10-Q

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


                                    FORM 10-Q

(Mark One)

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

                FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005

                                     OR

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



                         Commission File Number 1-13953

                                W. R. GRACE & CO.

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


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


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

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

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


66,905,496 shares of Common Stock, $0.01 par value, were outstanding at April
30, 2005.


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                       W. R. GRACE & CO. AND SUBSIDIARIES

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






                                                                                                      Page No.
                                                                                                      --------
PART I.    FINANCIAL INFORMATION


Item 1.             Financial Statements

                    Report of Independent Registered Public Accounting Firm                             I - 1

                    Consolidated Statements of Operations                                               I - 2

                    Consolidated Statements of Cash Flows                                               I - 3

                    Consolidated Balance Sheets                                                         I - 4

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

                    Consolidated Statements of Comprehensive Income (Loss)                              I - 5

                    Notes to Consolidated Financial Statements                                     I - 6 to I - 23

Item 2.             Management's Discussion and Analysis of Results of Operations
                    and Financial Condition                                                       I - 24 to I - 36

Item 3.             Quantitative and Qualitative Disclosures About Market Risk                         I - 37

Item 4.             Controls and Procedures                                                            I - 37


PART II.   OTHER INFORMATION

Item 1.             Legal Proceedings                                                                  II - 1

Item 6.             Exhibits                                                                           II - 1










             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


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

We have reviewed the accompanying consolidated balance sheets of W. R. Grace &
Co. and its subsidiaries as of March 31, 2005, and the related consolidated
statements of operations, of shareholders' equity (deficit) and of comprehensive
income (loss) for each of the three-month periods ended March 31, 2005 and March
31, 2004 and the consolidated statement of cash flows for the three-month
periods ended March 31, 2005 and March 31, 2004. These interim financial
statements are the responsibility of the Company's management.

We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.

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

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

We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet as of December 31, 2004, and the related consolidated statements of
operations, of cash flows, of shareholders' equity (deficit) and of
comprehensive income (loss) for the year then ended, management's assessment of
the effectiveness of the Company's internal control over financial reporting as
of December 31, 2004 and the effectiveness of the Company's internal control
over financial reporting as of December 31, 2004; and in our report dated March
4, 2005, we expressed (i) an unqualified opinion on those consolidated financial
statements with an explanatory paragraph relating to the Company's ability to
continue as a going concern and, (ii) unqualified opinions on management's
assessment of the effectiveness of the Company's internal control over financial
reporting and on the effectiveness of the Company's internal control over
financial reporting. The consolidated financial statements and management's
assessment of the effectiveness of internal control over financial reporting
referred to above are not presented herein. In our opinion, the information set
forth in the accompanying consolidated balance sheet information as of December
31, 2004, is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.


/s/ PricewaterhouseCoopers LLP
McLean, Virginia
May 6, 2005



                                      I-1






====================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES                                                                    THREE MONTHS ENDED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)                                                         MARCH 31,
- ------------------------------------------------------------------------------------------------------------------------------------

In millions, except per share amounts                                                             2005                  2004
                                                                                          ------------------------------------------

Net sales..........................................................................             $603.2                  $518.5
                                                                                          ------------------------------------------


Cost of goods sold, exclusive of depreciation and amortization shown separately
    below..........................................................................              392.7                   331.2
Selling, general and administrative expenses, exclusive of net pension expense
    shown separately below.........................................................              119.3                   101.5
Depreciation and amortization .....................................................               28.8                    27.2
Research and development expenses .................................................               15.1                    12.7
Net pension expense ...............................................................               17.6                    13.5
Interest expense and related financing costs ......................................               14.6                     3.9
Provision for environmental remediation ...........................................               --                      --
Provision for asbestos-related litigation, net of insurance........................               --                      --
Other (income) expense.............................................................               (6.1)                   (3.2)
                                                                                          ------------------------------------------
                                                                                                 582.0                   486.8
                                                                                          ------------------------------------------

Income (loss) before Chapter 11 expenses, income taxes, and minority interest......               21.2                    31.7
Chapter 11 expenses, net ..........................................................               (6.0)                   (4.5)
Benefit from (provision for) income taxes..........................................               (8.6)                  (10.9)
Minority interest in consolidated entities.........................................               (3.5)                   (0.5)
                                                                                          ------------------------------------------

    NET INCOME (LOSS) .............................................................             $  3.1                  $ 15.8
====================================================================================================================================


BASIC EARNINGS (LOSS) PER COMMON SHARE:
    Net income (loss) .................................................................        $  0.05                  $ 0.24
    Average number of basic shares ....................................................           66.6                    65.6

DILUTED EARNINGS (LOSS) PER COMMON SHARE:
    Net income (loss) .................................................................        $  0.05                  $ 0.24
    Average number of diluted shares...................................................           67.3                    65.8
====================================================================================================================================



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


                                      I-2






====================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES                                                                     THREE MONTHS ENDED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)                                                          MARCH 31,
- ------------------------------------------------------------------------------------------------------------------------------------

In millions                                                                                         2005               2004
                                                                                             ---------------------------------------

OPERATING ACTIVITIES
Income (loss) before Chapter 11 expenses, income taxes, and minority
    interest..............................................................................        $  21.2              $  31.7
Reconciliation to cash provided by operating activities:
     Depreciation and amortization........................................................           28.8                 27.2
     Interest accrued on pre-petition liabilities subject to compromise...................           13.3                  2.7
     Loss (gain) on sales of investments and disposals of assets..........................           (0.9)                 0.2
     Net pension expense..................................................................           17.6                 13.5
     Payments to fund defined benefit pension arrangements................................           (3.0)                (2.7)
     Cash paid for litigation settlement..................................................           (8.3)                --
     Provision for environmental remediation..............................................           --                   --
     Provision for asbestos-related litigation, net of insurance..........................           --                   --
     Net income from life insurance policies..............................................           (1.3)                (1.5)
     Bad debt expense.....................................................................            0.6                  0.5
     Payments under postretirement benefit plans..........................................           (2.3)                (2.6)
     Expenditures for environmental remediation...........................................           (1.2)                (2.9)
     Expenditures for retained obligations of divested businesses.........................           (0.3)                (0.4)
     Changes in assets and liabilities, excluding effect of businesses
        acquired/divested and foreign currency translation:
         Working capital items............................................................          (75.2)               (33.2)
         Other accruals and non-cash items................................................          (10.9)                 0.5
                                                                                             ---------------------------------------
     NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES BEFORE INCOME                             (21.9)                33.0
       TAXES AND CHAPTER 11 EXPENSES......................................................
Chapter 11 expenses paid, net.............................................................           (4.4)                (2.0)
Income taxes paid, net of refunds.........................................................           (5.4)               (10.3)
                                                                                             ---------------------------------------
     NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES.................................          (31.7)                20.7
                                                                                             ---------------------------------------
INVESTING ACTIVITIES
Capital expenditures......................................................................          (12.4)                (9.1)
Businesses acquired, net of cash acquired.................................................           (2.2)                --
Proceeds from termination of life insurance policies......................................           14.8                 --
Net investment in life insurance policies.................................................           --                   (4.6)
Proceeds from life insurance policies.....................................................            2.0                  5.3
Proceeds from sales of investments and disposals of assets................................            0.1                  0.1
                                                                                             ---------------------------------------
     NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES.................................            2.3                 (8.3)
                                                                                             ---------------------------------------
FINANCING ACTIVITIES
Net payment of loans secured by cash value of life insurance..............................           (0.5)                (1.3)
Borrowings under credit facilities, net of repayments.....................................           (2.0)                 8.9
Borrowings under debtor-in-possession facility, net of fees...............................           (0.6)                (0.5)
Repayments of borrowings under debtor-in-possession facility..............................           --                   --
Exercise of stock options.................................................................            3.0                 --
                                                                                             ---------------------------------------
     NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES.................................           (0.1)                 7.1
                                                                                             ---------------------------------------
Effect of currency exchange rate changes on cash and cash equivalents.....................           (6.1)                (3.4)
                                                                                             ---------------------------------------
     INCREASE IN CASH AND CASH EQUIVALENTS................................................          (35.6)                16.1
Cash and cash equivalents, beginning of period............................................          510.4                309.2
                                                                                             ---------------------------------------
Cash and cash equivalents, end of period..................................................         $474.8               $325.3
====================================================================================================================================



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


                                      I-3





===================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES                                                                    MARCH 31,        DECEMBER 31,
CONSOLIDATED BALANCE SHEETS (UNAUDITED)                                                                 2005              2004
- -----------------------------------------------------------------------------------------------------------------------------------
In millions, except par value and shares
ASSETS
CURRENT ASSETS

Cash and cash equivalents.................................................................            $  474.8          $   510.4
Trade accounts receivable, less allowance of $6.0 (2004 - $5.8)...........................               400.1              390.9
Inventories...............................................................................               258.3              248.3
Deferred income taxes.....................................................................                16.9               16.3
Other current assets......................................................................                56.7               62.6
                                                                                              -------------------------------------
     TOTAL CURRENT ASSETS.................................................................             1,206.8            1,228.5

Properties and equipment, net of accumulated depreciation and
     amortization of $1,326.9 (2004 - $1,325.9)...........................................               620.5              645.3
Goodwill..................................................................................               108.7              111.7
Cash value of life insurance policies, net of policy loans................................                81.0               96.0
Deferred income taxes.....................................................................               664.6              667.4
Asbestos-related insurance................................................................               500.0              500.0
Other assets..............................................................................               282.0              290.0
                                                                                              -------------------------------------
     TOTAL ASSETS.........................................................................            $3,463.6           $3,538.9
                                                                                              =====================================

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE
CURRENT LIABILITIES
Debt payable within one year..............................................................            $   10.1           $   12.4
Accounts payable..........................................................................               147.0              146.0
Income taxes payable......................................................................                10.0                7.7
Other current liabilities.................................................................               163.5              221.5
                                                                                              -------------------------------------
     TOTAL CURRENT LIABILITIES............................................................               330.6              387.6

Debt payable after one year    ...........................................................                 1.1                1.1
Deferred income taxes.....................................................................                60.6               64.1
Unfunded defined benefit pension liability................................................               431.1              424.9
Other liabilities.........................................................................                68.8               75.3
                                                                                              -------------------------------------
     TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE..........................................               892.2              953.0

LIABILITIES SUBJECT TO COMPROMISE - NOTE 2................................................             3,200.1            3,207.7
                                                                                              -------------------------------------
     TOTAL LIABILITIES....................................................................             4,092.3            4,160.7
                                                                                              -------------------------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock issued, par value $0.01; 300,000,000 shares authorized;
      outstanding: 2005 - 66,905,496 (2004 - 66,395,721)..................................                 0.8                0.8
Paid-in capital...........................................................................               423.5              426.5
Accumulated deficit.......................................................................              (570.1)            (573.2)
Treasury stock, at cost: shares: 2005 - 10,074,264; (2004 - 10,584,039)...................              (119.9)            (125.9)
Accumulated other comprehensive loss......................................................              (363.0)            (350.0)
                                                                                              -------------------------------------
     TOTAL SHAREHOLDERS' EQUITY (DEFICIT).................................................              (628.7)            (621.8)
                                                                                              -------------------------------------
     TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT).................................            $3,463.6           $3,538.9
===================================================================================================================================



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


                                      I-4






====================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
====================================================================================================================================
                                                                                                Accumulated           TOTAL
                                             Common Stock                                           Other          SHAREHOLDERS'
                                                and             Accumulated     Treasury        Comprehensive         EQUITY
In millions                                Paid-in Capital        Deficit         Stock              Loss           (DEFICIT)
- ------------------------------------------------------------------------------------------------------------------------------------

BALANCE, DECEMBER 31, 2004............   $        427.3        $  (573.2)      $   (125.9)        $ (350.0)          $ (621.8)

Net income............................               --              3.1               --               --                3.1
Stock plan activity ..................             (3.0)              --              6.0               --                3.0
Other comprehensive loss..............               --               --               --            (13.0)             (13.0)
                                         -------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 2005...............   $        424.3        $  (570.1)      $   (119.9)        $ (363.0)          $ (628.7)
====================================================================================================================================



====================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)                                              THREE MONTHS ENDED
(UNAUDITED)                                                                                              MARCH 31,
====================================================================================================================================
In millions                                                                                    2005                    2004
                                                                                      ------------------------ ---------------------

NET INCOME (LOSS)................................................................              $  3.1                $ 15.8

OTHER COMPREHENSIVE INCOME (LOSS):
   Foreign currency translation adjustments......................................               (13.0)                 (5.0)
                                                                                      ------------------------ ---------------------
COMPREHENSIVE INCOME (LOSS)......................................................              $ (9.9)               $ 10.8
===================================================================================== ======================== =====================



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


                                      I-5



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

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

W. R. Grace & Co., through its subsidiaries, is engaged in specialty chemicals
and specialty materials businesses on a worldwide basis through two business
segments: "Davison Chemicals," which includes two product groups - refining
technologies and specialty materials; and "Performance Chemicals," which
includes three product groups - specialty construction chemicals, building
materials, and sealants and coatings.

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

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

VOLUNTARY BANKRUPTCY FILING - In response to a sharply increasing number of
asbestos-related personal 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 personal injury claims, higher than expected costs to resolve
personal injury and certain property damage claims, and class action lawsuits
alleging damages from a former attic insulation product (Zonolite Attic
Insulation or "ZAI"). After a thorough review of these developments, the Board
of Directors of Grace concluded on April 2, 2001 that a federal court-supervised
Chapter 11 process provided the best forum available to achieve fairness in
resolving these claims. Under Chapter 11, the Debtors have continued to operate
their businesses as debtors-in-possession under court protection from creditors
and claimants, while using the Chapter 11 process to develop and implement a
plan for addressing the asbestos-related claims. Since the Filing, all motions
necessary to conduct normal business activities have been approved by the
Bankruptcy Court. (See Note 2 for Chapter 11 Related Information.)

BASIS OF PRESENTATION - The interim Consolidated Financial Statements presented
herein are unaudited and should be read in conjunction with the Consolidated
Financial Statements presented in the Company's 2004 Annual Report on Form 10-K.
Such interim Consolidated Financial Statements reflect all adjustments that, in
the opinion of management, are necessary for a fair presentation of the results
of the interim periods presented; all such adjustments are of a normal recurring
nature. Potential accounting adjustments discovered during normal reporting and
accounting processes are evaluated on the basis of materiality, both
individually and in the aggregate, and are recorded in the accounting period
discovered, unless a restatement of a prior period is necessary. All significant
intercompany accounts and transactions have been eliminated.

The results of operations for the three-month interim period ended March 31,
2005 are not necessarily indicative of the results of operations for the year
ending December 31, 2005.

RECLASSIFICATIONS - Certain amounts in prior years' Consolidated Financial
Statements have been reclassified to conform to the 2005 presentation.

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

o   Contingent liabilities such as asbestos-related matters (see Notes 2 and 3),
    environmental remediation (see Note 12), income taxes (see Note 12), and
    litigation related to retained obligations of divested businesses and
    discontinued operations.

o   Pension and postretirement liabilities that depend on assumptions regarding
    discount rates and/or total returns on invested funds. (See Note 13.)



                                      I-6


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

o   Realization values of various assets such as net deferred tax assets, trade
    receivables, inventories, insurance receivables, and goodwill.

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

EFFECT OF NEW ACCOUNTING STANDARDS - In December 2004, the Financial Accounting
Standards Board ("FASB") revised Statement of Financial Accounting Standards
("SFAS") No. 123, "Share-Based Payment," to require companies to measure and
recognize in operations the cost of employee services received in exchange for
an award of equity instruments based on the grant-date fair value. The
provisions of this standard are effective as of the beginning of the first
annual reporting period that begins after June 15, 2005. Grace believes that
this standard will not have a material impact on the Consolidated Financial
Statements.

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an Amendment
of ARB No. 43, Chapter 4," to provide clarification that abnormal amounts of
idle facility expense, freight, handling costs, and wasted material be
recognized as current-period charges. In addition, this standard requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. The provisions of this
standard are effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. Grace is currently evaluating the impact the
standard will have on the Consolidated Financial Statements.

STOCK INCENTIVE PLANS - SFAS No. 123 permits the Company to follow the
measurement provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and not recognize compensation
expense for its stock-based incentive plans.

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.
No compensation cost was recognized for the Company's stock-based incentive
compensation plans in pro forma net income for the three-month period ended
March 31, 2005 due to the fact that all prior grants had vested and were fully
expensed in prior periods. There were no option grants in the first quarter of
2005 or the year ended 2004.

2.   CHAPTER 11 RELATED INFORMATION

PLAN OF REORGANIZATION - On November 13, 2004 Grace filed a plan of
reorganization, as well as several associated documents, including a disclosure
statement, with the Bankruptcy Court. On January 13, 2005, Grace filed an
amended plan of reorganization (the "Plan") and related documents to address
certain objections of creditors and other interested parties. The amended Plan
is supported by committees representing general unsecured creditors and equity
holders, but is not supported by committees representing asbestos personal
injury claimants and asbestos property damage claimants.

Under the terms of the Plan, a trust would be established under Section 524(g)
of the Bankruptcy Code to which all pending and future asbestos-related claims
would be channeled for resolution. Grace has requested that the Bankruptcy Court
conduct an estimation hearing to determine the amount that would need to be paid
into the trust on the effective date of the Plan to satisfy the estimated
liability for each class of asbestos claimants and trust administration costs
and expenses over time. The Plan provides that Grace's asbestos-related
liabilities would be satisfied using cash and securities from Grace and third
parties.

