storage, handling, discharge and disposition of hazardous wastes
and other materials. Grace accrues for anticipated costs associated with
investigative and remediation efforts where an assessment has indicated that a
probable liability has been incurred and the cost can be reasonably estimated.
These accruals do not take into account any discounting for the time value of
money. At December 31, 2002, Grace's liability for environmental investigative
and remediation costs related to continuing and discontinued operations totaled
$201.1 million, as compared to $153.1 million at December 31, 2001. This
estimate of environmental cost is based on funding and/or

                                      F-24
<PAGE>

remediation agreements in place and Grace's best estimate of its cost for sites
not subject to a formal remediation plan. The amounts of cash expenditures below
have been charged against previously established reserves for the periods
presented.

================================================================================
(Dollars in millions)
================================================================================
                                           2002         2001         2000
                                       -----------------------------------------
Continuing Operations..............     $   20.0     $  24.9      $    36.8
Discontinued Operations............          0.8         4.0           10.4
--------------------------------------------------------------------------------
Total..............................     $   20.8     $  28.9      $    47.2
================================================================================

Grace has continued to fund environmental remediation activities related to its
owned sites while in Chapter 11. Charges against previously established reserves
include $1.4 million for draws under letters of credit supporting environmental
remediation activity. During 2002, the draws were reclassified to "other"
liabilities subject to compromise as a payable to the issuing banks.

During 2002, Grace recorded pre-tax charges of $70.7 million for environmental
matters. Approximately $68.0 million of these charges were in connection with a
cost recovery lawsuit brought by the U.S. government relating to Grace's former
vermiculite mining and processing activities near Libby, Montana. The
environmental risks related to such activities could result in additional
material future charges to Grace's earnings, the amounts of which are not
currently determinable. (See discussion under "Vermiculite Related Matters"
below.)

Grace's environmental liabilities are reassessed whenever circumstances become
better defined or remediation efforts and their costs can be better estimated.
These liabilities are evaluated based on currently available information,
including the progress of remedial investigation at each site, the current
status of discussions with regulatory authorities regarding the method and
extent of remediation at each site, existing technology, prior experience in
contaminated site remediation and the apportionment of costs among potentially
responsible parties. Grace expects that the funding of environmental remediation
activities will be affected by the Chapter 11 proceedings; any such effect could
be material. Grace's environmental liabilities are included in "liabilities
subject to compromise" as of December 31, 2002.

Vermiculite Related Matters

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

In connection with its defense, Grace conducted its own investigation to
determine whether the EPA's actions and cost claims were justified and
reasonable. However, in December 2002, the District Court granted the United
States' motion for partial summary judgment on a number of issues that limited
Grace's ability to challenge the EPA's response actions. In January 2003, a
trial was held on the remainder of the issues, which primarily involved the
reasonableness and adequacy of documentation of the EPA's cost recovery claims
through December 31, 2001. No decision has yet been issued. The EPA's
Libby-related cost recovery claims through December 31, 2001 totaled
approximately $57 million. Based on the testimony of EPA witnesses deposed in
the lawsuit and other information, Grace believes that the EPA's total cost
recovery claims could reach, and potentially exceed, $100 million. This lawsuit
is not subject to the automatic stay provided under the Bankruptcy Code. Grace
has accrued a

                                      F-25
<PAGE>

liability of $63 million at December 31, 2002 with respect to this lawsuit and
future cost recovery claims expected to be made by the EPA, which represents
Grace's current best estimate of probable liability and defense costs, pending
the issuance of a decision of the trial court and the availability of additional
information about the EPA's 2002 costs and projected future costs. Grace's
liability for this matter is included in "liabilities subject to compromise" and
any payments would be subject to the outcome of the Chapter 11 proceedings.

Since January 2000, Grace has spent approximately $13.2 million for remediation
of certain Libby area vermiculite processing sites and for health care of Libby
area residents diagnosed with asbestos-related illness.

The EPA is also evaluating environmental risks at vermiculite processing sites
throughout the U.S. that processed vermiculite from Libby, Montana, and has made
claims against Grace to carry out or fund remediation activities. Grace is
reviewing the EPA's actions and cost claims to determine whether they are
justified and reasonable and, in several instances, has remediated or agreed to
remediate certain sites. Costs associated with the above are included in
"provision for environmental remediation" included in the Consolidated Statement
of Operations.

Insurance Matters

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

CONTINGENT RENTALS

Grace is the named tenant or guarantor with respect to leases entered into by
previously divested businesses. These leases, some of which extend through the
year 2017, have future minimum lease payments aggregating $79.8 million, and are
fully offset by anticipated future minimum rental income from existing tenants
and subtenants. In addition, Grace is liable for other expenses (primarily
property taxes) relating to the above leases; these expenses are paid by current
tenants and subtenants. Certain of the rental income and other expenses are
payable by tenants and subtenants that have filed for bankruptcy protection or
are otherwise experiencing financial difficulties. Grace believes that any loss
from these lease obligations would be immaterial. Grace has rejected certain of
these leases as permitted by the Bankruptcy Code, the financial impacts of which
are insignificant.

TAX MATTERS

Grace has received the examination report from the Internal Revenue Service
("IRS") on tax periods 1993 through 1996 asserting, in the aggregate,
approximately $114.0 million of proposed tax adjustments. The most significant
contested issue addressed in such report concerns corporate-owned life insurance
("COLI") policies and is discussed below. Other proposed IRS tax adjustments
include Grace's tax position regarding research and development credits,
reporting of certain divestitures and other miscellaneous proposed adjustments.
The tax audit for the 1993 through 1996 tax period is under the jurisdiction of
IRS Appeals, where Grace has filed a protest. Grace's federal tax returns
covering periods 1997 and forward are either under examination by the IRS or
open for future examination. Grace believes that previously established reserves
for tax matters will be sufficient to cover the expected net cost of probable
tax return adjustments. Any cash payment would be subject to Grace's Chapter 11
proceedings.

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




                                      F-26
<PAGE>

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

The IRS has assessed additional federal income tax withholding and Federal
Insurance Contributions Act taxes plus interest and related penalties for
calendar years 1993 through 1995 against a Grace subsidiary that formerly
operated a temporary staffing business for nurses and other health care
personnel. The assessments, aggregating $21.8 million, were made in connection
with a meal and incidental expense per diem plan for traveling health care
personnel, which was in effect through 1999. The IRS contends that certain per
diem reimbursements should have been treated as wages subject to employment
taxes and federal income tax withholding. Grace contends that its per diem and
expense allowance plans were in accordance with statutory and regulatory
requirements, as well as other published guidance from the IRS. Grace expects
that the IRS will make additional assessments for the 1996 through 1999 periods.
The matter is currently pending in the United States Court of Claims. Grace is
currently in discussions with the Department of Justice concerning possible
settlement options.

LITIGATION RELATED TO FORMER PACKAGING AND MEDICAL CARE BUSINESSES

Grace has been named in a purported class action suit filed in September 2000 in
California Superior Court for the County of San Francisco alleging that the 1996
reorganization involving a predecessor of Grace and Fresenius AG and the 1998
reorganization involving a predecessor of Grace and Sealed Air Corporation were
fraudulent transfers. The Bankruptcy Court authorized the Official Committee of
Asbestos Personal Injury Claimants and the Official Committee of Asbestos
Property Damage Claimants to represent Grace in these lawsuits. On November 29,
2002, Sealed Air Corporation and Fresenius Medical Care AG each announced that
they had reached agreements in principle with representatives of the asbestos
creditors committees to resolve all of the current and future asbestos-related
claims and the pending fraudulent transfer claims made against them and their
respective affiliates. Under the terms of the proposed Sealed Air settlement,
Sealed Air would make a payment of $512.5 million (plus interest at 5.5% per
annum, commencing on December 21, 2002) and nine million shares of Sealed Air
common stock, valued at $335.7 million as of December 31, 2002, as directed by
the Bankruptcy Court upon confirmation of Grace's plan of reorganization. Under
the terms of the proposed Fresenius settlement, as subsequently revised,
Fresenius would contribute $115.0 million to the Grace estate, or as otherwise
directed by the Bankruptcy Court, upon confirmation of a plan of reorganization.
Both settlements are subject to Bankruptcy Court approval. Grace is unable to
predict how these settlements may ultimately affect its plan of reorganization.

PURCHASE COMMITMENTS

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

GUARANTEES AND INDEMNIFICATION OBLIGATIONS

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

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

o   Guarantees of real property lease obligations of third parties, typically
    arising out of (a) leases entered into by former subsidiaries of Grace, or

                                      F-27
<PAGE>

    (b) the assignment or sublease of a lease by Grace to a third party. These
    obligations are included in "liabilities subject to compromise" in the
    Consolidated Balance Sheet;

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

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

FINANCIAL ASSURANCES

Financial assurances have been established for a variety of purposes, including
insurance and environmental matters, asbestos settlements and appeals,
trade-related commitments and other matters. At December 31, 2002, Grace had
gross financial assurances issued and outstanding of $237.7 million, comprised
of $137.4 million of gross surety bonds issued by various insurance companies
and $100.3 million of standby letters of credit issued by various banks. Of the
standby letters of credit, $19.7 million act as collateral for surety bonds,
thereby reducing Grace's overall obligations under its financial assurances to a
net amount of $218.0 million. Of this net amount, approximately $6.5 million
were issued on behalf of non-Debtor entities and $211.5 million were issued on
behalf of the Debtors. Of the amounts issued by the Debtors, approximately
$195.1 million were issued before the Filing Date, with the remaining $16.4
million being subsequent to the Filing, of which $13.7 million was issued under
the DIP facility.

ACCOUNTING FOR CONTINGENCIES

Although the outcome of each of the matters discussed above cannot be predicted
with certainty, Grace has assessed its risk and has made accounting estimates as
required under U.S. generally accepted accounting principles. As a result of the
Filing, claims related to the items discussed above will be addressed as part of
Grace's Chapter 11 proceedings. Accruals recorded for such contingencies have
been included in "liabilities subject to compromise" on the accompanying
Consolidated Balance Sheet as of December 31, 2002. The amounts of these
liabilities as ultimately determined through the Chapter 11 proceedings could be
materially different from amounts recorded by Grace at December 31, 2002.

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

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, 2002, approximately 10,440,400 shares were reserved for issuance
pursuant to stock options and other stock incentives. The Company has not paid a
dividend on its common stock since 1998. The Certificate of Incorporation also
authorizes 53,000,000 shares of preferred stock, $.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 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 Company's Board of Directors previously approved programs to repurchase
outstanding shares of common stock. During the year ended December 31, 2000, the
Company acquired 4,815,400 shares of common stock for $47.3 million (at an
average price per share of $9.82). No shares were repurchased under this program
during 2002 and 2001.

In November 2001, 56,911 shares of restricted stock were reclassified as
treasury shares to reflect an election made by Paul J. Norris, Grace's Chairman,

                                      F-28
<PAGE>

President and Chief Executive Officer, under a Bankruptcy Court approved
employment agreement.

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

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

==========================================================
EARNINGS (LOSS) PER SHARE
(Amounts in millions,
except per share amounts)     2002       2001      2000
----------------------------------------------------------
NUMERATORS
 Net income (loss)........ $   22.1  $   78.6   $  (89.7)
                           ===============================
DENOMINATORS
Weighted average common
  shares - basic
  calculation.............     65.4      65.3       66.8
Dilutive effect of
  employee stock options
  and restricted shares...      0.1       0.1       --
                           -------------------------------
Weighted average common
  shares - diluted
  calculation.............     65.5      65.4       66.8
                           ===============================
BASIC EARNINGS (LOSS)
  PER SHARE............... $   0.34  $   1.20   $  (1.34)
                           ===============================
DILUTED EARNINGS (LOSS)
  PER SHARE............... $   0.34  $   1.20   $  (1.34)
==========================================================

Stock options that could potentially dilute basic earnings (loss) per share
(that were excluded from the computation of diluted earnings (loss) per share
because their exercise prices were greater than the average market price of the
common shares) averaged approximately 11.9 million in 2002, 14.2 million in
2001 and 9.4 million in 2000. As a result of the 2000 net loss of $89.7 million,
approximately 800,000 of employee compensation-related shares, primarily
issuable under stock options, were excluded from the diluted loss per share
calculation in 2000 because their effect would have been antidilutive.

