Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D. C. 20549**

 

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**FORM 10-K**

 

**(Mark One)**

 
| **x** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|------------------------------------------------------------------------------------------------------|

 

**For thefiscal year ended December 31, 2009**

** **

**or**

 
| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|----------------------------------------------------------------------------------------------------------|

 

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**Commissionfile number 33-13061**

 

**OWENS-ILLINOISGROUP, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                 | ** ** | **34-1559348**      |
|----------------------------------------------|------------|---------------------|
| (State or other jurisdiction of              |       | (IRS Employer       |
| incorporation or organization)               |       | Identification No.) |
|                                         |       |                |
| **One  Michael Owens Way, Perrysburg, Ohio** | ** ** | **43551**           |
| (Address of principal executive offices)     |       | (Zip Code)          |

 

Registrant’s telephone number, including area code:  **(567)336-5000**

 

Securities registered pursuant to Section 12(b) of theAct:  **None**

 

Securities registered pursuant to Section 12(g) of theAct:  **None**

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.  Yes o  No x

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or15(d) of the Act.  Yes o  No x

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject to suchfiling requirements for the past 90 days.  Yes x  No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12months (or for such shorter period that the registrant was required to submitand post such files).  Yes o  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer or a smaller reporting company. See definitionsof “large accelerated filer,” “accelerated filer” and “smaller reportingcompany” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer x                     |   | Accelerated filer o         |
|-----------------------------------------------|--------|-----------------------------|
|                                          |   |                        |
| Non-accelerated filer o                  |   | Smaller reporting company o |
| (do not check if a smaller reporting company) |   |                        |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes o  No x

 

Thenumber of shares of common stock, $.01 par value of Owens-Illinois Group, Inc.outstanding as of January 31, 2010 was 100.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Portionsof  Owens-Illinois, Inc. ProxyStatement for The Annual Meeting of Share Owners To Be Held Thursday, May 6,2010 (“Proxy Statement”) are incorporated by reference into Part IIIhereof.

 

Theregistrant, along with most of its direct and indirect wholly-ownedsubsidiaries, has guaranteed certain registered debt securities issued by oneof its indirect wholly-owned subsidiaries, Owens-Brockway Glass Container Inc.(the “issuer”).  The consolidatingcondensed financial statements of the registrant depicting separately theregistrant, the issuer, the guarantor subsidiaries and the non-guarantorsubsidiaries are presented in the notes to the registrant’s consolidatedfinancial statements.

 

Theregistrant meets the conditions set forth in General Instructions I (1)(a) and(b) of Form 10-K and is therefore filing this Form with apartially reduced disclosure format which omits the information otherwiserequired by Item 4, 5, 10, 11, 12 and 13 as permitted under GeneralInstructions I (2)(c) of Form 10-K.

 

 

 

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**TABLE OF CONTENTS**

 
| **PART I**   |                                                                                        | 1      |
|-------------------|---------------------------------------------------------------------------------------------|--------|
| ITEM 1.           | BUSINESS                                                                                    | 1      |
| ITEM 1A.          | RISK  FACTORS                                                                               | 8      |
| ITEM 1B.          | UNRESOLVED STAFF  COMMENTS                                                                  | 14     |
| ITEM 2.           | PROPERTIES                                                                                  | 15     |
| ITEM 3.           | LEGAL PROCEEDINGS                                                                           | 17     |
|              |                                                                                        |   |
| **PART II**  |                                                                                        | 18     |
| ITEM 6.           | SELECTED FINANCIAL  DATA                                                                    | 18     |
| ITEM 7.           | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 21     |
| ITEM 7A.          | QUALITATIVE  AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK                                 | 37     |
| ITEM 8.           | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA                                                | 40     |
| ITEM 9.           | CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE       | 98     |
| ITEM 9A.          | CONTROLS  AND PROCEDURES                                                                    | 98     |
| ITEM 9B.          | OTHER  INFORMATION                                                                          | 101    |
|              |                                                                                        |   |
| **PART III** |                                                                                        | 101    |
| ITEM 14.          | PRINCIPAL  ACCOUNTANT FEES AND SERVICES                                                     | 101    |
|              |                                                                                        |   |
| **PART IV**  |                                                                                        | 101    |
| ITEM 15.          | EXHIBITS  AND FINANCIAL STATEMENT SCHEDULES                                                 | 101    |
|              |                                                                                        |   |
| **SIGNATURES**    |                                                                                        | 192    |
|              |                                                                                        |   |
| **EXHIBITS**      |                                                                                        | E-1    |

 

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# **PART I**

 

## **ITEM1.                  BUSINESS**

 

**General Development of Business**

 

Owens-Illinois, Inc.(the “Company”), through its subsidiaries, is the successor to a businessestablished in 1903.  The Company is thelargest manufacturer of glass containers in the world, with leading positionsin Europe, North America, South America and Asia Pacific.

 

**Strategic Priorities andCompetitive Strengths**

 

TheCompany is pursuing the following strategic priorities aimed at optimizingshareholder return:

 

·                  Marketing Glass — promote its value addedbenefits and communicate its earth-friendly attributes

 

·                  Strategic & Profitable Growth —expand presence in growing markets and enter growing markets where we do nothave a presence

 

·                  Innovation & Technology — focus onproduct innovation that adds value for customers and develop technology thatprovides a sustainable advantage

 

·                  Operational Excellence — continuousproductivity improvement, pricing strategy to improve margins, and disciplineduse of cash

 

Beginningin 2007, the Company commenced a strategic review of its global profitabilityand manufacturing footprint.  Sinceundertaking this review, the Company has announced the curtailment of capacityor closing of facilities involving 26 furnaces and approximately 3,250 jobeliminations.  The Company has concludedits current global review as of December 31, 2009, with the final actionsbeing implemented in the first half of 2010. The Company believes these actions, combined with its pricinginitiatives, will contribute to optimizing shareholder return. On an ongoingbasis, the Company will review its manufacturing operations, and it is possiblethat it will close selected facilities or production lines in the future.

 

**TechnologyLeader**

 

The Company believes itis a technological leader in the worldwide glass container segment of the rigidpackaging market in which it competes. During the five years ended December 31, 2009, on a continuingoperations basis, the Company invested more than $1.7 billion in capitalexpenditures (excluding acquisitions) and more than $290 million in research,development and engineering to, among other things, improve labor and machineproductivity, increase capacity in growing markets and commercialize technologyinto new products.

 

**WorldwideCorporate Headquarters**

 

The principal executiveoffice of the Company is located at One Michael Owens Way, Perrysburg, Ohio43551; the telephone number is (567) 336-5000. The Company is a wholly owned subsidiary of Owens-Illinois, Inc. (“OIInc.”).  The Company does not have a website; however, certain general information about the Company’s operations isavailable from OI Inc.’s web site at www.o-i.com.  The Company’s annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K, andamendments to those reports filed or furnished pursuant to Section 13(a) or15(d) of the Securities Exchange Act of 1934 are available from the SEC’sweb site at www.sec.gov.  Copies of theCompany’s SEC filings may be obtained free of charge by writing to the Company,Attention: Investor Relations.

 

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**Financial Information aboutReportable Segments**

 

Information as to sales,earnings from continuing operations before interest income, interest expense,and provision for income taxes and excluding amounts related tocertain items that management considers not representative of ongoingoperations (“SegmentOperating Profit”), and total assets by reportable segment is included in Note17 to the Consolidated Financial Statements.

 

**Narrative Description of Business**

 

Below is a description ofthe business and information to the extent material to understanding theCompany’s business taken as a whole.

 

The Company is thelargest manufacturer of glass containers in the world with 78 glassmanufacturing plants in 21 countries. The Company is the leading glass container manufacturer in 17 of the 21countries where it competes in the glass container segment of the rigidpackaging market, including the U.S., and the sole manufacturer of glasscontainers in 7 of these countries.

 

**Productsand Services**

 

The Company producesglass containers for beer, ready-to-drink low alcohol refreshers, spirits,wine, food, tea, juice and pharmaceuticals. The Company also produces glass containers for soft drinks and othernon-alcoholic beverages, principally outside the U.S.  The Company manufactures these products in awide range of sizes, shapes and colors. The Company is active in new productdevelopment and glass container innovation.

 

**Customers**

 

In most of the countrieswhere the Company competes, it has the leading position in the glass containersegment of the rigid packaging market based on sales revenue.  The largest customers include many of theleading manufacturers and marketers of glass packaged products in theworld.  In the U.S., the majority ofcustomers for glass containers are brewers, wine vintners, distillers and foodproducers.  The Company also producesglass containers for soft drinks and other non-alcoholic beverages, principallyoutside the U.S.  The largest U.S. glasscontainer customers include (in alphabetical order) Anheuser-Busch InBev, BrownForman, Diageo, H.J. Heinz, Miller/Coors, PepsiCo, and Saxco-Demptos, Inc.  The largest glass container customers outsidethe U.S. include (in alphabetical order) Anheuser-Busch InBev, Carlsberg,Diageo, Foster’s, Heineken, Lion Nathan, Molson/Coors, Pernod Ricard, andSABMiller.  The Company is a major glasscontainer supplier to all of these customers.

 

The Company sells most ofits glass container products directly to customers under annual or multi-yearsupply agreements.  Multi-year contractstypically provide for price adjustments based on cost changes.  The Company also sells some of its productsthrough distributors. Glass container production is typically scheduled tomaintain reasonable levels of inventory.

 

**Marketsand Competitive Conditions**

 

The principal markets forglass container products made by the Company are in Europe, North America,South America, and Asia Pacific.  TheCompany believes it is a low-cost producer in the glass container segment of therigid packaging market in many of the countries in which it competes.  Much of this cost advantage is due toproprietary equipment and process technology used by the Company.  The Company’s machine development activitiesand systematic upgrading of production equipment, begun in the 1990’s and early2000’s, support its low-cost leadership position in the glass container segmentin many of the countries in which it competes, a key strength to competingsuccessfully in the rigid packaging market.

 

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The Company has theleading share of the glass container segment of the U.S. rigid packaging marketbased on sales revenue by domestic producers in the U.S.  The principal glass container competitors inthe U.S. are Saint-Gobain Containers, Inc., a wholly-owned subsidiary ofCompagnie de Saint-Gobain, and Anchor Glass Container Corporation.  In addition, imports from Mexico and othercountries compete in U.S. glass container segments.  Additionally, a few major consumer packagedgoods companies self-manufacture glass containers.

 

In supplying glasscontainers outside of the U.S., the Company competes directly with Compagnie deSaint-Gobain in Europe and Brazil, Ardagh plc in the U.K., Germany, and Poland,Vetropak in the Czech Republic and Amcor Limited in Australia.  In other locations in Europe, the Companycompetes indirectly with a variety of glass container firms including Compagniede Saint-Gobain, Vetropak and Ardagh plc. Except as mentioned above, the Company does not compete with any large,multi-national glass container manufacturers in South America or the AsiaPacific region.

 

In addition to competingwith other large, well-established manufacturers in the glass containersegment, the Company competes with manufacturers of other forms of rigidpackaging, principally aluminum cans and plastic containers, on the basis ofquality, price, service and the marketing attributes of the container.  The principal competitors producing metalcontainers are Amcor, Ball Corporation, Crown Holdings, Inc., Rexam plc,and Silgan Holdings Inc.  The principalcompetitors producing plastic containers are Consolidated Container Holdings,LLC, Graham Packaging Company, Plastipak Packaging, Inc. and SilganHoldings Inc.  The Company also competeswith manufacturers of non-rigid packaging alternatives, including flexiblepouches and aseptic cartons.

 

The Company’s unitshipments of glass containers in countries outside of the U.S. have grownsubstantially from levels in earlier years. The Company has added to its international operations by acquiring glasscontainer companies, many of which have leading positions in growing orestablished markets, increasing capacity at select foreign subsidiaries, andhaving a global network of glass container companies that license itstechnology.  In many developingcountries, the Company’s international glass operations have benefited in thelast ten years from increased consumer spending power, a trend toward theprivatization of industry, a favorable climate for foreign investment, loweringof trade barriers and global expansion programs by multi-national consumercompanies.

 

*Europe.* The Company’s European glass container business, headquartered inSwitzerland, has consolidated manufacturing operations in 10 countries and isthe largest in Europe.  The Company is aleading producer of wine and champagne bottles in France.  In Italy, the Company is the leadingmanufacturer of glass containers.  In TheNetherlands, the Company is one of the leading producers of glass beercontainers.  The Company is a leadingmanufacturer of glass containers for the spirits business in the U.K. andGermany.  In Spain, the Company servesthe market for olives in the Sevilla area and the market for wine bottles inBarcelona and southern France.  InPoland, the Company is the leading glass container manufacturer and operatestwo plants.  The Company is the leadingglass container manufacturer in the Czech Republic.  In Hungary, the Company is the sole glasscontainer manufacturer and serves the Hungarian food industry.  In the Baltic country of Estonia, the Companyis the only manufacturer of glass containers. The Company coordinates production activities in Estonia in order toefficiently serve the Finnish, Baltic and Russian markets. In recent years,Western European brewers have been establishing beer production facilities inCentral Europe and the Russian Republic. Because these new beer plants use high-speed filling lines, they requirehigh quality glass containers in order to operate properly. The Companybelieves it is well positioned to support this demand.

 

*NorthAmerica.*  In addition to the glass container operationsin the U.S., the Company’s subsidiary in Canada is the sole manufacturer ofglass containers in that country.

 

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*SouthAmerica. *TheCompany is the sole manufacturer of glass containers in Colombia, Ecuador andPeru.  In both Brazil and Venezuela, theCompany is the leading manufacturer of glass containers.  In South America, the Company maintains adiversified portfolio serving several markets, such as beer, non-alcoholicbeverages, spirits, ready-to-drink, wine, food, and pharmaceutical.  In South America there is a largeinfrastructure for returnable/refillable glass containers.  However, over the last several years, unitsales of non-returnable glass containers increased across countries in whichthe Company operates.