The Plan will become effective only after a vote of eligible creditors and with
the approval of the Bankruptcy Court and the U.S. District Court for the
District of Delaware. Votes on the Plan may not be solicited until the
Bankruptcy Court approves the disclosure statement. The Debtors have received
extensions of their exclusive right to propose a plan of reorganization through
May 24, 2005, and extensions of the Debtors' exclusive right to solicit
acceptances of a plan of reorganization through July 24, 2005.

Under the terms of the Plan, Grace would satisfy claims under the Chapter 11
cases as follows:

Asbestos-Related Claims and Costs
- ---------------------------------
A trust would be established under Section 524(g) of the Bankruptcy Code to
which all pending and future asbestos-related claims would be channeled for
resolution. The trust would utilize specified trust distribution procedures to
satisfy the following allowed asbestos-related claims and costs:

1.   Personal injury claims that meet specified exposure and medical criteria
     (Personal Injury-Symptomatic Eligible or "PI-SE" Claims) - In order to
     qualify for this class, claimants would have to prove that their health is
     impaired from meaningful exposure



                                      I-7


     to asbestos-containing products formerly manufactured by Grace.

2.   Personal injury claims that do not meet the exposure and medical criteria
     necessary to qualify as PI-SE Claims (Personal Injury-Asymptomatic and
     Other or "PI-AO" Claims) - This class would contain all asbestos-related
     personal injury claims against Grace that do not meet the specific
     requirements to be PI-SE Claims but do meet certain other specified
     exposure and medical criteria.

3.   Property damage claims, including claims related to ZAI ("PD Claims") - In
     order to qualify for this class, claimants would have to prove Grace
     liability for loss of property value or remediation costs related to
     asbestos-containing products formerly manufactured by Grace.

4.   Trust administration costs and legal expenses

The pending asbestos-related legal proceedings are described in
"Asbestos-Related Litigation" (see Note 3). The claims arising from such
proceedings would be subject to this classification process as part of the Plan.

Grace has requested that the Bankruptcy Court conduct estimation hearings to
determine the amounts that would need to be paid into the trust on the effective
date of the Plan to satisfy the estimated liability for each class of asbestos
claimants and trust administration costs and expenses over time. The amounts to
fund PI-SE Claims, PD Claims and the expense of trust administration would be
capped at the amount determined through the estimation hearing; therefore, after
initial funding of the asbestos trust, Grace would have no further obligation
for these claims and costs. Amounts required to fund PI-AO Claims would not be
capped, so if the amount funded in respect thereof later proved to be
inadequate, Grace would be responsible for contributing additional funds into
the asbestos trust to satisfy PI-AO Claims. Grace does not expect the estimation
process to be completed before mid-2006.

Asbestos personal injury claimants would have the option either to litigate
their claims against the trust in federal court in Delaware or, if they meet
specified eligibility criteria, accept a settlement amount based on the severity
of their condition. Asbestos property damage claimants would be required to
litigate their claims against the trust in federal court in Delaware. The Plan
provides that, as a condition precedent to confirmation, the maximum estimated
aggregate funding amount for all asbestos-related liabilities (PI-SE, PI-AO and
PD including ZAI) and trust administration costs and expenses as determined by
the Bankruptcy Court cannot exceed $1,613 million, which Grace believes would
fund over $2 billion in claims, costs and expenses over time.

The PI-SE Claims, the PD Claims and the related trust administration costs and
expenses would be funded with (1) $512.5 million in cash (plus interest at 5.5%
compounded annually from December 21, 2002) and nine million shares of common
stock of Sealed Air Corporation ("Sealed Air") pursuant to the terms of a
settlement agreement resolving asbestos-related and fraudulent transfer claims
against Sealed Air, and (2) Grace common stock. The amount of Grace common stock
required to satisfy these claims will depend on the liability measures approved
by the Bankruptcy Court and the value of the Sealed Air settlement, which
changes daily with the accrual of interest and the trading value of Sealed Air
stock. The Sealed Air settlement agreement remains subject to Bankruptcy Court
approval and the fulfillment of specified conditions.

The PI-AO Claims would be funded with warrants exercisable for that number of
shares of Grace common stock which, when added to the shares issued directly to
the trust on the effective date of the Plan, would represent 50.1% of Grace's
voting securities. If the common stock issuable upon exercise of the warrants is
insufficient to pay all PI-AO Claims (the liability for which is uncapped under
the Plan), then Grace would pay any additional liabilities in cash.

Other Claims
- ------------
The Plan provides that all allowed claims other than those covered under the
asbestos trust would be paid 100% in cash (if such claims qualify as
administrative or priority claims) or 85% in cash and 15% in Grace common stock
(if such claims qualify as general unsecured claims). Grace estimates that
claims with a recorded value of approximately $1,264 million, including interest
accrued through March 31, 2005, would be satisfied in this manner at the
effective date of the Plan. Grace would finance these payments with cash on
hand, cash from Fresenius Medical Care Holdings, Inc. ("Fresenius") paid in
settlement of asbestos and other Grace-related claims, new Grace debt, and Grace
common stock. Grace would satisfy other non-asbestos related liabilities and
claims (primarily certain environmental, tax, pension and retirement medical
obligations) as they become due and payable over time. Proceeds from available
product liability insurance applicable to asbestos-related claims would
supplement operating cash flow to service new debt and liabilities not paid on
the effective date of the Plan.



                                      I-8


Effect on Grace Common Stock
- ----------------------------
The Plan provides that Grace common stock will remain outstanding at the
effective date of the Plan, but that the interests of existing shareholders
would be subject to dilution by additional shares of common stock issued under
the Plan. In addition, in order to preserve significant tax benefits from net
operating loss carryforwards ("NOLs"), which are subject to elimination or
limitation in the event of a change in control (as defined by the Internal
Revenue Code) of Grace, the Plan places restrictions on the purchase of Grace
common stock. The restrictions would prohibit (without the consent of Grace),
for a period of three years, a person or entity from acquiring more than 4.75%
of the outstanding Grace common stock or, for those persons already holding more
than 4.75%, prohibit them from increasing their holdings. The Bankruptcy Court
has also approved the trading restrictions described above until the effective
date of the Plan.

Grace intends to address all pending and future asbestos-related claims and all
other pre-petition claims as outlined in the Plan. However, Grace may not be
successful in obtaining approval of the Plan by the Bankruptcy Court and other
interested parties. Instead, a materially different plan of reorganization may
ultimately be approved and, under the ultimate plan of reorganization, the
interests of the Company's shareholders could be substantially diluted or
cancelled. The value of Grace common stock following a plan of reorganization,
and the extent of any recovery by non-asbestos-related creditors, will depend
principally on the allowed value of Grace's asbestos-related claims as
determined by the Bankruptcy Court.

OFFICIAL PARTIES TO GRACE'S CHAPTER 11 PROCEEDINGS - 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, and a legal representative
of future asbestos claimants, have the right to be heard on all matters that
come before the Bankruptcy Court and are likely to play important roles in the
Chapter 11 Cases. The Debtors are required to bear certain costs and expenses of
the committees and of the future asbestos claimants' representative, including
those of their counsel and financial advisors.

CLAIMS FILINGS - The Bankruptcy Court established a bar date of March 31, 2003
for claims of general unsecured creditors, asbestos-related property damage
claims and medical monitoring claims related to asbestos. The bar date did not
apply to asbestos-related personal injury claims or claims related to ZAI, which
will be dealt with separately.

Approximately 14,900 proofs of claim were filed by the bar date. Of these
claims, approximately 9,400 were non-asbestos related, approximately 4,300 were
for asbestos-related property damage, and approximately 1,000 were for medical
monitoring. The medical monitoring claims were made by individuals who allege
exposure to asbestos through Grace's products or operations. These claims, if
sustained, would require Grace to fund ongoing health monitoring costs for
qualified claimants. In addition, approximately 500 proofs of claim were filed
after the bar date.

Approximately 7,000 of the non-asbestos related claims involve claims by
employees or former employees for future retirement benefits such as pension and
retiree medical coverage. Grace views most of these claims as contingent and has
proposed a plan of reorganization that would retain such benefits. The other
non-asbestos related claims include claims for payment of goods and services,
taxes, product warranties, principal and interest under pre-petition credit
facilities, amounts due under leases and other contracts, leases and other
executory contracts rejected in the Bankruptcy Court, environmental remediation,
indemnification or contribution to actual or potential co-defendants in
asbestos-related and other litigation, pending non-asbestos-related litigation,
and non-asbestos-related personal injury.

The Debtors' have analyzed the claims as filed and have found that many are
duplicates, represent the same claim filed against more than one of the Debtors,
lack any supporting documentation, or provide insufficient supporting
documentation. As of March 31, 2005, the Debtors had filed with the Bankruptcy
Court objections to 1,366 claims. Most of these objections were non-substantive
(duplicates, no supporting documentation, late filed claims, etc.). Of such
claims, 1,104 have been expunged, 202 have been resolved, 33 have been
withdrawn, and the remainder will be addressed through the claims objection
process and the dispute resolution procedures approved by the Bankruptcy Court.
The Debtors expect to file objections to a substantial number of additional
claims.

Grace believes that its recorded liabilities for claims subject to the bar date
represent a reasonable estimate of the ultimate allowable amount for claims that
are not in dispute or have been submitted with sufficient information to both
evaluate merit and estimate the value of the claim. The asbestos-related claims
are considered as part of Grace's overall asbestos liability and are being
accounted for in accordance with the conditions precedent under the Plan, as
described in "Accounting Impact" below. As claims are resolved, or where better



                                      I-9


information becomes available and is evaluated, Grace will make adjustments to
the liabilities recorded on its financial statements as appropriate. Any such
adjustments could be material to its consolidated financial position and results
of operations.

LITIGATION PROCEEDINGS IN BANKRUPTCY COURT - In September 2000, Grace was named
in a purported class action lawsuit filed in California Superior Court for the
County of San Francisco, alleging that the 1996 reorganization involving a
predecessor of Grace and Fresenius and the 1998 reorganization involving a
predecessor of Grace and Sealed Air were fraudulent transfers. The Bankruptcy
Court authorized the Official Committee of Asbestos Personal Injury Claimants
and the Official Committee of Asbestos Property Damage Claimants to proceed with
claims against Fresenius and Sealed Air on behalf of the Debtors' bankruptcy
estate.

On November 29, 2002, Sealed Air and Fresenius each announced that they had
reached agreements in principle with such Committees to settle asbestos and
fraudulent transfer claims related to such transactions (the "litigation
settlement agreements"). Under the terms of the Fresenius settlement, subject to
certain conditions, Fresenius would contribute $115.0 million to the Debtors'
estate as directed by the Bankruptcy Court upon confirmation of the Debtors'
plan of reorganization, subject to the fulfillment of specified conditions. In
July 2003, the Fresenius settlement was approved by the Bankruptcy Court. Under
the terms of the proposed Sealed Air settlement, Sealed Air would make a payment
of $512.5 million (plus interest at 5.5% compounded annually, commencing on
December 21, 2002) and nine million shares of Sealed Air common stock (valued at
$467.5 million as of March 31, 2005), as directed by the Bankruptcy Court upon
confirmation of the Debtors' plan of reorganization. The Sealed Air settlement
remains subject to the approval of the Bankruptcy Court and the fulfillment of
specified conditions.

DEBT CAPITAL - All of the Debtors' pre-petition debt is in default due to the
Filing. The accompanying Consolidated Balance Sheets reflect the classification
of the Debtors' pre-petition debt within "liabilities subject to compromise."

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

ACCOUNTING IMPACT - The accompanying Consolidated Financial Statements have been
prepared in accordance with Statement of Position 90-7 ("SOP 90-7"), "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code," promulgated
by the American Institute of Certified Public Accountants. SOP 90-7 requires
that financial statements of debtors-in-possession be prepared on a going
concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the Filing, the realization of certain of the Debtors'
assets and the liquidation of certain of the 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, the ultimate plan of reorganization could materially change the amounts
and classifications reported in the Consolidated Financial Statements.

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 March 31, 2005, 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). Obligations of Grace subsidiaries
not covered by the Filing continue to be classified on the Consolidated Balance
Sheets 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.

Grace has not recorded any assets available to fund asbestos-related and other
liabilities under the litigation settlements with Sealed Air and Fresenius, as
such agreements are subject to conditions which, although expected to be met,
have not been satisfied and approved by the Bankruptcy Court. The value
available under these litigation settlement agreements as measured at March 31,
2005, was $1,161.5 million comprised of $115.0 million in cash from Fresenius
and $1,046.5 million in cash and stock from Sealed Air.

Grace's Consolidated Balance Sheets separately identify the liabilities that are
"subject to compromise" as a result of the Chapter 11 proceedings. In Grace's
case, "liabilities subject to compromise" represent pre-petition liabilities as
determined under U.S. generally accepted accounting principles. Changes to the
recorded amount of such liabilities will be based on developments in the Chapter
11 Cases and management's assessment of the



                                      I-10


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 terms of Grace's proposed plan of
reorganization, as discussed above, including the accrual of interest on
pre-petition debt and the adjustment to Grace's recorded asbestos-related
liability; 3) accruals for employee-related programs; and 4) changes in
estimates related to other pre-petition contingent liabilities.

Components of liabilities subject to compromise are as follows:


===============================================================
(In millions)                      MARCH 31,     December 31,
(Unaudited)                          2005            2004
===============================================================

Debt, pre-petition plus
  accrued interest.........     $      655.1     $      645.8
Asbestos-related liability.          1,700.0          1,700.0
Income taxes...............            208.7            210.4
Environmental remediation..            343.8            345.0
Postretirement benefits other
  than pension.............            115.3            118.9
Unfunded special pension
  arrangements.............             79.0             77.4
Retained obligations of
  divested businesses......             19.5             25.1
Accounts payable ..........             31.3             31.3
Other accrued liabilities .             47.4             53.8
                                -------------------------------
TOTAL LIABILITIES SUBJECT TO
  COMPROMISE ..............     $    3,200.1     $    3,207.7
===============================================================

Note that the unfunded special pension arrangements reflected above exclude
non-U.S. plans and qualified U.S. plans that became underfunded subsequent to
the Filing. Contributions to qualified U.S. plans are subject to Bankruptcy
Court approval.


CHANGE IN LIABILITIES SUBJECT TO COMPROMISE

Set forth below is a reconciliation of the changes in pre-filing date liability
balances for the period from the Filing Date through March 31, 2005.

===============================================================
                                                   Cumulative
(In millions)                                         Since
(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................         (272.4)
Expense/(income) items:
   Interest on pre-petition liabilities.......          166.4
   Employee-related accruals..................           21.4
   Change in asbestos-related contingencies...          744.8
   Change in estimate of environmental
     contingencies............................          240.6
   Change in estimate of income tax
     contingencies............................          (26.2)
  Balance sheet reclassifications.............          (25.7)
                                                   ------------
Balance, end of period........................      $3,200.1
===============================================================

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.