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

Each stock option granted under the Company's stock incentive plans has an
exercise price equal to the fair market value of the Company's common stock on
the date of grant. Options become exercisable at the time or times determined by
a committee of the Company's Board of Directors and may have terms of up to ten
years and one month. The following table sets forth information relating to such
options during 2002, 2001 and 2000:

==============================================================
STOCK OPTION ACTIVITY                           2002
--------------------------------------------------------------
                                                     Average
                                         Number     Exercise
                                        of Shares     Price
                                       ------------ ----------
Balance at beginning of year.....       12,772,431  $  11.88
Options granted..................              --         --
Options exercised................          (1,266)      2.40
Options terminated or cancelled..      (2,330,748)     11.60
                                       ------------
Balance at end of year...........      10,440,417      11.94
==============================================================
Exercisable at end of year.......       8,973,964   $  12.58
==============================================================
                                                2001
--------------------------------------------------------------
Balance at beginning of year.....      14,005,209   $  12.70
Options granted..................       1,339,846       2.53
Options exercised................              --         --
Options terminated or cancelled..      (2,572,624)     11.46
                                       ------------
Balance at end of year...........      12,772,431      11.88
==============================================================
Exercisable at end of year.......       9,586,993   $  12.64
==============================================================
                                                2000
--------------------------------------------------------------
Balance at beginning of year.....      12,530,287   $  12.27
Options granted..................       2,555,000      13.32
Options exercised................        (779,863)      7.52
Options terminated or cancelled..        (300,215)     13.62
                                       ------------
Balance at end of year...........      14,005,209      12.70
==============================================================
Exercisable at end of year.......       9,386,539   $  11.96
==============================================================

At December 31, 2002, 4,468,504 shares were available for additional grants.
Currently outstanding options expire on various dates through November 2011.

Following is a summary of stock options outstanding at December 31, 2002:

================================================================================
STOCK OPTIONS OUTSTANDING
--------------------------------------------------------------------------------
                            Weighted-
                             Average      Weighted-                  Weighted-
EXERCISE                    Remaining      Average                    Average
PRICE          Number      Contractual     Exercise      Number       Exercise
RANGE        Outstanding   Life (Years)     Price      Exercisable     Price
--------------------------------------------------------------------------------
$1 - $8       2,661,025        5.62      $    4.33      1,934,444   $    5.06
$8 - $13      3,247,866        5.77          12.28      3,247,866       12.28
$13 - $18     2,807,826        7.64          14.13      2,067,954       14.37
$18 - $21     1,723,700        6.02          19.47      1,723,700       19.47
            --------------------------------------------------------------------
             10,440,417        6.27      $   11.94      8,973,964   $   12.58
================================================================================

In 2000, the Company granted a total of 25,000 shares of the Company's Common
Stock to certain executives, subject to various restrictions. (No shares were
granted in 2001 and 2002.) Such shares are subject to forfeiture if certain
employment conditions are not met. At December 31, 2001, restrictions on all
prior grants of restricted stock, net of forfeitures, totaled 55,000 shares;
these restrictions lapsed in 2002. The quoted market value of the restricted
shares at the date of grant is amortized to expense ratably over the restriction
period.

SFAS No. 123, "Accounting for Stock-Based Compensation," permits the Company to
follow the measurement provisions of APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and not recognize compensation expense for its stock-based

                                      F-29
<PAGE>

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 (loss) and related earnings
(loss) per share for 2002, 2001 and 2000 would have been reduced to the pro
forma amounts indicated below:

================================================================================
PRO FORMA EARNINGS
UNDER SFAS NO. 123
(Amounts in millions, except per
share amounts)                             2002         2001          2000
--------------------------------------------------------------------------------
Net income (loss):
As reported.........................     $   22.1     $   78.6     $   (89.7)
Pro forma (1).......................         17.9         71.2         (98.5)
Basic earnings (loss) per share:
As reported.........................     $   0.34     $   1.20     $   (1.34)
Pro forma (1).......................         0.27         1.09         (1.47)
Diluted earnings (loss) per share:
As reported.........................     $   0.34     $   1.20     $   (1.34)
Pro forma (1).......................         0.27         1.09         (1.47)
================================================================================

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

To determine compensation cost under SFAS No. 123, the fair value of each option
is estimated on the date of grant using the Black-Scholes option pricing model,
with the following historical weighted average assumptions applied to grants in
2001 and 2000:

================================================================================
OPTION VALUE ASSUMPTIONS                              2001           2000
--------------------------------------------------------------------------------
Dividend yield...............................          -- %           -- %
Expected volatility..........................          61 %           59 %
Risk-free interest rate......................           5 %            7 %
Expected life (in years).....................           4              4
================================================================================

Based upon the above assumptions, the weighted average fair value of each option
granted was $1.28 per share for 2001 and $6.86 per share for 2000.

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

Grace maintains defined benefit pension plans covering employees of certain
units who meet age and service requirements. Benefits are generally based on
final average salary and years of service. Grace funds its U.S. pension plans in
accordance with U.S. federal laws and regulations. Non-U.S. pension plans are
funded under a variety of methods, as required under local laws and customs, and
therefore cannot be summarized. Grace's accumulated other comprehensive loss,
reflected as a reduction of shareholders' equity (deficit), included additional
minimum pension liabilities as of December 31, 2002 and 2001 of $436.5 million
($283.7 million, net of tax) and $209.3 million ($136.0 million, net of tax),
respectively, for plans where the accumulated benefit obligation exceeded the
fair market value of assets. These amounts include offsets of related deferred
pension costs.

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

An amendment to the structure of the retiree-paid premiums for postretirement
medical benefits was approved by the Company's Board in November 2001. The
amendment became effective January 1, 2002, and requires all retirees and
beneficiaries covered by the postretirement medical plan to contribute a minimum
of 40% of the calculated premium for that coverage.

The following summarizes the changes in benefit obligation and fair value of
retirement plan assets during the period:



                                      F-30
<PAGE>

<TABLE>
<CAPTION>
====================================================================================================================================
                                                                                PENSION
                                                   ----------------------------------------------------------
                                                                                                                    OTHER POST-
CHANGE IN FINANCIAL STATUS OF RETIREMENT PLANS             U.S.              NON-U.S.              TOTAL        RETIREMENT PLANS
                                                   ---------------------------------------------------------------------------------
(Dollars in millions)                                2002       2001      2002      2001       2002      2001     2002     2001
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>       <C>        <C>       <C>       <C>       <C>       <C>       <C>
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation at beginning of year  $ 776.6   $  741.0   $ 196.1   $ 199.2   $  972.7  $  940.2  $ 136.0   $ 176.7
Service cost.....................................      8.5        7.9       4.3       3.8       12.8      11.7      0.6       0.7
Interest cost....................................     55.1       55.3      12.5      11.2       67.6      66.5      8.7       9.8
Plan participants' contributions.................     --         --         0.4       0.4        0.4       0.4     --        --
Amendments.......................................      5.6       --         2.4       1.6        8.0       1.6    (31.1)     --
Actuarial loss (gain)............................     93.6       42.9       2.8       0.6       96.4      43.5     31.1     (28.9)
Benefits paid....................................    (69.2)     (70.5)    (11.1)    (11.7)     (80.3)    (82.2)   (21.5)    (22.3)
Currency exchange translation adjustments........     --         --        26.3      (9.0)      26.3      (9.0)    --        --
------------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation at end of year......  $ 870.2   $  776.6   $ 233.7   $ 196.1   $1,103.9  $  972.7  $ 123.8   $ 136.0
====================================================================================================================================
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year...  $ 689.5   $  800.2   $ 167.3   $ 198.3   $  856.8  $  998.5  $  --     $  --
Actual return on plan assets.....................    (67.8)     (47.0)    (21.4)    (15.2)     (89.2)    (62.2)    --        --
Employer contribution............................      4.3        6.8       5.9       3.8       10.2      10.6     21.5      22.3
Acquisitions/spinoff.............................      0.4       --         1.8      --          2.2      --       --        --
Plan participants' contribution..................     --         --         0.4       0.4        0.4       0.4     --        --
Benefits paid....................................    (69.2)     (70.5)    (11.1)    (11.7)     (80.3)    (82.2)   (21.5)    (22.3)
Currency exchange translation adjustment.........     --         --        16.3      (8.3)      16.3      (8.3)    --        --
------------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year.........  $ 557.2   $  689.5   $ 159.2   $ 167.3   $  716.4  $  856.8  $  --     $  --
====================================================================================================================================
Funded status....................................  $(313.0)  $  (87.1)  $ (74.5)  $ (28.8)  $ (387.5) $ (115.9) $(123.8)  $(136.0)
Unrecognized transition obligation (asset).......     --          0.7       0.5       0.8        0.5       1.5     --        --
Unrecognized actuarial loss (gain)...............    463.6      253.7      90.6      45.6      554.2     299.3     51.9      23.8
Unrecognized prior service cost (benefit)........     26.1       25.1       3.8       4.0       29.9      29.1    (75.3)    (56.9)
------------------------------------------------------------------------------------------------------------------------------------
Net amount recognized............................  $ 176.7   $  192.4   $  20.4   $  21.6   $  197.1  $  214.0  $(147.2)  $(169.1)
====================================================================================================================================
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE
SHEET CONSIST OF:
  Deferred pension costs.........................  $   5.3   $   58.2   $  98.9   $  85.1   $  104.2  $  143.3  $  --     $  --
  Pension related liability......................   (290.7)     (93.2)    (79.3)    (65.1)    (370.0)   (158.3)  (147.2)   (169.1)
  Unamortized prior service cost.................     26.2       19.0       0.2       0.7       26.4      19.7    N/A       N/A
  Accumulated other comprehensive loss...........    435.9      208.4       0.6       0.9      436.5     209.3    N/A       N/A
------------------------------------------------------------------------------------------------------------------------------------
Net amount recognized.........................     $ 176.7   $  192.4   $  20.4   $  21.6   $  197.1  $  214.0  $(147.2)  $(169.1)
====================================================================================================================================
WEIGHTED AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate....................................     6.75%      7.25%     5.72%     5.87%     N/M        N/M     6.75%     7.25%
Expected return on plan assets...................     9.00%      9.00%     8.67%     8.65%     N/M        N/M     N/M       N/M
Rate of compensation increase....................     4.25%      4.25%     3.84%     4.08%     N/M        N/M     N/M       N/M
====================================================================================================================================
</TABLE>

<TABLE>
<CAPTION>
===========================================================================================================================
                                                           2002                       2001                       2000
                                                  ----------------------- ----------------------- -------------------------
COMPONENTS OF NET PERIODIC BENEFIT (INCOME) COST
(Dollars in millions)                              U.S.  NON-U.S.  OTHER   U.S.  NON-U.S.  OTHER    U.S.   NON-U.S. OTHER
------------------------------------------------   ----  --------  -----   ----  --------  -----    ----   -------- -------
<S>                                               <C>     <C>     <C>     <C>     <C>      <C>      <C>      <C>      <C>
Service cost..................................... $  8.5  $  4.3  $  0.6  $  7.9  $  3.8   $ 0.7  $   6.3  $  3.8   $ 0.6
Interest cost....................................   55.1    12.5     8.7    55.3    11.2     9.8     54.5    11.4    14.4
Expected return on plan assets...................  (59.1)  (14.8)    --    (69.1)  (15.9)   --      (78.2)  (18.2)   --
Amortization of transition asset.................    0.7     0.4     --    (10.0)   --      --      (10.0)   (0.2)   --
Amortization of prior service cost (benefit).....    5.2     0.6   (12.7)    7.6     0.5    (8.3)     7.4     0.6    (6.7)
Amortization of unrecognized actuarial loss......    9.7     1.8     3.0     2.4     0.2     0.1      0.8    (0.4)    2.4
Net curtailment and settlement loss..............   --      --       --     --       0.2    --       --      --      --
---------------------------------------------------------------------------------------------------------------------------
Net periodic benefit (income) cost............... $ 20.1  $  4.8  $ (0.4) $ (5.9) $ --     $ 2.3  $ (19.2) $ (3.0)  $10.7
=============================================================================================================================
</TABLE>

<TABLE>
<CAPTION>
==================================================================== ====================== ===========================
                                                                                                     OTHER POST-
PENSION PLANS WHERE ACCUMULATED BENEFIT                U.S.                 NON-U.S.              RETIREMENT PLANS
  OBLIGATIONS EXCEED PLAN ASSETS             ----------------------- ---------------------- ---------------------------
  (Dollars in millions)                         2002        2001        2002       2001         2002          2001
-------------------------------------------------------- ----------- ---------- ----------- ------------- -------------
<S>                                          <C>         <C>         <C>        <C>          <C>           <C>
Projected benefit obligation...............  $  867.1    $  691.1    $   95.6   $   74.1        N/A           N/A
Accumulated benefit obligation.............     841.9       676.8        82.1       63.8    $   123.8     $   136.0
Fair value of plan assets..................     551.2       583.7         3.3        0.9         --            --
======================================================== =========== ========== =========== ============= =============
</TABLE>

N/M - Not meaningful
N/A - Not applicable

                                      F-31
<PAGE>

For 2002 measurement purposes, rates of increase of 9.0% and 9.5% in the per
capita cost of covered retiree health care benefits for pre-age 65 and post-age
65, respectively, were assumed. The rate is assumed to decrease gradually to
5.3% through 2007 and remain at that level thereafter. A one percentage point
increase (decrease) in assumed health care medical cost trend rates would have a
negligible impact on Grace's postretirement benefit obligations.