 

*Asia Pacific.*The Company hasglass operations in four countries in the Asia Pacific region: Australia, NewZealand, Indonesia and China. In this region, the Company is the leadingmanufacturer of glass containers in most of the countries in which itcompetes.  In Australia, the Company’ssubsidiary operates four glass container plants including a plant focused onserving the needs of the growing Australian wine industry.  In New Zealand, the Company is the sole glasscontainer manufacturer.  In Indonesia,the Company supplies the Indonesian market and exports glass containers to anumber of countries.  In China, the glasscontainer segments of the packaging market are regional and highly fragmentedwith a number of local competitors.  TheCompany has four glass container plants and a mold shop in China, manufacturingcontainers to serve a wide range of customers both domestically and abroad.

 

The Company continues to focus on serving the needs ofleading multi-national consumer companies as they pursue international growthopportunities.  The Company believes thatit is often the glass container partner of choice for such multi-national consumercompanies due to its leadership in glass technology and its status as a highquality producer in most of the markets it serves.

 

**Manufacturing**

 

The Company believes itis a low-cost producer in the North American rigid packaging market, as well asa low-cost producer in many of the international glass segments in which itcompetes.  Much of this cost advantage isdue to the Company’s proprietary equipment and process technology.  The Company believes its proprietary highvolume glass forming machines, developed and refined by its engineering group,are significantly more efficient and productive than those used bycompetitors.  The Company’s machinedevelopment activities and systematic upgrading of production equipment havegiven it a low-cost leadership position in the glass container segment in mostof the countries in which it competes, a key strength to competing successfullyin the rigid packaging market.

 

The Company operatesseveral machine shops that assemble and repair high-productivity glass-formingmachines as well as mold shops that manufacture molds and relatedequipment.  The Company also providesengineering support for its glass manufacturing operations through facilitieslocated in the U.S., Australia, Poland and Peru.

 

**Methods of Distribution**

 

Due to the significanceof transportation costs and the importance of timely delivery, glass containermanufacturing facilities are generally located close to customers.  In the U.S., most of the Company’s glasscontainer products are shipped by common carrier to customers within a 250-mileradius of a given production site.  Inaddition, the Company’s glass container operations outside the U.S. export someproducts to customers beyond their national boundaries, which may includetransportation by rail and ocean delivery in combination with common carriers.

 

**Suppliersand Raw Materials**

 

The primary raw materialsused in the Company’s glass container operations are sand, soda ash, limestoneand recycled glass.  Each of thesematerials, as well as the other raw materials used to manufacture glasscontainers, has historically been available in adequate supply from multiplesources.  One of the sources is a sodaash mining operation in Wyoming in which the Company has a 25% interest.  

 

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For certain rawmaterials, however, there may be temporary shortages due to weather or otherfactors, including disruptions in supply caused by raw material transportationor production delays.

 

**Energy**

 

The Company’s glasscontainer operations require a continuous supply of significant amounts ofenergy, principally natural gas, fuel oil, and electrical power.  Adequate supplies of energy are generallyavailable to the Company at all of its manufacturing locations.  Energy costs typically account for 15-25% ofthe Company’s total manufacturing costs, depending on the cost of energy, thefactory location, and its particular energy requirements.  The percentage of total cost related toenergy can vary significantly because of volatility in market prices,particularly for natural gas and fuel oil in volatile markets such as NorthAmerica and Europe.  In order to limitthe effects of fluctuations in market prices for natural gas, the Company usescommodity futures contracts related to its forecasted requirements in NorthAmerica.  The objective of these futurescontracts is to reduce the potential volatility in cash flows and expense due tochanging market prices.  The Company continuallyevaluates the energy markets with respect to its forecasted energy requirementsin order to optimize its use of commodity futures contracts.  If energy costs increase substantially in thefuture, the Company could experience a corresponding increase in operatingcosts, which may not be fully recoverable through increased selling prices.

 

**GlassRecycling**

 

The Company is animportant contributor to the recycling effort in the U.S. and abroad andcontinues to melt substantial recycled glass tonnage in its glass furnaces. TheCompany is the largest user of recycled glass containers.  If sufficient high-quality recycled glasswere available on a consistent basis, the Company has the technology to operateusing up to 90% recycled glass.  Usingrecycled glass in the manufacturing process reduces energy costs and prolongsthe operating life of the glass melting furnaces.

 

#### **Technical Assistance License Agreements**

#### ** **

The Company hasagreements to license its proprietary glass container technology and provide technicalassistance to 19 companies in 19 countries. These agreements cover areas related to manufacturing and engineeringassistance.  The worldwide licenseenetwork provides a stream of revenue to help support the Company’s developmentactivities and gives it the opportunity to participate in the rigid packagingmarket in countries where it does not already have a direct presence.  In addition, the Company’s technicalagreements enable it to apply “best practices” developed by its worldwidelicensee network.  In the years 2009,2008 and 2007, the Company earned $12.9 million, $18.6 million and$19.7 million, respectively, in royalties and net technical assistance revenueon a continuing operations basis.

 

## **Research and Development**

## ** **

The Company believes it isa technological leader in the worldwide glass container segment of the rigidpackaging market.  Research, development,and engineering constitute important parts of the Company’s technicalactivities.  On a continuing operationsbasis, research, development, and engineering expenditures were$58.8 million, $66.6 million, and $65.8 million for 2009, 2008,and 2007, respectively.  The Company’sresearch, development and engineering activities include new products,manufacturing process control, automatic inspection and further automation ofmanufacturing activities.  The Company’sresearch and development activities are conducted at its corporate facilitiesin Perrysburg, Ohio.

 

## **Environmental and OtherGovernmental Regulation**

## ** **

TheCompany’s worldwide operations, in common with those of the industry generally,are subject to extensive laws, ordinances, regulations and other legalrequirements relating to environmental protection, 

 

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includinglegal requirements governing investigation and clean-up of contaminatedproperties as well as water discharges, air emissions, waste management andworkplace health and safety.

 

*Recycling and Bottle Deposits*

 

In the U.S., Canada, Europeand elsewhere, a number of government authorities have adopted or areconsidering legal requirements that would mandate certain rates of recycling,the use of recycled materials, or limitations on or preferences for certaintypes of packaging.  The Company believesthat governments worldwide will continue to develop and enact legalrequirements seeking to, or having the effect of, guiding customer andend-consumer packaging choices.

 

In North America, sales ofbeverage containers are affected by governmental regulation of packaging,including deposit return laws.  As of December 31,2009, there were 11 U.S. states with bottle deposit laws in effect, requiringconsumer deposits of between 5 and 15 cents (USD), depending on the size of thecontainer. In Canada, there are 10 provinces and 2 territories with consumerdeposits between 5 and 25 cents (Canadian), depending on the size of thecontainer. In Europe a number of countries have some form of consumer depositlaw in effect, including Austria, Belgium, Denmark, Finland, Germany, TheNetherlands, Norway, Sweden and Switzerland. The structure and enforcement ofsuch laws and regulations can impact the sales of beverage containers in agiven jurisdiction. Such laws and regulations also impact the availability ofpost-consumer recycled glass for the Company to use in container production.

 

Anumber of U.S. states and Canadian provinces have recently considered or arenow considering laws and regulations to encourage curbside, deposit return, andon-premise recycling.  Although there isno clear trend in the direction of these state and provincial laws andregulations, the Company believes that U.S. states and Canadian provinces, aswell as municipalities within those jurisdictions, will continue to adoptrecycling laws which will affect supplies of post-consumer recycled glass.  As a large user of post-consumer recycledglass for bottle-to-bottle production, the Company has an interest in laws andregulations impacting supplies of such material in its markets.

 

*Air Emissions*

 

TheEuropean Union Emissions Trading Scheme (“EUETS”) commenced January 1,2005.  The EU has committed to KyotoProtocol emissions reduction targets and the EUETS is intended to facilitate suchreduction.  The Company’s manufacturinginstallations which operate in EU countries must restrict the volume of theirCO2 emissions to the level of their individually allocated Emissions Allowancesas set by country regulators.   If theactual level of emissions for any installation exceeds its allocated allowance,additional allowances can be bought on the market to cover deficits;conversely, if the actual level of emissions for such installation is less thanits allocation, the excess allowances can be sold on the same market.  The EUETS has not had a material effect onthe Company’s results to date, however, should the regulators significantlyrestrict the number of Emissions Allowances available, it could have a materialeffect in the future.

 

InNorth America, the U.S. and Canada are engaged in significant legislative andregulatory activity relating to CO2 emissions, both at the federal and thestate and provincial levels of government. There are numerous proposals pending before the U.S. Congress whichwould create a cap-and-trade emissions trading scheme for CO2, but nolegislation has been adopted into law. Other proposals would adopt a national carbon tax or would createrestrictions on CO2 emissions without utilizing a cap-and-trade system.  The U.S. Environmental Protection Agency hasrecently commenced a regulatory process for CO2, but no specific schemeaffecting manufacturing facilities has been detailed.

 

InAsia Pacific, Australia’s ratification of the Kyoto Protocol came into effectin March 2008. In July 2008, the Australian Federal Government issuedthe Carbon Pollution Reduction Scheme (“CPRS”) 

 

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GreenPaper aimed to help reduce the country’s carbon emissions. The CPRS recommendsan emissions trading scheme (“ETS”) be established in Australia in 2010,however the framework has yet be agreed by federal parliament. In New Zealand,parliament passed ETS legislation in September 2008, which included acap-and-trade system that was to be in effect by 2010.  However, a change of government in NewZealand in November 2008 saw the legislation put on hold for furtherreview. Also in Australia, the *NationalGreenhouse and Energy Reporting Act 2007* commenced on July 1,2008. The Act establishes a mandatory reporting system for corporate greenhousegas emissions and energy production and consumption. Key features of the Actinclude the following: (1) reporting of greenhouse gas emissions, energyconsumption and production by large corporations, subject to independent audit;(2) public disclosure of corporate level greenhouse gas emissions and energyinformation; and (3) consistent and comparable data available forgovernment, in particular, the development and administration of the CPRS.

 

The Company is unable topredict what environmental legal requirements may be adopted in thefuture.  However, the Company continuallymonitors its operations in relation to environmental impacts and invests inenvironmentally friendly and emissions-reducing projects.  As such, the Company has made significant expenditures forenvironmental improvements at certain of its factories over the last severalyears; however, these expenditures did not have a material adverse affect onthe Company’s results of operations or cash flows.  The Company is unable to predict the impactof future environmental legal requirements. However, based on existingregulations, the Company does not expect the associated annual compliance coststo have a material impact on its results of operations or cash flows.

 

## **Intellectual Property Rights**

 

The Company has a largenumber of patents which relate to a wide variety of products and processes, hasa substantial number of patent applications pending, and is licensed underseveral patents of others.  While in theaggregate the Company’s patents are of material importance to its businesses,the Company does not consider that any patent or group of patents relating to aparticular product or process is of material importance when judged from thestandpoint of any segment or its businesses as a whole. The Company has anumber of intellectual property rights, comprised of both patented andproprietary technology, that the Company believes makes its glass formingmachines more efficient and productive than those used by its competitors.  In addition, the efficiency of the Company’sglass forming machines is enhanced by the Company’s overall approach to costefficient manufacturing technology, which extends from the raw materials batchhouse to the finished goods warehouse. This technology is proprietary to the Company through a combination ofissued patents, pending applications, copyrights, trade secrets and proprietaryknow-how.

 

Upstream of the glassforming machines, there is technology to deliver molten glass to the formingmachine at high rates of flow and fully conditioned to be homogeneous inconsistency, viscosity and temperature for efficient forming into glasscontainers.  The Company has proprietaryknow-how in (a) the batch house, where raw materials are stored, measuredand mixed, (b) the furnace control system and furnace combustion, and (c) theforehearth and feeding system to deliver such homogeneous glass to the formingmachines.

 

In the Company’s glasscontainer manufacturing processes, computer controls and electro-mechanicalmechanisms are commonly used for a wide variety of applications in the formingmachines and auxiliary processes. Various patents held by the Company aredirected to the electro-mechanical mechanisms and related technologies used tocontrol sections of the machines. Additional U.S. patents held by the Company and various pending applicationsare directed to the technology used by the Company for the systems that controlthe operation of the forming machines and many of the component mechanisms thatare embodied in the machine systems.

 

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Downstream of the glassforming machines, there is patented and unpatented technology for warehandling, annealing, coating and inspection, which further enhances the overallefficiency of the manufacturing process.

 

While the above patentsand intellectual property rights are representative of the technology used inthe Company’s glass manufacturing operations, there are numerous other pendingpatent applications, trade secrets and other proprietary know-how andtechnology, as supplemented by administrative and operational best practices,which contribute to the Company’s competitive advantage.  As noted above, however, the Company does notconsider that any patent or group of patents relating to a particular productor process is of material importance when judged from the standpoint of anysegment or its businesses as a whole.

 

## **Seasonality**

## ** **

Sales of particular glasscontainer products such as beer are seasonal. Shipments in the U.S. and Europe are typically greater in the second andthird quarters of the year, while shipments in the Asia Pacific region aretypically greater in the first and fourth quarters of the year, and shipmentsin South America are typically greater in the third and fourth quarters of theyear.

 

**Employees**

 

The Company’s worldwideoperations employed approximately 22,000 persons as of December 31,2009.  Approximately 78% of NorthAmerican employees are hourly workers covered by collective bargainingagreements.  The principal collectivebargaining agreement, which at December 31, 2009, covered approximately81% of the Company’s union-affiliated employees in North America, will expireon March 31, 2011. Approximately 54% of employees in South America areunionized, although according to the labor legislation in each country, 100% ofemployees are covered by collective bargaining agreements. The average lengthof these agreements is approximately 2-3 years. In addition, a large number of the Company’s employees are employed incountries in which employment laws provide greater bargaining or other rightsto employees than the laws of the U.S. Such employment rights require the Company to work collaboratively withthe legal representatives of the employees to effect any changes to laborarrangements. The Company considers its employee relations to be good and doesnot anticipate any material work stoppages in the near term.

 

**FinancialInformation about Foreign and Domestic Operations**

 

Information as to netsales, Segment Operating Profit, and assets of the Company’s reportablesegments is included in Note 17 to the Consolidated Financial Statements.

 

**ITEM1A.               RISK FACTORS**

 

**SubstantialLeverage — The Company’s substantial indebtedness could adversely affect theCompany’s financial health.**

 

The Company has asignificant amount of debt.  As of December 31,2009, the Company had approximately $3.6 billion of total debt outstanding,increased from $3.3 billion at December 31, 2008.  The Company’s ratios of earnings to fixedcharges were 3.1x and 4.1x for the years ended December 31, 2009 and 2008,respectively.