CHAPTER 11 EXPENSES

===============================================================
                                         THREE MONTHS ENDED
(In millions)                                 MARCH 31,
===============================================================
                                          2005        2004
                                       ------------------------
Legal and financial advisory fees.     $     7.8   $     4.8
Interest income ..................          (1.8)       (0.3)
                                       ------------------------
CHAPTER 11 EXPENSES, NET..........     $     6.0   $     4.5
===============================================================

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



                                      I-11



CONDENSED FINANCIAL INFORMATION OF THE DEBTORS

===============================================================
W. R. GRACE & CO. - CHAPTER 11
  FILING ENTITIES
  DEBTOR-IN-POSSESSION STATEMENTS
  OF OPERATIONS                        THREE MONTHS ENDED
(In millions) (Unaudited)                   MARCH 31,
===============================================================
                                        2005         2004
                                    --------------------------
Net sales, including intercompany   $    298.9   $    269.4
                                    --------------------------
Cost of goods sold, including
   intercompany, exclusive of
   depreciation and amortization
   shown separately below........        202.8        194.4
Selling, general and
   administrative expenses,
   exclusive of net pension
   expense shown separately below         69.0         61.7
Research and development
  expenses.......................          9.6          8.6
Depreciation and amortization....         14.9         14.5
Net pension expense..............         13.2         10.2
Interest expense and related
   financing costs...............         14.4          3.8
Other (income) expense...........        (12.0)        (9.3)
                                    --------------------------
                                         311.9        283.9
                                    --------------------------
Income (loss) before Chapter 11
   expenses, income taxes, and
   equity in net income of
   non-filing entities...........        (13.0)       (14.5)
Chapter 11 expenses, net.........         (5.9)        (4.5)
Benefit from (provision for)
  income taxes...................         (0.8)         2.5
                                    --------------------------
Income (loss) before equity in
  net income of non-filing
  entities.......................        (19.7)       (16.5)
Equity in net income of
  non-filing entities............         22.8         32.3
                                    --------------------------
NET INCOME (LOSS) ..............    $      3.1   $     15.8
===============================================================


===============================================================
W. R. GRACE & CO. - CHAPTER 11 FILING
   ENTITIES DEBTOR-IN-POSSESSION
   CONDENSED STATEMENTS OF CASH FLOWS     THREE MONTHS ENDED
(In millions) (Unaudited)                     MARCH 31,
===============================================================
                                          2005        2004
                                       ------------------------
OPERATING ACTIVITIES
Income (loss) before Chapter 11
  expenses, income taxes, and equity
  in net income of non-filing entities $  (13.0)   $  (14.5)
Reconciliation to net cash provided
  by (used for) operating activities:
    Non-cash items, net.............       26.9        15.5
    Contributions to defined benefit
     pension plans..................       (1.1)       (1.1)
    Changes in other assets and
     liabilities, excluding the
     effect of businesses
     acquired/divested..............      (82.2)       (9.3)
                                       ------------------------
NET CASH USED FOR OPERATING ACTIVITIES    (69.4)       (9.4)

NET CASH PROVIDED BY (USED FOR)
   INVESTING ACTIVITIES.............       11.7        (6.0)

NET CASH USED FOR FINANCING ACTIVITIES     (1.1)       (1.8)
                                       ------------------------

NET DECREASE IN CASH AND CASH
   EQUIVALENTS......................      (58.8)      (17.2)
Cash and cash equivalents, beginning
   of period........................      340.0       120.5
                                       ------------------------
Cash and cash equivalents, end of
   period...........................   $  281.2    $  103.3
===============================================================





===============================================================
W. R. GRACE & CO. -
   CHAPTER 11 FILING ENTITIES
   DEBTOR-IN-POSSESSION
   BALANCE SHEETS                  MARCH 31,     DECEMBER 31,
(In millions) (Unaudited)            2005           2004
===============================================================
ASSETS
CURRENT ASSETS
Cash and cash equivalents ....   $      281.2    $      340.0
Trade accounts receivable, net          112.1           111.6
Receivables from non-filing
   entities, net..............           57.8            37.8
Inventories...................           83.3            76.9
Other current assets..........           34.1            38.1
                                 ------------------------------
TOTAL CURRENT ASSETS..........          568.5           604.4

Properties and equipment, net.          352.0           359.9
Cash value of life
   insurance policies,
   net of policy loans........           81.0            96.0
Deferred income taxes ........          663.4           666.2
Asbestos-related insurance....          500.0           500.0
Loans receivable from
   non-filing entities, net...          340.7           358.6
Investment in non-filing
entities......................          484.1           468.4
Other assets..................          101.7           101.7
                                 ------------------------------
TOTAL ASSETS..................   $    3,091.4    $    3,155.2
===============================================================


                                      I-12


===============================================================
                                    MARCH 31,   DECEMBER 31,
(In millions) (Unaudited)              2005         2004
===============================================================
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
LIABILITIES NOT SUBJECT TO
  COMPROMISE
Current liabilities.............   $    133.9   $    187.5
Other liabilities...............        386.1        381.8
                                   ---------------------------
TOTAL LIABILITIES NOT SUBJECT TO
 COMPROMISE.....................        520.0        569.3

LIABILITIES SUBJECT TO
 COMPROMISE.....................      3,200.1      3,207.7
                                   ---------------------------
TOTAL LIABILITIES...............      3,720.1      3,777.0

SHAREHOLDERS' EQUITY
 (DEFICIT)......................       (628.7)      (621.8)
                                   ---------------------------
TOTAL LIABILITIES AND
 SHAREHOLDERS'
 EQUITY (DEFICIT) ..............   $  3,091.4   $  3,155.2
===============================================================

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 personal injury lawsuits relating to
previously sold asbestos-containing products. As of the Filing Date, Grace was a
defendant in 65,656 asbestos-related lawsuits, 17 involving claims for property
damage (one of which has since been dismissed), and the remainder involving
129,191 claims for personal 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. Separate
creditors' committees representing the interests of property damage and personal
injury claimants, and a legal representative of future personal injury
claimants, have been appointed in the Chapter 11 Cases. Grace's obligations with
respect to present and future claims will be determined through the Chapter 11
process.

PROPERTY DAMAGE LITIGATION - The plaintiffs in asbestos property damage lawsuits
generally seek to have the defendants pay for 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
legal status of the claimant, 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.

Out of 380 asbestos property damage cases (which involved thousands of
buildings) filed prior to the Filing Date, 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 are alleged to involve ZAI).

Approximately 4,300 additional property damage claims were filed prior to the
March 31, 2003 claims bar date established by the Bankruptcy Court. (The bar
date did not apply to ZAI claims.) Such claims were reviewed in detail by Grace,
categorized into claims with sufficient information to be evaluated or claims
that require additional information and, where sufficient information existed,
the estimated cost of resolution was considered as part of Grace's recorded
asbestos-related liability. (Approximately 140 claims failed to provide
sufficient information to permit an evaluation.)

Eight of the ZAI cases were filed as purported class action lawsuits in 2000 and
2001. In addition, two purported class action lawsuits were filed in October
2004 with respect to persons and homes in Canada. 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 and
that the cost of removal could be several thousand dollars per home. As a result
of the Filing, the eight U.S. cases have been transferred to the Bankruptcy
Court. Based on Grace's investigation of the claims described in these lawsuits,
and testing and analysis of this product by Grace and others, Grace believes
that the product was and continues to be safe for its intended purpose and poses
little or no threat to



                                      I-13


human health. The plaintiffs in the ZAI lawsuits (and the U.S. government in the
Montana criminal proceeding described in Note 12) dispute Grace's position on
the safety of ZAI. In July 2002, the Bankruptcy Court approved special counsel
to represent, at the Debtors' expense, the ZAI claimants in a proceeding to
determine certain threshold scientific issues regarding ZAI. On October 18,
2004, the Bankruptcy Court held a hearing on motions filed by the parties to
address a number of important legal and factual issues regarding the ZAI claims,
and has taken the motions under advisement. The Bankruptcy Court has indicated
that it may require further proceedings with respect to the matters addressed in
the motions. Given the very early stage of litigation, Grace's recorded
asbestos-related liability at March 31, 2005 assumes the risk of loss from ZAI
litigation is not probable.

PERSONAL INJURY LITIGATION - Asbestos personal injury claimants allege adverse
health effects from exposure to asbestos-containing products formerly
manufactured by Grace. Claims are generally similar to each other, differing
primarily in the type of asbestos-related illness allegedly suffered by the
plaintiff. Claimants allege adverse health effects from exposure to
asbestos-containing products formerly manufactured by Grace. Grace's cost to
resolve such claims has been influenced by numerous variables, including the
solvency of other former producers of asbestos containing products, cross-claims
by co-defendants, the rate at which new claims are filed, the jurisdiction in
which the claims are filed, and the defense and disposition costs associated
with these claims.

Cumulatively through the Filing Date, 16,354 asbestos personal 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 settlements and judgments) for a total of
$645.6 million. As of the Filing Date, 129,191 claims for personal injury were
pending against Grace. Grace believes that a substantial number of additional
personal injury claims would have been received between the Filing Date and
March 31, 2005 had such claims not been stayed by the Bankruptcy Court.

ASBESTOS-RELATED LIABILITY - The total asbestos-related liability balance as of
March 31, 2005 and December 31, 2004 was $1,700.0 million and is included in
"liabilities subject to compromise." Grace adjusted its asbestos-related
liability in the fourth quarter of 2004 based on its proposed plan of
reorganization as discussed in Note 2. The amount recorded at December 31, 2004
includes the $1,613 million maximum amount reflected as a condition precedent to
the Plan and $87 million related to pre-Chapter 11 contractual settlements and
judgments included in the general unsecured claims.

Under the Plan, Grace is requesting that the Bankruptcy Court determine the
aggregate dollar amount, on a net present value basis (the "Funding Amount"),
that must be funded on the effective date of the Plan into an asbestos trust
(established under Section 524(g) of the Bankruptcy Code) to pay all allowed
pending and future asbestos-related personal injury and property damage claims
(including ZAI) and related trust administration costs and expenses on the later
of the effective date of the Plan or when allowed. It is a condition to
confirmation of the Plan that the Bankruptcy Court shall conclude that the
Funding Amount is not greater than $1,613 million. This amount, which should be
sufficient to fund over $2 billion in pending and future claims, is based in
part on Grace's evaluation of (1) existing but unresolved personal injury and
property damage claims, (2) actuarially-based estimates of future personal
injury claims, (3) the risk of loss from ZAI litigation, (4) proposed claim
payments reflected in the Plan, and (5) the cost of the trust administration and
litigation. This amount may not be consistent with what the Bankruptcy Court may
conclude would be a sufficient Funding Amount.

Grace has requested that the Bankruptcy Court implement a process for estimating
the Funding Amount, which will be primarily a function of the number of allowed
property damage (including ZAI) and personal injury claims, and the amount
payable per claim. Using this process, which involves the use of detailed claim
forms, questionnaires, and expert testimony, Grace will seek to demonstrate that
the vast majority of claims should not be allowed because they fail to establish
any material property damage, health impairment or significant occupational
exposure to asbestos from Grace's operations or products. Grace also will seek
Bankruptcy Court approval of Grace's proposed payouts for allowed personal
injury claims, which will vary depending upon the type of claim and/or the
claimant's medical condition. If the Bankruptcy Court agrees with Grace's
position on the number of, and the amounts to be paid in respect of, allowed
personal injury and property damage claims, then Grace believes that the Funding
Amount could be less than $1,613 million. However, this outcome is highly
uncertain and will depend on a number of Bankruptcy Court rulings favorable to
Grace's position.

Conversely, the asbestos claimants committees and the future claimants
representative have objected to Grace's proposed estimation process and are
likely to continue to assert that Grace's asbestos-related liabilities are



                                      I-14


substantially higher than $1,613 million, and in fact are in excess of Grace's
business value. If the Court accepts the position of the asbestos claimants
committees, then any plan of reorganization likely would result in the loss of
all or substantially all equity value by current shareholders. Therefore, due to
the significant uncertainties of this process and asbestos litigation generally,
Grace is not able to estimate a probable Funding Amount that would be accepted
by the Bankruptcy Court.

However, as Grace is willing to proceed with confirmation of the Plan with a
Funding Amount of up to $1,613 million (assuming that other conditions precedent
to confirmation of the Plan are satisfied, including the availability of funds
from Sealed Air under the settlement agreement described in Note 2), during the
fourth quarter of 2004, Grace accrued and took a charge of $714.8 million to
increase its recorded asbestos-related liability to reflect the maximum amount
allowed as a condition precedent under the Plan. This amount, plus $87.0 million
for pre-Chapter 11 contractual settlements and judgments, brings the total
recorded asbestos-related liability as of March 31, 2005 to $1,700 million. Any
differences between the Plan as filed and as approved for confirmation could
fundamentally change the accounting measurement of Grace's asbestos-related
liability and that change could be material.

INSURANCE RIGHTS - Grace previously purchased insurance policies that provide
coverage for the 1962-1985 period with respect to asbestos-related lawsuits
and claims. Since 1985, insurance coverage for asbestos-related liabilities has
not been commercially available to Grace.

Grace's primary insurance coverage is in the amount of $1 million per occurrence
with annual aggregate product-liability limits ranging from $1 to $2 million.
With one exception, coverage disputes regarding primary insurance policies have
been settled, and the settlement amounts paid in full.

Grace's excess coverage is for loss above certain levels. The levels vary from
policy to policy, creating "layers" of excess coverage, some of which are
triggered before others. As of March 31, 2005, after subtracting previous
reimbursements by insurers and allowing for discounts pursuant to certain
settlement agreements, there remains approximately $978 million of excess
coverage from more than 30 presently solvent insurers.

Grace has entered into settlement agreements with various excess insurance
carriers. These settlements involve amounts paid and to be paid to Grace. The
unpaid maximum aggregate amount available under these settlement agreements is
approximately $495 million. With respect to asbestos-related personal injury
claims, the settlement agreements generally require that the claims be spread
over the claimant's exposure period and that each insurer pay a pro rata portion
of each claim based on the amount of coverage provided during each year of the
total exposure period.

Presently, Grace has no agreements in place with insurers with respect to
approximately $483 million of excess coverage, which is at layers of coverage
that have not yet been triggered, but certain layers would be triggered if the
Plan were approved at the recorded asbestos-related liability of $1,700 million.
Grace believes that the ZAI claims also are covered under the settlement
agreements and unsettled policies discussed above to the extent they relate to
installations of ZAI occurring after July 1, 1973.

Grace has approximately $355 million of excess coverage with insolvent or
non-paying insurance carriers. (Non-paying carriers are those that, although
technically not insolvent, are not currently meeting their obligations to pay
claims.) Grace has filed and continues to file claims in the insolvency
proceedings of insolvent carriers. Grace is currently receiving distributions
from some of these insolvent carriers and expects to receive distributions in
the future. Settlement amounts are recorded as income when received.

Pursuant to settlements with primary-level and excess-level insurance carriers
with respect to asbestos-related claims, Grace received no such payments during
the first quarter of 2005 and $1.6 million during the prior year period.

Grace estimates that, assuming an ultimate payout of asbestos-related claims
equal to the recorded liability of $1,700 million, it should be entitled to
approximately $500 million, on a net present value basis, of insurance recovery.

4.   ACQUISITIONS AND JOINT VENTURES

In the first quarter of 2005, Grace completed two business combinations for a
total cash cost of $2.2 million as follows:

o    In February 2005, Grace acquired certain assets of Midland Dexter
     Venezuela, S.A. (Midevensa). Midevensa is a supplier of coatings and
     sealants for rigid packaging in the local and export markets of Latin
     America.


                                      I-15


o    In March 2005, Grace acquired certain assets relating to the concrete
     admixtures business of Perstorp Peramin AB ("Perstorp") located in
     Sweden. Perstorp is a leading supplier of specialty chemicals and
     materials to the construction industry in Sweden and other Northern
     European countries.

In the first quarter of 2004, Grace did not complete any business combinations.

5.   OTHER (INCOME) EXPENSE

Components of other (income) expense are as follows:


===============================================================
OTHER (INCOME) EXPENSE                   THREE MONTHS ENDED
(In millions)                                 MARCH 31,
===============================================================
                                          2005         2004
                                       ------------ -----------
Investment income .................    $   (1.3)    $   (1.5)
Interest income ...................        (0.7)        (0.9)
Net (gain) loss on sale of
  investments and disposals of assets      (0.9)         0.2
Tolling revenue....................        (0.2)        (0.3)
Currency translation - intercompany
  loan.............................        14.9         --
Value of currency hedges...........       (14.5)        --
Other currency transaction effects.         0.2          1.4
Asbestos-related insurance ........        --           --
Other miscellaneous income.........        (3.6)        (2.1)
                                       ------------ -----------
TOTAL OTHER (INCOME) EXPENSE.......    $   (6.1)    $   (3.2)
===============================================================

In March 2004, Grace began accounting for currency fluctuations on a (euro) 293
million intercompany loan between Grace's subsidiaries in the United States and
Germany as a component of operating results instead of as a component of other
comprehensive income. The change was prompted by new tax laws in Germany and
Grace's cash flow planning for its Chapter 11 reorganization, which indicated
that it is no longer reasonable to consider this loan as part of the permanent
capital structure in Germany. In May 2004, Grace entered into a series of
foreign currency hedge agreements to mitigate future currency fluctuations on
the remaining loan balance. These hedge agreements have varying rates on
notional amounts that coincide with loan repayments due periodically through
June 2005. For the three months ended March 31, 2005, a $14.5 million hedge gain
was recognized, offset by a $14.9 million foreign currency loss. These hedges
are viewed as risk management instruments by Grace and are not used for trading
or speculative purposes.


6.   OTHER BALANCE SHEET ACCOUNTS

                                      MARCH 31,    December 31,
(In millions)                           2005          2004
===============================================================
INVENTORIES
Raw materials..................    $    62.2      $    62.4
In process.....................         35.0           36.1
Finished products..............        180.0          166.7
General merchandise............         33.2           32.2
Less:  Adjustment of certain
  inventories to a
  last-in/first-out (LIFO) basis       (52.1)         (49.1)
                                   -------------- -------------
                                   $   258.3      $   248.3
================================== ============== =============
OTHER ASSETS
Deferred pension costs.........    $   115.1      $   119.5
Deferred charges ..............         50.9           49.9
Long-term receivables, less
  allowances of $0.7
  (2004 - $0.8) ...............          8.3            8.3
Patents, licenses and other
  intangible assets, net.......         91.7           96.3
Pension-unamortized prior
  service cost.................         15.3           15.3
Investments in unconsolidated
  affiliates and other.........          0.7            0.7
                                   -------------- -------------
                                   $   282.0      $   290.0
================================== ============== =============
OTHER CURRENT LIABILITIES
Accrued compensation...........    $    53.2      $    92.9
Deferred tax liability.........          1.2            1.2
Customer volume rebates........         18.7           31.7
Accrued commissions............          5.9           11.0
Accrued reorganization fees....         13.0           11.4
Other accrued liabilities .....         71.5           73.3
                                   -------------- -------------
                                   $   163.5      $   221.5
================================== ============== =============



7.   LIFE INSURANCE

Grace is the beneficiary of life insurance policies on certain current and
former employees with a net cash surrender value of $81.0 million and $96.0
million at March 31, 2005 and December 31, 2004, 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 tables summarize activity in these policies for each of the
three-month periods ended March 31, 2005 and 2004, and the components of net
cash value at March 31, 2005 and December 31, 2004:



                                      I-16


===============================================================
LIFE INSURANCE -
  ACTIVITY SUMMARY                     THREE MONTHS ENDED
(In millions)                              MARCH 31,
===============================================================
                                       2005           2004
                                  --------------- -------------
Earnings on policy assets.....    $       3.1     $      9.1
Interest on policy loans......           (1.8)          (7.6)
Premiums......................           --             --
Policy loan repayments........            0.5            1.3
Proceeds from termination of
 life insurance policies......          (14.8)          --
Net investing activity........           (2.0)          (0.7)
                                  --- ----------- -- ----------
Change in net cash value......    $     (15.0)    $      2.1
===============================================================
Tax-free proceeds received....    $       2.0     $      5.3
===============================================================


===============================================================
COMPONENTS OF NET CASH VALUE        MARCH 31,      December 31,
(In millions)                         2005           2004
===============================================================
Gross cash value..............    $    104.7      $    484.2
Principal - policy loans......         (22.9)         (368.2)
Accrued interest - policy
 loans .......................          (0.8)          (20.0)
                                  --------------- -------------
Net cash value................    $     81.0      $     96.0
===============================================================
Insurance benefits in force...    $    193.6      $  2,191.3
===============================================================

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.