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

Grace is a global producer of specialty chemicals and specialty materials. It
generates revenues from two business segments: Davison Chemicals and Performance
Chemicals. Davison Chemicals produces a variety of catalysts and silica
products. Performance Chemicals produces specialty construction chemicals,
building materials and sealants and coatings. Intersegment sales, eliminated in
consolidation, are not material. The table below presents information related to
Grace's business segments for 2002, 2001 and 2000. Only those corporate expenses
directly related to the segment are allocated for reporting purposes. All
remaining corporate items are reported separately and labeled as such.

================================================================================
BUSINESS SEGMENT DATA (Dollars
in millions)                            2002            2001            2000
--------------------------------------------------------------------------------
NET SALES (a)
Davison Chemicals.............    $       945.2    $       874.1   $     783.9
Performance Chemicals.........            872.0            849.1         813.5
                                  ----------------------------------------------
Total.........................    $     1,817.2    $     1,723.2   $   1,597.4
                                  ==============================================

PRE-TAX OPERATING INCOME
Davison Chemicals.............    $       129.4    $       123.8   $     128.0
Performance Chemicals.........             98.8             96.7          91.6
                                  ----------------------------------------------
Total.........................    $       228.2    $       220.5   $     219.6
                                  ==============================================

DEPRECIATION AND AMORTIZATION
Davison Chemicals.............    $        61.7    $        58.4   $      57.2
Performance Chemicals.........             31.8             29.5          29.3
                                  ----------------------------------------------
Total.........................    $        93.5    $        87.9   $      86.5
                                  ==============================================

CAPITAL EXPENDITURES
Davison Chemicals.............    $        59.5    $        39.3   $      33.7
Performance Chemicals.........             27.9             22.8          28.3
                                  ----------------------------------------------
Total.........................    $        87.4    $        62.1   $      62.0
                                  ==============================================

TOTAL ASSETS
Davison Chemicals.............    $       751.1    $       704.1   $     639.2
Performance Chemicals.........            530.9            504.1         486.7
                                  ----------------------------------------------
Total.........................    $     1,282.0    $     1,208.2   $   1,125.9
================================================================================

a= Net sales amounts presented herein for 2000 reflect a reclassification of
freight costs and sales commissions (previously shown as a reduction of sales).

The table below presents information related to the geographic areas in which
Grace operated in 2002, 2001 and 2000.

================================================================================
GEOGRAPHIC AREA DATA
(Dollars in millions)                  2002            2001            2000
--------------------------------------------------------------------------------
NET SALES
United States..................    $     829.2      $     835.1     $   825.6
Canada and Puerto Rico.........           56.2             40.7          34.4
Europe.........................          551.9            472.9         416.8
Asia Pacific...................          272.8            267.5         216.8
Latin America..................          107.1            107.0         103.8
                                   ---------------------------------------------
Total..........................    $   1,817.2      $   1,723.2     $ 1,597.4
================================================================================
PROPERTIES AND EQUIPMENT, NET
United States..................    $     392.0      $     386.7     $   408.3
Canada and Puerto Rico.........           18.4             20.1          19.9
Europe.........................          152.0            118.0         101.1
Asia Pacific...................           47.4             49.1          54.7
Latin America..................           11.0             15.1          17.7
                                   ---------------------------------------------
Total..........................    $     620.8      $     589.0     $   601.7
================================================================================



                                      F-32
<PAGE>


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

================================================================================
RECONCILIATION OF BUSINESS SEGMENT
DATA TO FINANCIAL STATEMENTS
(Dollars in millions)                         2002          2001          2000
--------------------------------------------------------------------------------
Pre-tax operating income - business
   segments.............................. $    228.2    $   220.5     $   219.6
Add back:
Minority Interest........................        1.9          3.5          --
                                          --------------------------------------
                                          $    230.1    $   224.0     $   219.6
Gain on disposal of assets...............        0.7          1.8           5.5
Gain on sale of investments..............        1.2          7.9          19.0
Provision for environmental remediation .      (70.7)        (5.8)        (10.4)
Provisions for asbestos-related
   litigation, net of insurance
   coverage..............................       --           --          (208.0)
Interest expense and related financing
   costs.................................      (20.0)       (37.1)        (28.1)
Corporate operating costs................      (47.4)       (33.0)        (32.5)
Other, net...............................       (1.8)         3.7          15.2
                                          --------------------------------------
Income (loss) from operations  before
   Chapter 11 expenses,  income taxes,
   and minority interest................. $     92.1    $   161.5      $  (19.7)
================================================================================
Depreciation and amortization -
   business segments..................... $     93.5    $    87.9      $   86.5
Depreciation and amortization -
   corporate.............................        1.1          1.1           1.3
                                          --------------------------------------
Total depreciation and amortization...... $     94.6    $    89.0      $   87.8
================================================================================
Capital expenditures - business
   segments.............................. $     87.4    $    62.1      $   62.0
Capital expenditures - corporate.........        3.7          0.8           2.8
                                          --------------------------------------
Total capital expenditures............... $     91.1    $    62.9      $   64.8
================================================================================
Total assets - business segments......... $  1,282.0    $ 1,208.2      $1,125.9
Total assets - corporate.................      528.4        491.4         599.8
Asbestos-related receivables.............      282.6        293.4         372.0
Deferred tax assets......................      594.7        525.4         487.2
                                          --------------------------------------
Total assets............................. $  2,687.7    $ 2,518.4      $2,584.9
================================================================================


                                      F-33
<PAGE>
--------------------------------------------------------------------------------
20.  QUARTERLY SUMMARY AND STATISTICAL INFORMATION (UNAUDITED)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
=====================================================================================================
QUARTERLY SUMMARY AND STATISTICAL INFORMATION (Unaudited)
(Dollars in millions, except per share)
-----------------------------------------------------------------------------------------------------
                                         March 31      June 30        September 30     December 31(1)
-----------------------------------------------------------------------------------------------------
<S>                                    <C>           <C>             <C>               <C>
2002
Net sales .......................      $    413.5    $    471.6      $    478.7        $    453.4
Cost of goods sold (2) ..........           260.8         294.6           299.4             294.1
Net income (loss) ...............            12.4          21.2            14.0             (25.5)

Net income per share: (3)
  Basic earnings per share:
  Net income ....................      $     0.19    $     0.32      $     0.21        $    (0.39)
  Diluted earnings per share:
  Net income ....................            0.19          0.32            0.21             (0.39)

Market price of common stock: (4)
    High ........................      $     2.47    $     3.75      $     3.05        $     2.50
    Low .........................            1.56          2.13            1.46              0.99
    Close .......................            2.20          3.00            1.60              1.96
-----------------------------------------------------------------------------------------------------
2001
Net sales .......................      $    395.7    $    450.3      $    448.1        $    429.1
Cost of goods sold (2) ..........           252.2         279.0           275.2             273.0
Net income ......................            14.6          23.0            19.8              21.2

Net income per share: (3)
  Basic earnings per share:
  Net income ....................      $     0.22    $     0.35      $     0.30        $     0.32
  Diluted earnings per share:
  Net income ....................            0.22          0.35            0.30              0.32

Market price of common stock: (4)
    High ........................      $     4.38    $     2.35      $     1.87        $     1.72
    Low .........................            1.63          1.31            1.46              1.35
    Close .......................            2.30          1.75            1.55              1.55
=====================================================================================================
</TABLE>

(1) Fourth quarter 2002 net income includes a $51.0 million pre-tax charge to
    adjust Grace's estimate of defense and other probable costs to resolve cost
    recovery claims by the EPA for cleanup of vermiculite in and around Libby,
    Montana.

(2) 2002 and 2001 quarterly results are retroactively restated to reflect the
    full consolidation of Advanced Refining Technologies, LLC, previously
    reported as an equity method joint venture. This restatement had no effect
    on reported sales or net income.

(3) 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.

(4) Principal market: New York Stock Exchange.

                                      F-34
<PAGE>

<TABLE>
<CAPTION>
====================================================================================================================================
FINANCIAL SUMMARY (1) (Dollars in millions, except per share amounts)
------------------------------------------------------------------------------------------------------------------------------------

                                                              2002         2001           2000           1999          1998
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>          <C>          <C>                 <C>            <C>
STATEMENT OF OPERATIONS
Net sales .............................................    $  1,817.2   $  1,723.2   $        1,597.4    $   1,550.9    $  1,546.2
Income (loss) from continuing operations before
     Chapter 11 expenses, income taxes, and
     minority interest (2).............................          92.1        161.5              (19.7)         203.4        (223.2)
Income (loss) from continuing operations (2)...........          22.1         78.6              (89.7)         130.2        (194.7)
Income from discontinued operations (2) ...............          --           --                 --              5.7           0.9
Minority interest in consolidated entities.............          (1.9)        (3.5)              --              --           --
Net income (loss) .....................................          22.1         78.6              (89.7)         135.9        (229.1)
------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Current assets (3).....................................    $    830.4   $    735.9   $          773.9   $      779.8   $     625.6
Current liabilities (3)................................         243.3        233.3            1,092.9          769.4         669.8
Properties and equipment, net..........................         620.8        589.0              601.7          617.3         661.4
Total assets (3).......................................       2,687.7      2,518.4            2,584.9        2,475.1       2,556.3
Total debt not subject to compromise (3)...............           3.4          6.3              421.9          136.2         113.4
Liabilities subject to compromise......................       2,334.7      2,311.5               --             --             --
Shareholders' equity (deficit).........................        (222.1)      (141.7)             (71.3)         111.1          42.1
------------------------------------------------------------------------------------------------------------------------------------
CASH FLOW
Operating activities (3) ..............................    $    195.4   $     14.7   $         (143.7)   $     130.5   $     (66.9)
Investing activities...................................        (110.7)      (131.4)             (94.0)          89.4        (114.0)
Financing activities (3)...............................          (9.2)       123.1              239.9          (80.9)        196.6
Net cash flow (3)......................................          91.6         (0.5)              (7.9)         134.5          17.7
------------------------------------------------------------------------------------------------------------------------------------
DATA PER COMMON SHARE (DILUTED)
Income (loss) from continuing operations (2)...........    $     0.34    $    1.20   $          (1.34)  $       1.76   $     (2.61)
Net income (loss) .....................................          0.34         1.20              (1.34)          1.84         (3.07)
Average common diluted shares outstanding (thousands)..        65,500       65,400             66,800         73,800        74,600
------------------------------------------------------------------------------------------------------------------------------------
OTHER STATISTICS
Capital expenditures...................................    $     91.1   $     62.9  $            64.8   $       82.5  $      100.9
Common stock price range (4)...........................    $0.99-3.75   $1.31-4.38  $14 15/16-1 15/16   $21-11 13/16  $21 11/16-10
Common shareholders of record..........................        11,187       11,643             12,240         13,215        14,438
Number of employees - continuing operations............         6,400        6,400              6,300          6,300         6,600
====================================================================================================================================
</TABLE>

(1) Certain prior-year amounts have been reclassified to conform to the 2002
    presentation and to reflect a reclassification of freight costs and sales
    commissions (previously shown as a reduction of sales) to cost of sales and
    selling expenses in accordance with Emerging Issues Task Force Consensus No.
    00-10, "Accounting for Shipping and Handling Revenues and Costs" adopted in
    2000.

(2) Amounts contain a provision for environmental remediation of $70.7 million
    for 2002. Amounts for 2000 and 1998 also contain a provision for asbestos
    litigation, net of expected insurance recovery, of $208.0 million and $376.1
    million, respectively.