 

The Company’s substantialindebtedness could result in the following consequences:

·                  Increased vulnerability to generaladverse economic and industry conditions;

·                  Increased vulnerability to interest rateincreases for the portion of the debt under the secured credit agreement;

 

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·                  Require the Company to dedicate asubstantial portion of cash flow from operations to payments on indebtedness,thereby reducing the availability of cash flow to fund working capital, capitalexpenditures, acquisitions, development efforts and other general corporatepurposes;

·                  Limited flexibility in planning for, orreacting to, changes in the Company’s business and the rigid packaging market;

·                  Place the Company at a competitivedisadvantage relative to its competitors that have less debt; and

·                  Limit, along with the financial and otherrestrictive covenants in the documents governing indebtedness, among otherthings, the Company’s ability to borrow additional funds.

 

**Ability to Service Debt****—****Toservice its indebtedness, the Company will require a significant amount ofcash.  The Company’s ability to generatecash depends on many factors beyond its control.**

 

TheCompany’s ability to make payments on and to refinance its indebtedness and tofund working capital, capital expenditures, acquisitions, development effortsand other general corporate purposes depends on its ability to generate cash inthe future.  The Company has no assurancethat it will generate sufficient cash flow from operations, or that futureborrowings will be available under the secured credit agreement, in an amountsufficient to enable the Company to pay its indebtedness, or to fund otherliquidity needs. If short term interest rates increase, the Company’s debtservice cost will increase because some of its debt is subject to short termvariable interest rates. At December 31, 2009, the Company’s debt subjectto variable interest rates represented approximately 31% of total debt.

 

TheCompany may need to refinance all or a portion of its indebtedness on or beforematurity. If the Company is unable to generate sufficient cash flow and isunable to refinance or extend outstanding borrowings on commercially reasonableterms or at all, it may have to take one or more of the following actions:

·                  Reduce or delay capital expenditures plannedfor replacements, improvements and expansions;

·                  Sell assets;

·                  Restructure debt; and/or

·                  Obtain additional debt or equity financing.

 

The Company can provide no assurance that it could effect or implementany of these alternatives on satisfactory terms, if at all.

 

**Debt Restrictions****—****TheCompany may not be able to finance future needs or adapt its business plans tochanges because of restrictions placed on it by the secured credit agreementand the indentures and instruments governing other indebtedness.**

 

Thesecured credit agreement, the indentures governing the senior debentures andnotes, and certain of the agreements governing other indebtedness containaffirmative and negative covenants that limit the ability of the Company totake certain actions. For example, these indentures restrict, among otherthings, the ability of the Company and its restricted subsidiaries to borrowmoney, pay dividends on, or redeem or repurchase its stock, make investments,create liens, enter into certain transactions with affiliates and sell certainassets or merge with or into other companies. These restrictions couldadversely affect the Company’s ability to operate its businesses and may limitits ability to take advantage of potential business opportunities as theyarise.

 

Failureto comply with these or other covenants and restrictions contained in thesecured credit agreement, the indentures or agreements governing otherindebtedness could result in a default under those agreements, and the debtunder those agreements, together with accrued interest, could then be declaredimmediately due and payable. If a default occurs under the secured creditagreement, the Company could no longer request borrowings under the agreement,and the lenders could cause all of the 

 

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outstandingdebt obligations under such secured credit agreement to become due and payable,which would result in a default under a number of other outstanding debtsecurities and could lead to an acceleration of obligations related to thesedebt securities. A default under the secured credit agreement, indentures oragreements governing other indebtedness could also lead to an acceleration ofdebt under other debt instruments that contain cross acceleration orcross-default provisions.

 

**Cash Used to Satisfy OtherObligations—A portion of the Company’s cash flow will be used to make paymentsto OI Inc. to satisfy certain debt and litigation-related obligations,including settlement of asbestos-related claims.**

 

AlthoughOI Inc. does not conduct any operations, it has substantial obligations tomake payments on its outstanding public debt securities and to satisfy claimsof persons for exposure to asbestos-containing products and related expensesand to pay other ordinary-course obligations. OI Inc. relies primarily ondistributions from its subsidiaries, including the Company, to meet these obligations.OI Inc. makes semi-annual interest payments of $10.8 million on itsoutstanding public debt securities. OI Inc.’s asbestos-related paymentswere $190.3 million, $210.2 million, and $347.1 million for the yearsended December 31, 2009, 2008, and 2007, respectively. In the fourthquarter of 2009, OI Inc. recorded a charge of $180.0 million (inaddition to previously recorded charges of $3.47 billion) to cover itsestimated indemnity payments and legal fees arising from outstanding asbestospersonal injury lawsuits and claims and asbestos personal injury lawsuits andclaims expected to be filed in the next several years.

 

Asa result of the magnitude of OI Inc.’s obligations for asbestos-relatedlawsuits and its dependence on the cash flows of its subsidiaries, the Companyexpects that a substantial portion of its cash flow will be used to makepayments to OI Inc. to enable it to satisfy these obligations. Thesepayments will reduce the cash flow available to the Company for other purposes.For additional information regarding OI Inc.’s asbestos-related lawsuits,claims and payments, see Note 16 to the Consolidated Financial Statements.

 

**International Operations — The Company is subject to risksassociated with operating in foreign countries.**

 

The Company operatesmanufacturing and other facilities throughout the world.  Net sales from international operationstotaled approximately $5.2 billion, representing approximately 73% of theCompany’s net sales for the year ended December 31, 2009.  As a result of its international operations,the Company is subject to risks associated with operating in foreign countries,including:

·                  Political, social and economicinstability;

·                  War, civil disturbance or acts ofterrorism;

·                  Taking of property by nationalization orexpropriation without fair compensation;

·                  Changes in government policies andregulations;

·                  Devaluations and fluctuations in currencyexchange rates;

·                  Imposition of limitations on conversionsof foreign currencies into dollars or remittance of dividends and otherpayments by foreign subsidiaries;

·                  Imposition or increase of withholding andother taxes on remittances and other payments by foreign subsidiaries;

·                  Hyperinflation in certain foreigncountries; and

·                  Impositions or increase of investment andother restrictions or requirements by foreign governments.

 

The risks associated withoperating in foreign countries may have a material adverse effect onoperations.

 

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**Competition— The Company faces intense competition from other glass container producers,as well as from makers of alternative forms of packaging.  Competitive pressures could adversely affectthe Company’s financial health.**

 

The Company is subject tosignificant competition from other glass container producers, as well as frommakers of alternative forms of packaging, such as aluminum cans and plasticcontainers.  The Company competes witheach rigid packaging competitor on the basis of price, quality, service and themarketing attributes of the container. Advantages or disadvantages in any of these competitive factors may besufficient to cause the customer to consider changing suppliers and/or using analternative form of packaging.  Theadverse effects of consumer purchasing decisions may be more significant inperiods of economic downturn and may lead to longer term reductions in consumerspending on glass packaged products.  TheCompany also competes with manufacturers of non-rigid packaging alternatives,including flexible pouches and aseptic cartons, in serving the packaging needsof certain end-use markets, including juice customers.

 

Pressures fromcompetitors and producers of alternative forms of packaging have resulted inexcess capacity in certain countries in the past and have led to capacityadjustments and significant pricing pressures in the rigid packaging market.

 

**HighEnergy Costs — Higher energy costs worldwide and interrupted power supplies mayhave a material adverse effect on operations.**

 

Electrical power, naturalgas, and fuel oil are vital to the Company’s operations as it relies on acontinuous power supply to conduct its business.  Depending on the location and mix of energysources, energy accounts for 15% to 25% of total production costs.  Substantial increases and volatility inenergy costs could cause the Company to experience a significant increase inoperating costs, which may have a material adverse effect on operations.

 

**EconomicEnvironment - The Company may be adversely affected by the current economicenvironment.**

 

As a result ofseverely weak credit market conditions (including uncertainties with respect tofinancial institutions, and severely diminished liquidity and creditavailability), volatility in energy costs and other macro-economic challengescurrently affecting many of the economies in which the Company operates,customers or vendors may experience serious cash flow problems and as a result,may modify, delay, or curtail plans to purchase the Company’s products andvendors may significantly and quickly increase their prices or reduce theiroutput.  Additionally, if customers arenot successful in generating sufficient revenue or are precluded from securingfinancing, they may not be able to pay, or may delay payment of, accountsreceivable that are owed to the Company. Any inability of current and/or potential customers to pay the Companyfor its products may adversely affect the Company’s earnings and cashflow.  If the economic conditions in theCompany’s key markets deteriorate further, the Company may experience materialadverse impacts to its business and operating results.

 

**BusinessIntegration Risks — The Company may not be able to effectively integrateadditional businesses it acquires in the future.**

 

The Company may considerstrategic transactions, including acquisitions that will complement, strengthenand enhance growth in its worldwide glass operations.  The Company evaluates opportunities on apreliminary basis from time to time, but these transactions may not advancebeyond the preliminary stages or be completed. Such acquisitions are subject to various risks and uncertainties,including:

·                  The inability to integrate effectivelythe operations, products, technologies and personnel of the acquired companies(some of which are located in diverse geographic regions) and achieve expectedsynergies;

·                  The potential disruption of existingbusiness and diversion of management’s attention from day-to-day operations;

 

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·                  The inability to maintain uniform standards,controls, procedures and policies;

·                  The need or obligation to divest portionsof the acquired companies; and

·                  The potential impairment of relationshipswith customers.

 

In addition, the Companycannot make assurances that the integration and consolidation of newly acquiredbusinesses will achieve any anticipated cost savings and operating synergies.

 

**CustomerConsolidation — The continuing consolidation of the Company’s customer base mayintensify pricing pressures and have a material adverse effect on operations.**

 

Beginning in the early1990s, many of the Company’s largest customers have acquired companies withsimilar or complementary product lines. This consolidation has increased the concentration of the Company’sbusiness with its largest customers.  Inmany cases, such consolidation has been accompanied by pressure from customersfor lower prices, reflecting the increase in the total volume of productspurchased or the elimination of a price differential between the acquiringcustomer and the company acquired. Increased pricing pressures from the Company’s customers may have amaterial adverse effect on operations.

 

**Seasonalityand Raw Materials — Profitability could be affected by varied seasonal demandsand the availability of raw materials.**

 

Due principally to theseasonal nature of the consumption of beer and other beverages, for whichdemand is stronger during the summer months, sales of the Company’s productshave varied and are expected to vary by quarter.  Shipments in the U.S. and Europe aretypically greater in the second and third quarters of the year, while shipmentsin the Asia Pacific region are typically greater in the first and fourthquarters of the year, and shipments in South America are typically greater inthe third and fourth quarters of the year. Unseasonably cool weather during peak demand periods can reduce demandfor certain beverages packaged in the Company’s containers.

 

The raw materials thatthe Company uses have historically been available in adequate supply from multiplesources.  For certain raw materials,however, there may be temporary shortages due to weather or other factors,including disruptions in supply caused by raw material transportation orproduction delays.  These shortages, aswell as material volatility in the cost of any of the principal raw materialsthat the Company uses, may have a material adverse effect on operations.

 

**EnvironmentalRisks — The Company is subject to various environmental legal requirements andmay be subject to new legal requirements in the future.  These requirements may have a materialadverse effect on operations.**

 

The Company’s operationsand properties, both in the U.S. and abroad, are subject to extensive laws,ordinances, regulations and other legal requirements relating to environmentalprotection, including legal requirements governing investigation and clean-upof contaminated properties as well as water discharges, air emissions, wastemanagement and workplace health and safety. Such legal requirements frequently change and vary amongjurisdictions.  The Company’s operationsand properties, both in the U.S. and abroad, must comply with these legalrequirements.  These requirements mayhave a material adverse effect on operations.

 

The Company has incurred,and expects to incur, costs for its operations to comply with environmentallegal requirements, and these costs could increase in the future.  Many environmental legal requirements providefor substantial fines, orders (including orders to cease operations), and criminalsanctions for violations.  These legalrequirements may apply to conditions at properties that the Company presentlyor formerly owned or operated, as well as at other properties for which theCompany may be responsible, including those at which wastes attributable to theCompany were disposed.  A significantorder or 

 

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judgment against theCompany, the loss of a significant permit or license or the imposition of asignificant fine may have a material adverse effect on operations.

 

A number of governmentalauthorities both in the U.S. and abroad have enacted, or are considering, legalrequirements that would mandate certain rates of recycling, the use of recycledmaterials and/or limitations on certain kinds of packaging materials.  In addition, some companies with packagingneeds have responded to such developments and/or perceived environmentalconcerns of consumers by using containers made in whole or in part of recycledmaterials.  Such developments may reducethe demand for some of the Company’s products and/or increase the Company’scosts, which may have a material adverse effect on operations.

 

**LaborRelations — Some of the Company’s employees are unionized or represented byworkers’ councils.**

 

The Company is party to anumber of collective bargaining agreements with labor unions which at December 31,2009, covered approximately 78% of the Company’s employees in North America.Approximately 54% of employees in South America are unionized, althoughaccording to the labor legislation of each country, 100% of employees arecovered by collective bargaining agreements. The agreement covering substantially all of the Company’sunion-affiliated employees in its U.S. glass container operations expires on March 31,2011.  Agreements in South Americatypically have an average term of approximately 2-3 years.  Upon the expiration of any collectivebargaining agreement, if the Company is unable to negotiate acceptablecontracts with labor unions, it could result in strikes by the affected workersand increased operating costs as a result of higher wages or benefits paid tounion members. In addition, a large number of the Company’s employees areemployed in countries in which employment laws provide greater bargaining orother rights to employees than the laws of the U.S.  Such employment rights require the Company towork collaboratively with the legal representatives of the employees to effectany changes to labor arrangements.  Forexample, most of the Company’s employees in Europe are represented by workers’councils that must approve any changes in conditions of employment, includingsalaries and benefits and staff changes, and may impede efforts to restructurethe Company’s workforce.  Although theCompany believes that it has a good working relationship with its employees, ifthe Company’s employees were to engage in a strike or other work stoppage, theCompany could experience a significant disruption of operations and/or higherongoing labor costs, which may have a material adverse effect on operations.