In January 2005, Grace surrendered and terminated most of these life insurance
policies and received $14.8 million of net cash value from the termination. As a
result of the termination, gross cash value of the policies was reduced by
approximately $381 million and policy loans of approximately $365 million were
satisfied. Grace's insurance benefits in force was reduced by approximately $2
billion to approximately $191 million as of December 31, 2004. See Note 12 for a
discussion of a settlement agreement with the Internal Revenue Service ("IRS")
with respect to tax contingencies of these life insurance policies and the tax
consequences of terminating such policies.

8.   DEBT

===============================================================
COMPONENTS OF DEBT                 MARCH 31,     December 31,
(In millions)                         2005           2004
===============================================================

DEBT PAYABLE WITHIN ONE YEAR
Other short-term borrowings..    $      10.1     $      12.4
                                 --------------- --------------
                                 $      10.1     $      12.4
                                 =============== ==============
DEBT PAYABLE AFTER ONE YEAR
DIP facility ................    $      --       $      --
Other short-term borrowings..            1.1             1.1
                                 --------------- --------------
                                 $       1.1     $       1.1
                                 =============== ==============

DEBT SUBJECT TO COMPROMISE
Bank borrowings..............    $     500.0     $     500.0
Other borrowings.............           14.7            15.0
Accrued interest.............          140.4           130.8
                                 --------------- --------------
                                 $     655.1     $     645.8
                                 =============== ==============
Annualized weighted average
  interest rates on total debt           6.0%            6.0%
===============================================================

In April 2001, the Debtors entered into the DIP facility for a two-year term in
the aggregate amount of $250 million. The DIP facility is secured by a priority
lien on substantially all assets of the Debtors, and bears interest based on
LIBOR. The Debtors have extended the term of the DIP facility through April 1,
2006. Grace had no outstanding borrowings under the DIP facility as of March 31,
2005; however, $28.8 million of standby letters of credit were issued and
outstanding under the facility. The letters of credit, which reduce available
funds under the facility, were issued mainly for trade-related matters such as
performance bonds, and certain insurance and environmental matters.

9.   SHAREHOLDERS' EQUITY (DEFICIT)

The Company is authorized to issue 300,000,000 shares of common stock. Of the
common stock unissued on March 31, 2005, approximately 7,160,862 shares were
reserved for issuance pursuant to stock option and other stock incentive plans.
In the first three months of 2005 and the year ended December 31, 2004, Grace
did not grant any stock options.

For additional information, see Notes 15 and 17 to the Consolidated Financial
Statements in Grace's 2004 Form 10-K.

10.  EARNINGS PER SHARE

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

===============================================================
 EARNINGS PER SHARE                       THREE MONTHS ENDED
(In millions, except per share amounts)        MARCH 31,
===============================================================
                                           2005        2004
                                         ---------- -----------
NUMERATORS
  Net income........................     $    3.1   $   15.8
                                         ========== ===========
DENOMINATORS
  Weighted average common shares -
    basic calculation...............         66.6       65.6
  Dilutive effect of employee stock
    options.........................          0.7        0.2
  Weighted average common shares
    diluted calculation.............         67.3       65.8
                                         ========== ===========

BASIC EARNINGS PER SHARE............     $   0.05   $   0.24
                                         ========== ===========
DILUTED EARNINGS PER SHARE..........     $   0.05   $   0.24
===============================================================

11.  COMPREHENSIVE INCOME (LOSS)

Grace's other comprehensive income (loss) consists entirely of foreign currency
translation adjustments. The table below presents the pre-tax, tax and after tax
amounts of Grace's other comprehensive income (loss) for the three months ended
March 31, 2005 and 2004:


                                      I-17

===============================================================
                                                       After
                             Pre-Tax        Tax         Tax
(In millions)                 Amount      Benefit     Amount
===============================================================
THREE MONTHS ENDED:
  March 31, 2005.......     $  (13.0)   $   --       $  (13.0)
  March 31, 2004.......     $   (5.0)   $   --       $   (5.0)
===============================================================

The table below presents the components of Grace's accumulated other
comprehensive loss at March 31, 2005 and December 31, 2004:

===============================================================
COMPONENTS OF ACCUMULATED
  OTHER COMPREHENSIVE LOSS        MARCH 31,     December 31,
(In millions)                        2005            2004
===============================================================
Foreign currency translation    $    (15.5)      $     (2.5)
Minimum pension liability .         (347.5)          (347.5)
                                ---------------- --------------
Accumulated other
  comprehensive loss.......     $   (363.0)      $   (350.0)
===============================================================

Grace is a global enterprise which operates in over 40 countries with local
currency generally deemed to be the functional currency for accounting purposes.
The foreign currency translation amount represents the adjustment necessary to
translate the balance sheets valued in local currencies to the U.S. dollar as of
the end of each year presented. The change in foreign currency translation at
March 31, 2005 compared with December 31, 2004 is due to the strengthening of
the U.S. dollar against most other reporting currencies.

The decline in equity market returns in 2000-2002, coupled with a decline in
interest rates from 2000-2004, as well as updated assumptions for expected
life-spans and the longevity of Grace's active work force 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, 2004.

12.  COMMITMENTS AND CONTINGENT LIABILITIES

ASBESTOS-RELATED LITIGATION - See Note 3

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

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

Grace's estimated environmental liabilities are included in "liabilities subject
to compromise."

At March 31, 2005, Grace's estimated liability for environmental investigative
and remediation costs totaled $343.8 million, as compared with $345.0 million at
December 31, 2004. The amount is based on funding and/or remediation agreements
in place and Grace's best estimate of its cost for sites not subject to a formal
remediation plan.

Net cash expenditures charged against previously established reserves for the
three months ended March 31, 2005 and 2004 were $1.2 million and $2.9 million,
respectively.

Vermiculite Related Matters

From the 1920's until 1992, Grace (beginning in 1963) and previous owners
conducted vermiculite mining and related activities near Libby, Montana. The
mined vermiculite ore contained varying amounts of asbestos as an impurity,
almost all of which was removed during processing. Expanded vermiculite was used
in products such as fireproofing, insulation and potting soil.

In November 1999, Region 8 of the Environmental Protection Agency ("EPA") began
an investigation into alleged excessive levels of asbestos-related disease in
the Libby population related to these former mining activities. This
investigation led the EPA to undertake additional investigative activity and to
carry out response actions in and around Libby. On March 30, 2001, the EPA filed
a lawsuit in U.S. District Court for the District of Montana, Missoula Division
(United States v. W. R. Grace & Company et al.) under the Comprehensive
Environmental Response, Compensation and Liability Act for the recovery of costs
allegedly incurred by the United States in response to the release

                                      I-18


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, 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 December 2002, the District Court granted the United States' motion for
partial summary judgment on a number of issues that limited Grace's ability to
challenge the EPA's response actions. In January 2003, a trial was held on the
remainder of the issues, which primarily involved the reasonableness and
adequacy of documentation of the EPA's cost recovery claims through December 31,
2001. On August 28, 2003, the District Court issued a ruling in favor of the
United States that requires Grace to reimburse the government for $54.5 million
(plus interest) in costs expended through December 2001, and for all appropriate
future costs to complete the clean-up. Grace appealed the court's ruling to the
Ninth Circuit Court of Appeals, which heard oral argument on February 7, 2005.
No decision has been issued on the appeal.

As a result of the District Court ruling and Grace's evaluation of estimated
costs for remediation in and around Libby and at vermiculite processing sites
currently or formerly operated by Grace, Grace's total estimated liability for
vermiculite-related remediation at March 31, 2005 and December 31, 2004 was
$204.1 million and $204.2 million, respectively. Grace's estimate of expected
costs is based on public comments regarding the EPA's spending plans,
discussions of spending forecasts with EPA representatives, analysis of other
information made available from the EPA, and evaluation of probable remediation
costs at vermiculite processing sites. However, the EPA's cost estimates have
increased regularly and substantially over the course of this clean-up.
Consequently, as the EPA's spending on these matters increases, Grace's
liability for remediation will increase.

Non-Vermiculite Related Matters

At March 31, 2005 and December 31, 2004, Grace's estimated liability for
remediation of sites not related to its former vermiculite mining and processing
activities was $139.7 million and $140.8 million, respectively. This liability
relates to Grace's current and former operations, including its share of
liability for off-site disposal at facilities where it has been identified as a
potentially responsible party. Grace's estimated liability is based upon an
evaluation of claims for which sufficient information was available. As Grace
receives new information and continues its claims evaluation process, its
estimated liability may change materially.

TAX MATTERS - On January 10, 2005, Grace received a corrected examination report
from the Internal Revenue Service (the "IRS") for the 1993 - 1996 tax periods
asserting, in the aggregate, approximately $90.9 million of proposed tax
adjustments, plus accrued interest (the "Examination Report"). The most
significant issue addressed in the Examination Report concerns corporate-owned
life insurance ("COLI") policies. As discussed below, a settlement agreement
relating to COLI was executed on January 20, 2005. The benefit of that
settlement was not reflected in the Examination Report. Once reflected, Grace
anticipates that the proposed tax adjustment will be reduced from approximately
$90.9 million to approximately $77.5 million plus accrued interest. Other
proposed adjustments include disallowance of research and development ("R&D")
credits, general business credits and miscellaneous deductions. Subject to IRS
revision of the Examination Report to reflect the benefit of the COLI
settlement, Grace is in agreement with the IRS with respect to all proposed tax
adjustments in the Examination Report with the exception of approximately $7.0
million of proposed adjustments relating to R&D credits.

On April 14, 2005, Grace made a $90 million payment to the IRS with respect to
federal taxes and accrued interest for the 1993-1996 tax periods, consistent
with the expected revised Examination Report. Grace's estimate for state tax
payments to be made for the 1990-1996 tax periods is approximately $27 million,
of which approximately $18.5 million is expected to be paid in the near future.

With respect to COLI, in 1988 and 1990, Grace acquired COLI policies and funded
policy premiums in part using loans secured against policy cash surrender value.
Grace claimed a total of approximately $258 million in deductions attributable
to interest accrued on such loans through the 1998 tax year, after which such
deductions were no longer permitted by law. The IRS disallowance of such
interest deductions, beginning during the 1990-1992 federal tax audit, resulted
in years of discussion until recently, when the issue was resolved in a
settlement approved by the Bankruptcy Court, as described below.

On January 20, 2005, Grace terminated the COLI policies and Grace, Fresenius,
Sealed Air and the IRS entered into a COLI Closing Agreement. Under the COLI
Closing Agreement, the government allowed 20% of the aggregate amount of the
COLI interest deductions and Grace owes federal income tax and interest with



                                      I-19


respect to the remaining 80% of the COLI interest deductions disallowed. Grace
estimates that the federal tax liability resulting from the COLI settlement is
approximately $52.5 million, $10.4 million of which was paid in 2000 in
connection with the 1990-1992 tax audit, and $30.8 million of which was paid in
the April 14, 2005 payment in connection with the 1993-1996 federal tax audit
discussed above. The remaining approximately $11.3 million of additional tax
liability will be satisfied in connection with the 1997 and 1998 federal tax
audits, which are still under examination by the IRS. The COLI Closing Agreement
also provides that, with respect to the termination of the COLI policies, Grace
will include 20% of the gain realized in taxable income, with the government
exempting 80% of such gain from tax. As a result of the termination, Grace
received $14.8 million in cash proceeds and will record income for tax purposes
of approximately $60 million in 2005. It is anticipated that Grace will apply
its net operating loss carryforwards to offset the taxable income generated from
terminating the COLI policies, although alternative minimum taxes may apply.

Grace's federal tax returns covering 1997 through 2001 are currently under
examination by the IRS and subsequent years are open for future examination.

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 1998 against a Grace subsidiary that formerly
operated a temporary staffing business for nurses and other health care
personnel. The assessments, aggregating $61.9 million, were made in connection
with a meal and incidental expense per diem plan for traveling health care
personnel, which was in effect through 1999, the year in which Grace sold the
business. (The statute of limitations has expired with respect to 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 has a right to indemnification from its former partner in the business for
approximately 36% of any tax liability (including interest thereon) for the
period from July 1996 through December 1998. The matter is currently pending in
the United States Court of Claims. Grace has tentatively agreed with the
Department of Justice and IRS on a settlement amount and certain other terms
that would resolve the matter. The preliminary settlement is subject to the
execution of written closing agreements with the IRS and a written settlement
agreement with the Department of Justice, and to Bankruptcy Court approval.

On October 22, 2004, President Bush signed the American Jobs Creation Act of
2004 (the "Jobs Act") into law. While Grace and its advisors are currently
analyzing the many revisions to the tax laws enacted by the Jobs Act, Grace has
focused primarily at this time on the potential impacts of the domestic
manufacturing deductions and the foreign repatriation incentives. With respect
to manufacturing, commencing in 2005, the Jobs Act phases in over a five-year
period an annual manufacturing deduction of up to 9% on the lesser of a
taxpayer's income from domestic manufacturing activities or taxable income.
Given Grace's current U.S. net operating loss carryforward position, Grace will
not be entitled to the special deduction. Therefore, Grace's 2004 effective tax
rate does not reflect any benefit for the special deduction.

With respect to foreign repatriation incentives, the Jobs Act provides an 85%
dividends received deduction with respect to certain dividends received from a
U.S. corporation's foreign subsidiaries. The dividends must be used to fund
certain permitted domestic activities, as specified in the Jobs Act. These
domestic activities include the building or improvement of infrastructure,
research and development, and the financial stabilization of the corporation. As
Grace currently understands the repatriation provision, companies in a net
operating loss carryforward position would not be eligible to utilize foreign
tax credits to offset U.S. taxes on foreign dividends eligible for benefits
under the Jobs Act. Such dividends would be subject to cash taxes equal to
approximately 5.25% of the dividend distributions. Therefore, Grace does not
expect to elect the application of the Jobs Act to foreign dividend
distributions. Instead, if Grace is unable to utilize foreign tax credits to
offset the U.S. tax on these dividends, it will likely opt to utilize NOLs to
offset the full 35% U.S. income tax. Grace will continue to monitor IRS
pronouncements with respect to the Jobs Act and will reconsider its current
position if the law is either clarified or amended to permit use of its foreign
tax credits to offset the U.S. tax on qualifying dividend income. In order to
preserve its rights under the Jobs Act, Grace will comply with its terms in
repatriating dividends in 2005. Grace is closely tracking this new law and, if
the government provides guidance permitting Grace to utilize foreign tax credits
to offset U.S. taxes on dividend distributions, the company will likely elect
the application of the Jobs Act. The dividend-received deduction is available to
taxpayers for only a limited period of time, expiring after year-end 2005.


                                      I-20


Grace believes that the impact of probable tax return adjustments is adequately
recognized as liabilities in its consolidated financial statements at March 31,
2005.

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

GUARANTEES AND INDEMNIFICATION OBLIGATIONS - Grace is a party to many contracts
containing guarantees and indemnification obligations. These contracts primarily
consist of:

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

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

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

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

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

FINANCIAL ASSURANCES - Financial assurances have been established for a variety
of purposes, including insurance and environmental matters, asbestos settlements
and appeals, trade-related commitments and other matters. At March 31, 2005,
Grace had gross financial assurances issued and outstanding of $252.5 million,
comprised of $135.2 million of gross surety bonds issued by various insurance
companies and $117.3 million standby letters of credit and other financial
assurances issued by various banks.

MONTANA CRIMINAL PROCEEDING - On February 7, 2005, the United States Department
of Justice announced the unsealing of a 10-count grand jury indictment against
Grace and seven current or former senior level employees (United States of
America v. W. R. Grace & Co. et al) relating to Grace's former vermiculite
mining and processing activities in Libby, Montana. The indictment accuses the
defendants of (1) conspiracy to violate environmental laws and obstruct federal
agency proceedings; (2) violations of the federal Clean Air Act; (3) wire fraud
in connection with the sale of allegedly contaminated properties; and (4)
obstruction of justice. The U.S. District Court for the District of Montana has
entered a scheduling order setting a trial date of September 11, 2006.

Grace purchased the Libby mine in 1963 and operated it until 1990; vermiculite
processing activities continued until 1992. The grand jury charges that the
conspiracy took place from 1976 to 2002 and also charges that the alleged
endangerment to the areas surrounding Libby continues to the present day.
According to the U.S. Department of Justice, Grace could be subject to fines in
an amount equal to twice the after-tax profit earned from its Libby operations
or twice the alleged loss suffered by Libby victims, plus additional amounts for
restitution to victims. The indictment alleges that such after tax profits were
$140 million. Grace has categorically denied any criminal wrongdoing and intends
to vigorously defend itself at trial.