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

(4) On March 31, 1998, a predecessor of the Company ("Old Grace") completed a
    transaction in which its flexible packaging business ("Packaging Business")
    was combined with Sealed Air Corporation ("Sealed Air"). Old Grace effected
    this transaction by transferring its specialty chemicals businesses along
    with certain other businesses and assets to the Company (then named Grace
    Specialty Chemicals, Inc.), distributing the shares of the Company's common
    stock to Old Grace's shareholders on a one-for-one basis ("Spin-off") and
    merging a subsidiary of Old Grace with Sealed Air ("Merger"). Immediately
    following the Spin-off and Merger, the Company changed its name to "W. R.
    Grace & Co." and Old Grace changed its name to "Sealed Air Corporation"
    ("New Sealed Air"). For further information, see Old Grace's Joint Proxy
    Statement/Prospectus dated February 13, 1998 and the Company's Information
    Statement dated February 13, 1998. Stock prices in 1998 have been adjusted
    so that they are on a basis comparable to the stock prices following the
    disposition of the Packaging Business.


                                      F-35
<PAGE>


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


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

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

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

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

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

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

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

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

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

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

As provided by the Bankruptcy Code, the Debtors had the exclusive right to
propose a plan of reorganization for a 120-day period following the Filing Date.
The Debtors have received an extension of their exclusivity period during which
to file a plan of reorganization through August 1, 2003, and an extension of the
Debtors' exclusive rights to solicit acceptances of a reorganization plan
through October 1, 2003.

Three creditors' committees, two representing asbestos claimants and the third
representing other unsecured creditors, and a committee representing
shareholders have been appointed in the Chapter 11 Cases. These

                                      F-36
<PAGE>

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

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

At a hearing on April 22, 2002 the Bankruptcy Court entered an order
establishing a bar date of March 31, 2003 for claims of general unsecured
creditors, asbestos property damage claims and medical monitoring claims related
to asbestos. The bar date does not apply to asbestos-related bodily injury
claims or claims related to Zonolite(R) attic insulation ("ZAI"), which will be
addressed separately. Grace has distributed notices and run media announcements
of the bar date under a program approved by the Bankruptcy Court. Rust
Consulting, the court-approved claims handling agent for the Chapter 11 Cases,
is maintaining a register of all claims filed. As claims are filed, Grace will
be cataloguing and assessing their validity. At this time, it is not possible to
estimate the value of the claims that will ultimately be allowed by the
Bankruptcy Court, due to the uncertainties of the Chapter 11 process, the
in-progress state of Grace's investigation of submitted claims and the lack of
documentation submitted in support of many claims.

In July 2002, the Bankruptcy Court approved special counsel to represent the ZAI
claimants, at the Debtors' expense, in a proceeding to determine certain
threshold scientific issues regarding ZAI. The court has set a litigation
schedule that would result in pretrial hearings on these issues in the third
quarter of 2003.

On November 29, 2002 Sealed Air Corporation ("Sealed Air") and Fresenius Medical
Care AG ("Fresenius") each announced that they had reached agreements in
principle with the Official Committee of Asbestos Personal Injury Claimants and
the Official Committee of Asbestos Property Damage Claimants to settle asbestos
and fraudulent conveyance claims related to the 1998 transaction involving
Grace's former packaging business and Sealed Air, and the 1996 transaction
involving Grace's former medical care business and Fresenius, respectively.
Under the terms of the proposed Sealed Air settlement, Sealed Air would make a
payment of $512.5 million (plus interest at 5.5% per annum commencing on
December 21, 2002) and nine million shares of Sealed Air common stock, valued at
$335.7 million as of December 31, 2002, as directed by the Bankruptcy Court upon
confirmation of Grace's plan of reorganization. Under the terms of the proposed
Fresenius settlement, as subsequently revised, Fresenius would contribute $115.0
million to the Grace estate, or as otherwise directed by the Bankruptcy Court,
upon confirmation of a plan of reorganization. The Sealed Air and Fresenius
settlements are subject to the approval of the Bankruptcy Court. Grace is unable
to predict how these settlements may ultimately affect its plan of
reorganization.

Impact on Debt Capital - All of the Debtors' pre-petition debt is in default due
to the Filing. The accompanying Consolidated Balance Sheet as of December 31,
2002 reflects the classification of the Debtors' pre-petition debt within
"liabilities subject to compromise."

The Debtors have entered into a debtor-in-possession post-petition loan and
security agreement with Bank of America, N.A. (the "DIP facility") in the
aggregate amount of $250 million. The DIP facility has a term expiring on April
1, 2003 and bears interest under a formula based on the London Inter-Bank
Offered Rate ("LIBOR") plus 2.00 to 2.25 percentage points depending on the
level of loans outstanding. The Debtors have filed a motion with the Bankruptcy
Court seeking approval to extend the term of the DIP facility for an additional
three years and to modify certain other provisions.

Accounting Impact - The accompanying Consolidated Financial Statements have been
prepared in accordance with Statement of Position 90-7 ("SOP 90-7") "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code," promulgated
by the American Institute of Certified Public Accountants. SOP 90-7 requires
that financial statements of debtors-in-possession be prepared on a going
concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the Filing, the realization of certain Debtors' assets
and the liquidation of certain Debtors' liabilities are subject to significant
uncertainty. While operating as debtors-in-possession, the Debtors may sell or
otherwise dispose of assets and liquidate or settle liabilities for amounts
other than those reflected in the Consolidated Financial Statements. Further, a
plan of reorganization could

                                      F-37
<PAGE>

materially change the amounts and classifications reported in the Consolidated
Financial Statements, which do not currently give effect to any adjustments to
the carrying value or classification of assets or liabilities that might be
necessary as a consequence of a plan of reorganization.


Pursuant to SOP 90-7, Grace's pre-petition liabilities that are subject to
compromise are required to be reported separately on the balance sheet at an
estimate of the amount that will ultimately be allowed by the Bankruptcy Court.
As of December 31, 2002, such pre-petition liabilities include fixed obligations
(such as debt and contractual commitments) as well as estimates of costs related
to contingent liabilities (such as asbestos-related litigation, environmental
remediation and other claims). The recorded amounts of such liabilities
generally reflect accounting measurements as of the Filing Date, adjusted as
warranted for changes in facts and circumstances and/or rulings under Grace's
Chapter 11 proceedings subsequent to the Filing. (See Note 2 to the Consolidated
Financial Statements for detail of the liabilities subject to compromise as of
December 31, 2002, and as of the Filing Date.) Obligations of Grace subsidiaries
not covered by the Filing continue to be classified on the Consolidated Balance
Sheet based upon maturity dates or the expected dates of payment. SOP 90-7 also
requires separate reporting of certain expenses, realized gains and losses, and
provisions for losses related to the Filing as reorganization items.

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

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

o   Contingent liabilities such as asbestos-related matters, environmental
    remediation, income taxes and retained obligations of divested businesses.

o   Pension and postretirement liabilities that depend on assumptions regarding
    discount rates and/or total returns on invested funds.

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

o   Realization values of various assets such as trade receivables, inventories,
    insurance receivables, income taxes, and goodwill.

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

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

Set forth below is a chart that lists key operating statistics and percentage
changes for the years ended December 31, 2002, 2001 and 2000. Immediately
following the chart is an overview of the matters affecting the comparison of
2002 and 2001 as well as the comparison of 2001 and 2000. Each of these items
should be referenced when reading management's discussion and analysis of the
results of operations and financial condition. The chart below, as well as the
financial information presented throughout this discussion, divides Grace's
financial results between "core operations" and "noncore activities." Core
operations comprise the financial results of Davison Chemicals, Performance
Chemicals and the costs of corporate activities that directly or indirectly
support business operations. In contrast, noncore activities comprise all other
events and transactions not directly related to the generation of operating
revenue or the support of core operations.

Neither pre-tax income from core operations nor pre-tax income from core
operations before depreciation and amortization purport to represent income or
cash flow as defined under generally accepted accounting principles, and should
not be considered an alternative to such measures as an indicator of Grace's
performance.


                                      F-38
<PAGE>

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

ANALYSIS OF CONSOLIDATED OPERATIONS                                                        % Change                     % Change
(Dollars in millions)                                             2002       2001 (a)     Fav(Unfav)      2000 (a)     Fav(Unfav)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>            <C>              <C>        <C>              <C>
NET SALES:
    Davison Chemicals....................................    $    945.2     $    874.1       8.1%       $    783.9       11.5%
    Performance Chemicals................................         872.0          849.1       2.7%            813.5        4.4%
                                                             -----------------------------------------------------------------------
TOTAL GRACE SALES - CORE OPERATIONS......................    $  1,817.2     $  1,723.2       5.5%       $  1,597.4        7.9%
                                                             =======================================================================
PRE-TAX OPERATING INCOME (b):
    Davison Chemicals (c)................................    $    129.4     $    123.8       4.5%       $    128.0       (3.3%)
    Performance Chemicals................................          98.8           96.7       2.2%             91.6        5.6%
    Corporate operating costs............................         (47.4)         (33.0)    (43.6%)           (32.5)      (1.5%)
                                                             -----------------------------------------------------------------------
PRE-TAX INCOME FROM CORE OPERATIONS (d)..................         180.8          187.5      (3.6%)           187.1        0.2%
                                                             -----------------------------------------------------------------------
PRE-TAX INCOME (LOSS) FROM NONCORE ACTIVITIES............         (74.5)           3.0       NM             (188.4)       NM
Interest expense.........................................         (20.0)         (37.1)     46.1%            (28.1)     (32.0%)
Interest income..........................................           3.9            4.6     (15.2%)             9.7      (52.6%)
                                                             -----------------------------------------------------------------------
INCOME (LOSS) BEFORE CHAPTER 11 REORGANIZATION EXPENSE
AND INCOME TAXES.........................................          90.2          158.0     (42.9%)           (19.7)       NM
Chapter 11 reorganization expenses, net..................         (30.1)         (15.7)    (91.7%)            --          NM
Provision for income taxes...............................         (38.0)         (63.7)     40.3%            (70.0)       9.0%
                                                             -----------------------------------------------------------------------
 NET INCOME (LOSS).......................................    $     22.1     $     78.6     (71.9%)      $    (89.7)     187.6%
                                                             =======================================================================
KEY FINANCIAL MEASURES:
  PRE-TAX INCOME FROM CORE OPERATIONS AS A
    PERCENTAGE OF SALES:
      Davison Chemicals..................................          13.7%          14.2%     (0.5)pts          16.3%      (2.1)pts
      Performance Chemicals..............................          11.3%          11.4%     (0.1)pts          11.3%       0.1 pts
      Consolidated.......................................           9.9%          10.9%     (1.0)pts          11.7%      (0.8)pts

  Pre-tax income from core operations before
    depreciation and amortization (d)....................    $    275.4     $    276.5      (0.4%)      $    274.9        0.6%
  As a percentage of sales...............................          15.2%          16.0%     (0.8)pts          17.2%      (1.2)pts
                                                             =======================================================================
NET SALES BY REGION:
 North America...........................................    $    885.4     $    875.8       1.1%       $    860.0        1.8%
 Europe..................................................         551.9          472.9      16.7%            416.8       13.5%
 Asia Pacific............................................         272.8          267.5       2.0%            216.8       23.4%
 Latin America...........................................         107.1          107.0       0.1%            103.8        3.1%
                                                             -------------- ------------ -------------- ------------- --------------
 TOTAL...................................................    $ 1,817.2      $  1,723.2       5.5%       $  1,597.4        7.9%
====================================================================================================================================
</TABLE>


NM = Not meaningful         a = Net sales amounts presented herein reflect a
                            reclassification of freight costs and sales
                            commissions (previously shown as a reduction of
                            sales).

                            b = Pre-tax operating income for all periods
                            presented reflects a reallocation of the cost of
                            annual accrued pension benefits of active
                            participants from corporate to the respective
                            business segments.

                            c = Davison Chemicals pre-tax operating income
                            includes minority interest related to the
                            Advanced Refining Technologies joint venture.

                            d = Neither pre-tax income from core operations nor
                            pre-tax income from core operations before
                            depreciation and amortization purport to
                            represent income or cash flow as defined under
                            generally accepted accounting principles, and
                            should not be considered an alternative to such
                            measures as an indicator of Grace's performance.

                                      F-39
<PAGE>



COSTS OF DOING BUSINESS IN CHAPTER 11

Although it is difficult to measure precisely how Chapter 11 has impacted
Grace's overall financial performance, there are certain added costs that are
directly attributable to operating under the Bankruptcy Code. Net reorganization
expenses of $30.1 million in 2002 and $15.7 million in 2001 consist primarily of
legal, financial and consulting fees incurred by Grace and three creditors'
committees. In addition, for 2002 and 2001, Grace's pre-tax income from core
operations included expenses of $7.8 million and $10.0 million, respectively,
for Chapter 11-related compensation charges. Poor stock price performance in the
period leading up to and after the Filing diminished the value of Grace's stock
option program to current and prospective employees, which caused Grace to
change its long-term incentive compensation program into a cash-based program.
Grace has also sought to address employee retention issues by providing added
compensation to certain employees and increasing Grace's contribution to its
savings and investment plan.