 

**Accounting— The Company’s financial results are based upon estimates and assumptions thatmay differ from actual results.**

 

In preparing theCompany’s consolidated financial statements in accordance with U.S. generallyaccepted accounting principles, several estimates and assumptions are made thataffect the accounting for and recognition of assets, liabilities, revenues andexpenses.  These estimates andassumptions must be made because certain information that is used in thepreparation of the Company’s financial statements is dependent on futureevents, cannot be calculated with a high degree of precision from data availableor is not capable of being readily calculated based on generally acceptedmethodologies.  In some cases, theseestimates are particularly difficult to determine and the Company must exercisesignificant judgment.  The Companybelieves that accounting for long-lived assets, pension benefit plans,contingencies and litigation, and income taxes involves the more significantjudgments and estimates used in the preparation of its consolidated financialstatements.  Actual results for allestimates could differ materially from the estimates and assumptions that theCompany uses, which could have a material adverse effect on the Company’sfinancial condition and results of operations.

 

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**Accounting Standards — The adoption of new accountingstandards or interpretations could adversely impact the Company’s financialresults.**

 

TheCompany’s implementation of and compliance with changes in accounting rules andinterpretations could adversely affect its operating results or causeunanticipated fluctuations in its results in future periods.  The accounting rules and regulationsthat the Company must comply with are complex and continually changing.  Recent actions and public comments from theSEC have focused on the integrity of financial reporting generally.  The Financial Accounting Standards Board hasrecently introduced several new or proposed accounting standards, or isdeveloping new proposed standards, which would represent a significant changefrom current industry practices.  Inaddition, many companies’ accounting policies are being subjected to heightenedscrutiny by regulators and the public. While the Company believes that its financial statements have beenprepared in accordance with U.S. generally accepted accounting principles, theCompany cannot predict the impact of future changes to accounting principles orits accounting policies on its financial statements going forward.

 

**Goodwill— A significant write down of goodwill would have a material adverse effect onthe Company’s reported results of operations and net worth.**

 

Goodwillat December 31, 2009 totaled $2,381.0 million.  The Company evaluates goodwill annually (ormore frequently if impairment indicators arise) for impairment using therequired business valuation methods. These methods include the use of a weighted average cost of capital tocalculate the present value of the expected future cash flows of the Company’sreporting units.  Future changes in thecost of capital, expected cash flows, or other factors may cause the Company’sgoodwill to be impaired, resulting in a non-cash charge against results ofoperations to write down goodwill for the amount of the impairment.  If a significant write down is required, thecharge would have a material adverse effect on the Company’s reported resultsof operations and net worth.

 

**PensionFunding — Declines in the fair value of the assets of the pension planssponsored by the Company could require increased funding.**

 

The Company’s definedbenefit pension plans in the U.S. and several other countries are fundedthrough qualified trusts that hold investments in a broad range of equity anddebt securities.  Deterioration in thevalue of such investments, or reductions driven by a decline in securitiesmarkets or otherwise, could increase the underfunded status of the Company’sfunded pension plans, thereby increasing its obligation to make contributionsto the plans as required by the laws and regulations governing each plan.  An obligation to make contributions topension plans could reduce the cash available for working capital and othercorporate uses, and may have an adverse impact on the Company’s operations,financial condition and liquidity.

 

**ITEM 1B.               UNRESOLVED STAFF COMMENTS**

 

None.

 

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**ITEM 2.                  PROPERTIES**

 

The principalmanufacturing facilities and other material important physical properties ofthe Company at December 31, 2009 are listed below.  All properties shown are owned in fee exceptwhere otherwise noted.

 
| ***North American Operations*** |              |
|---------------------------------|-------------------|
| United  States                  |              |
| Glass  Container Plants         |              |
| Atlanta,  GA                    | Oakland, CA       |
| Auburn,  NY                     | Portland, OR      |
| Brockway, PA                    | Streator, IL      |
| Charlotte, MI (1)               | Toano, VA         |
| Clarion, PA (1)                 | Tracy, CA         |
| Crenshaw, PA                    | Waco, TX          |
| Danville, VA                    | Windsor, CO       |
| Lapel, IN                       | Winston-Salem, NC |
| Los Angeles, CA                 | Zanesville, OH    |
| Muskogee*,*OK                   |              |
|                            |              |
| Canada                          |              |
| Glass Container Plants          |              |
| Brampton,  Ontario              | Montreal, Quebec  |
|                            |              |
| ***Asia Pacific Operations***   |              |
| Australia                       |              |
| Glass  Container Plants         |              |
| Adelaide                        | Melbourne         |
| Brisbane                        | Sydney            |
|                            |              |
| China                           |              |
| Glass  Container Plants         |              |
| Guangzhou                       | Tianjin           |
| Shanghai                        | Wuhan             |
|                            |              |
| Mold  Shop                      |              |
| Tianjin                         |              |
|                            |              |
| Indonesia                       |              |
| Glass  Container Plant          |              |
| Jakarta                         |              |
|                            |              |
| New  Zealand                    |              |
| Glass  Container Plant          |              |
| Auckland                        |              |

 

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| ***European Operations*** |       |
|---------------------------|------------|
| Czech  Republic           |       |
| Glass  Container Plants   |       |
| Sokolov                   | Teplice    |
|                      |       |
| Estonia                   |       |
| Glass  Container Plant    |       |
| Jarvakandi                |       |
|                      |       |
| France                    |       |
| Glass  Container Plants   |       |
| Beziers                   | Reims      |
| Gironcourt                | Vayres     |
| Labegude                  | Veauche    |
| Puy-Guillaume             | Wingles    |
|                      |       |
| Germany                   |       |
| Glass  Container Plants   |       |
| Achern                    | Holzminden |
| Bernsdorf                 | Rinteln    |
|                      |       |
| Hungary                   |       |
| Glass Container Plant     |       |
| Oroshaza                  |       |
|                      |       |
| Italy                     |       |
| Glass  Container Plants   |       |
| Asti                      | Pordenone  |
| Bari (2 plants)           | Terni      |
| Latina                    | Trento     |
| Trapani                   | Treviso    |
| Napoli                    | Varese     |
|                      |       |
| The  Netherlands          |       |
| Glass  Container Plants   |       |
| Leerdam                   | Schiedam   |
| Maastricht                |       |
|                      |       |
| Poland                    |       |
| Glass Container Plants    |       |
| Antoninek                 | Jaroslaw   |
|                      |       |
| Spain                     |       |
| Glass  Container Plants   |       |
| Alcala                    | Barcelona  |
|                      |       |
| United  Kingdom           |       |
| Glass  Container Plants   |       |
| Alloa                     | Harlow     |

 

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| ***South American Operations***               |                                        |
|-----------------------------------------------|---------------------------------------------|
| Brazil                                        |                                        |
| Glass Container Plants                        |                                        |
| Rio de Janeiro                                | Sao Paulo                                   |
|  (glass  container and tableware)        |                                        |
|                                          |                                        |
| Mold  Shop                                    |                                        |
| Manaus                                        |                                        |
|                                          |                                        |
| Colombia                                      |                                        |
| Glass  Container Plants                       |                                        |
| Envigado                                      | Zipaquira (glass  container and flat glass) |
| Soacha                                        |                                        |
|                                          |                                        |
| Tableware  Plant                              |                                        |
| Buga                                          |                                        |
|                                          |                                        |
| Ecuador                                       |                                        |
| Glass  Container Plant                        |                                        |
| Guayaquil                                     |                                        |
|                                          |                                        |
| Peru                                          |                                        |
| Glass  Container Plants                       |                                        |
| Callao  Lurin (2)                             |                                        |
|                                          |                                        |
| Venezuela                                     |                                        |
| Glass  Container Plants                       |                                        |
| Valencia                                      | Valera                                      |
|                                          |                                        |
| ***Other Operations***                        |                                        |
| Machine  Shops and Engineering Support Center |
| Brockway, Pennsylvania                        | Cali, Colombia                              |
| Clayton, Australia                            | Jaroslaw, Poland                            |
| Lurin, Peru                                   | Perrysburg, Ohio                            |
|                                          |                                        |
| **Corporate Facilities**                      |                                        |
| Perrysburg,  Ohio (2)                         |                                        |

 

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(1)  Thisfacility is scheduled to be closed in 2010.

(2)  Thisfacility is leased in whole or in part.

 

The Companybelieves that its facilities are well maintained and currently adequate for itsplanned production requirements over the next three to five years.

 

**ITEM 3.                  LEGAL PROCEEDINGS**

 

For further informationon legal proceedings, see Note 16 to the Consolidated Financial Statements andthe section entitled “Environmental and Other Governmental Regulation” in Item1.

 

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**PART II**

 

**ITEM 6.****                                                    ****SELECTED FINANCIAL DATA**

 

The selected consolidatedfinancial data presented below relates to each of the five years in the periodended December 31, 2009.  Thefinancial data for each of the five years in the period ended December 31,2009 was derived from the audited consolidated financial statements of theCompany.  For more information, see the “ConsolidatedFinancial Statements” included elsewhere in this document.

 
| ** **                                                        | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                        | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                        | ** ** | **(Dollar amounts in millions)**  | ** ** |
| Consolidated operating results (a):                               |       |                              |       |   |   |   |   |   |   |   |   |
|                                                              |       |                              |       |   |   |   |   |   |   |   |   |
| Net sales                                                         |       | $                                 | 7,066.5    |   | $ | 7,884.7 |   | $ | 7,566.7 |   | $ | 6,650.4 |   | $ | 6,266.9 |   |
| Manufacturing, shipping and delivery (b)                          |       | (5,582.6                          | )          | (6,208.1 | ) | (5,971.4 | ) | (5,481.1 | ) | (5,084.9 | ) |
|                                                              |       |                              |       |   |   |   |   |   |   |   |   |
| Gross profit                                                      |       | 1,483.9                           |       | 1,676.6 |   | 1,595.3 |   | 1,169.3 |   | 1,182.0 |   |
|                                                              |       |                              |       |   |   |   |   |   |   |   |   |
| Selling and administrative, research development  and engineering |       | (565.2                            | )          | (578.5 | ) | (586.4 | ) | (579.1 | ) | (506.1 | ) |
| Other expense (c)                                                 |       | (297.0                            | )          | (154.2 | ) | (151.2 | ) | (54.7 | ) | (525.8 | ) |
| Other revenue (d)                                                 |       | 105.3                             |       | 117.5 |   | 112.5 |   | 98.6 |   | 103.2 |   |
| Earnings before interest expense and items below                  |       | 727.0                             |       | 1,061.4 |   | 970.2 |   | 634.1 |   | 253.3 |   |
| Interest expense (e)                                              |       | (221.7                            | )          | (253.0 | ) | (348.6 | ) | (349.0 | ) | (325.4 | ) |
| Earnings (loss) from continuing operations before  income taxes   |       | 505.3                             |       | 808.4 |   | 621.6 |   | 285.1 |   | (72.1 | ) |
| Provision for income taxes (f)                                    |       | (154.7                            | )          | (237.9 | ) | (147.8 | ) | (125.3 | ) | (428.9 | ) |
| Earnings (loss) from continuing operations                        |       | 350.6                             |       | 570.5 |   | 473.8 |   | 159.8 |   | (501.0 | ) |
| Net earnings (loss) of discontinued operations (g)                |       |                              |       |   |   | 3.0 |   | (23.7 | ) | 63.1 |   |
| Gain on sale of discontinued operations                           |       |                              |       | 6.8 |   | 1,038.5 |   |   |   | 1.2 |   |
| Net earnings (loss)                                               |       | 350.6                             |       | 577.3 |   | 1,515.3 |   | 136.1 |   | (436.7 | ) |
| Net earnings attributable to noncontrolling  interests            |       | (36.0                             | )          | (70.2 | ) | (59.7 | ) | (43.6 | ) | (35.9 | ) |
| Net earnings (loss) attributable to the Company                   |       | $                                 | 314.6      |   | $ | 507.1 |   | $ | 1,455.6 |   | $ | 92.5 |   | $ | (472.6 | ) |

 

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| ** **                                                            | ** ** | **Years  ended December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                            | ** ** | **2009**                           | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                            | ** ** | **(Dollar  amounts in millions)**  | ** ** |
| Other  data:                                                          |       |                               |       |   |   |   |   |   |   |   |   |
| The  following are included in net earnings:                          |       |                               |       |   |   |   |   |   |   |   |   |
| Depreciation                                                          |       | $                                  | 374.8      |   | $ | 431.0 |   | $ | 423.4 |   | $ | 427.7 |   | $ | 436.1 |   |
| Amortization  of intangibles                                          |       | 21.1                               |       | 28.9 |   | 28.9 |   | 22.3 |   | 22.5 |   |
| Amortization  of deferred finance fees (included in interest expense) |       | 10.4                               |       | 7.9 |   | 8.6 |   | 5.7 |   | 6.7 |   |
|                                                                  |       |                               |       |   |   |   |   |   |   |   |   |
| Balance  sheet data (at end of period):                               |       |                               |       |   |   |   |   |   |   |   |   |
| Working  capital (current assets less current liabilities)            |       | $                                  | 938        |   | $ | 616 |   | $ | 375 |   | $ | 216 |   | $ | 618 |   |
| Total  assets                                                         |       | 8,727                              |       | 7,977 |   | 9,325 |   | 9,321 |   | 9,521 |   |
| Total  debt                                                           |       | 3,610                              |       | 3,325 |   | 3,714 |   | 5,464 |   | 5,300 |   |
| Share  owner’s equity (a)                                        |       | 2,222                              |       | 1,789 |   | 2,895 |   | 1,251 |   | 1,379 |   |

 

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(a)          Amounts related to the Company’s plasticpackaging business have been reclassified to discontinued operations for2005-2007 as a result of the sale of that business in 2007.

 

The Company adopted theprovisions of a new accounting standard on January 1, 2009, which changedthe presentation of noncontrolling interests in subsidiaries.  The presentation requirements of the newstandard were also required to be applied retrospectively.

 

(b)         Amount for 2006 includes a loss of $8.7million ($8.4 million after tax amount attributable to the Company) from themark to market effect of natural gas hedge contracts.