The U.S. Bankruptcy Court previously granted Grace's request to advance legal
and defense costs to the employees, subject to a reimbursement obligation if it
is later determined that the employees did not meet the standards for
indemnification set forth under the appropriate state corporate law. For the
three-month period ended March 31, 2005, total expense for Grace and the
employees was $6.0 million.

Grace is unable to assess whether the indictment, or any conviction resulting
therefrom, will have a material adverse effect on the results of operations or
financial condition of Grace or affect Grace's bankruptcy proceedings. However,
Grace expects legal fees for its



                                      I-21


current and former employees defense could be several million dollars per
quarter through the trial date. Such costs will be accounted for as incurred.

ACCOUNTING FOR CONTINGENCIES - Although the outcome of each of the matters
discussed above cannot be predicted with certainty, Grace has assessed its risk
and has made accounting estimates as required under U.S. generally accepted
accounting principles. As a result of the Filing, claims related to certain of
the items discussed above will be addressed as part of Grace's Chapter 11
proceedings. Accruals recorded for such contingencies have been included in
"liabilities subject to compromise" on the accompanying Consolidated Balance
Sheets. The amounts of these liabilities as ultimately determined through the
Chapter 11 proceedings could be materially different from amounts recorded at
March 31, 2005.

13.  PENSION PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS

PENSION PLANS - Grace maintains defined benefit pension plans covering employees
of certain units who meet age and service requirements. Benefits are generally
based on final average salary and years of service. Grace funds its U.S.
qualified domestic pension plans ("qualified domestic 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.

Grace also provides, through nonqualified plans, supplemental pension benefits
in excess of qualified domestic pension plan limits imposed by federal tax law.
These plans cover officers and higher-level employees and serve to increase the
combined pension amount to the level that they otherwise would have received
under the qualified domestic pension plans in the absence of such limits. The
nonqualified plans are unfunded and Grace pays the costs of benefits as they are
incurred.

At the December 31, 2004 measurement date for Grace's defined benefit pension
plans (the "Plans"), the accumulated benefit obligation ("ABO") was
approximately $1,367 million as measured under U.S. generally accepted
accounting principles. At March 31, 2005, Grace's recorded pension liability for
underfunded plans was $510.1 million ($431.1 million included in liabilities not
subject to compromise and $79.0 million related to supplemental pension
benefits, included in "liabilities subject to compromise"). The recorded ABO
liability reflects (1) the shortfall between dedicated assets and the ABO of
underfunded plans ($304.1 million); and (2) the ABO of pay-as-you-go plans
($206.0 million).

POST RETIREMENT BENEFITS OTHER THAN PENSIONS - Grace provides postretirement
health care and life insurance benefits (referred to as other post-employment
benefits or "OPEB") for retired employees of certain U.S. business units and
certain divested units. The postretirement medical plan provides various levels
of benefits to employees hired before 1991 and who retire from Grace after age
55 with at least 10 years of service. These plans are unfunded, and Grace pays a
portion of 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.

Retirees and beneficiaries covered by the postretirement medical plan are
required to contribute a minimum of 40% of the calculated premium for that
coverage. During 2002, per capita costs under the retiree medical plans exceeded
caps on the amount Grace was required to contribute under a 1993 amendment to
the plan. As a result, for 2003 and future years, retirees will bear 100% of any
increase in premium costs. For this reason, assumed health care cost trend rates
are not used in the determination of Grace's OPEB expense.

In December 2003, President Bush signed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the "Act") into law. The Act
introduces a prescription drug benefit under Medicare ("Medicare Part D") as
well as a federal subsidy to companies that provide a benefit that is at least
actuarially equivalent (as defined in the Act) to Medicare Part D. On January
21, 2005, the Center for Medicare and Medicaid Services released the final
regulations implementing the Act. Grace has determined that the prescription
drug benefit under its postretirement health care plan is actuarially equivalent
to the Medicare Part D benefit. Therefore, the accumulated postretirement
benefit obligation (APBO) was remeasured as of January 21, 2005 to reflect the
amount associated with the federal subsidy. The APBO was reduced by
approximately $22.0 million and the net periodic benefit cost for 2005 will be
reduced by approximately $2.8 million ($0.7 million for the three-month period
ended March 31, 2005) due to the effect of the federal subsidy.



                                      I-22



The components of net periodic benefit cost for the three months ended March 31,
2005 and 2004 are as follows:

===============================================================
 COMPONENTS OF
  NET PERIODIC
  BENEFIT COST           THREE MONTHS ENDED MARCH 31,
- ---------------- ----------------------------------------------
                         2005                    2004
- ---------------- ---------------------- -----------------------
                          NON-                   Non-
                   U.S.   U.S.    OPEB    U.S.   U.S.    OPEB
- ---------------- ------ ------- ------- ------- ------- -------
Service cost      $ 4.2  $ 1.9   $ 0.2   $ 2.9   $ 1.5   $ 0.2

Interest cost      14.4    4.4    1.2     13.9     4.2     1.7
Expected return
 on plan assets   (12.8)  (4.0)   --     (12.6)   (3.8)    --
Amortization of
 prior service
 cost......        1.3     0.2   (3.2)     1.4     0.2    (3.2)
Amortization of
 unrecognized
 actuarial
 loss......        5.1     1.9    0.4      4.6     1.2     0.7
Net curtailment
 and settlement
 loss......        1.0      --     --    --         --      --
                 ------ ------- ------- ------- ------- -------
NET PERIODIC
 BENEFIT
COST......      $ 13.2 $  4.4   $(1.4)  $10.2  $  3.3   $ (0.6)
===============================================================

PLAN CONTRIBUTIONS AND FUNDING - Subject to the approval of the Bankruptcy
Court, it is Grace's intention to satisfy its obligations under the Plans and to
comply with all of the requirements of the Employee Retirement Income Security
Act of 1974. In that regard, Grace will seek Bankruptcy Court approval to fund
minimum required payments of approximately $60 million for the July 2005 to July
2006 period. However, there can be no assurance that the Bankruptcy Court will
continue to approve arrangements to satisfy the funding needs of the Plans.
Contributions to non-U.S. plans are not subject to Bankruptcy Court approval and
Grace intends to fund such plans based on actuarial and trustee recommendations.

14.  BUSINESS SEGMENT INFORMATION

Grace is a global producer of specialty chemicals and specialty materials. It
generates revenues from two business segments: Davison Chemicals, which consists
of the refining technologies and specialty materials product groups; and
Performance Chemicals, which consists of the specialty construction chemicals,
building materials, and sealants and coatings product groups. Intersegment
sales, eliminated in consolidation, are not material. The table below presents
information related to Grace's business segments for the three-month period
ended March 31, 2005 and 2004. 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                      THREE MONTHS ENDED
(In millions)                                   MARCH 31,
===============================================================
                                             2005      2004
                                           --------- ----------
NET SALES
  Davison Chemicals....................    $  334.7  $  270.9
  Performance Chemicals................       268.5     247.6
                                           --------- ----------
TOTAL..................................    $  603.2  $  518.5
                                           ========= ==========
PRE-TAX OPERATING INCOME
  Davison Chemicals....................    $   37.7  $   32.0
  Performance Chemicals................        27.3      27.6
                                           --------- ----------
TOTAL..................................     $  65.0   $  59.6
===============================================================

The table below presents information related to the geographic areas in which
Grace operated for each of the three-month periods ended March 31, 2005 and
2004, respectively.

===============================================================
GEOGRAPHIC AREA DATA                       THREE MONTHS ENDED
(In millions)                                   MARCH 31,
- ------------------------------------------ --------- ----------
                                             2005      2004
                                           --------- ----------
NET SALES
  United States........................    $  227.0  $  202.3
  Canada and Puerto Rico...............        33.2      22.9
                                           --------- ----------
  Total North America..................       260.2     225.2
                                           --------- ----------
  Germany..............................        28.4      28.2
  Europe, other than Germany...........       192.8     165.2
                                           --------- ----------
  Total Europe.........................       221.2     193.4
                                           --------- ----------
  Asia Pacific.........................        88.1      72.7
  Latin America........................        33.7      27.2
                                           --------- ----------
TOTAL..................................     $ 603.2   $ 518.5
===============================================================

The pre-tax operating income for Grace's business segments for each of the
three-month periods ended March 31, 2005 and 2004, respectively, is reconciled
below to income (loss) before Chapter 11 expenses, income taxes, and minority
interest presented in the accompanying Consolidated Statements of Operations.

===============================================================
RECONCILIATION OF BUSINESS SEGMENT DATA
  TO FINANCIAL STATEMENTS                  THREE MONTHS ENDED
(In millions)                                   MARCH 31,
===============================================================
                                             2005       2004
                                           ---------- ---------
Pre-tax operating income - business
  segments.............................    $  65.0    $  59.6
Minority interest .....................        3.5        0.5
Gain (loss) on sale of investments and
  disposals of assets..................        0.9       (0.2)
Interest expense and related financing
  costs................................      (14.6)      (3.9)
Corporate costs........................      (25.3)     (21.1)
Other, net.............................       (8.3)      (3.2)
                                           ---------- ---------
Income (loss) before Chapter 11 expenses,
  income taxes, and minority interest      $  21.2    $  31.7
===============================================================

Corporate costs include expenses of corporate headquarters functions incurred in
support of core operations, such as corporate financial and legal services,
human resources management, communications and regulatory affairs. This item
also includes certain pension and postretirement benefits, including the
amortization of deferred costs that are considered a core operating expense but
not allocated to business segments.


                                      I-23


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


FINANCIAL SUMMARY FOR FIRST QUARTER 2005

The following is a summary analysis of key financial measures of Grace's
performance for the quarter ended March 31, 2005 compared with the 2004 first
quarter.

o     Grace's net income for each quarter has been determined primarily by: (1)
      the performance of Grace's businesses, which employ a growth and
      productivity strategy to maximize business performance, and (2) the impact
      of legal contingencies and other noncore liabilities.

o     The 80% decline in 2005 first quarter net income compared with the prior
      year quarter was a result of higher interest expense to reflect rates to
      which Grace's general unsecured creditors would be entitled in Grace's
      proposed plan of reorganization, higher pension expenses to reflect recent
      plan experience and capital market returns, and higher legal costs related
      to Chapter 11 and other litigation proceedings.

o     Sales increased 16.3% compared with the first quarter of 2004 as a result
      of (1) higher unit volumes (including incremental sales from
      acquisitions), (2) selling price increases to partially offset inflation
      in operating costs, and (3) favorable currency translation from a weaker
      U.S. dollar.

o     Pre-tax income from core operations increased 3.1%. The pre-tax results
      from core operations reflect added profit from higher sales and
      productivity improvements, which more than offset significant inflationary
      increases in the costs of raw materials, transportation fuels, energy and
      certain operating expenses.

o     Pre-tax operating income for the Davison Chemicals segment increased
      17.8%, primarily as a result of improved sales volume, particularly in
      refining technologies products, and selling price increases implemented to
      offset higher raw materials and energy costs.

o     Pre-tax operating income for the Performance Chemicals segment was 1.1%
      lower than a strong prior year quarter. Operating income and margins were
      negatively affected by higher raw material and transportation costs, but
      were largely offset by improved volumes, selling price increases to
      mitigate inflation in raw material and transportation costs, and
      productivity gains.

o     Operating cash flow was a negative $31.7 million for the 2005 first
      quarter primarily due to payments of approximately $70 million for prior
      year performance incentives and customer volume rebates.

Grace is attempting to resolve noncore liabilities and contingencies through a
voluntary bankruptcy proceeding. The noncore liabilities include
asbestos-related litigation, environmental remediation, tax disputes and
business litigation. Grace's operating statements include periodic adjustments
to account for changes in estimates of such liabilities and developments in its
Chapter 11 proceeding. These liabilities and contingencies may result in
continued volatility in net income in the future.

DESCRIPTION OF CORE BUSINESS

W. R. Grace & Co. and its subsidiaries are engaged in specialty chemicals and
specialty materials businesses on a worldwide basis through two business
segments: Davison Chemicals, which includes two main product groups - refining
technologies and specialty materials; and Performance Chemicals, which includes
three main product groups - specialty construction chemicals, building materials
and sealants and coatings.

GLOBAL SCOPE - Grace operates its business on a global scale with more than 60%
of its revenue and 40% of its operating property outside the United States. Its
business is conducted in more than 40 countries and in more than 20 currencies.
The business segments are managed on a global basis, serving global markets,
with currency fluctuations in relation to the U.S. dollar affecting reported
earnings, net assets and cash flows.

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

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

PERCENTAGE OF                            THREE MONTHS ENDED
  TOTAL GRACE SALES                           MARCH 31,
===============================================================
                                           2005       2004
                                        ----------- ----------
Refining technologies.............         32.2%       28.0%
Specialty materials...............         23.3%       24.2%
                                        ----------- ----------
DAVISON CHEMICALS.................         55.5%       52.2%
                                        ----------- ----------
Construction chemicals............         21.5%       22.5%
Building materials................         11.1%       11.5%
Sealants and coatings.............         11.9%       13.8%
                                        ----------- ----------
PERFORMANCE CHEMICALS.............         44.5%       47.8%
                                        ----------- ----------
TOTAL.............................        100.0%      100.0%
===============================================================

REFINING TECHNOLOGIES includes: fluid cracking catalysts and additives used in
petroleum refineries to convert distilled crude oil into transportation fuels
and other petroleum-based products, and hydroprocessing



                                      I-24


catalysts used to upgrade heavy oils and remove certain impurities. Key external
factors for refining technologies products are the economics of the refining
industry, specifically the impacts of demand for transportation fuels and
petrochemical products, and crude oil supply.

SPECIALTY MATERIALS includes: silica-based engineered materials, which are used
in a wide range of industrial and consumer applications such as paper, wood and
coil coatings, food processing, plastics, adsorbents, and personal care
products; life sciences materials and products which are used for biotechnology
and pharmaceutical separations; and specialty catalysts, which are used in a
variety of chemical processes and are essential components in the manufacture of
polyethylene and polypropylene resins used in products such as plastic film,
high-performance plastic pipe and other plastic parts. Sales of these products
are affected most by general economic conditions, and specifically by the
underlying growth rate of targeted end-use applications.

CONSTRUCTION CHEMICALS AND BUILDING MATERIALS are used primarily by the
non-residential and residential construction industries. Construction chemicals
improve strength and aesthetics of finished concrete, control corrosion, and
enhance the handling and application of concrete, and reduce the manufacturing
cost and improve the quality of cement. Performance for this product group is
affected by non-residential construction activity and, to a lesser extent,
residential construction activity, which tend to lag the general economy in both
decline and recovery. Building materials prevent water damage to structures and
protect structural steel against collapse due to fire. The performance of this
product group also is affected by non-residential construction activity and by
residential construction and renovation activity, with greater lags than
construction chemicals, reflecting longer lead times for large projects. Since
building materials is largely a North American product group, it is most notably
affected by the level of U.S. construction activity.

SEALANTS AND COATINGS are used to seal beverage and food cans, and glass and
plastic bottles, and to protect metal packaging from corrosion and the contents
from the influences of metal. Although this product group is affected by general
economic conditions, there is an ongoing shift in demand from metal and glass to
plastic packaging for foods and beverages. This shift is causing a decline in
can sealant usage, but provides opportunities to use closure sealants and other
products for plastic packaging.

CRITICAL ACCOUNTING ESTIMATES

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

o        Contingent liabilities such as asbestos-related matters (see Notes 2
         and 3 to the Consolidated Financial Statements), environmental
         remediation (see Note 12 to the Consolidated Financial Statements),
         income taxes (see Note 12 to the Consolidated Financial Statements),
         and litigation related to retained obligations of divested businesses
         and discontinued operations.

o        Pension and postretirement liabilities that depend on assumptions
         regarding discount rates and/or total returns on invested funds. (See
         Note 13 to the Consolidated Financial Statements.)

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

o        Realization values of various assets such as net deferred tax assets,
         trade receivables, inventories, insurance receivables, and goodwill.

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

SUMMARY FINANCIAL INFORMATION AND METRICS

Set forth on the next page is a chart that lists key operating statistics, and
dollar and percentage changes for the three months ended March 31, 2005 and
2004. The chart should be referenced when reading management's discussion and
analysis of the results of operations and financial condition.