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

MATTERS AFFECTING COMPARISON - 2002 VS. 2001

The principal factors affecting changes in pre-tax income from core operations
from 2001 to 2002 were: sales and income from three acquisitions completed in
2002 for a total cash cost of $28.5 million; the full-year impact of 2001
acquisitions; productivity gains; higher costs for pensions, medical benefits
and insurance; the negative effects of the cost of facility rationalizations;
and continued weakness in the global economy and in U.S. commercial construction
activity. The primary factors affecting changes in pre-tax income from noncore
activities included accruals for legal and environmental matters and higher
pension costs, offset by income from life insurance policies. The effects of
each of these factors are quantified throughout management's discussion and
analysis.

MATTERS AFFECTING COMPARISON - 2001 VS. 2000

The principal factors affecting changes in pre-tax income from core operations
from 2000 to 2001 were: sales and income from three acquisitions for a total
cash cost of $84.4 million; the formation of a joint venture; a downturn in
world economic activity beginning in late 2000 (exacerbated by the events of
September 11, 2001); productivity gains; strengthening of the U.S. dollar
compared to most foreign currencies; and increased energy costs. The primary
factors affecting changes in pre-tax income from noncore activities were the
sale of Grace's remaining interest in Cross Country Staffing in 2001 and
accruals for legal and environmental matters. The effects of each of these
factors are quantified throughout management's discussion and analysis.

NET SALES

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

================================================================================
NET SALES                                  2002 AS A PERCENTAGE
VARIANCE ANALYSIS                     INCREASE (DECREASE) FROM 2001
--------------------------------------------------------------------------------
                             VOLUME      PRICE/MIX     TRANSLATION      TOTAL
                           -----------------------------------------------------
Davison Chemicals......        6.3%         0.7%           1.1%         8.1%
Performance Chemicals..        3.8%        (0.1%)         (1.0%)        2.7%
Net sales..............        5.1%         0.3%           0.1%         5.5%
--------------------------------------------------------------------------------
BY REGION:
  North America........        1.6%        (0.5%)         --            1.1%
  Europe...............       13.1%         0.1%           3.7%        16.7%
  Latin America........        2.7%        13.2%         (15.9%)        0.1%
  Asia Pacific.........        3.0%        (1.2%)          0.2%         2.0%
================================================================================
                                           2001 AS A PERCENTAGE
                                      INCREASE (DECREASE) FROM 2000
--------------------------------------------------------------------------------

Davison Chemicals......       9.1%          4.5%          (2.1%)       11.5%
Performance Chemicals..       6.6%          0.5%          (2.7%)        4.4%
Net sales..............       7.8%          2.6%          (2.5%)        7.9%
--------------------------------------------------------------------------------
BY REGION:
  North America........       0.5%          1.6%          (0.3%)        1.8%
  Europe...............      14.4%          2.9%          (3.8%)       13.5%
  Latin America........      (1.3%)         9.7%          (5.3%)        3.1%
  Asia Pacific.........      28.5%          2.1%          (7.2%)       23.4%
================================================================================


Grace's 2002 net sales increased 5.5% to $1,817.2 million, compared with
$1,723.2 million in 2001. Sales were favorably impacted by strong demand for
refining catalysts, and by revenue from synergistic acquisitions in catalyst
products, silica products and construction chemicals. Acquisitions contributed
$45.0 million or 2.6 percentage points of the sales growth. The impact from
foreign currency translation occurred primarily in Europe, where sales reported
in U.S. dollars were positively affected by 3.7%, partially offset by Latin

                                      F-40
<PAGE>

America, where sales reported in U.S. dollars were adversely affected by 15.9%.

In 2002 and 2001, both business segments experienced volume growth. Catalyst
volumes were strong due to increased refining catalyst demand. Silica products
sales reflect the addition of two acquisitions during the first quarter of 2001
and volume increases in coatings. Construction chemical volume growth in Europe
was driven by the acquisition of Pieri S.A. in July 2001.

In 2002, the most significant volume increases were experienced in Europe,
primarily attributable to the Borealis A/S and Pieri S.A. acquisitions. In 2001,
the most significant volume increases were experienced in Asia Pacific and
Europe, attributable to acquisitions and the Advanced Refining Technologies LLC
joint venture ("ART"). Reported net sales from Grace's non-U.S. operations were
relatively free from impact of foreign currency translation in 2002, but were
negatively impacted in 2001. Approximately 48% and 45% of Grace's reported net
sales were generated by its non-U.S. operations in 2002 and 2001, respectively.
For countries in which Grace operates, weighted average foreign currency
exchange rates appreciated approximately 0.3% in 2002, and depreciated
approximately 5.0% in 2001.

PRE-TAX INCOME FROM CORE OPERATIONS

Pre-tax income from core operations was $180.8 million for the year ended
December 31, 2002, compared with $187.5 million for the year ended December 31,
2001, a decrease of 3.6%.

Grace values its U.S. inventories under the last-in/first-out method ("LIFO"),
and its non-U.S. inventories under the first-in/first-out ("FIFO") method. LIFO
was selected in 1974 for U.S. book and tax purposes because it generally results
in a better match of current revenue with current costs. Grace cannot elect LIFO
for its non-U.S. inventories due to statutory restrictions. However, if Grace
valued its U.S. inventories using the FIFO method, consistent with non-U.S.
subsidiaries, pre-tax income from core operations would have been $186.4 million
for the year ended December 31, 2002, compared with $184.1 million for the year
ended December 31, 2001, an increase of 1.2%. If Grace valued its U.S.
inventories using the FIFO method, pre-tax income from core operations would
have been $184.1 million for the year ended December 31, 2001, compared with
$189.2 million for the year ended December 31, 2000, a decrease of 2.7%.

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

Higher energy costs and the negative effects of currency translation were the
most significant factors adversely affecting operating income in 2001 and 2000.
In the first half of 2001 and the last half of 2000, the rise in natural gas
prices (used by Davison Chemicals as part of its manufacturing process) and
transportation fuel prices (impacting distribution costs for Performance
Chemicals) had an adverse affect on profit margins. These energy sources are
also a significant factor in the cost of many raw materials used by both
business segments. Selling price increases did not keep pace with the rapid rise
in these energy related costs.

Corporate operating costs for the years ended December 31, 2002, 2001 and 2000
were $47.4 million, $33.0 million and $32.5 million, respectively. The increase
from 2001 to 2002 is primarily attributable to higher pension and general
insurance costs, offset by a year-over-year improvement in support function
costs. The increase in pension costs was attributable to negative returns on
pension plan assets, due to poor equity market performance. Grace also
experienced a significant increase in costs of medical, general, and directors
and officers liability insurance, due to market factors.

During 2002 and 2001, Grace continued to focus on productivity improvements. The
results of its productivity initiatives are reflected in: 1) sales - through
added plant capacity by improving production processes; 2) costs - through
efficiency gains and purchasing synergies; 3) working capital - by improving
collection processes and inventory management; and 4) capital avoidance - by
maximizing asset utilization.

PRE-TAX INCOME (LOSS) FROM NONCORE ACTIVITIES

The pre-tax loss from noncore activities totaled $74.5 million for 2002,
compared with pre-tax income from noncore activities of $3.0 million for 2001.
The expense from noncore activities for 2002 included $70.7 million for Grace's
defense and other probable costs to resolve pending environmental litigation
(primarily in Libby, Montana).

Income from noncore activities for 2001 included $7.7 million from the sale of
Grace's remaining cost-based

                                      F-41
<PAGE>

investment in Cross Country Staffing, offset by accruals for legal and
environmental matters primarily related to Grace's former vermiculite mining
operations in Libby, Montana.

The pre-tax loss for 2000 included a provision of $208.0 million for
asbestos-related litigation, net of insurance, as well as accruals for legal and
environmental matters related to Grace's former vermiculite mining operations.
These items were offset by a $19.0 million gain on the sale of marketable
securities, and a $5.5 million gain on the sale of noncore assets.

CHAPTER 11 EXPENSES

Net reorganization expenses for the year ended December 31, 2002 were $30.1
million compared with $15.7 million for the prior year, and consisted primarily
of legal, financial and consulting fees incurred by Grace and three creditors'
committees related to the Filing. The increase in net reorganization expenses in
2002 compared with 2001 is due to a full year of costs and more activity in the
Chapter 11 Cases. Grace believes that reorganization expenses will continue
between $6 and $8 million per quarter for the foreseeable future.

INTEREST

Net interest expense for 2002 was $16.1 million, a decrease of 50.5% from net
interest expense of $32.5 million in 2001. This decrease was attributable to a
lower contractual interest rate on pre-petition debt subject to compromise, as
well as lower interest expense on the DIP facility due to reduced borrowings in
2002 as compared with 2001. Net interest expense increased 76.6% in 2001 over
the 2000 amount of $18.4 million. This increase was attributable to higher
average debt levels in 2001 versus 2000 and the continued accrual of contractual
interest on pre-petition debt subject to compromise, as well as interest expense
on the DIP facility. Average debt levels were $508.6 million in 2002; $538.6
million in 2001; and $277.3 million in 2000. Interest accrued on pre-petition
debt is subject to Grace's Chapter 11 proceedings. Weighted average interest
rates in each year were 2.8%, 5.8% and 7.1%, respectively.

INCOME TAXES

Grace's provisions for income taxes at the federal corporate rate of 35% were
$21.0 million and $49.8 million for the years ended December 31, 2002 and 2001,
respectively. The primary differences between these amounts and the overall
provisions for income taxes of $38.0 million for 2002 and $63.7 million for 2001
were attributable to current period interest on tax contingencies and the
non-deductibility of certain Chapter 11 reorganization expenses. In 2000,
Grace's benefit from income taxes at the federal corporate rate was $6.9
million. The primary difference between this amount and the overall provision
for income taxes of $70.0 million was attributable to an accrual for probable
additional taxes and interest relating to the tax deductibility of interest on
corporate owned life insurance policy loans.

DAVISON CHEMICALS

================================================================================
                                                                    % Change
NET SALES                              2002            2001        Fav(Unfav)
--------------------------------------------------------------------------------
Catalyst products ..........     $     680.6      $    624.8           8.9%
Silica products.............           264.6           249.3           6.1%
--------------------------------------------------------------------------------
TOTAL DAVISON CHEMICALS.....     $     945.2      $    874.1           8.1%
================================================================================
                                                                    % Change
                                       2001            2000        Fav(Unfav)
--------------------------------------------------------------------------------
Catalyst products ..........     $     624.8      $    562.7          11.0%
Silica products.............           249.3           221.2          12.7%
--------------------------------------------------------------------------------
TOTAL DAVISON CHEMICALS.....     $     874.1      $    783.9          11.5%
================================================================================

Recent Acquisitions and Joint Ventures

In August 2002, ART, Grace's joint venture with Chevron Products Company
("Chevron"), acquired an exclusive license for the hydroprocessing catalyst
technology of Japan Energy Corporation and its subsidiary Orient Catalyst
Company. The joint venture will market and distribute catalysts based on this
technology worldwide.

In January 2002, Grace, through its Swedish subsidiary, acquired the catalyst
manufacturing assets of Borealis A/S. This acquisition has been integrated into
Grace's global polyolefin catalysts business.

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

In March 2001, Grace and Chevron formed ART, to develop and market
hydroprocessing catalysts globally. ART conducts business through two
distribution companies and one operating company. ART has agreements with both
Grace and Chevron under which each provides certain administrative and research
and development services to ART.

                                      F-42
<PAGE>

Sales

Catalyst products represented approximately 37%, 36% and 35% of 2002, 2001 and
2000 total Grace sales, respectively. This product group includes: fluid
cracking catalysts and additives ("FCC") used in petroleum refineries to convert
distilled crude oil into transportation fuels and other petroleum-based
products; hydroprocessing catalysts, which upgrade heavy oils and remove certain
impurities; polyolefin catalysts, which are essential components in the
manufacture of polyethylene used in products such as high-performance plastic
pipe and other plastic parts; and chemical catalysts, which are used in a
variety of chemical processes. Silica products represented approximately 15%,
15% and 14% of 2002, 2001 and 2000 total Grace sales, respectively. Silica
products are used in a wide range of industrial and consumer applications such
as coatings, food processing, plastics, adsorbents, personal care products and
separations.