 

Amount for 2005 includesa gain of $3.8 million ($2.3 million after tax amount attributable to theCompany) from the mark to market effect of natural gas hedge contracts.

 

(c)          Amount for 2009 includes charges of$213.6 million ($182.8 million after tax amount attributable to the Company)for restructuring and asset impairments, and $17.3 million ($17.6 million aftertax amount attributable to the Company) for the remeasurement of certainbolivar-denominated assets and liabilities held outside of Venezuela.

 

Amount for 2008 includescharges of $133.3 million ($110.1 million after tax amount attributable to theCompany) for restructuring and asset impairments.

 

Amount for 2007 includescharges of $100.3 million ($84.1 million after tax amount attributable to theCompany) for restructuring and asset impairments.

 

Amount for 2006 includesa charge of $20.8 million ($20.7 million after tax amount attributable to theCompany) for CEO transition costs and a charge of $29.7 million ($27.7 millionafter tax amount attributable to the Company) for the closing of the Godfrey,Illinois machine parts manufacturing operation.

 

Amount for 2005 includesa charge of $494.0 million (pretax and after tax amount attributable to theCompany) to write down goodwill in the Asia Pacific Glass unit.

 

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(d)         Other revenue in 2006 includes a gain of$15.9 million ($11.2 million after tax amount attributable to the Company) forthe curtailment of postretirement benefits in The Netherlands.

 

Other revenue in 2005 includes$28.1 million (pretax and after tax amount attributable to the Company) fromthe sale of the Company’s glass container facility in Corsico, Italy.

 

(e)          Amount for 2009 includes charges of $4.9million (pretax and after tax amount attributable to the Company) for noterepurchase premiums, net of a gain from the termination of interest rate swapagreements on the notes.

 

Amount for 2007 includescharges of $7.9 million ($7.3 million after tax amount attributable to theCompany) for note repurchase premiums.

 

Amount for 2006 includescharges of $6.2 million (pretax and after tax amount attributable to theCompany) for note repurchase premiums.

 

Includes additionalinterest charges for the write-off of unamortized deferred financing feesrelated to the early extinguishment of debt as follows:  $0.3 million (pretax and after tax amountattributable to the Company) for 2009; $1.6 million ($1.5 million after taxamount attributable to the Company) for 2007; and $11.3 million ($10.9 millionafter tax amount attributable to the Company) for 2006.

 

(f)            Amount for 2009 includes a non-cash taxbenefit transferred from other comprehensive income (equity) of $20.7 million.

 

Amount for 2008 includesa net tax expense of $33.3 million ($34.8 million attributable to the Company)related to tax legislation, restructuring, and other.

 

Amount for 2007 includesa benefit of $13.5 million for the recognition of tax credits related torestructuring of investments in certain European operations.

 

Amount for 2006 includesa benefit of $5.7 million from the reversal of a non-U.S. deferred tax assetvaluation allowance partially offset by charges related to international taxrestructuring.

 

Amount for 2005 includesa charge of $300.0 million to record a valuation allowance related toaccumulated deferred tax assets in the U.S. and a benefit of $5.3 million forthe reversal of an accrual for potential tax liabilities related to a previousdivestiture.  The accrual is no longerrequired based on the Company’s reassessment of potential liabilities.

 

(g)         Amount for 2005 consists principally of athird quarter benefit from the reversal of an accrual for potential taxliabilities related to a previous divestiture. The accrual is no longer required based on the Company’s reassessment ofthe potential liabilities.

 

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| **ITEM 7.** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|-------------------------------------------------------------------------------------------------|

 

Following are the Company’snet sales by segment and segment operating profit for the years ended December 31,2009, 2008, and 2007 (dollars in millions). The Company’s measure of profit for its reportable segments is SegmentOperating Profit, which consists of consolidated earnings from continuingoperations before interest income, interest expense, and provision for incometaxes and excludes amounts related to certain items that management considersnot representative of ongoing operations as well as certain retained corporatecosts.  The segment data presented belowis prepared in accordance with general accounting principles for segmentreporting.  The line titled ‘reportablesegment totals’, however, is a non-GAAP measure when presented outside of thefinancial statement footnotes. Management has included ‘reportable segment totals’ below to facilitatethe discussion and analysis of financial condition and results ofoperations.  The Company’s managementuses Segment Operating Profit, in combination with selected cash flowinformation, to evaluate performance and to allocate resources.

 
| **Net Sales:**             | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|
| Europe                     |       | $        | 2,917.6    |     | $          | 3,497.8  |       | $ | 3,298.7 |   |
| North  America             |       | 2,074.3  |       | 2,209.7  |       | 2,271.3  |       |
| South  America             |       | 1,104.1  |       | 1,135.9  |       | 970.7    |       |
| Asia  Pacific              |       | 925.0    |       | 964.1    |       | 934.3    |       |
|                       |       |     |       |     |       |     |       |
| Reportable  segment totals |       | 7,021.0  |       | 7,807.5  |       | 7,475.0  |       |
| Other                      |       | 45.5     |       | 77.2     |       | 91.7     |       |
| Net  Sales                 |       | $        | 7,066.5    |     | $          | 7,884.7  |       | $ | 7,566.7 |   |

 

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| **Segment Operating Profit:**                                        | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                 |       |     |       |     |       |     |       |
| Europe                                                               |       | $        | 332.6      |     | $          | 477.8    |       | $ | 433.0 |   |
| North  America                                                       |       | 281.5    |       | 185.2    |       | 265.1    |       |
| South  America                                                       |       | 250.6    |       | 331.0    |       | 254.9    |       |
| Asia  Pacific                                                        |       | 131.3    |       | 162.8    |       | 154.0    |       |
| Reportable  segment totals                                           |       | 996.0    |       | 1,156.8  |       | 1,107.0  |       |
|                                                                 |       |     |       |     |       |     |       |
| Items  excluded from Segment Operating Profit:                       |       |     |       |     |       |     |       |
| Retained  corporate costs and other                                  |       | (66.7    | )          | (0.7     | )          | (78.8    | )          |
| Restructuring  and asset impairment                                  |       | (213.6   | )          | (133.3   | )          | (100.3   | )          |
| Charge  for Venezuela currency remeasurement                         |       | (17.3    | )          |     |       |     |       |
| Interest  income                                                     |       | 28.6     |       | 38.6     |       | 42.3     |       |
| Interest  expense                                                    |       | (221.7   | )          | (253.0   | )          | (348.6   | )          |
| Earnings  from continuing operations before income taxes             |       | 505.3    |       | 808.4    |       | 621.6    |       |
| Provision  for income taxes                                          |       | (154.7   | )          | (237.9   | )          | (147.8   | )          |
| Earnings  from continuing operations                                 |       | 350.6    |       | 570.5    |       | 473.8    |       |
| Net  earnings of discontinued operations                             |       |     |       |     |       | 3.0      |       |
| Gain  on sale of discontinued operations                             |       |     |       | 6.8      |       | 1,038.5  |       |
| Net  earnings                                                        |       | 350.6    |       | 577.3    |       | 1,515.3  |       |
| Net  earnings attributable to noncontrolling interests               |       | (36.0    | )          | (70.2    | )          | (59.7    | )          |
| Net  earnings attributable to the Company                            |       | $        | 314.6      |     | $          | 507.1    |       | $ | 1,455.6 |   |
|                                                                 |       |     |       |     |       |     |       |
| Net  earnings from continuing operations attributable to the Company |       | $        | 314.6      |     | $          | 500.3    |       | $ | 414.3 |   |

 

Note:  all amounts excluded fromreportable segment totals are discussed in the following applicable sections.

 

***Executive Overview — Years ended December 31, 2009 and 2008***

 

Net sales were$818.2 million lower than the prior year principally resulting from decreasedshipments and the unfavorable effect of foreign currency exchange rates,partially offset by higher selling prices and improved mix.

 

Segment OperatingProfit for reportable segments was $160.8 million lower than the prioryear.  The decrease was mainlyattributable to lower sales volume and increased manufacturing and deliverycosts resulting from higher unabsorbed fixed costs of approximately $302.0million, primarily from production curtailments, as well as inflationary costincreases.  The Company also recognized$28.0 million of foreign currency exchange losses in 2009 related to cashremittances out of Venezuela as part of the Company’s cash managementstrategy.  Partially offsetting thesecosts were higher selling prices and savings from permanent curtailment ofplant capacity and realignment of selected operations.

 

Interest expense in 2009 was $221.7 million compared with interestexpense of $253.0 million in 2008.  The2009 amount includes $5.2 million of additional interest charges for noterepurchase premiums and the related write-off of unamortized finance fees, netof a gain from the termination of interest rate swap agreements following the May tenderfor the 7.50% Senior Debentures due May 2010.  Exclusive of these items, interest expensedecreased approximately $36.5 million. The decrease is principally due to lower

 

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variable interest rates under the Company’s bank credit agreement aswell as favorable foreign currency exchange rates.

 

Interest income for 2009 was $28.6 million compared to $38.6 millionfor 2008.

 

Net earnings fromcontinuing operations attributable to the Company for 2009 were $314.6 millioncompared to $500.3 million for 2008. Earnings in both periods included items that management considered notrepresentative of ongoing operations. These items decreased net earnings in 2009 by $184.9 million anddecreased net earnings in 2008 by $144.9 million.

 

Capital spendingfor property, plant and equipment was $427.6 million for 2009 compared to$361.7 million for 2008.

 

***Results of Operations - Comparison of 2009 with 2008***

* *

*Net Sales*

 

TheCompany’s net sales in 2009 were $7,066.5 million compared with $7,884.7 millionin 2008, a decrease of $818.2 million, or 10.4%. For further information, see Segment Information included in Note 17 tothe Consolidated Financial Statements.

 

The change in net sales of reportable segments can be summarized asfollows (dollars in millions):

 
| Net  sales - 2008                           |   |   |   | $      |        7,807.5 |   |
|---------------------------------------------|--------|--------|--------|--------|----------------------------------------------|--------|
| Net  effect of price and mix                |   | $      | 377.0  |   |                                         |   |
| Decreased  sales volume                     |   | (819.8 | )      |   |                                         |
| Effects  of changing foreign currency rates |   | (343.7 | )      |   |                                         |
|                                        |   |   |   |   |                                         |
| Total  effect on net sales                  |   |   |   | (786.5 | )                                            |
| Net  sales - 2009                           |   |   |   | $      | 7,021.0                                      |   |
|                                             |        |        |        |        |                                              |        |  |

 

*Segment Operating Profit*

 

Operating Profitof the reportable segments includes an allocation of some corporate expensesbased on both a percentage of sales and direct billings based on the costs ofspecific services provided.  Unallocatedcorporate expenses and certain other expenses not directly related to thereportable segments’ operations are included in Retained Corporate Costs andOther.  For further information, seeSegment Information included in Note 17 to the Consolidated FinancialStatements.

 

Segment Operating Profit of reportable segments in 2009 was $996.0million compared to $1,156.8 million in 2008, a decrease of $160.8 million, or13.9%.

 

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The change in Segment Operating Profit of reportable segments can besummarized as follows (dollars in millions):

 
| Segment Operating  Profit - 2008              |   |   |   | $      | 1,156.8 |   |
|-----------------------------------------------|--------|--------|--------|--------|---------|--------|
| Net effect of price and  mix                  |   | $      | 377.0  |   |    |   |
| Decreased sales volume                        |   | (280.2 | )      |   |    |
| Effects of changing  foreign currency rates   |   | (35.1  | )      |   |    |
| Manufacturing and  delivery                   |   | (205.5 | )      |   |    |
| Operating expenses                            |   | 4.4    |   |   |    |
| Other                                         |   | (21.4  | )      |   |    |
|                                          |   |   |   |   |    |
| Total net effect on  Segment Operating Profit |   |   |   | (160.8 | )       |
| Segment Operating  Profit - 2009              |   |   |   | $      | 996.0   |   |
|                                               |        |        |        |        |         |        |  |

 

*Interest Expense*

 

Interest expense in 2009 was $221.7 million compared with interestexpense of $253.0 million in 2008.  The2009 amount includes $5.2 million of additional interest charges for noterepurchase premiums and the related write-off of unamortized finance fees, netof a gain from the termination of interest rate swap agreements following the May tenderfor the 7.50% Senior Debentures due May 2010.  Exclusive of these items, interest expensedecreased approximately $36.5 million. The decrease is principally due to lower variable interest rates underthe Company’s bank credit agreement as well as favorable foreign currencyexchange rates.

 

*Interest Income*

 

Interestincome for 2009 was $28.6 million compared to $38.6 million for 2008.  The decrease is principally due to lowerinterest rates on investments, which more than offset the additional interestearned on the Company’s higher cash balance.

 

*Provisionfor Income Taxes*

 

TheCompany’s effective tax rate from continuing operations for 2009 was 30.6%,compared with 29.4% for 2008.  Theprovision for 2009 includes a non-cash tax benefit transferred from othercomprehensive income of $20.7 million (see Note 10 to the ConsolidatedFinancial Statements for more information). The provision for 2008 includes a net expense of $33.3 million relatedto tax legislation, restructuring, and other. Excluding these items and the effects in both periods of pretax itemsfor which taxes are separately calculated and recorded in the period, theCompany’s effective tax rate for 2009 was 26.5% compared to 24.0% for2008.  The increase in the effective taxrate in 2009 was due to lower earnings generated in jurisdictions where theCompany has lower effective tax rates. The Company expects that the effective tax rate will not changesignificantly in 2010 compared to 2009.

 

*NetEarnings Attributable to Noncontrolling Interests*

 

Netearnings attributable to noncontrolling interests for 2009 were $36.0 millioncompared to $70.2 million for 2008.  Netearnings attributable to noncontrolling interests were reduced by $9.2 millionin 2009 related to restructuring and asset impairment charges recorded duringthe year.  Excluding this amount, netearnings attributable to noncontrolling interests in 2009 decreased $25.0million compared with 2008.  The decreaseis primarily a result of lower segment operating profit in the Company’s SouthAmerican segment in 2009.