                                      I-25






====================================================================================================================================
ANALYSIS OF CONSOLIDATED OPERATIONS                                                           THREE MONTHS ENDED
(In millions)                                                                                      MARCH 31,
====================================================================================================================================
                                                                                                            $ Change      % Change
                                                                                 2005           2004      Fav (Unfav)   Fav (Unfav)
                                                                            -------------- ------------- ------------- -------------

NET SALES:
    Davison Chemicals.................................................      $    334.7     $    270.9    $     63.8        23.6%
    Performance Chemicals.............................................           268.5          247.6          20.9         8.4%
                                                                            -------------- ------------- ------------- -------------
TOTAL GRACE SALES - CORE OPERATIONS...................................      $    603.2     $    518.5    $     84.7        16.3%
====================================================================================================================================
PRE-TAX OPERATING INCOME:
    Davison Chemicals (1).............................................      $     37.7     $     32.0    $      5.7        17.8%
    Performance Chemicals.............................................            27.3           27.6          (0.3)       (1.1)%
    Corporate costs:
      Support functions...............................................            (9.5)          (8.0)         (1.5)      (18.8%)
      Pension, performance-related compensation, and other............           (15.8)         (13.1)         (2.7)      (20.6%)
                                                                            -------------- ------------- ------------- -------------
    Total Corporate costs.............................................           (25.3)         (21.1)         (4.2)      (19.9%)
                                                                            -------------- ------------- ------------- -------------
PRE-TAX INCOME FROM CORE OPERATIONS...................................            39.7           38.5           1.2         3.1%
PRE-TAX LOSS FROM NONCORE ACTIVITIES..................................            (8.1)          (4.3)         (3.8)      (88.4%)
     Interest expense.................................................           (14.6)          (3.9)        (10.7)         NM
     Interest income..................................................             0.7            0.9          (0.2)      (22.2%)
                                                                            -------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE CHAPTER 11 EXPENSES AND INCOME TAXES.............            17.7           31.2         (13.5)      (43.3%)
Chapter 11 expenses, net..............................................            (6.0)          (4.5)         (1.5)      (33.3%)
Benefit from (provision for) income taxes.............................            (8.6)         (10.9)          2.3        21.1%
                                                                            -------------- ------------- ------------- -------------
NET INCOME (LOSS).....................................................      $      3.1     $     15.8    $    (12.7)      (80.4%)
====================================================================================================================================
KEY FINANCIAL MEASURES:
   PRE-TAX INCOME FROM CORE OPERATIONS AS PERCENTAGE OF SALES:
    Davison Chemicals (1).............................................            11.3%          11.8%          NM         (0.5) pts
    Performance Chemicals.............................................            10.2%          11.1%          NM         (0.9) pts
    Total Core Operations.............................................             6.6%           7.4%          NM         (0.8) pts
   PRE-TAX INCOME FROM CORE OPERATIONS BEFORE DEPRECIATION AND
     AMORTIZATION ....................................................      $     68.5     $     65.7    $      2.8         4.3%
     AS A PERCENTAGE OF SALES.........................................            11.4%          12.7%          NM         (1.3) pts
====================================================================================================================================
NET CONSOLIDATED SALES BY REGION:
   North America......................................................      $    260.2     $    225.2    $     35.0        15.5%
   Europe.............................................................           221.2          193.4          27.8        14.4%
   Asia Pacific.......................................................            88.1           72.7          15.4        21.2%
   Latin America......................................................            33.7           27.2           6.5        23.9%
                                                                            -------------- ------------- ------------- -------------
TOTAL.................................................................      $    603.2     $    518.5    $     84.7        16.3%
====================================================================================================================================



  NM = Not meaningful (1) Pre-tax operating income for Davison Chemicals
                          excludes minority interest related to the Advanced
                          Refining Technologies joint venture.

The above chart, as well as the financial information presented throughout this
discussion, divides Grace's financial results between "core operations" and
"noncore activities." Core operations comprise the financial results of Davison
Chemicals, Performance Chemicals, and the costs of corporate activities that
directly or indirectly support business operations. In contrast, noncore
activities comprise all other events and transactions not directly related to
the generation of operating revenue or the support of core operations and
generally relate to Grace's former operations and products.

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



                                      I-26



GRACE OVERVIEW

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

================================================================
NET SALES             THREE MONTHS ENDED MARCH 31, 2005 AS A
 VARIANCE               PERCENTAGE INCREASE (DECREASE) FROM
 ANALYSIS                THREE MONTHS ENDED MARCH 31, 2004
================================================================
                     VOLUME   PRICE/MIX  TRANSLATION    TOTAL
                    --------- ---------- ------------ ----------
Davison Chemicals     10.5%      10.7%       2.4%       23.6%
Performance
 Chemicals ....        4.0%       2.1%       2.3%        8.4%
Net sales......        7.4%       6.5%       2.4%       16.3%
- ------------------- --------- ---------- ------------ ----------
BY REGION:
  North America.       6.5%       8.8%       0.2%       15.5%
  Europe.......        3.7%       5.5%       5.2%       14.4%
  Asia Pacific.        8.0%      11.3%       1.9%       21.2%
  Latin America       34.9%     (12.1)%      1.1%       23.9%
================================================================

Grace's sales in the three-month period ended March 31, 2005 were favorably
impacted by higher unit volumes in refining technologies and construction
chemicals products, with acquisitions contributing $16.4 million or 3.2
percentage points of the sales volume growth. Foreign currency translation
contributed $12.2 million or 2.4 percentage points of the sales growth, mainly
due to the strengthening of the Euro against the U.S. dollar compared with the
prior year period. Selling price increases, implemented to partially offset a
significant increase in raw material and energy costs, added approximately $9.4
million to 2005 first quarter sales.

PRE-TAX INCOME FROM CORE OPERATIONS - Operating profit for the three months
ended March 31, 2005 was higher as compared with the prior year period due to
improved sales volume, particularly in refining technologies and
construction-related products, and selling price increases implemented to
partially offset higher raw material and energy costs.

Corporate costs include corporate functional costs (such as financial and legal
services, human resources, communications and information technology), the cost
of corporate governance (including directors and officers ("D&O") liability
insurance, a portion of which is allocated to noncore activities) and pension
costs related to both corporate employees and to the effects of changes in
assets and liabilities for all Grace pension plans. Corporate costs for the
three months ended March 31, 2005 increased over the prior year period primarily
due to higher pension expense that reflects updated assumptions for expected
life-spans, the longevity of Grace's active work force, and amortization of
deferred costs related to capital market returns in recent years.

PRE-TAX LOSS FROM NONCORE ACTIVITIES - Pre-tax loss from noncore activities
reflects items not directly related to Grace's core operating units. This
category of costs and income is expected to be volatile as potentially material
items are addressed through Grace's Chapter 11 proceedings and/or as the
financial implications of Grace's legal contingencies become better understood.

================================================================
                                              THREE MONTHS
PRE-TAX LOSS FROM NONCORE ACTIVITIES              ENDED
(In millions)                                   MARCH 31,
================================================================
                                             2005       2004
                                           ---------- ----------
Asbestos administration and insurance
  recovery, net.......................     $  (2.3)   $  --
COLI income, net......................         1.3        1.5
D&O insurance cost ...................        (1.5)      (1.3)
Pension and postretirement benefit costs      (1.3)      (2.2)
Translation effects - intercompany loan      (14.9)      --
Value of currency hedges..............        14.5       --
Foreign currency transaction effects..        (0.2)      (1.4)
Montana criminal proceeding legal fees        (6.0)      --
Other.................................         2.3       (0.9)
                                           ---------- ----------
                                           $  (8.1)   $  (4.3)
================================================================

Pre-tax loss from noncore activities for the three-month period ended March 31,
2005 was comparable with the prior year period except for a pre-tax charge of
$6.0 million in the first quarter of 2005 to accrue for legal fees related to
the Montana criminal proceeding (see Note 12 to the Consolidated Financial
Statements for more information).

In March 2004, Grace began accounting for currency fluctuations on a (euro)293
million intercompany loan between Grace's subsidiaries in the United States and
Germany as a component of operating results instead of as a component of other
comprehensive income. The change was prompted by new tax laws in Germany and
Grace's cash flow planning for its Chapter 11 reorganization, which indicated
that it is no longer reasonable to consider this loan as part of the permanent
capital structure in Germany. In May 2004, Grace entered into a series of
foreign currency hedge agreements to mitigate future currency fluctuations on
the remaining loan balance. These hedge agreements have varying rates that
coincide with loan repayments due periodically through June 2005. For the three
months ended March 31, 2005, a $14.5 million hedge gain was recognized, offset
by a $14.9 million foreign currency loss, and was reported in other (income)
expense. These hedges are considered derivative instruments that are viewed as
risk management tools by Grace and are not used for trading or speculative
purposes.

CHAPTER 11 EXPENSES - Although it is difficult to measure precisely how Chapter
11 has impacted Grace's overall financial performance, there are certain added
costs that are directly attributable to operating under the Bankruptcy Code. Net
Chapter 11 expenses consist primarily of legal, financial and consulting fees
incurred by Grace and three creditors' committees. Chapter 11 expenses for the
three-



                                      I-27


month period ended March 31, 2005 are comparable to recent quarters and reflect
normal and expected activity. Grace believes that Chapter 11 expenses will range
between $2 million and $7 million per quarter for the foreseeable future.

In addition, for the quarters ended March 31, 2005 and 2004, Grace's pre-tax
income from core operations included expenses of $2.9 million and $3.7 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.

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

INTEREST EXPENSE - Net interest expense in the three-month period ended March
31, 2005 was up $10.9 million compared with the prior year period. This increase
is due to the interest to which general unsecured creditors would be entitled
under the Plan. The Plan states that each holder of an allowed general unsecured
claim shall be paid in full, plus post-petition interest. Post-petition interest
shall accrue through the date of payment and shall be (i) for the holders of the
Debtors' pre-petition bank credit facilities, at a rate of 6.09% per annum,
compounded quarterly, (ii) for the holders of claims who, but for the Filing of
the Chapter 11 Cases would be entitled under a contract or otherwise to accrue
or be paid interest on such claim in a non-default (or non-overdue payment)
situation under applicable non-bankruptcy law, the rate provided in the contract
between a Debtor(s) and the claimant or such rate as may otherwise apply under
applicable non-bankruptcy law, or (iii) for all other holders of allowed general
unsecured claims, at a rate of 4.19% per annum, compounded annually. Under the
Plan, such interest, which is payable 85% in cash and 15% in Grace common stock,
will not be paid until the Plan is confirmed and funded.

INCOME TAXES - Grace's provision for income taxes at the federal corporate rate
of 35.0% was $4.1 million and $9.3 million for the three months ended March 31,
2005 and 2004, respectively. The primary differences between these amounts and
the overall provision for income taxes is attributable to current period
interest on tax contingencies and the non-deductibility of certain Chapter 11
expenses.

BUSINESS SEGMENT OVERVIEW

DAVISON CHEMICALS

================================================================
                            THREE MONTHS ENDED MARCH 31,
                      ------------------------------------------
NET SALES BY                               $ Change    % Change
 PRODUCT LINE                                 Fav        Fav
(In millions)            2005      2004     (Unfav)    (Unfav)
- --------------------- --------- --------- ---------- -----------
Refining
 technologies.....    $   194.4 $   145.1 $    49.3      34.0%
Specialty materials       140.3     125.8      14.5      11.5%
                      --------- --------- ---------- -----------
TOTAL DAVISON
 CHEMICALS........    $   334.7 $   270.9 $    63.8      23.6%
================================================================


================================================================
                            THREE MONTHS ENDED MARCH 31,
                      ------------------------------------------
                                          $ Change    % Change
NET SALES BY REGION                          Fav        Fav
(In millions)            2005      2004    (Unfav)    (Unfav)
- --------------------- --------- --------- ---------- -----------
North America.....    $   130.0 $   105.1 $    24.9      23.7%
Europe............        137.4     117.5      19.9      16.9%
Asia Pacific......         50.3      37.7      12.6      33.4%
Latin America.....         17.0      10.6       6.4      60.4%
                      --------- --------- ---------- -----------
TOTAL DAVISON
 CHEMICALS........    $   334.7 $   270.9 $    63.8      23.6%
================================================================

Sales

The factors affecting demand were relatively strong in refining technologies and
neutral in specialty materials in the first quarter of 2005 versus the prior
year period. The increase in sales of refining technologies products resulted
mainly from volume gains in response to high worldwide demand for catalysts that
enhance refinery through-put, upgrade crude oil feedstocks and help produce
cleaner fuels, and added revenue from the contractual pass-through of commodity
metals costs.

Sales of specialty materials products were about even with the prior period as
higher volumes of polyolefin catalysts and favorable price/mix were offset by
lower sales into consumer and automotive applications and lower sales in Western
Europe.

Sales from acquisitions accounted for $12.6 million, or 4.7 percentage points of
the sales growth in the period, almost all of which was attributable to the
acquisition of Alltech International Holdings, Inc. in August 2004. Sales
increases also reflected favorable foreign currency translation, which
contributed 2.4 percentage points of the sales increase in the period.

Sales growth was strong in all regions. Sales in Asia Pacific and Latin America
were up due to strong demand in all businesses from strong economic activity in
China and increased sales activity in Latin America. In North America, increased
sales were primarily attributable to volume growth, as well as favorable product
price/mix, reflecting stronger economic activity in the United States. European
sales were higher due to the effects of favorable



                                      I-28


currency translation and higher demand for refining technologies products.

Operating Income

Pre-tax operating income for the Davison Chemicals segment was up 17.8% compared
with the first quarter of 2004, as contributions from higher sales of refining
technologies products, acquisitions in specialty materials, favorable currency
translation, favorable price/mix, and productivity gains more than offset a
greater than 10% increase in raw materials and energy costs. Productivity gains
were achieved primarily through increased output of manufacturing facilities and
supply-chain initiatives.


PERFORMANCE CHEMICALS

================================================================
                             THREE MONTHS ENDED MARCH 31,
                        ----------------------------------------
NET SALES BY                              $ Change    % Change
 PRODUCT LINE                                Fav        Fav
(In millions)             2005     2004    (Unfav)    (Unfav)
- ----------------------- -------- -------- ---------- -----------
Construction chemicals  $  129.8 $  116.4 $   13.4       11.5%
Building materials..        66.8     59.8      7.0       11.7%
Sealants and coatings       71.9     71.4      0.5        0.7%
                        -------- -------- ---------- -----------
TOTAL PERFORMANCE
 CHEMICALS..........    $  268.5 $  247.6 $   20.9        8.4%
================================================================

================================================================
                              THREE MONTHS ENDED MARCH 31,
                        ----------------------------------------
                                          $ Change    % Change
NET SALES BY REGION                           Fav        Fav
(In millions)             2005     2004     (Unfav)    (Unfav)
- ----------------------- -------- -------- ---------- -----------
North America.......    $  130.2 $  120.1 $   10.1       8.4%
Europe..............        83.8     75.9      7.9      10.4%
Asia Pacific........        37.8     35.0      2.8       8.0%
Latin America.......        16.7     16.6      0.1       0.6%
                        -------- -------- ---------- -----------
TOTAL PERFORMANCE
 CHEMICALS..........    $  268.5 $  247.6 $   20.9       8.4%
================================================================

Sales

The increase in sales for the Performance Chemicals segment in the first quarter
of 2005 compared with the first quarter of 2004 was primarily attributable to
volume growth in construction chemicals, favorable foreign currency translation,
price increases in response to increasing raw material costs, and several recent
acquisitions, primarily the acquisition of the Tri-Flex 30(R) synthetic roof
underlayments product line. Acquisitions accounted for $3.8 million, or 1.5
percentage points of the sales growth, while currency translation accounted for
2.3 percentage points.

The sales increase in construction chemicals primarily reflected the success of
new product, key account and geographic growth programs, as well as strong U.S.
construction activity. Favorable currency translation impacts (2.5 percentage
points) and acquisitions (0.9 percentage points) also contributed to the
increase. The increase in sales of building materials was driven by strong
increases in waterproofing products, both structural and residential (roofing
underlayments and flashing) products, reflecting strong U.S. construction
activity and growth initiatives in residential channels. The Tri-Flex 30(R)
synthetic underlayments acquisition in November 2004 (4.5 percentage points),
price increases triggered by raw material cost increases, and favorable foreign
currency translation (1.7 percentage points) also contributed to the increase.
Sales increases in sealants and coatings reflected pricing actions in response
to raw material cost increases and favorable foreign currency translation (2.5
percentage points), offset by volume declines versus a very strong first quarter
2004.

Sales increases in North America reflected very strong U.S. construction
activity, growth programs in construction chemicals and residential
waterproofing, and the Tri-Flex 30(R) acquisition. In Europe, higher sales were
primarily due to favorable foreign currency translation and new growth programs
in construction chemicals. Sales in Asia Pacific increased as a result of
broad-based volume growth and the effects of favorable foreign currency
translation. Sales in Latin America were favorably impacted by currency
translation and volume increases in construction chemicals and can sealants,
offset by lower sales of closure sealants and coatings.

Operating Income

Pre-tax operating income was down 1.1% in the first quarter of 2005 compared
with a record first quarter in 2004, reflecting significant increases in raw
material and transportation costs, partially offset by sales increases,
successful productivity programs and favorable foreign currency translation.

OPERATING RETURNS ON ASSETS EMPLOYED - The following charts set forth the
Davison Chemicals and Performance Chemicals total asset position and pre-tax
return on average total assets as of March 31, 2005 and December 31, 2004. It
should be noted that the manufacture of Davison Chemicals products generally
requires significantly higher capital costs than the manufacture of Performance
Chemical products.



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

DAVISON CHEMICALS                    MARCH 31,     December 31,
 (In millions)                          2005           2004
- ---------------------------------- --------------- -------------
Trade receivables..............      $  184.7      $   172.0
Inventory......................         155.3          151.8
Other current assets...........          18.0            4.9
                                   --------------- -------------
Total current assets...........         358.0          328.7
Properties and equipment, net..         419.2          437.6
Goodwill and other intangible
  assets.......................         102.4          105.7
Other assets...................          18.9           18.9
                                   --------------- -------------
Total assets...................      $  898.5      $   890.9
                                   =============== =============
Pre-tax return on average total          17.9%          17.8%
 assets........................
================================================================

Davison Chemicals' total assets increased by $7.6 million compared with the
prior year. The increase was attributable to increased trade receivables and
inventory due to increased sales, offset by $16.3 million of foreign



                                      I-29


currency translation due to the stronger U.S. dollar compared with December 31,
2004.