Sales for the Davison Chemicals segment in 2002 were $945.2 million, an 8.1%
increase over 2001. Acquisitions accounted for $25.0 million or 2.9 percentage
points of the sales growth. Sales of catalyst products were up 8.9%. This
increase primarily reflected added revenue from acquisitions and joint ventures
that complemented polyolefin and hydroprocessing catalyst product offerings and
an increase in FCC volumes. Sales of silica products were up 6.1% for the
period, primarily from growth programs in coating applications and added volume
in Latin America, Europe and Asia Pacific.

Sales in 2002 were up 5.9% in North America and 16.8% in Europe. In Latin
America, sales were down 3.4%, and Asia Pacific sales were about even with 2001.
In North America, the increase was primarily attributable to favorable order
patterns of hydroprocessing catalysts, offset by a decrease in chemical
catalysts. In Europe, the increase was driven by refining catalysts and silica
coating applications, along with the Borealis A/S acquisition in polyolefin
catalysts completed in the first quarter of 2002. The decrease in Latin America
was primarily due to a reduction in sales of hydroprocessing catalysts offset by
an increase in sales of silica materials.

Sales for the Davison Chemicals segment in 2001 were $874.1 million, an 11.5%
increase over 2000. Acquisitions accounted for $40.9 million or 5.2 percentage
points of the sales growth. Sales of catalyst products in 2001 were up 11.0% as
compared with 2000. Excluding the negative impact of currency translation, 2001
sales were up 14.1%. This increase mainly reflected sales of new FCCs for
value-added refinery applications. Silica product sales in 2001 were up 12.7% as
compared with 2000. Excluding acquisitions and the negative impact of currency
translation, 2001 sales decreased 2.5%, mainly reflecting weakness in demand for
end-use segments such as plastics and coatings, which were most affected by the
general economic downturn.

2001 sales in North America were down 4.6% compared with 2000. Sales were up
17.2% in Europe, 5.2% in Latin America, and 67.3% in Asia Pacific in 2001 as
compared with 2000, despite the effect of currency weakness in those regions
compared with the U.S. dollar, which adversely impacted 2001 sales by $16.6
million. Excluding the impact of currency translation, total Davison sales
increased by 13.6%.

Operating Income

Pre-tax operating income of $129.4 million in 2002 was 4.5% higher than 2001.
Added income from good year-over-year sales growth was partially offset by
higher expenses to support growth initiatives and increases in employee benefits
(including pension), insurance and other operating costs.

Pre-tax operating income of $123.8 million in 2001 was down 3.3% from $128.0
million in 2000. The decline in operating income was primarily attributable to
higher energy and raw materials costs, partially offset by productivity
initiatives.

PERFORMANCE CHEMICALS

================================================================================
                                                                    % Change
NET SALES                              2002           2001         Fav(Unfav)
--------------------------------------------------------------------------------
Construction chemicals........    $    393.9      $    365.1           7.9%
Building materials............         230.8           239.9          (3.8%)
Sealants and coatings.........         247.3           244.1           1.3%
--------------------------------------------------------------------------------
TOTAL PERFORMANCE CHEMICALS...    $    872.0      $    849.1           2.7%
================================================================================
                                                                    % Change
                                       2001           2000         Fav(Unfav)
--------------------------------------------------------------------------------
Construction chemicals........    $    365.1      $    348.7           4.7%
Building materials............         239.9           228.0           5.2%
Sealants and coatings.........         244.1           236.8           3.1%
--------------------------------------------------------------------------------
TOTAL PERFORMANCE CHEMICALS...    $    849.1      $    813.5           4.4%
================================================================================

                                      F-43
<PAGE>


Recent Acquisitions and Joint Ventures

In March 2002, Grace acquired the assets of Addiment, Incorporated, a leading
supplier of specialty chemicals to the concrete paver and masonry industries in
the U.S. and Canada, which has been integrated into the construction chemicals
product line.

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

Sales

The major product groups of this business segment include: specialty
construction chemicals and specialty building materials used primarily by the
nonresidential construction industry, and container sealants and coatings for
food and beverage packaging. Construction chemicals, which represented 22% of
2002 total Grace sales (21% in 2001 and 22% in 2000) add strength, control
corrosion, and enhance the handling and application of concrete, and reduce the
manufacturing cost and improve the quality of cement. Building materials, which
represented 13% of 2002, 14% of 2001 and 14% of 2000 total Grace sales, prevent
water damage to structures and protect structural steel against collapse due to
fire. Sealants and coatings, which represented 13% of 2002 total Grace sales
(14% in 2001 and 15% in 2000) are used to seal beverage and food cans, and glass
and plastic bottles, and to protect metal packaging from corrosion and the
contents from the influences of metal.

Sales for the Performance Chemicals segment in 2002 were $872.0 million, a 2.7%
increase over 2001. Acquisitions accounted for $20.0 million, or 2.4 percentage
points of the sales growth, all related to construction chemicals. Sales of
construction chemicals were up 7.9%, despite reduced commercial construction
activity in North America. Sales were strong in all other geographic regions,
reflecting additional sales from the Pieri S.A. acquisition, some pickup in
construction activity and the success of new product programs and sales
initiatives in key economics worldwide. Sales of building materials products
were down 3.8%, reflecting softness in North American construction and
re-roofing activity. This business is largely based in the United States and is
most affected by changes in U.S. commercial construction activity. Sales of
sealants and coatings were up 1.3%, reflecting continued good results from
growth programs in coatings and closure compounds, particularly in North America
and Europe.

2002 sales in North America were down 2.5% compared with 2001. 2002 sales were
up in Europe by 16.9%, in Asia Pacific by 4.6% and in Latin America by 3.3%.
Declining sales in North America occurred primarily in construction chemicals
and building materials, reflecting softness in North American commercial
construction activity. Sealants and coatings sales were up slightly compared
with the prior year. In Europe, the increase in sales was primarily attributable
to the Pieri S.A. acquisition and volume growth in all three product lines.
Sales in Asia Pacific reflected an increase in construction chemicals, with
offsetting declines in building materials and sealants and coatings. Sales in
Latin America reflected an overall increase in sales of construction chemicals,
with slight decreases in sales of building materials and sealants and coatings.

In 2001, sales of construction chemicals were $365.1 million, an increase of
4.7% over 2000. The Pieri S.A. acquisition accounted for 2.9 percentage points
of the increase. Sales increased in all major regions and were driven by
penetration of high-performance products for concrete and cement, especially in
value added water reducers, grinding aids and quality improvers. Sales of
building materials were $239.9 million in 2001, a 5.2% increase over 2000.
Excluding the impact of acquisitions and unfavorable currency translation, sales
were up 5.8%. This growth was attributable to increased sales in North America,
primarily roofing underlayments and specialty structural waterproofing. Sales of
sealants and coatings were $244.1 million in 2001, a 3.1% increase over 2000.
Excluding acquisitions and unfavorable currency translation, sales were up 0.2%,
primarily from volume gains in closure sealants and coatings.

2001 sales were down 7.6% in Asia Pacific as compared with 2000. 2001 sales were
up 7.0% in North America, 7.2% in Europe and 1.1% in Latin America as compared
with 2000. The effect of currency weakness in Europe, Asia Pacific and Latin
America compared with the U.S. dollar adversely impacted sales by $20.3 million
for 2001. Excluding the impact of currency translation, total Performance
Chemicals sales increased 7.0%.

Operating Income

Pre-tax operating income increased 2.2% from $96.7 million in 2001 to $98.8
million in 2002. The cost of facility rationalizations during 2002, primarily in
the sealants and coatings product line, partially offset the profit improvement
from added sales and productivity. Pre-tax operating income of $96.7 million in
2001 was up 5.6% compared with pre-tax operating income of $91.6 million in
2000. This increase was attributable to

                                      F-44
<PAGE>

higher sales and savings generated from productivity programs, which more than
offset higher petroleum-based raw material costs.

CORPORATE OPERATING COSTS

Corporate operating costs include expenses incurred by corporate headquarters'
functions in support of core operations. It includes the cost of corporate
functions such as legal, finance, human resources and information technology, as
well as other costs not directly attributable to business segments. Corporate
operating costs for the year ended December 31, 2002 were $47.4 million, up from
$33.0 million in 2001. This increase was primarily attributable to an increase
in pension costs and directors and officers liability insurance ("D&O"), offset
by lower support function expenses. Pension costs rose $17.6 million in 2002,
reflecting the accounting effects of negative returns on pension assets from
2000 to 2002. The loss in value of pension assets will cause 2003 pension
expense to increase by approximately $25.0 million. D&O costs increased $1.1
million, or 24.5% in 2002, reflecting the current tight insurance market for
this coverage. Due to the continued difficulty in the D&O market, 2003 premiums
for D&O are anticipated to increase by $5.4 million. Corporate operating costs
for the year ended December 31, 2001 totaled $33.0 million, compared with $32.5
million for the prior year period, a 1.5% increase.

FINANCIAL POSITION AND CASH FLOWS

The following chart sets forth Grace's net asset position supporting its core
operations and its net cash flows from core operations.


================================================================================
Core Operations                                    DECEMBER          December
(Dollars in millions)                                2002              2001
--------------------------------------------------------------------------------

Book value of invested capital
Receivables...................................   $     308.4        $    296.3
Inventory.....................................         172.4             180.0
Properties and equipment, net.................         614.6             582.9
Intangible assets and other...................         609.7             585.0
Assets supporting core operations.............       1,705.1           1,644.2
Accounts payable and accruals.................        (311.0)           (294.5)
                                                 -------------------------------
Capital invested in core operations...........   $   1,394.1        $  1,349.7
After-tax return on average invested capital
  (trailing twelve months)....................           8.3%              9.4%
                                                 ===============================
                                                            DECEMBER 31,
                                                 -------------------------------
Cash flows:                                           2002              2001
                                                 -------------------------------
Pre-tax operating income......................   $     180.8        $    187.5
Depreciation and amortization.................          94.6              89.0
                                                 -------------------------------
Pre-tax earnings before depreciation and
  amortization ...............................         275.4             276.5
Working capital and other changes.............          28.1             (47.9)
                                                 -------------------------------
Cash flow before investing....................         303.5             228.6
Capital expenditures..........................         (91.1)            (62.9)
Businesses acquired...........................         (28.5)            (84.4)
                                                 -------------------------------
Net cash flow from core operations............   $     183.9        $     81.3
================================================================================

Grace had a net asset position supporting its core operations of $1,394.1
million at December 31, 2002, compared with $1,349.7 million at December 31,
2001 (including the cumulative translation account reflected in Shareholders'
Equity (Deficit) of $119.5 million for 2002 and $164.8 million for 2001). The
increase in invested capital supporting core operations was primarily due to:

a)  An increase in receivables of $12.1 million, which was attributable to
    currency translation, primarily of European and Asian receivables,
    reflecting the weaker dollar.

b)  An overall decrease in inventory of $7.6 million consisting of: a $15.4
    million decrease based on a reduction in the number of days on hand as
    compared with the prior year, offset by an increase of $7.8 million
    attributable to currency translation, primarily of European and Asian
    inventories reflecting the weaker dollar.

c)  An increase in property, equipment and intangibles due to currency
    translation and capital invested in property and acquisitions.

The after tax return on capital invested in core operations decreased by 1.1
percentage points in 2002, due to a 3.6% decline in pre-tax operating income
compared to a higher investment base. Net cash flows from core operations
increased due to the easing of working capital pressures that began prior to the
Filing, and a reduction in cash invested in business acquisitions,

                                      F-45
<PAGE>

partially offset by an increase in capital spending, primarily for expansion
projects coming on line in 2003.


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

EFFECT OF CHAPTER 11

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

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

LIABILITIES AND CONTINGENCIES

Grace has a number of financial exposures originating from past businesses,
products and events. These obligations arose from transactions and/or business
practices that date back to when Grace was a much larger company, when it
produced products or operated businesses that are no longer part of its revenue
base, and when government regulations and scientific knowledge were much less
advanced than today. The table below summarizes the net noncore liability at
December 31, 2002 and 2001 and the net cash flow from noncore activities for the
years then ended:


================================================================================
NONCORE ACTIVITIES
(Dollars in millions)                              2002              2001
--------------------------------------------------------------------------------
NONCORE LIABILITIES:
Asbestos-related liabilities.............    $      (973.2)    $      (996.3)
Asbestos-related insurance receivable....            282.6             293.4
                                             -----------------------------------
Asbestos-related liability, net .........           (690.6)           (702.9)
Environmental remediation................           (201.1)           (153.1)
Postretirement benefits..................           (147.2)           (169.1)
Retained obligations and other...........            (55.3)            (80.6)
                                             -----------------------------------
NET NONCORE LIABILITY....................    $    (1,094.2)    $    (1,105.7)
================================================================================
CASH FLOWS:
Pre-tax (loss) income from noncore
  activities.............................    $       (74.5)    $         3.0
Non-cash charges.........................             77.6               4.0
Cash spending for:
  Asbestos-related litigation, net of
    insurance recovery...................             (2.3)            (30.8)
  Environmental remediation..............            (20.8)            (28.9)
  Postretirement benefits................            (21.5)            (22.3)
  Retained obligations and other.........             (4.5)             (9.1)
                                             -----------------------------------
NET CASH FLOW FROM NONCORE ACTIVITIES ...    $       (46.0)    $       (84.1)
================================================================================

As described under "Voluntary Bankruptcy Filing," the resolution of most of
these noncore recorded and contingent liabilities will be determined through the
Chapter 11 proceedings. Grace cannot predict with any certainty how, and for
what amounts, any of such estimates will be resolved. The amounts of these
liabilities as ultimately determined through the Chapter 11 proceedings could be
materially different from amounts recorded by Grace at December 31, 2002.