 

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*Earnings from Continuing Operations Attributable tothe Company*

 

For2009, the Company recorded earnings from continuing operations attributable tothe Company of $314.6 million compared to $500.3 million for 2008.  The after tax effects of the items excludedfrom Segment Operating Profit, the 2009 additional interest charges, and the2009 and 2008 unusual tax items increased or decreased earnings in 2009 and2008 as set forth in the following table (dollars in millions).

 
| ** **                                                                             | ** ** | **Net Earnings********Increase (Decrease)** | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **Description**                                                                        | ** ** | **2009**                                    | ** ** | **2008** | ** ** |
| Net expense related to tax legislation,  restructuring, and other                      |       | $                                           | —     |   | $ | (34.8 | ) |
| Non-cash tax benefit transferred from other  comprehensive income                      |       | 20.7                                        |       |   |   |
| Restructuring and asset impairment                                                     |       | (182.8                                      | )          | (110.1 | ) |
| Charge for Venezuela currency remeasurement                                            |       | (17.6                                       | )          |   |   |
| Note repurchase premiums and write-off of finance  fees, net of interestrate swap gain |       | (5.2                                        | )          |   |   |
|                                                                                   |       |                                        |       |   |   |
| Total                                                                                  |       | $                                           | (184.9     | ) | $ | (144.9 | ) |

 

***Executive Overview — Years ended December 31, 2008 and 2007***

 

Net sales fromcontinuing operations were $318.0 million higher than the prior yearprincipally resulting from improved pricing and favorable product mix acrossall regions, as well as favorable foreign currency exchange rates, principallythe Euro. Lower unit shipments partially offset these favorable increases.

 

Segment OperatingProfit for reportable segments was $49.8 million higher than the prioryear.  The benefits of higher sellingprices, improved product mix, improvements in glass plant operatingefficiencies, and favorable foreign currency exchange rates were partiallyoffset by inflationary cost increases in manufacturing and delivery costs andlower sales volume.

 

Interest expense in 2008 was $253.0 million compared with interestexpense from continuing operations of $348.6 million in 2007.  Included in the 2007 interest expense was$9.5 million for both note repurchase premiums and the write-off of unamortizedfinance fees related to the November 2007 repurchase of the $625.0 million8.75% Senior Secured Notes.  Exclusive ofthese items, interest expense decreased approximately $86.1 million.  The decrease is principally due to lowervariable interest rates under the Company’s bank credit agreement and on longterm debt variable and swapped rates as well as lower overall debt levels,partially offset by an increase in foreign currency exchange rates.  The decrease is also due to the non-recurrenceof interest on debt that was repaid during the fourth quarter of 2007 with theproceeds from the plastics sale.  Thisinterest was previously allocated to discontinued operations until the date ofthe sale.

 

Interest income for continuing operations for 2008 was $38.6 millioncompared to $42.3 million for 2007.

 

Net earnings fromcontinuing operations attributable to the Company for 2008 were $500.3 millioncompared to earnings from continuing operations attributable to the Company of$414.3 million for 2007.  Earnings inboth periods included items that management considered not representative ofongoing operations.  These itemsdecreased net earnings in 2008 by $144.9 million and decreased net earnings in2007 by $79.4 million.

 

Capital spendingfor property, plant and equipment for continuing operations was $361.7 millionfor 2008 compared to $292.5 million for 2007. The 2008 amount is in a range consistent with long term historicallevels.  The increase is also due tochanges in foreign currency exchange rates.

 

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***Results of Operations - Comparison of 2008 with 2007***

 

*Net Sales*

 

The Company’s net sales in 2008 were $7,884.7 millioncompared with $7,566.7 million in 2007, an increase of $318.0 million, or 4.2%.  For further information, see SegmentInformation included in Note 17 to the Consolidated Financial Statements.

 

The change in net sales can be summarized as follows (dollars inmillions):

 
| Net  sales - 2007                           |   |   |   | $      | 7,475.0 |   |
|---------------------------------------------|--------|--------|--------|--------|---------|--------|
| Net  effect of price and mix                |   | $      | 572.0  |   |    |   |
| Effects  of changing foreign currency rates |   | 274.5  |   |   |    |
| Decreased  sales volume                     |   | (514.0 | )      |   |    |
|                                        |   |   |   |   |    |
| Total  effect on net sales                  |   |   |   | 332.5  |    |
| Net  sales - 2008                           |   |   |   | $      | 7,807.5 |   |
|                                             |        |        |        |        |         |        |  |

 

*Segment Operating Profit*

 

Operating Profit ofthe reportable segments includes an allocation of some corporate expenses basedon both a percentage of sales and direct billings based on the costs ofspecific services provided.  Unallocatedcorporate expenses and certain other expenses not directly related to thereportable segments’ operations are included in Retained Corporate Costs andOther.  For further information, seeSegment Information included in Note 17 to the Consolidated FinancialStatements.

 

Segment Operating Profit of reportable segments in 2008 was $1,156.8million compared to $1,107.0 million in 2007, an increase of $49.8 million, or4.5%.

 

The change in Segment Operating Profit of reportable segments can besummarized as follows (dollars in millions):

 
| Segment  Operating Profit - 2007              |   |   |   | $      | 1,107.0 |   |
|-----------------------------------------------|--------|--------|--------|--------|---------|--------|
| Net  effect of price and mix                  |   | $      | 572.0  |   |    |   |
| Effects  of changing foreign currency rates   |   | 56.0   |   |   |    |
| Manufacturing  and delivery costs             |   | (468.0 | )      |   |    |
| Decreased  sales volume                       |   | (116.0 | )      |   |    |
| Operating  expens                             |   | (28.0  | )      |   |    |
| Other                                         |   | 33.8   |   |   |    |
| Total  net effect on Segment Operating Profit |   |   |   | 49.8   |    |
| Segment  Operating Profit - 2008              |   |   |   | $      | 1,156.8 |   |
|                                               |        |        |        |        |         |        |  |

 

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*Interest Expense*

 

Interest expense in 2008 was $253.0 million compared with interestexpense from continuing operations of $348.6 million in 2007.  Included in the 2007 interest expense was$9.5 million for both note repurchase premiums and the write-off of unamortizedfinance fees related to the November 2007 repurchase of the $625.0 million8.75% Senior Secured Notes.  Exclusive ofthese items, interest expense decreased approximately $86.1 million.  The decrease is principally due to lowervariable interest rates under the Company’s bank credit agreement and on longterm debt variable and swapped rates as well as lower overall debt levels,partially offset by an increase in foreign currency exchange rates.  The decrease is also due to thenon-recurrence of interest on debt that was repaid during the fourth quarter of2007 with the proceeds from the plastics sale. This interest was previously allocated to discontinued operations untilthe date of the sale.

 

*Interest Income*

 

Interest income for continuing operations for 2008 was $38.6 millioncompared to $42.3 million for 2007.

 

*Provisionfor Income Taxes*

 

TheCompany’s effective tax rate from continuing operations for 2008 was 29.4%,compared with 23.8% for 2007. The provision for 2008 includes a net expense of$33.3 million related to tax legislation, restructuring, and other.   The provision for 2007 includes a benefit of$13.5 million for the recognition of tax credits related to restructuring ofinvestments in certain European operations. Excluding those items and the effects in both periods of pretax itemsfor which taxes are separately calculated and recorded in the period, theCompany’s effective tax rate from continuing operations for 2008 was 24.0%compared to 24.4% for 2007. 

 

*NetEarnings Attributable to Noncontrolling Interests*

 

Netearnings attributable to noncontrolling interests for 2008 were $70.2 millioncompared to $59.7 million for 2007.  Theincrease was primarily attributed to higher earnings from the Company’s operationsin South America.

 

*Earnings from Continuing Operations*

 

For2008, the Company recorded earnings from continuing operations attributable tothe Company of $500.3 million compared to $414.3 million for 2007.  The after tax effects of the items excluded fromSegment Operating Profit, the 2008 and 2007 international net tax benefits, andthe 2007 additional interest charges, increased or decreased earnings in 2008and 2007 as set forth in the following table (dollars in millions).

 
| ** **                                                        | ** ** | **Net Earnings********Increase (Decrease)** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **Description**                                                   | ** ** | **2008**                                    | ** ** | **2007** | ** ** |
| Net expense related to tax legislation,  restructuring, and other |       | $                                           | (34.8      | ) | $ | — |   |
| Gain recognition from foreign tax credits                         |       |                                        |       | 13.5 |   |
| Restructuring and asset impairments                               |       | (110.1                                      | )          | (84.1 | ) |
| Note repurchase premiums and write-off of finance  fees           |       |                                        |       | (8.8 | ) |
|                                                              |       |                                        |       |   |   |
| Total                                                             |       | $                                           | (144.9     | ) | $ | (79.4 | ) |

 

 

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***Items Excluded from Reportable Segment Totals***

 

Retained Corporate Costs and Other

 

Retained corporate costs and other for 2009 were $66.7 million comparedwith $0.7 million for 2008.  Theincreased expense in 2009 is mainly attributable to increased employee benefitcosts, primarily pension expense, and lower royalty income.

 

Retained corporate costs and other for 2008 were $0.7 million comparedwith $78.8 million for 2007. Beginningin 2008, the Company revised its method of allocating corporate expenses.  The Company decreased slightly the percentageallocation based on sales and significantly expanded the number of functionsincluded in the allocation based on cost of services.  It is not practicable to quantify the neteffect of these changes on periods prior to 2008.  However, the effect for 2008 was to reducethe amount of retained corporate costs by approximately $38.0 million.  Also contributing to the decrease were loweraccruals for self insured risks and increased pension income in 2008.

 

Restructuring andAsset Impairments

 

During2009, the Company recorded charges totaling $213.6 million ($182.8 millionafter tax amount attributable to the Company), for restructuring, assetimpairment and settlement of pension liabilities in Europe, North America andSouth America.  The charges reflect theadditional decisions reached in the Company’s strategic review of its globalmanufacturing footprint.  See Note 14 to the ConsolidatedFinancial Statements for additionalinformation.

 

Chargesfor similar actions during 2008 totaled $132.4 million ($109.2 million aftertax amount attributable to the Company). See Note 14 to the Consolidated Financial Statements for additionalinformation.

 

During 2008, the Company also recorded an additional$0.9 million (pretax and after tax amount attributable to the Company), relatedto the impairment of the Company’s equity investment in the South AmericanSegment’s 50%-owned Caribbean affiliate.

 

During 2007, the Companyrecorded charges totaling $100.3 million ($84.1 million after tax amountattributable to the Company), for restructuring and asset impairment in SouthAmerica, Europe, and North America.  Thecharges reflect the initial decisions of the Company’s strategic globalmanufacturing footprint review. See Note 14 to theConsolidated Financial Statements for additional information.

 

Charge for Venezuela Currency Remeasurement

 

Due to Venezuelan governmentrestrictions on transfers of cash out of the country, the Company used theparallel market rate to translate the balance sheets of its Venezuelan subsidiariesas of December 31, 2009.  The impactof this change in exchange rates was an approximate 60% reduction in the U.S.dollar reported amounts for all assets and liabilities of the Company’sVenezuelan subsidiaries, and a resulting $132.5 million charge recorded in thecumulative translation adjustment component of other comprehensive income and$45.9 million charge recorded against noncontrolling interests.  In addition, the Company remeasured certainbolivar-denominated assets and liabilities held outside of Venezuela to theparallel market rate and recorded a charge of $17.3 million ($17.6 millionafter tax amount attributable to the Company) in 2009.  See Note 20 to the Consolidated FinancialStatements for additional information.

 

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*Discontinued Operations*

 

On July 31, 2007, the Company completed the sale of its plasticspackaging business to Rexam PLC for approximately $1.825 billion in cash.  The Company has presented the results ofoperations for the plastics packaging business in the Consolidated Results ofOperations for the year ended December 31, 2007 as discontinuedoperations.  Interest expense was allocatedto the discontinued operations based on debt that was required by an amendmentto the Secured Credit Agreement to be repaid from the net proceeds.  Amounts for the prior periods have beenreclassified to conform to this presentation.

 

The following summarizes the revenues and expenses of the discontinuedoperations as reported in the consolidated results of operations for theperiods indicated:

 
| ** **                                                                           | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                           | ** ** | **2007**                         | ** ** |
| Net  sales                                                                           |       | $                                | 455.0      |   |
| Manufacturing,  shipping and delivery                                                |       | (343.5                           | )          |
| Gross  profit                                                                        |       | 111.5                            |       |
|                                                                                 |       |                             |       |
| Selling  and administrative                                                          |       | (20.7                            | )          |
| Research,  development and engineering                                               |       | (8.3                             | )          |
| Interest  expense                                                                    |       | (80.6                            | )          |
| Other  income                                                                        |       | (0.1                             | )          |
| Other  expense                                                                       |       | (1.2                             | )          |
| Earnings  before income taxes                                                        |       | 0.6                              |       |
| Credit  for income taxes                                                             |       | 2.4                              |       |
| Earnings  from discontinued operations                                               |       | 3.0                              |       |
| Gain  on sale of discontinued operations                                             |       | 1,038.5                          |       |
| Net  earnings from discontinued operations                                           |       | 1,041.5                          |       |
| Net  earnings from discontinued operations attributable to noncontrolling  interests |       | (0.2                             | )          |
| Net  earnings from discontinued operations attributable to the Company               |       | $                                | 1,041.3    |   |

 

### **The 2007 gainon the sale of discontinued operations of $1,038.5 million includes chargestotaling $62.1 million for debt retirement costs, consisting principally ofredemption premiums and write-off of unamortized fees, and a gain of $8.7million for curtailment and settlement of pension and other postretirementbenefits.  The gain also includes a netprovision for income taxes of $38.2 million, consisting of taxes on the gain of$445.0 million that are substantially offset by a credit of $406.8 million forthe reversal of valuation allowances against existing tax losscarryforwards.  The sale agreementprovides for an adjustment of the selling price based on working capital levelsand certain other factors.**

 

The gain on sale ofdiscontinued operations of $6.8 million reported in 2008 relates to anadjustment of the 2007 gain on the sale of the plastics packaging businessmainly related to finalizing certain tax allocations and an adjustment to theselling price in accordance with procedures set forth in the final contract.

 

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***CapitalResources and Liquidity***

 

*Currentand Long-Term Debt*

 

The Company’stotal debt at December 31, 2009 was $3.61 billion, compared to $3.33billion at December 31, 2008.