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

PERFORMANCE CHEMICALS                 MARCH 31,    December 31,
(In millions)                            2005          2004
================================================================
Trade receivables...............     $   215.7     $   219.1
Inventory.......................         103.0          96.5
Other current assets............          12.9          14.5
                                     ------------- -------------
Total current assets............         331.6         330.1
Properties and equipment, net...         191.5         198.3
Goodwill and other intangible assets      99.1         102.2
Other assets....................          44.9          43.9
                                     ------------- -------------
Total assets....................     $   667.1     $   674.5
                                     ============= =============
Pre-tax return on average total
 assets.........................          20.2%         20.7%
================================================================

Performance Chemicals' total assets decreased by $7.4 million compared with the
prior year, of which $15.4 million was attributable to currency translation
reflecting the stronger U.S. dollar compared with December 31, 2004. The
offsetting increase was due to overall sales growth and inventory was higher to
meet increased demand. The decline in properties and equipment was caused by
first quarter net depreciation.


VOLUNTARY BANKRUPTCY FILING

As described under "Voluntary Bankruptcy Filing" in Notes 1 and 2 to the
Consolidated Financial Statements, the Company and its principal U.S. operating
subsidiary are debtors-in-possession under Chapter 11 of the Bankruptcy Code.
Grace's non-U.S. subsidiaries, although not part of the Filing, are owned
directly or indirectly by the Company's principal operating subsidiary or other
filing entities. Consequently, it is likely that a Chapter 11 reorganization
plan will involve the combined value of Grace's global businesses and its other
assets to fund (with cash and/or securities) Grace's obligations as adjudicated
through the bankruptcy process. Grace has analyzed its cash flow and 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.

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

The following table summarizes net noncore liabilities at March 31, 2005 and
December 31, 2004:

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

NET NONCORE LIABILITIES              MARCH 31,    December 31,
(In millions)                          2005           2004
================================================================
Asbestos-related liabilities...   $ (1,700.0)     $ (1,700.0)
Asbestos-related insurance
  receivable...................        500.0           500.0
                                  ------------------------------
Asbestos-related liability, net     (1,200.0)       (1,200.0)
Environmental remediation......       (343.8)         (345.0)
Postretirement benefits........       (115.3)         (118.9)
Retained obligations and other.        (24.8)          (25.1)
Income taxes...................       (208.7)         (210.4)
                                  ------------------------------
NET NONCORE LIABILITY..........   $ (1,892.6)     $ (1,899.4)
================================================================

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 these contingencies 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 March 31, 2005.

PLAN OF REORGANIZATION - On November 13, 2004 Grace filed a plan of
reorganization, as well as several associated documents, including a disclosure
statement, with the Bankruptcy Court. On January 13, 2005, Grace filed an
amended plan of reorganization (the "Plan") and related documents to address
certain objections of creditors and other interested parties. The amended Plan
is supported by committees representing general unsecured creditors and equity
holders, but is not supported by committees representing asbestos personal
injury claimants and asbestos property damage claimants. See Note 2 to the
Consolidated Financial Statements for more information on Grace's plan of
reorganization.

RISKS OF THE PLAN - Grace intends to address all pending and future
asbestos-related claims and all other pre-petition claims as outlined in the
Plan. However, Grace may not be successful in obtaining approval of the Plan by
the Bankruptcy Court. Instead, a materially different plan of reorganization may
ultimately be approved and, under the ultimate plan of reorganization, the
interests of the Company's shareholders could be substantially diluted or
cancelled. The value of Grace common stock following a plan of reorganization,
and the extent of any recovery by non-asbestos-related creditors, will depend
principally on the allowed value of Grace's asbestos-related claims as
determined by the Bankruptcy Court.

Grace's proposed plan of reorganization assumes several fundamental conditions
including:

1.   Grace's asbestos-related liabilities can be resolved at a net present value
     cost of no more than $1,700 million (including $87 million for pre-petition
     asbestos-related contractual settlements and



                                      I-30


     judgments), including all property damage claims (including ZAI) and all
     pending and future personal injury claims; and

2.   Assets from litigation settlement agreements with Sealed Air and Fresenius
     will be available to fund the liability under the Plan.

There can be no guarantee that these two fundamental conditions can be met. The
measure of Grace's asbestos-related liabilities could be settled by the
Bankruptcy Court (in conformity with Grace's Plan or otherwise), by a
negotiation with interested parties, and/or by legislation (currently being
considered by the U.S. Congress) for the personal injury component of this
contingency. Any resolution, other than that reflected in the Plan, could have a
material adverse effect on the percentage of Grace common stock to be retained
by current shareholders of Grace beyond that reflected in the proforma financial
information presented below. Also, a resolution of personal injury claims based
on federal legislation that would provide for payments to be made by companies
and their insurers to a government-administered trust may not satisfy the
conditions precedent under the litigation settlement agreements with Sealed Air
and Fresenius and, therefore, may reduce or eliminate the availability of these
assets to fund a plan of reorganization. Grace will adjust its financial
statements and the proforma effects of its Plan as facts and circumstances
warrant.

PROFORMA FINANCIAL INFORMATION - The proforma financial information of Grace
presented below reflects the accounting effects of the Plan (1) as if it were
put in effect on the date of Grace's most recent consolidated balance sheet -
March 31, 2005, and (2) as if it were in effect for (a) the full year ended
December 31, 2004, and (b) the three months ended March 31, 2005. The proforma
financial information included herein, may not be consistent with the Plan
documents filed on January 13, 2005 due to subsequent changes in operations and
accounting estimates. Such proforma financial statements show how Grace's
assets, liabilities, equity and income would be affected by the Plan as follows:

A.       Borrowings Under New Debt Agreements and Contingencies

The Plan reflects the assumed establishment of a new $1,000 million debt
facility to fund settled claims payable at the effective date of the Plan
(approximately $800 million) and to provide working capital (approximately $200
million) for continuing operations. Proforma expenses reflect an assumed 7%
interest rate on outstanding borrowings. No such facility currently exists but,
in Grace's view based on discussions with prospective lenders, one can be
established before the effective date of the Plan. In addition, the proforma
financial information reflects $150.0 million in contingencies to pay
professional and bank fees, other non-operating liabilities and their related
tax effects that will not become liabilities until the effective date of the
Plan.

B.       Fresenius and Sealed Air Settlements

The Plan reflects the value, in the form of cash and securities, expected to be
realized under each litigation settlement agreement as follows: $115.0 million
of cash from Fresenius Medical Care; and, $1,046.5 million of estimated value
from Sealed Air Corporation (calculated as of March 31, 2005) in the form of
$512.5 million of cash plus accrued interest at 5.5% from December 21, 2002
compounded annually (approximately $66.4 million), and nine million shares of
Sealed Air common stock valued at $51.94 per share (approximately $467.5
million). Tax accounts have been adjusted to reflect the satisfaction of Grace's
recorded liabilities by way of these third-party agreements. The Fresenius
settlement amount will be payable to Grace and will be accounted for as income.
The Sealed Air settlement assets will be paid directly to the asbestos trust by
Sealed Air and will be accounted for as satisfaction of a portion of Grace's
recorded asbestos-related liability. In addition, the valuation allowance
related to Grace's federal deferred tax assets will not be required as a result
of taxable amounts from these settlements and has therefore been reversed. The
Sealed Air settlement remains subject to Bankruptcy Court approval, and both the
Sealed Air and Fresenius settlements are subject to the fulfillment of specified
conditions.

C.       Payment of Pre-Petition Liabilities

The Plan reflects the transfer of funds and securities to settle estimated
obligations payable under the Plan at the effective date. Tax accounts are
adjusted to reflect the change in nature of Grace's tax assets from
predominately temporary differences to predominately time-limited tax net
operating losses. Non-asbestos pass-through liabilities are assumed to be paid
in cash when due. The payment of liability for tax claims and contingencies
includes an approximate $90 million payment made in April 2005 to the IRS
related to liability and accrued interest for the 1993-1996 tax periods (see
Note 12 to the Consolidated Financial Statements).

D.       Proforma Consolidated Statement of Operations and Capital Structure

The proforma income adjustments reflect the elimination from Grace's March 31,
2005 Consolidated Statements of Operations of: (1) charges and expenses directly
related to Chapter 11, (2) the accounting for estimates and provisions directly
related to the Plan, and (3) the



                                      I-31


addition of interest and new common shares related to the assumed financing of
the Plan. For purposes of proforma earnings per share and proforma share
capital, the trading value of Grace's common stock at March 31, 2005, of $8.52
per share, was used for calculating issued and outstanding shares. At this per
share valuation, it is assumed that 69.3 million shares will be issued at the
effective date of the Plan to fund asbestos and general unsecured claims, 15.3
million shares would be issuable upon exercise of warrants to satisfy Grace's
estimate of PI-AO claims, and 1.2 million shares would be issued upon exercise
of in-the-money stock options. Such trading value is presented solely for
purposes of presenting a proforma Consolidated Statement of Operations and may
not be indicative of the actual trading value of Grace common stock following
the effective date of the Plan. Should Grace's distributable value per share at
the effective date of the Plan be below approximately $8.75 per share, Grace
would be required to revalue its balance sheet for a change in control. These
proforma financial statements reflect no change in assets or income related to
this potential accounting outcome.

E.       Non-asbestos Contingencies

The accompanying proforma financial information assumes all non-asbestos related
contingencies (including environmental, tax and civil and criminal litigation)
are settled for recorded amounts as of March 31, 2005. Certain liabilities are
assumed to be paid at the effective date based on Grace's estimate of amounts
that will be determinable and payable. The remainder, which would also be
subject to the approved plan of reorganization, is assumed to be paid subsequent
to the effective date as amounts are either not due until a later date or will
be determined through post-effective-date litigation. The ultimate value of such
claims may change materially as Grace's Chapter 11 and other legal proceedings
further define Grace's non-asbestos related obligations.



                                      I-32





====================================================================================================================================
                                                                                   PROFORMA ADJUSTMENTS
                                                                   ---------------------------------------------------
                                                                       BORROWINGS                        PAYMENT OF
W. R. GRACE & CO AND SUBSIDIARIES                    MARCH 31,       UNDER NEW DEBT     SEALED AIR/       REMAINING       MARCH 31,
 PROFORMA CONDENSED CONSOLIDATED BALANCE SHEET         2005            AGREEMENTS        FRESENIUS       PRE-PETITION       2005
(In millions)                                       AS REPORTED    AND CONTINGENCIES    SETTLEMENTS      LIABILITIES      PROFORMA
====================================================================================================================================

ASSETS
CURRENT ASSETS
Cash and cash equivalents........................ $     474.8      $      800.0      $     115.0       $  (1,109.4)    $    280.4
Other current assets.............................       732.0              --               --                --            732.0
                                                  ---------------- ----------------- ----------------- --------------- -------------
   TOTAL CURRENT ASSETS..........................     1,206.8             800.0            115.0          (1,109.4)       1,012.4

Non-current operating assets.....................     1,011.2              --               --                --          1,011.2
Cash value of life insurance.....................        81.0              --               --                --             81.0
 Deferred income taxes:
   Net operating loss carryforwards..............        69.3              --              (40.3)            124.2          153.2
   Temporary differences, net of valuation
   allowance ....................................       595.3              26.3           (366.3)           (124.2)         131.1
Asbestos-related insurance.......................       500.0              --               --                --            500.0
                                                  ---------------- ----------------- ----------------- --------------- -------------
   TOTAL ASSETS.................................. $   3,463.6      $      826.3      $    (291.6)      $  (1,109.4)    $  2,888.9
                                                  ================ ================= ================= =============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Total Current Liabilities........................ $     330.6      $       --        $      --         $      --       $    330.6
Long-term debt...................................         1.1             800.0             --                --            801.1
Other noncurrent liabilities.....................       560.5              --               --                --            560.5
                                                  ---------------- ----------------- ----------------- --------------- -------------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE......       892.2             800.0             --                --          1,692.2

Bank debt/letters of credit/capital leases.......       655.1              --               --              (652.9)           2.2
Liability for asbestos-related litigation and
 claims .........................................     1,700.0              --           (1,046.5)           (523.5)         130.0
Liability for environmental remediation..........       343.8              --               --              (231.3)         112.5
Liability for postretirement health and special
 pensions........................................       194.3              --               --                (9.2)         185.1
Liability for accounts payable and litigation....        98.2              --               --               (74.1)          24.1
Liability for tax claims and contingencies.......       208.7              --               --              (159.0)          49.7
Other nonoperating liabilities, including Plan
 contingencies...................................        --               150.0             --               (50.0)         100.0
                                                  ---------------- ----------------- ----------------- --------------- -------------
LIABILITIES SUBJECT TO COMPROMISE................     3,200.1             150.0         (1,046.5)         (1,700.0)         603.6
                                                  ---------------- ----------------- ----------------- --------------- -------------
TOTAL LIABILITIES................................     4,092.3             950.0         (1,046.5)         (1,700.0)       2,295.8
                                                  ---------------- ----------------- ----------------- --------------- -------------

SHAREHOLDER'S EQUITY (DEFICIT)
Share capital....................................       424.3              --               --               590.6        1,014.9
Retained earnings and other equity items.........    (1,053.0)           (123.7)           754.9              --           (421.8)
                                                  ---------------- ----------------- ----------------- --------------- -------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) ............      (628.7)           (123.7)           754.9             590.6          593.1
                                                  ---------------- ----------------- ----------------- --------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY        $   3,463.6      $      826.3      $    (291.6)      $  (1,109.4)    $  2,888.9
 (Deficit) ......................................
====================================================================================================================================







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


                                                          YEAR ENDED DECEMBER 31, 2004       THREE MONTH PERIOD ENDED MARCH 31, 2005
                                                          ----------------------------       ---------------------------------------
W.R. GRACE & CO. AND SUBSIDIARIES
   PROFORMA CONSOLIDATED STATEMENTS OF OPERATIONS        AS         PROFORMA                     AS         PROFORMA
(In millions, except per share amounts)               REPORTED     ADJUSTMENTS    PROFORMA    REPORTED     ADJUSTMENTS    PROFORMA
====================================================================================================================================

NET SALES........................................   $  2,259.9   $     --       $  2,259.9    $  603.2    $     --       $   603.2
                                                    ------------ --------------- ------------ ----------- -------------- -----------
Cost of goods sold, exclusive of depreciation
   and amortization shown separately below.......      1,431.5         --          1,431.5       392.7          --           392.7
Selling, general and administrative expenses,
   exclusive of net pension expense shown
   separately below..............................        442.8         --            442.8       119.3          (9.9)        109.4
Depreciation and amortization....................        108.8         --            108.8        28.8          --            28.8
Research and development expenses................         51.1         --             51.1        15.1          --            15.1
Net pension expense..............................         61.9         --             61.9        17.6          --            17.6
Interest expense and related financing costs.....        111.1        (51.8)          59.3        14.6          (0.4)         14.2
Provision for environmental remediation..........         21.6        (21.6)          --          --            --            --
Provision for asbestos-related litigation........        476.6       (476.6)          --          --            --            --
Other (income) expense ..........................        (68.4)        62.3           (6.1)       (6.1)         --            (6.1)
                                                    ------------ --------------- ------------ ----------- -------------- -----------
TOTAL COSTS AND EXPENSES.........................      2,637.0       (487.7)       2,149.3       582.0         (10.3)        571.7
INCOME (LOSS) BEFORE CHAPTER 11 EXPENSES, INCOME
   TAXES AND MINORITY INTEREST...................       (377.1)       487.7          110.6        21.2          10.3          31.5
Chapter 11 expenses, net.........................        (18.0)        18.0           --          (6.0)          6.0          --
Benefit from (provision for) income taxes........          1.5        (37.2)         (35.7)       (8.6)         (1.2)         (9.8)
Minority interest in consolidated entities.......         (8.7)        --             (8.7)       (3.5)         --            (3.5)
                                                    ------------ --------------- ------------ ----------- -------------- -----------
NET INCOME (LOSS)................................   $   (402.3)  $    468.5      $    66.2    $    3.1    $     15.1     $    18.2
                                                    ============ =============== ============ =========== ============== ===========
BASIC EARNINGS (LOSS) PER COMMON SHARE...........   $    (6.11)                  $    0.49    $   0.05                   $    0.13
Weighted average number of basic shares..........         65.8         70.5          136.3        66.6          70.5         137.1
DILUTED EARNINGS (LOSS) PER COMMON SHARE.........   $    (6.11)                  $    0.44    $   0.05                   $    0.12
Weighted average number of diluted shares........         65.8         85.8          151.6        67.3          85.8         153.1
====================================================================================================================================



                                      I-33


FINANCIAL CONDITION

ASBESTOS-RELATED LITIGATION - See Note 3 to the Consolidated Financial
Statements.

ENVIRONMENTAL MATTERS - See Note 12 to the Consolidated Financial Statements.