ASBESTOS-RELATED MATTERS

Grace is a defendant in lawsuits relating to previously sold asbestos-containing
products. In 2002, Grace paid $2.3 million for the defense and disposition of
asbestos-related property damage and bodily injury litigation, net of amounts
received under settlements with insurance carriers, compared with net
expenditures in 2001 of $30.8 million. At December 31, 2002, Grace's balance
sheet reflects a gross liability of $973.2 million, ($690.6 million net of
insurance). This liability represents management's estimate of the undiscounted
future net cash outflows in satisfaction of Grace's current and expected
asbestos-related claims, based on facts and circumstances existing prior to the
Filing. Changes to the recorded amount of such liability will be based on
Chapter 11 developments and Grace's assessment of the claim amounts that will
ultimately be allowed by the Bankruptcy Court. Grace's ultimate liability for
asbestos-related litigation could differ materially from the recorded liability.

                                      F-46
<PAGE>

During the year prior to the Filing, Grace experienced several adverse
developments in its asbestos-related litigation, including: a significant
increase in bodily injury claims; higher than expected costs to resolve certain
property damage and bodily injury claims; and defense costs related to new
class-action lawsuits alleging damages from a former attic insulation product
not previously subject to property damage litigation. In addition, five
co-defendant companies in asbestos bodily injury litigation petitioned for
bankruptcy court protection. These developments contribute to the risk that
Grace would be subject to more claims than previously projected, with higher
settlement demands. (See Notes 1 and 3 to the Consolidated Financial Statements
for further information concerning asbestos-related lawsuits and claims.)

The Consolidated Balance Sheet at December 31, 2002 includes total amounts due
from insurance carriers of $282.6 million pursuant to settlement agreements with
insurance carriers. The recovery of amounts due from insurance carriers is
dependent upon the timing, character and exposure periods of asbestos-related
claims. Grace's Chapter 11 proceedings could also affect recovery timing and
amounts.

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

ENVIRONMENTAL MATTERS

Grace is subject to loss contingencies resulting from extensive and evolving
federal, state, local and foreign environmental laws and regulations. Grace has
expended substantial funds to comply with such laws and regulations and expects
to continue to do so in the future. The following table sets forth Grace's
expenditures in the past three years for (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.

================================================================================
                            OPERATION OF
                             FACILITIES           CAPITAL
(DOLLARS IN MILLIONS)         AND WASTE        EXPENDITURES     SITE REMEDIATION
--------------------------------------------------------------------------------
2002                       $    36.9           $    5.6         $     13.7
--------------------------------------------------------------------------------
2001                            31.7                3.8               26.6
--------------------------------------------------------------------------------
2000                            26.4                4.0               42.4
================================================================================

Expenditures to comply with environmental initiatives in 2003 and 2004 are
estimated to be between $35.0 and $39.0 million for the operation of facilities
and waste disposal and $5.0 and $10.0 million for capital expenditures. Costs
incurred to remediate environmentally impaired sites have been charged against
previously established reserves. At December 31, 2002, Grace's recorded
liability for environmental investigative and remediation costs related to both
continuing and discontinued operations totaled $201.1 million, as compared with
$153.1 million at December 31, 2001. This estimate of environmental costs is
based on funding and/or remediation agreements in place, together with Grace's
best estimate of its cost for sites not subject to a formal remediation plan.
Future pre-tax cash outlays for remediation costs are expected to range between
$8.0 and $22.0 million over the next few years. This estimate does not include
spending or reimbursement of remediation costs related to Grace's former
vermiculite mining and processing activities in the Libby, Montana area.

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

                                      F-47
<PAGE>

that would be binding in future actions to recover further response costs.

In connection with its defense, Grace conducted its own investigation to
determine whether the EPA's actions and cost claims were justified and
reasonable. In December 2002, the District Court granted the United States'
motion for partial summary judgment on a number of issues that limited Grace's
ability to challenge the EPA's response actions. In January 2003, a trial was
held on the remainder of the issues, which primarily involved the reasonableness
and adequacy of documentation of the EPA's cost recovery claims through December
31, 2001. No decision has yet been issued. The EPA's Libby-related cost recovery
claims through December 31, 2001 totaled approximately $57 million. Based on the
testimony of EPA witnesses deposed in the lawsuit and other information, Grace
believes that the EPA's total cost recovery claims could reach, and potentially
exceed, $100 million. This lawsuit is not subject to the automatic stay provided
under the Bankruptcy Code. Grace has accrued a liability of $63.0 million at
December 31, 2002, with respect to this lawsuit and future cost recovery claims
expected to be made by the EPA, which represents Grace's current estimate of
probable liability and defense costs, pending the issuance of a decision of the
trial court and the availability of additional information about the EPA's 2002
costs and projected future costs. Liabilities for recovery costs are included in
"liabilities subject to compromise" and any payments would be subject to the
outcome of the Chapter 11 proceedings.

Since January 2000, Grace has spent approximately $13.2 million for remediation
of certain Libby area vermiculite processing sites and for health care of Libby
area residents diagnosed with asbestos-related illness.

The EPA is also evaluating environmental risks at vermiculite processing sites
throughout the U.S. that processed vermiculite from Libby, Montana, and has made
claims against Grace to carry out or fund remediation activities. Grace is
reviewing the EPA's actions and cost claims to determine whether they are
justified and reasonable and, in several instances, has remediated or agreed to
remediate certain sites. Costs associated with the above are included in
"provision for environmental remediation" included in the Consolidated Statement
of Operations.

POSTRETIREMENT BENEFITS

Grace provides certain postretirement health care and life insurance benefits
for retired employees, a large majority of which pertain to retirees of
previously divested businesses. These plans are unfunded, and Grace pays the
costs of benefits under these plans as they are incurred. Effective January 1,
2002, Grace's postretirement medical plan was amended to increase the
contribution required to be paid by the retirees to a minimum of 40% of the
calculated premium. During 2002, per capita costs under the retiree medical
plans exceeded caps on the amount Grace is required to subsidize under the 1993
amendment to the plan. As a result, for 2003 and future years, retirees will
bear 100% of any increase in premium costs.

RETAINED OBLIGATIONS OF DIVESTED BUSINESSES

The principal retained obligations of divested businesses relate to contractual
indemnification and to contingent liabilities not passed on to the new owner. At
December 31, 2002, Grace had recorded $55.3 million, as compared with $80.5
million at December 31, 2001, to satisfy such obligations. The decrease
primarily relates to a reclassification within "liabilities subject to
compromise." Most of these matters are now subject to the automatic stay of the
Bankruptcy Court and are expected to be resolved as part of Grace's Chapter 11
proceedings.

TAX MATTERS

Grace has received the examination report from the Internal Revenue Service
("IRS") on tax periods 1993 through 1996 asserting, in the aggregate,
approximately $114.0 million of proposed tax adjustments. The most significant
contested issue addressed in such report concerns corporate-owned life insurance
("COLI") policies and is discussed below. Other proposed IRS tax adjustments
include Grace's tax position regarding research and development credits,
reporting of certain divestitures and other miscellaneous proposed adjustments.
The tax audit for the 1993 through 1996 tax period is under the jurisdiction of
IRS Appeals, where Grace has filed a protest. Grace's federal tax returns
covering tax periods 1997 and forward are either under examination by the IRS or
open for future examination. Grace believes that previously established reserves
for tax matters will be sufficient to cover the expected net cost of probable
tax return adjustments. Any cash payment would be subject to Grace's Chapter 11
proceedings.

In 1988 and 1990, Grace acquired COLI policies on the lives of certain of its
employees as part of a strategy to fund the cost of postretirement employee
health care benefits and other long-term liabilities. COLI premiums have been
funded in part by loans issued against the cash surrender value of the COLI
policies. The IRS is

                                      F-48
<PAGE>

challenging deductions of interest on loans secured by COLI policies for years
prior to 1999. In 2000, Grace paid $21.2 million of tax and interest related to
this issue for tax years 1990 through 1992. Subsequent to 1992, Grace deducted
approximately $163.2 million in interest attributable to COLI policy loans.
Although Grace continues to believe that the deductions were legitimate, the IRS
has successfully challenged interest deductions claimed by other corporations
with respect to broad-based COLI policies in all of the three litigated cases to
date. Therefore, Grace requested and was granted early referral to the IRS
Office of Appeals for consideration of possible settlement alternatives of the
COLI interest deduction issue.

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

The IRS has assessed additional federal income tax withholding and Federal
Insurance Contributions Act taxes plus interest and related penalties for
calendar years 1993 through 1995 against a Grace subsidiary that formerly
operated a temporary staffing business for nurses and other health care
personnel. The assessments, aggregating $21.8 million, were made in connection
with a meal and incidental expense per diem plan for traveling health care
personnel, which was in effect through 1999. The IRS contends that certain per
diem reimbursements should have been treated as wages subject to employment
taxes and federal income tax withholding. Grace contends that its per diem and
expense allowance plans were in accordance with statutory and regulatory
requirements, as well as other published guidance from the IRS. Grace expects
that the IRS will make additional assessments for the 1996 through 1999 periods.
The matter is currently pending in the United States Court of Claims. Grace is
currently in discussions with the Department of Justice concerning possible
settlement options.

LITIGATION RELATED TO FORMER PACKAGING AND MEDICAL CARE BUSINESSES

On November 29, 2002, Sealed Air Corporation ("Sealed Air") and Fresenius
Medical Care AG ("Fresenius") each announced that they had reached agreements in
principle with the Official Committee of Asbestos Personal Injury Claimants and
the Official Committee of Asbestos Property Damage Claimants to settle asbestos
and fraudulent conveyance claims related to the 1998 transaction involving
Grace's former packaging business and Sealed Air, and the 1996 transaction
involving Grace's former medical care business and Fresenius, respectively.
Under the terms of the proposed Sealed Air settlement, Sealed Air would make a
payment of $512.5 million (plus interest at 5.5% per annum commencing on
December 21, 2002) and nine million shares of Sealed Air common stock, valued at
$335.7 million as of December 31, 2002, as directed by the Bankruptcy Court upon
confirmation of Grace's plan of reorganization. Under the terms of the proposed
Fresenius settlement, as subsequently revised, Fresenius would contribute $115.0
million to the Grace estate, or as otherwise directed by the Bankruptcy Court,
upon confirmation of a plan of reorganization. The Sealed Air and Fresenius
settlements are subject to the approval of the Bankruptcy Court. Grace is unable
to predict how these settlements may ultimately affect its plan of
reorganization.

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

CASH RESOURCES AND AVAILABLE CREDIT FACILITIES

At December 31, 2002, Grace had $365.4 million in cash and cash-like assets on
hand ($283.0 million in cash and cash equivalents and $82.4 million in cash
value of life insurance). In addition, Grace had access to committed credit
facilities aggregating $248.4 million under the DIP facility, of which $226.2
million (net of letters of credit and holdback provisions) was available at
December 31, 2002. The Debtors have filed a motion with the Bankruptcy Court
seeking approval to extend the term of the DIP facility for an additional three
years and to modify certain other provisions. Grace believes that these funds
and credit facilities will be sufficient to finance its business strategy while
in Chapter 11.

                                      F-49
<PAGE>

CASH FLOW

Grace's net cash flow from core operations before investing was $303.6 million
in 2002, compared with $228.6 million in 2001. Acquisition investments
aggregated $28.5 million in 2002, compared with $84.4 million in 2001. Total
Grace capital expenditures for 2002 and 2001 were $91.1 million and $62.9
million, respectively, substantially all of which was directed toward its
business segments for capacity expansion and routine upgrades.