 

On June 14,2006, the Company’s subsidiary borrowers entered into the Secured CreditAgreement (the “Agreement”).  At December 31,2009, the Agreement included a $900.0 million revolving credit facility, a160.0 million Australian dollar term loan, and a 110.8 million Canadian dollarterm loan, each of which has a final maturity date of June 15, 2012.  It also included a $189.5 million term loanand a €189.5 million term loan, each of which has a final maturity date of June 14,2013.  During December 2009, theCompany’s subsidiary borrowers repaid 65.0 million Australian dollars, $2.0million and €2.0 million of term loans under the Agreement.

 

As a result of the2008 bankruptcy of Lehman Brothers Holdings Inc. and several of itssubsidiaries, the Company believes that the maximum amount available under therevolving credit facility was reduced by $32.3 million.  After further deducting amounts attributableto letters of credit and overdraft facilities that are supported by therevolving credit facility, at December 31, 2009 the Company’s subsidiaryborrowers had unused credit of $760.0 million available under the Agreement.

 

The Agreementcontains various covenants that restrict, among other things and subject tocertain exceptions, the ability of the Company to incur certain liens, makecertain investments and acquisitions, become liable under contingentobligations in certain defined instances only, make restricted junior payments,make certain asset sales within guidelines and limits, make capitalexpenditures beyond a certain threshold, engage in material transactions withshareholders and affiliates, participate in sale and leaseback financingarrangements, alter its fundamental business, amend certain outstanding debtobligations, and prepay certain outstanding debt obligations.

 

The Agreement alsocontains one financial maintenance covenant, a Leverage Ratio, that requiresthe Company not to exceed a ratio calculated by dividing consolidated totaldebt, less cash and cash equivalents, by Consolidated Adjusted EBITDA, asdefined in the Agreement.  The LeverageRatio could restrict the ability of the Company to undertake additionalfinancing to the extent that such financing would cause the Leverage Ratio toexceed the specified maximum.

 

Failure to complywith these covenants and restrictions could result in an event of default underthe Agreement.  In such an event, theCompany could not request borrowings under the revolving facility, and allamounts outstanding under the Agreement, together with accrued interest, couldthen be declared immediately due and payable. If an event of default occurs under the Agreement and the lenders causeall of the outstanding debt obligations under the Agreement to become due andpayable, this would result in a default under a number of other outstandingdebt securities and could lead to an acceleration of obligations related tothese debt securities.  A default orevent of default under the Agreement, indentures or agreements governing otherindebtedness could also lead to an acceleration of debt under other debtinstruments that contain cross acceleration or cross-default provisions.

 

The Leverage Ratioalso determines pricing under the Agreement. The interest rate on borrowings under the Agreement is, at the Company’soption, the Base Rate or the Eurocurrency Rate, as defined in theAgreement.  These rates include a marginlinked to the Leverage Ratio and the borrowers’ senior secured debt rating.  The margins range from 0.875% to 1.75% forEurocurrency Rate loans and from -0.125% to 0.75% for Base Rate loans.  In addition, a facility fee is payable on therevolving credit facility commitments ranging from 0.20% to 0.50% per annumlinked to the Leverage Ratio.  Theweighted average interest rate on borrowings outstanding under the Agreement atDecember 31, 2009 was 2.40%.  As of December 31,2009, the Company was in compliance with all covenants and restrictions in theAgreement.  In addition, the Companybelieves that it will remain in compliance and that its ability to borrow fundsunder the Agreement will not be adversely affected by the covenants andrestrictions.

 

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During the second quarterof 2008, the Company used cash from operations and borrowings under theAgreement to retire $250 million principal amount of 7.35% Senior Notes whichmatured in May 2008.

 

During May 2009, asubsidiary of the Company issued senior notes with a face value of $600.0million at 96.72% of face value for an effective interest rate of 8.00%.  The notes bear interest at 7.375% and are dueMay 15, 2016.  The notes areguaranteed by substantially all of the Company’s domestic subsidiaries.  The net proceeds, after deducting commissionsand expenses from the notes, approximated $568 million and were used to repurchase$221.9 million of intercompany debt with OI Inc. and to reduce borrowings underthe revolving credit facility.  Thebalance of the proceeds increased cash. As a part of the issuance of these notes and the related debt repayment,the Company recorded additional interest charges in 2009 of $5.2 million fornote repurchase premiums and the related write-off of unamortized finance fees,net of a gain from the termination of related interest rate swap agreements.

 

During October 2006,the Company entered into a European accounts receivable securitization program,which had a limit of €250 million at December 31, 2009.  The program extends through October 2011,subject to annual renewal of backup credit lines.  In addition, the Company participates in areceivables financing program in the Asia Pacific region with a revolvingfunding commitment of 89 million Australian dollars and 10 million New Zealanddollars that expire February 2010 and November 2010, respectively.

 

Informationrelated to the Company’s accounts receivable securitization program as of December 31,2009 and 2008 is as follows:

 
| ** **                             | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
|                                   |       |     |       |     |       |
| Balance (included in short-term loans) |       | $        | 289.0      |     | $          | 293.7 |   |
|                                   |       |     |       |     |       |
| Weighted average interest rate         |       | 2.52     | %          | 5.31     | %          |
|                                        |            |          |            |          |            |  |  |

 

*CashFlows*

 

For2009, cash provided by continuing operating activities was $990.3 millioncompared with $966.2 million for 2008. The increase is mainly attributable to lower working capital balancesand lower interest payments, partially offset by lower net earnings, increasedpayments for restructuring activities, and increased pensioncontributions.  Cash flows from operatingactivities will continue to be affected by payments for restructuringactivities in 2010.

 

During2009, the Company contributed $123.1 million, including $49.5 million ofaccelerated 2010 contributions, to its non-U.S. defined benefit pension plans,compared with $61.2 million in 2008.  TheCompany was not required to make cash contributions to the U.S. defined benefitpension plans during 2009.  Contributionsin 2010 are dependent on future asset returns and discount rates which theCompany is unable to predict.  However,the Company believes that contributions to its non-U.S. plans will be lower in2010, due to the accelerated contributions made in 2009, and that it will notbe required to make contributions to its U.S. plans in 2010.  Depending on a number of factors, the Companymay elect to contribute amounts in excess of minimum required amounts in orderto improve the funded status of certain plans.

 

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Capitalspending for property, plant and equipment was $427.6 million compared with$361.7 million in the prior year.  TheCompany capitalized $16.8 million and $25.6 million in 2009 and 2008,respectively, under capital lease obligations with the related financingrecorded as long-term debt.

 

Asof December 31, 2009, the Company had $811.7 million in cash and cashequivalents. The increase over the December 31, 2008 balance of $379.5million largely represents cash provided by operating activities of $800.0million for 2009 and additional funds provided by the May 2009 financingactivities described above, partially offset by capital spending of $427.6million and term loan repayments of $63.4 million.  Most of the cash is held in mature, liquid marketswhere the Company has operations, such as North America, Europe and Australiaand is readily available to fund global liquidity requirements.  Approximately 7% of the cash at December 31,2009 is held in Venezuela where government restrictions on transfers of cashout of the country limit the Company’s ability to immediately access cash atthe government’s official exchange rate of 2.15 bolivars to the U.S. dollar asof December 31, 2009.  The Companyhas been able to obtain U.S. dollars at the official rate to pay for some ofits key raw materials and other imports. However, in 2009, the Venezuelan government significantly slowed theprocess of exchanging bolivars to U.S. dollars at the official rate.  As a result, the Company’s cash balance inVenezuela increased as earnings accumulated. The Company has the ability to access the cash in Venezuela more quicklythrough a market-driven parallel exchange process which, at December 31,2009, valued the bolivar about 60% lower than the official exchange rate.  During 2009, the Company entered into aseries of parallel market transactions in order to exchange Venezuelan bolivarsinto U.S. dollars, and recognized foreign currency exchange losses of $28.0million ($19.5 million after tax amount attributable to the Company).  As of December 31, 2009, the Companytranslated the balance sheets of its Venezuelan subsidiaries at the parallelmarket rate, which resulted in a decrease in cash and cash equivalents of$101.5 million.  For further informationregarding Venezuela, see Note 20 to the Consolidated Financial Statements.

 

TheCompany anticipates that cash flows from its operations and from utilization ofcredit available under the Agreement will be sufficient to fund its operatingand seasonal working capital needs, debt service and other obligations on ashort-term (twelve-months) and long-term basis. Based on the Company’s expectations regarding future payments forlawsuits and claims and also based on the Company’s expected operating cashflow, the Company believes that the payment of any deferred amounts ofpreviously settled or otherwise determined lawsuits and claims, and theresolution of presently pending and anticipated future lawsuits and claimsassociated with asbestos, will not have a material adverse effect upon theCompany’s liquidity on a short-term or long-term basis.

 

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*ContractualObligations and Off-Balance Sheet Arrangements*

 

The followinginformation summarizes the Company’s significant contractual cash obligationsat December 31, 2009 (dollars in millions).

 
| ** **                                             | ** ** | **Payments due by period** | ** ** |
|--------------------------------------------------------|------------|----------------------------|------------|
| ** **                                             | ** ** | **Total**                  | ** ** | **Less than  one year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than 5  years** | ** ** |
| Contractual  cash obligations:                         |       |                       |       |   |   |   |   |   |   |   |   |
| Long-term  debt                                        |       | $                          | 3,231.3    |   | $ | 39.6 |   | $ | 272.9 |   | $ | 1,647.4 |   | $ | 1,271.4 |   |
| Capital  lease obligations                             |       | 75.9                       |       | 10.1 |   | 28.6 |   | 21.3 |   | 15.9 |   |
| Operating  leases                                      |       | 199.0                      |       | 60.8 |   | 77.8 |   | 36.8 |   | 23.6 |   |
| Interest  (1)                                          |       | 1,096.5                    |       | 212.2 |   | 399.0 |   | 333.5 |   | 151.8 |   |
| Purchase  obligations (2)                              |       | 898.8                      |       | 517.0 |   | 310.0 |   | 68.8 |   | 3.0 |   |
| Pension  benefit plan contributions                    |       | 15.0                       |       | 15.0 |   |   |   |   |   |   |   |
| Postretirement  benefit plan benefit payments (1) |       | 289.0                      |       | 22.3 |   | 44.5 |   | 44.1 |   | 178.1 |   |
|                                                   |       |                       |       |   |   |   |   |   |   |   |   |
| Total  contractual cash obligations                    |       | $                          | 5,805.5    |   | $ | 877.0 |   | $ | 1,132.8 |   | $ | 2,151.9 |   | $ | 1,643.8 |   |

 
| ** **                     | ** ** | **Amount of commitment expiration per period** | ** ** |
|--------------------------------|------------|------------------------------------------------|------------|
| ** **                     | ** ** | **Total**                                      | ** ** | **Less than  one year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than 5  years** | ** ** |
| Other  commercial commitments: |       |                                           |       |   |   |   |   |   |   |   |   |
| Standby  letters of credit     |       | $                                              | 107.7      |   | $ | 107.7 |   |   |   |   |   |   |   |
|                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Total  commercial commitments  |       | $                                              | 107.7      |   | $ | 107.7 |   |   |   |   |   |   |   |

 

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(1) Amountsbased on rates and assumptions at December 31, 2009.

 

(2) TheCompany’s purchase obligations consist principally of contracted amounts forenergy and molds. In cases where variable prices are involved, current marketprices have been used.  The amount abovedoes not include ordinary course of business purchase orders because themajority of such purchase orders may be canceled.  The Company does not believe such purchaseorders will adversely affect its liquidity position.

 

The Company isunable to make a reasonably reliable estimate as to when cash settlement withtaxing authorities may occur for its unrecognized tax benefits.  Therefore, the liability for unrecognized taxbenefits is not included in the table above. See Note 10 to the Consolidated Financial Statements for additionalinformation.

 

The Company has nooff-balance sheet arrangements.

 

***Critical Accounting Estimates***

 

The Company’s analysis and discussion of its financial condition andresults of operations are based upon its consolidated financial statements thathave been prepared in accordance with accounting principles generally acceptedin the United States (“U.S. GAAP”).  Thepreparation of financial statements in conformity with U.S. GAAP requiresmanagement to make estimates and assumptions that affect the reported amountsof assets, liabilities, revenues and expenses, and the disclosure of contingentassets and liabilities.  The Company evaluatesthese estimates and assumptions on an ongoing basis.  Estimates and assumptions are based onhistorical and other factors believed to be reasonable under the circumstancesat the time the financial statements are issued.  The results of these estimates may form thebasis of the carrying value of certain assets and liabilities and may not bereadily apparent from other sources. Actual results, under conditions and circumstances different from thoseassumed, may differ from estimates.

 

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The impact of, and any associated risks related to, estimates andassumptions are discussed within Management’s Discussion and Analysis ofFinancial Condition and Results of Operations, as well as in the Notes to theConsolidated Financial Statements, if applicable, where estimates andassumptions affect the Company’s reported and expected financial results.

 

The Company believes that accounting for property, plant and equipment,impairment of long-lived assets, pension benefit plans, and income taxesinvolves the more significant judgments and estimates used in the preparationof its consolidated financial statements.

 

*Property, Plant and Equipment*

 

The net carrying amount ofproperty, plant, and equipment (“PP&E”) at December 31, 2009 totaled$2,742.3 million, representing 31% of total assets.  Depreciation expense during 2009 totaled$374.8 million, representing approximately 5% of total costs and expenses.Given the significance of PP&E and associated depreciation to the Company’sconsolidated financial statements, the determinations of an asset’s cost basisand its economic useful life are considered to be critical accountingestimates.

 

**Cost Basis** - PP&E isrecorded at cost, which is generally objectively quantifiable when assets arepurchased singly.   However, when assetsare purchased in groups, or as part of a business, costs assigned to PP&Eare based on an estimate of fair value of each asset at the date ofacquisition.  These estimates are basedon assumptions about asset condition, remaining useful life and marketconditions, among others.  The Companyfrequently employs expert appraisers to aid in allocating cost among assetspurchased as a group.

 

Included in the cost basisof PP&E are thosecosts which substantially increase the useful lives or capacity of existingPP&E.  Significant judgment is neededto determine which costs should be capitalized under these criteria and whichcosts should be expensed as a repair or maintenance expenditure.  For example, the Company frequently incursvarious costs related to its existing glass melting furnaces and formingmachines and must make a determination of which costs, if any, tocapitalize.  The Company relies on theexperience and expertise of its operations and engineering staff to makereasonable and consistent judgments regarding increases in useful lives orcapacity of PP&E.