DEFINED BENEFIT PENSION PLANS - Grace sponsors defined benefit pension plans for
its employees in the United States, Canada, the United Kingdom, Australia,
Germany, Italy, France, Spain, Denmark, Japan, Philippines, South Korea, Taiwan,
South Africa, Brazil and Mexico and funds government sponsored programs in other
countries where it operates. Certain of the Grace sponsored plans are
advance-funded and others are pay-as-you-go. The advance-funded plans are
administered by trustees who direct the management of plan assets and arrange to
have obligations paid when due out of a trust. The most significant
advance-funded plans cover Grace's salaried employees in the U.S. and U.K. and
employees covered by collective bargaining agreements at certain of its U.S.
facilities.

At the December 31, 2004 measurement date for the U.S. advance-funded defined
benefit pension plans (the "Plans"), the accumulated benefit obligation ("ABO")
was approximately $958 million as measured under U.S. generally accepted
accounting principles. The ABO is measured as the present value (using a 5.5%
discount rate as of December 31, 2004) of vested and non-vested benefits earned
from employee service to date, based upon current salary levels. Such discount
rate is based on a high quality bond portfolio designed to meet the payout
pattern of the Plans. Of the participants in the Plans, approximately 80% are
current retirees or employees of former Grace businesses, making the payout
pattern skewed to the nearer term. Assets available to fund the ABO at December
31, 2004 were approximately $666 million, or approximately $292 million less
than the measured obligation.

Assets available at March 31, 2005 totaled approximately $643 million down $23
million from December 31, 2004 primarily due to negative equity market returns.
It is Grace's intention to satisfy its obligations under the Plans and to comply
with all of the requirements of the Employee Retirement Income Security Act of
1974. In that regard, Grace will seek Bankruptcy Court approval to fund minimum
required payments of approximately $60 million for the July 2005 to July 2006
period. However, there can be no assurance that the Bankruptcy Court will
continue to approve arrangements to satisfy the funding needs of the Plans.
Contributions to non-U.S. plans are not subject to Bankruptcy Court approval and
Grace intends to fund such plans based on actuarial and trustee recommendations.

See Note 13 to the Consolidated Financial Statements for the components of net
periodic benefit cost for each of the three-month periods ended March 31, 2005
and 2004. Grace expects total pension expense for 2005 to be approximately $68
million, and benefit payments to retirees to aggregate to approximately $92
million for all pension programs in 2005. At March 31, 2005, Grace's recorded
pension liability for U.S. and non-U.S. underfunded plans was $510.1 million
($431.1 million included in liabilities not subject to compromise and $79.0
million related to supplemental pension benefits, included in "liabilities
subject to compromise") which includes the following components: (1) shortfall
between dedicated assets and ABO of underfunded plans ($304.1 million); and (2)
ABO of pay-as-you-go plans ($206.0 million).

POSTRETIREMENT BENEFITS OTHER THAN PENSIONS - Grace provides certain health care
and life insurance benefits for retired employees, a large majority of which
pertain to retirees of previously divested businesses. These plans are unfunded,
and Grace pays the costs of benefits under these plans as they are incurred.
Grace's share of benefits under this program was $2.3 million during the three
months ended March 31, 2005, compared with $2.6 million in the prior-year
period. Grace's recorded liability for postretirement benefits of $115.3 million
at March 31, 2005 is stated at net present value discounted at 5.5% (as
discussed under Defined Benefit Pension Plans). Grace's Plan provides for the
continuation of these benefits.

In December 2003, President Bush signed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the "Act") into law. The Act
introduces a prescription drug benefit under Medicare ("Medicare Part D") as
well as a federal subsidy to companies that provide a benefit that is at least
actuarially equivalent (as defined in the Act) to Medicare Part D. On January
21, 2005, the Center for Medicare and Medicaid Services released the final
regulations implementing the Act. Grace has determined that the prescription
drug benefit under its postretirement health care plan is actuarially equivalent
to the Medicare Part D benefit. Therefore, the accumulated postretirement
benefit obligation (APBO) was remeasured as of January 21, 2005 to reflect the
amount associated with the federal subsidy. The APBO was reduced by
approximately $22.0 million and the net periodic benefit cost for 2005 will be
reduced by approximately $2.8 million ($0.7 million for the three-month period
ended March 31, 2005) due to the effect of the federal subsidy.


                                      I-34


LIQUIDITY AND CAPITAL RESOURCES

CASH RESOURCES AND AVAILABLE CREDIT FACILITIES - At March 31, 2005, Grace had
$555.8 million in cash and cash-like assets on hand ($474.8 million in cash and
cash equivalents and $81.0 million in net cash value of life insurance). In
addition, Grace had access to committed credit facilities aggregating $250.0
million under the DIP facility, of which $197.1 million (letters of credit and
holdback provisions) was available at March 31, 2005. The term of the DIP
facility expires April 1, 2006. Grace believes that these funds and credit
facilities will be sufficient to finance its business strategy while in Chapter
11.

CASH FLOW FROM CORE OPERATIONS - Grace's net cash flow from core operations
before investing for the three-month period ended March 31, 2005 decreased from
the prior-year period due to increased investment in working capital and an
increase in capital expenditures.

===============================================================
                                            THREE MONTHS
                                                ENDED
                                              MARCH 31,
CORE OPERATIONS                        ------------------------
(In millions)                             2005        2004
===============================================================
CASH FLOWS:
Pre-tax operating income............   $    39.7   $    38.5
Depreciation and amortization.......        28.8        27.2
                                       ------------------------
PRE-TAX EARNINGS BEFORE DEPRECIATION
   AND AMORTIZATION.................        68.5        65.7
Working capital and other changes...       (74.1)      (26.4)
                                       ------------------------
CASH FLOW BEFORE INVESTING..........        (5.6)       39.3
Capital expenditures................       (12.4)       (9.1)
Businesses acquired.................        (2.2)       --
                                       ------------------------
NET CASH FLOW FROM CORE OPERATIONS..   $   (20.2)  $    30.2
===============================================================

The increased investment in working capital was primarily due to payments of
approximately $70 million for prior year performance incentives and customer
volume rebates.

Grace expects to continue to invest excess cash flow and/or other available
capital resources in its core business base. These investments are likely to be
in the form of added plant capacity, product line extensions and geographic
market expansions, and/or acquisitions in existing product lines. Investments
that are outside the ordinary course of business may be subject to Bankruptcy
Court approval and review by the Chapter 11 committees.

CASH FLOW FROM NONCORE ACTIVITIES - The cash flow from Grace's noncore
activities can be volatile. Expenditures are generally governed by Bankruptcy
Court rulings and receipts are generally nonrecurring. Much of the noncore
spending in the past three years has been under Chapter 11 first-day motions
that allow Grace to fund postretirement benefits and required environmental
remediation on Grace-owned sites. Cash inflows have been from asbestos-related
insurance recovery on pre-Chapter 11 liability payments, and unusual events. In
April 2005, Grace made a $90 million payment to the U.S. Internal Revenue
Service to fund taxes and interest on settled amounts as approved by the
Bankruptcy Court.

===============================================================
                                            THREE MONTHS
                                                ENDED
                                              MARCH 31,
NONCORE ACTIVITIES                     ------------------------
(In millions)                             2005        2004
===============================================================
CASH FLOWS:
Pre-tax loss from noncore activities     $ (8.1)    $  (4.3)
Non-cash charges.....................      (2.9)        3.5
Cash spending for:
  Asbestos-related litigation,
   net of insurance recovery.........      (2.1)       (0.3)
  Environmental remediation..........      (1.2)       (2.9)
  Postretirement benefits............      (2.3)       (2.6)
  Retained obligations and other.....      (0.3)       (0.4)
                                       ------------------------
NET CASH OUTFLOW FOR NONCORE
  ACTIVITIES ........................    $(16.9)    $  (7.0)
===============================================================

See the Consolidated Statements of Cash Flows included in the Consolidated
Financial Statements for investing and financing activities for each of the
three-month periods ended March 31, 2005 and 2004.

DEBT AND OTHER CONTRACTUAL OBLIGATIONS - Total debt outstanding at March 31,
2005 was $666.3 million, including $140.4 million of accrued interest on
pre-petition debt. As a result of the Filing, Grace is now in default on $514.7
million of pre-petition debt which, together with accrued interest thereon, has
been included in "liabilities subject to compromise" as of March 31, 2005. The
automatic stay provided under the Bankruptcy Code prevents Grace's lenders from
taking any action to collect the principal amounts as well as related accrued
interest. However, Grace will continue to accrue and report interest on such
debt during the Chapter 11 proceedings unless further developments lead
management to conclude that it is probable that such interest will be
compromised.

See Note 12 to the Consolidated Financial Statements for a discussion of
financial assurances.

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 Financial
Condition and Results of Operations, other uncertainties include: the impact of
worldwide economic conditions; pricing of both Grace's products and raw
materials; customer outages and customer demand; factors



                                      I-35


resulting from fluctuations in interest rates and foreign currencies; the impact
of competitive products and pricing; the continued success of Grace's process
improvement initiatives; the impact of tax, legislation and other regulations in
the jurisdictions in which Grace operates; and developments in and the outcome
of the Chapter 11 proceedings discussed above. Also, see "Introduction and
Overview - Projections and Other Forward-Looking Information" in Item 1 of
Grace's current Annual Report on Form 10-K.



                                      I-36



ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Grace had no outstanding derivative financial instruments that qualify for
accounting treatment under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" at March 31, 2005. Grace has entered into foreign
exchange forward contracts to manage exposure to fluctuations in foreign
currency exchange rates on an intercompany loan between Grace and a subsidiary
in Germany. (See Note 5 to the Consolidated Financial Statements.) For further
information concerning Grace's quantitative and qualitative disclosures about
market risk, refer to Note 8 in the Consolidated Financial Statements in Grace's
2004 Annual Report on Form 10-K.

ITEM 4. 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. 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 is also responsible for establishing and maintaining adequate
internal control over financial reporting. These internal controls consist of
policies and procedures that are designed to assess and monitor the
effectiveness of the control environment including: risk identification,
governance structure, delegations of authority, information flow, communications
and control activities. A chartered Disclosure Committee oversees Grace's public
financial reporting process and key managers are required to confirm their
compliance with Grace's policies and internal controls quarterly. While no
system of internal controls can ensure elimination of all errors and
irregularities, Grace's internal controls, which are reviewed and modified in
response to changing conditions, have been designed to provide reasonable
assurance that assets are safeguarded, policies and procedures are followed,
transactions are properly executed and reported, and appropriate disclosures are
made. The concept of reasonable assurance is based on the recognition that there
are limitations in all systems of internal control and that the costs of such
systems should be balanced with their benefits. The Audit Committee of the Board
of Directors, which is comprised solely of independent directors, meets
regularly with Grace's senior financial management, internal auditors and
independent auditors to review audit plans and results, as well as the actions
taken by management in discharging its responsibilities for accounting,
financial reporting and internal controls. The Audit Committee is responsible
for the selection and compensation of the independent auditors. Grace's
financial management, internal auditors and independent auditors have direct and
confidential access to the Audit Committee at all times.


EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As of March 31, 2005, Grace carried out an evaluation of the effectiveness of
the design and operation of its disclosure controls and procedures pursuant to
Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Based upon that evaluation, Grace's Chief Executive Officer and Chief
Financial Officer concluded that Grace's disclosure controls and procedures are
effective in ensuring that information required to be disclosed in Grace's
periodic filings under the Exchange Act is accumulated and communicated to such
officers to allow timely decisions regarding required disclosures. There was no
significant change in Grace's internal control over financial reporting during
the quarter ended March 31, 2005 that has materially affected, or is reasonably
likely to materially affect, Grace's internal control over financial reporting.



                                      I-37


                           PART II. OTHER INFORMATION


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

Notes 2, 3 and 12 to the interim consolidated financial statements in Part I of
this Report are incorporated herein by reference.

ITEM 6.  EXHIBITS
- --------------------------------------------------------------------------------

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

            15       Accountants' Awareness Letter

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

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

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








                                      II-1




                                    SIGNATURE

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


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

Date:  May 6, 2005                             By /s/ Paul J. Norris
                                                  ------------------
                                                  Paul J. Norris
                                                  Chairman and
                                                  Chief Executive Officer

Date:  May 6, 2005                             By /s/ Robert M. Tarola
                                                  --------------------
                                                  Robert M. Tarola
                                                  Senior Vice President and
                                                  Chief Financial Officer
                                                  (Principal Accounting Officer)




                                      II-2







                                  EXHIBIT INDEX




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

     15           Accountants' Awareness Letter

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

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

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



                                      II-3

EX-15

                                                                      EXHIBIT 15
May 6, 2005


Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Commissioners:

We are aware that our report dated May 6, 2005 on our review of interim
financial information of W. R. Grace & Co. (the "Company") for the three month
periods ended March 31, 2005 and March 31, 2004, and included in the Company's
Quarterly Report on Form 10-Q for the quarter then ended, is incorporated by
reference in its Registration Statements on Form S-8 (Nos. 333-37024, 333-49083,
333-49507, 333-49509, 333-49511, 333-49513, 333-49515, 333-49517, 333-49703 and
333-49705).

Very truly yours,


/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
McLean, Virginia

EX-31.1

                                                                    EXHIBIT 31.1

              CERTIFICATION OF PERIODIC REPORT UNDER SECTION 302 OF
                         THE SARBANES-OXLEY ACT OF 2002

I, Paul J. Norris, certify that:

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

2.       Based on my knowledge, this 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 report;

3.       Based on my knowledge, the financial statements, and other financial
         information included in this 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 report;

4.       The registrant's other certifying officer(s) and I are responsible for
         establishing and maintaining disclosure controls and procedures (as
         defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
         control over financial reporting (as defined in Exchange Act Rules
         13a-15(f) and 15d-15(f)) for the registrant and have:

         (a)    designed such disclosure controls and procedures, or caused such
                disclosure controls and procedures to be designed under our
                supervision, 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 report is being prepared;

         (b)    designed such internal control over financial reporting, or
                caused such internal control over financial reporting to be
                designed under our supervision, to provide reasonable assurance
                regarding the reliability of financial reporting and the
                preparation of financial statements for external purposes in
                accordance with generally accepted accounting principles;

         (c)    evaluated the effectiveness of the registrant's disclosure
                controls and procedures and presented in this report our
                conclusions about the effectiveness of the disclosure controls
                and procedures, as of the end of the period covered by this
                report based on such evaluation; and

         (d)    disclosed in this report any change in the registrant's internal
                control over financial reporting that occurred during the
                registrant's most recent fiscal quarter (the registrant's fourth
                fiscal quarter in the case of an annual report) that has
                materially affected, or is reasonably likely to materially
                affect, the registrant's internal control over financial
                reporting; and

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

         (a)    all significant deficiencies and material weaknesses in the
                design or operation of internal control over financial reporting
                which are reasonably likely to adversely affect the registrant's
                ability to record, process, summarize and report financial
                information; and

         (b)    any fraud, whether or not material, that involves management or
                other employees who have a significant role in the registrant's
                internal control over financial reporting.


         Date:  May 6, 2005
                                                        /s/ Paul J. Norris
                                                        ------------------------
                                                        Paul J. Norris
                                                        Chairman and
                                                        Chief Executive Officer

EX-31.2

                                                                    EXHIBIT 31.2

              CERTIFICATION OF PERIODIC REPORT UNDER SECTION 302 OF
                         THE SARBANES-OXLEY ACT OF 2002

I, Robert M. Tarola, certify that:

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

2.       Based on my knowledge, this 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 report;

3.       Based on my knowledge, the financial statements, and other financial
         information included in this 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 report;

4.       The registrant's other certifying officer(s) and I are responsible for
         establishing and maintaining disclosure controls and procedures (as
         defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
         control over financial reporting (as defined in Exchange Act Rules
         13a-15(f) and 15d-15(f)) for the registrant and have:


         (a)  designed such disclosure controls and procedures, or caused such
              disclosure controls and procedures to be designed under our
              supervision, 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 report is being prepared;


         (b)  designed such internal control over financial reporting, or caused
              such internal control over financial reporting to be designed
              under our supervision, to provide reasonable assurance regarding
              the reliability of financial reporting and the preparation of
              financial statements for external purposes in accordance with
              generally accepted accounting principles;


         (c)  evaluated the effectiveness of the registrant's disclosure
              controls and procedures and presented in this report our
              conclusions about the effectiveness of the disclosure controls and
              procedures, as of the end of the period covered by this report
              based on such evaluation; and


         (d)  disclosed in this report any change in the registrant's internal
              control over financial reporting that occurred during the
              registrant's most recent fiscal quarter (the registrant's fourth
              fiscal quarter in the case of an annual report) that has
              materially affected, or is reasonably likely to materially affect,
              the registrant's internal control over financial reporting; and

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


         (a)  all significant deficiencies and material weaknesses in the design
              or operation of internal control over financial reporting which
              are reasonably likely to adversely affect the registrant's ability
              to record, process, summarize and report financial information;
              and

         (b)  any fraud, whether or not material, that involves management or
              other employees who have a significant role in the registrant's
              internal control over financial reporting.


         Date:  May 6, 2005
                                                      /s/ Robert M. Tarola
                                                      --------------------------
                                                      Robert M. Tarola
                                                      Senior Vice President and
                                                      Chief Financial Officer

EX-32

                                                                      EXHIBIT 32

        CERTIFICATION UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
1350), the undersigned certifies that (1) this Quarterly Report of W. R. Grace &
Co. (the "Company") on Form 10-Q for the period ended March 31, 2005, as filed
with the Securities and Exchange Commission on the date hereof (this "Report"),
fully complies with the requirements of Sections 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, and (2) the information contained
in this Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.

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

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

Date: May 6, 2005

A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.