Grace expects to continue to invest excess cash flow and/or other available
capital resources in its core business segments. These investments are likely to
be in the form of added plant capacity, product line extensions and geographic
market expansions. Such investments may be subject to Bankruptcy Court approval
and Chapter 11 creditor committee review. Grace has taken steps to improve
productivity and manage costs and, at this time, projects 2003 cash flow from
core operations comparable to 2002.

The pre-tax cash outflow of noncore activities was $46.0 million in 2002,
compared with an outflow of $84.1 million in 2001. The decreased cash outflow
was primarily due to lower asbestos-related payments in 2002 resulting from the
stay on payments for asbestos-related claims after the Filing Date. Expenditures
for environmental remediation were lower in 2002, due partly to Grace's Chapter
11 proceedings and partly to the completion of remediation work on certain
sites. Postretirement benefit payments were consistent with the prior year.
Payments for retained obligations of divested businesses and other contingencies
were lower in 2002 due to the stay of litigation and to the one-time nature of
these matters.

Cash flows used for investing activities in 2002 were $110.7 million, compared
with cash used of $131.4 million in 2001, and cash used of $94.0 million in
2000. Net cash outflows in 2002 were primarily impacted by businesses acquired
of $28.5 million and capital expenditures of $91.1 million, $20.8 million of
which was for capacity expansion projects. Net cash outflows in 2001 consisted
of $84.4 million in businesses acquired and $62.9 million of capital
expenditures.

Net cash (used for) provided by financing activities in 2002, 2001, and 2000 was
($9.2 million), $123.1 million and $239.9 million, respectively. In 2002, cash
used in financing activities was primarily for loan repayments against life
insurance policies. In 2001, borrowings under credit facilities of $93.5
million, net of repayments, were used to pay down Grace's receivables
securitization program, which was terminated in May 2001, and to fund
investments in acquired businesses, capital expenditures and noncore
obligations. Net cash provided by financing activities in 2000 primarily related
to borrowings under credit facilities of $311.3 million and the exercise of
stock options of $5.8 million, offset by the repayment of $24.7 million of
long-term debt, and the purchase of $47.3 million of treasury stock.

LIFE INSURANCE

Grace is the beneficiary of life insurance policies on certain current and
former employees with a net cash surrender value of $82.4 million at December
31, 2002. This net cash surrender value is composed of $471.3 million in policy
gross cash value offset by $388.9 million of policy loans. The policies were
acquired to fund various employee benefit programs and other long-term
liabilities and are structured to provide cash flows (primarily tax-free) over
an extended period. Certain of these policies are of the type that has received
recent judicial and legislative attention. Pending rulings and proposed reforms
could adversely affect the availability of these policies as a funding source
for Grace's noncore liabilities. Grace is evaluating whether to continue the
policies that may be affected by these developments or to terminate them for
their cash value.

DEBT AND OTHER CONTRACTUAL OBLIGATIONS

Total debt outstanding at December 31, 2002 was $542.2 million. As a result of
the Filing, Grace is now in default on $501.0 million of such debt, which has
been included in "liabilities subject to compromise" as of December 31, 2002.
The automatic stay provided under the Bankruptcy Code prevents Grace's lenders
from taking any action to collect the principal amounts as well as related
accrued interest. However, Grace will continue to accrue and report interest on
such debt during the Chapter 11 proceedings (unless further developments lead
management to conclude that it is probable that such interest will not be paid).

In addition, Grace's accounts receivable securitization program was terminated
effective May 14, 2001. As a result of the Filing, outstanding balances of
approximately $65.3 million were satisfied under the terms of the program
through the use of pre-petition trade receivables collected during the period
from the Filing Date to early May 2001. During the period from the Filing Date
to the termination of the program, Grace compensated for the lack of access to
trade receivables collections by borrowing under the DIP facility.

                                      F-50
<PAGE>

Financial assurances have been established for a variety of purposes, including
insurance and environmental matters, asbestos settlements and appeals,
trade-related commitments and other matters. At December 31, 2002, Grace had
gross financial assurances outstanding of $237.7 million, comprised of $137.4
million of gross surety bonds issued by various insurance companies and $100.3
million of standby letters of credit issued by various banks. Of the standby
letters of credit, $19.7 million act as collateral for surety bonds, thereby
reducing Grace's overall obligations under its financial assurances to a net
amount of $218.0 million. Of this net amount, approximately $6.5 million were
issued on behalf of non-Debtor entities and $211.5 million were issued on behalf
of the Debtors. Of the amounts issued by the Debtors, approximately $195.1
million were issued before the Filing Date, with the remaining $16.4 million
being subsequent to the Filing, of which $13.7 million was issued under the DIP
facility.

================================================================================
CONTRACTUAL OBLIGATIONS NOT SUBJECT TO COMPROMISE
--------------------------------------------------------------------------------
                                             Payments due by Period
                                 -----------------------------------------------
                                               Less
                                              than 1      1-3
(Dollars in millions)               Total      Year      Years    Thereafter
--------------------------------------------------------------------------------
Debt.......................      $    3.4   $    3.4   $   --     $   --
Operating leases...........          67.5       16.0       33.0       18.5
                                 -----------------------------------------------
TOTAL CONTRACTUAL CASH
OBLIGATIONS................      $   70.9   $   19.4   $   33.0   $   18.5
================================================================================

PENSION BENEFITS

The decline in value of the U.S. and global equity markets, coupled with a
decline in interest rates during 2002 and 2001, created a shortfall between
accounting measurements of Grace's obligations under certain of its qualified
pension plans for U.S. employees and the market value of dedicated pension
assets. Grace's U.S. pension trust has been reduced by an overall negative
return of 6.9% per annum over this three year period. The combination of
negative returns on assets and lower interest rates required a balance sheet
adjustment in shareholders' equity (deficit) of $147.7 million and $124.4
million at December 31, 2002 and 2001, respectively (net of tax), to recognize
the pension shortfall and to fully reserve deferred pension losses. Grace has
lowered its assumed return on plan assets for 2003 to 8.25%, down from 9.0% for
2002 and 2001. The new rate of return is comparable to the average long-term
rate of return Grace has experienced since 1990. Furthermore, as a result of
these conditions, certain of Grace's U.S. qualified pension plans are
underfunded as defined by the Employee Retirement Income Security Act of 1984
(ERISA) and will require contributions from Grace over the next several years to
close the shortfall between dedicated assets and measured pension obligations.
The amount and timing of contributions could be affected by Grace's Chapter 11
proceedings. The total shortfall as of December 31, 2002 as defined under ERISA
is $227.1 million.

SHARE ACTIVITY

Key employees of Grace currently receive salaries, and are eligible to receive
incentive bonuses and other long-term benefits, including stock options. In
2002, no options were issued as the uncertainties resulting from the Filing have
diminished the value of the stock option program to current and prospective
employees. In 2001, the Company granted a total of 1,339,846 options with an
average exercise price of $2.53.

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

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

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

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




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

The forward-looking statements contained in this document are based on current
expectations regarding important risk factors. Actual results may differ
materially from those expressed. In addition to the uncertainties referred to in
Management's Discussion and Analysis of Results of Operations and Financial
Condition, other uncertainties include: the impact of worldwide economic
conditions; pricing of both Grace's products and raw materials; customer outages
and customer demand; factors resulting from fluctuations in interest rates and
foreign currencies; the impact of competitive products and pricing; the
continued success of Grace's process improvement initiatives; the impact

                                      F-51
<PAGE>

of tax, legislation and other regulations in the jurisdictions in which the
Company operates; and development in and the outcome of the Chapter 11
proceedings discussed above. Also, see "Introduction and Overview - Projections
and Other Forward-Looking Information" in Item 1 of Grace's current Annual
Report on Form 10-K.














                                      F-52
<PAGE>


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

<TABLE>
<CAPTION>

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

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

<TABLE>
<CAPTION>
                                                           FOR THE YEAR 2000
========================================================================================================================
                                                                                Additions/(deductions)
                                                                --------------------------------------------------------
                                                                                 Charged/
                                                                 Balance at     (credited)                  Balance at
                                                                beginning of     to costs       Other         end of
                         Description                               period      and expenses    net (b)        period
------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>            <C>           <C>           <C>
VALUATION AND QUALIFYING ACCOUNTS DEDUCTED FROM ASSETS:
     Allowances for notes and accounts receivable.............  $    4.1       $      0.3    $    --       $     4.4
     Allowances for long-term receivables.....................       0.8             --           --             0.8
     Valuation allowance for deferred tax assets..............     153.2             16.4          9.5         179.1
RESERVES:
     Reserves for retained obligations of divested businesses.  $   99.1       $      6.2    $   (27.2)    $    78.1
========================================================================================================================
</TABLE>

(a) $25.2 million represents net spending offset by a reclass of an $18.0
    million tax receivable relating to Grace's divested packaging business.

(b) 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), cash payments for previously established reserves
    for divested businesses and miscellaneous other adjustments.

                                      F-53
<PAGE>
                                                                      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)
                      (Dollars in millions, except ratios)
                                   (Unaudited)

<TABLE>
<CAPTION>
============================================================================================================================
                                                                             Years Ended December 31, (b)
                                                          ------------------------------------------------------------------
                                                            2002 (C)        2001       2000 (d)      1999       1998 (e)
----------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>           <C>          <C>          <C>          <C>
Net income (loss) from continuing operations.........     $      22.1   $     78.6   $    (89.7)  $    130.2   $   (194.7)
Add (deduct):
Provision for (benefit from) income taxes............            38.0         63.7         70.0         73.2        (28.5)

Minority interest in income (loss) of majority owned
subsidiaries.........................................            (1.9)        (3.5)        --           --           --

Equity in unremitted losses (earnings) of less than
50%-owned companies..................................             1.7         (4.0)        (0.5)        (0.2)        (1.2)

Interest expense and related financing costs,
including amortization of capitalized interest.......            22.3         39.5         30.6         18.8         37.5

Estimated amount of rental expense deemed to
represent the interest factor........................             5.0          4.7          4.7          5.2          5.2
                                                          ------------------------------------------------------------------
Income (loss) as adjusted............................     $      87.2   $    179.0   $     15.1   $    227.2   $   (181.7)
                                                          ==================================================================

Combined fixed charges and preferred stock dividends:
Interest expense and related financing costs,
including capitalized interest.......................     $      21.8   $     37.6   $      29.1  $     17.0   $     37.4

Estimated amount of rental expense deemed to
represent the interest factor........................             5.0          4.7           4.7         5.2          5.2
                                                          ------------------------------------------------------------------
Fixed charges........................................            26.8         42.3          33.8        22.2         42.6

Combined fixed charges and preferred stock dividends.     $      26.8   $     42.3   $      33.8  $     22.2   $     42.6
                                                          ==================================================================
Ratio of earnings to fixed charges...................             3.25          4.23       (f)          10.23        (f)
                                                          ==================================================================
Ratio of earnings to combined fixed charges and
preferred stock dividends............................             3.25          4.23       (f)          10.23        (f)
============================================================================================================================
</TABLE>


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

(b) Certain amounts have been restated to conform to the 2002 presentation.

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

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

(e) Includes a pre-tax provision of $376.1 million for asbestos-related
    liabilities net of insurance coverage; $21.0 million relating to
    restructuring costs and asset impairments, offset by a pre-tax gain of
    $38.2 million for the receipt of insurance proceeds related to environmental
    matters, partially offset by a charge to reflect a change in the
    environmental remediation strategy for a particular site.

(f) As a result of the losses incurred for the years ended December 31, 2000 and
    1998, Grace was unable to fully cover the indicated fixed charges.

                                      F-54
<PAGE>

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

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

The management of Grace is responsible for the preparation, integrity and
objectivity of the Consolidated Financial Statements and the other information
included in this report. The financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America and accordingly include certain amounts that represent management's best
estimates and judgments. Actual amounts could differ from those estimates.
Management maintains internal 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. For 2002, a Disclosure
Committee was established to oversee Grace's public financial reporting process
and key managers were required to confirm their compliance with Grace's policies
and internal control systems. 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,
transactions are properly executed and reported and appropriate disclosures are
made. The concept of reasonable assurance is based on the recognition that there
are limitations in all systems of internal control and that the costs of such
systems should not exceed their benefits.

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

Within the 90 days prior to the date of this report, Grace carried out an
evaluation of the effectiveness of the design and operation of its disclosure
controls and procedures pursuant to Rule 13a-14 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). Based upon that evaluation,
Grace's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in ensuring that
information required to be disclosed in the Company's periodic filings under the
Exchange Act is accumulated and communicated to such officers to allow timely
decisions regarding required disclosures. There have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect internal controls subsequent to the date the Company completed its
evaluation.

                                      F-55