 

**Estimated Useful Life** — PP&E isgenerally depreciated using the straight-line method, which deducts equalamounts of the cost of each asset from earnings each period over its estimatedeconomic useful life.  Economic usefullife is the duration of time an asset is expected to be productively employedby the Company, which may be less than its physical life. Management’sassumptions regarding the following factors, among others, affect thedetermination of estimated economic useful life: wear and tear, product andprocess obsolescence, technical standards, and changes in market demand.

 

The estimated economicuseful life of an asset is monitored to determine its appropriateness,especially in light of changed business circumstances. For example,technological advances, excessive wear and tear, or changes in customers’requirements may result in a shorter estimated useful life than originallyanticipated. In these cases, the Company depreciates the remaining net bookvalue over the new estimated remaining life, thereby increasing depreciationexpense per year on a prospective basis. Likewise, if the estimated useful life is increased, the adjustment tothe useful life decreases depreciation expense per year on a prospectivebasis.  Changes in economic useful lifeassumptions did not have a material impact on the Company’s reported results in2009, 2008 or 2007.

 

*Impairment of Long-Lived Assets*

 

**Property, Plant, and Equipment** — The Companytests for impairment of PP&E whenever events or changes in circumstancesindicate that the carrying amount of the assets may not be recoverable.  PP&E 

 

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held for use in the Company’sbusiness is grouped for impairment testing at the lowest level for which cashflows can reasonably be identified, typically a geographic region.  The Company evaluates the recoverability of property,plant, and equipment based on undiscounted projected cash flows, excludinginterest and taxes. If an asset group is considered impaired, theimpairment loss to be recognized is measured as the amount by which the assetgroup’s carrying amount exceeds its fair value. PP&E held for sale is reported at the lower of carrying amount orfair value less cost to sell.

 

Impairment testing requiresestimation of the fair value of PP&E based on the discounted value ofprojected future cash flows generated by the asset group.  The assumptions underlying cash flowprojections represent management’s best estimates at the time of the impairmentreview.  Factors that management mustestimate include, among other things: industry and market conditions, salesvolume and prices, production costs and inflation.  Changes in key assumptions or actualconditions which differ from estimates could result in an impairmentcharge.  The Company uses reasonable andsupportable assumptions when performing impairment reviews and cannot predictthe occurrence of future events and circumstances that could result inimpairment charges.

 

In mid-2007, the Companybegan a strategic review of its global manufacturing footprint.  As a result of this review, during 2007,2008, and 2009, the Company recorded charges that included impairments ofproperty, plant, and equipment across all segments including certain RetainedCorporate Costs and Other activities.  Whilethe Company has concluded this strategic review of its manufacturing footprint,it is possible that the Company may conclude in the future that it will closeor temporarily idle additional selected facilities or production lines andreduce headcount to increase operating performance and cash flows.  As of December 31, 2009, no otherdecisions had been made and no events had occurred that would require anadditional evaluation of possible impairment. For additional information on charges recorded in 2009, 2008 and 2007,see Note 14 to the Consolidated Financial Statements.

 

**Goodwill** — Goodwill at December 31,2009 totaled $2,381.0 million, representing 27% of total assets.  The Company evaluates goodwill annually (ormore frequently if impairment indicators arise) for impairment.  The Company conducts its evaluation as of October 1of each year.  Goodwill impairmenttesting is performed using the business enterprise value (“BEV”) of each reportingunit which is calculated as of a measurement date by determining the presentvalue of debt-free, after-tax projected future cash flows, discounted at theweighted average cost of capital of a hypothetical third party buyer.  This BEV is then compared to the book valueof each reporting unit as of the measurement date to assess whether animpairment of goodwill may exist.

 

During the fourth quarter of 2009, the Company completed its annualtesting and determined that no impairment of goodwill existed.

 

The testing performed as of October 1, 2009, indicated asignificant excess of BEV over book value for each unit.  If the Company’s projected future cash flowswere substantially lower, or if the assumed weighted average cost of capitalwas substantially higher, the testing performed as of October 1, 2009, mayhave indicated an impairment of one or more of the Company’s reporting unitsand, as a result, the related goodwill may also have been impaired.  However, less significant changes inprojected future cash flows or the assumed weighted average cost of capitalwould not have indicated an impairment. For example, if projected future cash flows had been decreased by 5%, orif the weighted average cost of capital had been increased by 5%, or both, theresulting lower BEV’s would still have exceeded the book value of eachreporting unit by a significant margin.

 

The Company will monitor conditions throughout 2010 that mightsignificantly affect the projections and variables used in the impairment testto determine if a review prior to October 1 may be appropriate.  If the results of impairment testing confirmthat a write down of goodwill is necessary, then the Company will record acharge in the fourth quarter of 2010, or earlier if appropriate.  In the event the Company 

 

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would be required to record a significant write down of goodwill, thecharge would have a material adverse effect on reported results of operationsand net worth.

 

**OtherLong-Lived Assets** — Other long-lived assets include, among others,equity investments and repair parts inventories.  The Company’s equity investments arenon-publicly traded ventures with other companies in businesses related tothose of the Company.  Equity investmentsare reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount of the investment may not berecoverable.  In the event that a declinein fair value of an investment occurs, and the decline in value is consideredto be other than temporary, an impairment loss is recognized. Summarizedfinancial information of equity affiliates is included in Note 4 to theConsolidated Financial Statements. During 2007 and 2008, the Company recordedcharges that included impairments of an equity investment.  For additional information on these charges,see Note 14 to the Consolidated Financial Statements.

 

The Company carries a significant amount of repair parts inventories inorder to provide a dependable supply of quality parts for servicing the Company’sPP&E, particularly its glass melting furnaces and forming machines.  The Company evaluates the recoverability of repairparts inventories based on undiscounted projected cash flows, excludinginterest and taxes, when factors indicate that impairment may exist.  If impairment exists, the repair parts arewritten down to fair value.  The Companycontinually monitors the carrying value of repair parts for recoverability,especially in light of changing business circumstances.  For example, technological advances relatedto, and changes in, the estimated future demand for products produced on theequipment to which the repair parts relate may make the repair partsobsolete.  In these circumstances, theCompany writes down the repair parts to fair value.

 

*Pension Benefit Plans*

 

SignificantEstimates - The determination of pension obligations and therelated pension expense or credits to operations involves significantestimates.  The most significantestimates are the discount rate used to calculate the actuarial present valueof benefit obligations and the expected long-term rate of return on planassets.  The Company uses discount ratesbased on yields of high quality fixed rate debt securities at the end of theyear.  At December 31, 2009, theweighted average discount rate for all plans was 5.76%.  The Company uses an expected long-term rateof return on assets that is based on both past performance of the various plans’assets and estimated future performance of the assets.  Due to the nature of the plans’ assets andthe volatility of debt and equity markets, actual returns may varysignificantly from year to year.  TheCompany refers to average historical returns over longer periods (up to 10years) in determining its expected rates of return because short-termfluctuations in market values do not reflect the rates of return the Companyexpects to achieve based upon its long-term investing strategy.  For purposes of determining pension chargesand credits in 2010, the Company’s estimated weighted average expectedlong-term rate of return on plan assets is 7.6% compared to 7.6% in 2009. TheCompany recorded pension expense (income) from continuing operations of $41.3million, $(24.3) million, and $3.4 million in 2009, 2008, and 2007,respectively, from its principal defined benefit pension plans.  Pension expense for 2009 included a charge of$9.3 million for the settlement of pension liabilities related to previouslyclosed facilities and $8.6 million for special termination benefits related toannounced plant closures.  The increasein pension expense in 2009 is principally a result of lower asset values in theU.S. plans at the beginning of 2009.  Dependingon currency translation rates, the Company expects to record approximately $75million of pension expense for the full year of 2010.

 

Futureeffects on reported results of operations depend on economic conditions andinvestment performance.  For example, aone-half percentage point change in the actuarial assumption regarding theexpected return on assets would result in a change of approximately $18 millionin the pretax pension amount for the full year 2010.  In addition, changes in external factors,including the fair values of plan assets and the discount rates used tocalculate plan liabilities, could have a significant effect on the recognitionof funded status as described below.

 

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Recognitionof Funded Status — General accounting principles for pension benefitplans require employers to adjust the assets and liabilities related to definedbenefit plans so that the amounts reflected on the balance sheet represent theoverfunded or underfunded status of the plans. These funded status amounts are measured as the difference between thefair value of plan assets and actuarially calculated benefit obligations as ofthe balance sheet date.  At December 31,2009, the Accumulated Other Comprehensive Loss component of share owners’equity was decreased by $133.5 million ($119.1 million after tax attributableto non-U.S. pension plans) to reflect a net increase in the funded status ofthe Company’s plans at that date.

 

*IncomeTaxes*

 

The Company accounts for income taxes as required bygeneral accounting principles under which deferred tax assets and liabilitiesare recognized for the tax effects of temporary differences between thefinancial reporting and tax bases of assets and liabilities measured usingenacted tax rates.

 

Management judgment is required in determining incometax expense and the related balance sheet amounts.  In addition, judgments are required concerningthe ultimate outcome of uncertain income tax positions.  Actual income taxes paid may vary fromestimates, depending upon changes in income tax laws, actual results ofoperations, and the final audit of tax returns by taxing authorities. Tax assessmentsmay arise several years after tax returns have been filed. During 2009, theCompany’s estimated unrecognized tax benefits increased by $16.0 millionrelated to tax positions taken in prior years in non-U.S. jurisdictions.

 

Deferred tax assets are also recorded for operatinglosses and tax credit carryforwards. However, a valuation allowance is recordedwhen it is more likely than not that some portion or all of the deferred taxassets will not be realized.  Thisassessment is dependent upon projected profitability including the effects oftax planning.  Deferred tax assets andliabilities are determined separately for each tax jurisdiction in which theCompany conducts its operations or otherwise incurs taxable income orlosses.  In the U.S., the Company hasrecorded significant deferred tax assets, the largest of which relate toforeign and other tax credits which amounted to $329.7 million at December 31,2009 and the pension liability which amounted to $82.0 million at December 31,2009.   The deferred tax assets arepartially offset by deferred tax liabilities, the most significant of whichrelate to accelerated depreciation.  TheCompany has recorded a valuation allowance for the portion of U.S. deferred taxassets not offset by deferred tax liabilities.

 

## **ITEM 7A.               QUALITATIVEAND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Market risksrelating to the Company’s operations result primarily from fluctuations inforeign currency exchange rates, changes in interest rates, and changes incommodity prices, principally energy and soda ash.  The Company uses certain derivativeinstruments to mitigate a portion of the risk associated with changing foreigncurrency exchange rates and fluctuating energy prices.  These instruments carry varying degrees ofcounterparty credit risk.  To mitigatethis risk, the Company has established limits on the exposure with individualcounterparties and the Company regularly monitors these exposures.  Substantially all of these exposures are withcounterparties that are rated single-A or above.

 

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***ForeignCurrency Exchange Rate Risk***

 

*Earningsof operations outside the United States*

 

A substantialportion of the Company’s operations are conducted by subsidiaries outside theU.S.  The primary international marketsserved by the Company’s subsidiaries are in Canada, Australia, China, SouthAmerica (principally Colombia, Brazil and Venezuela), and Europe (principallyItaly, France, The Netherlands, Germany, the United Kingdom, Spain, andPoland).  In general, revenues earned andcosts incurred by the Company’s major international operations are denominatedin their respective local currencies.  Consequently, the Company’s reported financialresults could be affected by factors such as changes in foreign currencyexchange rates or highly inflationary economic conditions in the internationalmarkets in which the Company’s subsidiaries operate.  When the U.S. dollar strengthens againstforeign currencies, the reported U.S. dollar value of local currency earningsgenerally decreases; when the U.S. dollar weakens against foreign currencies,the reported U.S. dollar value of local currency earnings generallyincreases.  For the years ended December 31,2009, 2008 and 2007, the Company did not have any significant foreignsubsidiaries whose functional currency was the U.S. dollar.  However, beginning January 1, 2010, theCompany’s subsidiaries in Venezuela will be considered to be operating in ahighly inflationary economy and the Company will be required to adopt the U.S.dollar as the functional currency for its subsidiaries in that country.  The Company does not hedge the foreigncurrency exchange rate risk related to earnings of operations outside theUnited States.

 

In Venezuela, where currency restrictions have been in effect for anumber of years, the government controls all exchanges of bolivars into U.S.dollars at the official rate, which, as of December 31, 2009, had remainedfixed at 2.15 bolivars to the U.S dollar since early 2005.  In 2009, increased restrictions in thecurrency exchange process, combined with a general decline in economicconditions in Venezuela, contributed to a growing shortage of U.S. dollarsavailable for exchange at the official rate. In addition, inflation in Venezuela has continued at an acceleratedrate, and, beginning January 1, 2010, Venezuela’s economy will beconsidered highly inflationary.  Foraccounting purposes, an economy is deemed to be highly inflationary when thethree-year cumulative rate of inflation exceeds 100%.  Due to currency restrictions in place inVenezuela, the Company adopted the market-driven parallel exchange rate as of December 31,2009 for translation purposes, and expects to use the parallel market rate toremeasure its financial statements under a highly-inflationary basis ofaccounting.  This will have an adverseimpact on the reported results of the Company’s Venezuelan operations, which representedapproximately 40% of the South American Segment’s operating profit for 2009,including the $28.0 million foreign exchange losses recognized in 2009 toexchange bolivars into U.S. dollars in the parallel market.  In addition, monetary assets (such as cashand receivables) and monetary liabilities (such as payables and accruals) willbe remeasured at the end of each reporting period using the parallel marketrate at that date.  Because the parallelmarket rate is subject to fluctuation, such remeasurement will increase thevolatility of reported results of operations. See Note 20 to the Consolidated Financial Statements for moreinformation.

 

*Borrowings not denominated in the functional currency*

 

Because the Company’ssubsidiaries operate within their local economic environment, the Companybelieves it is appropriate to finance those operations with borrowingsdenominated in the local currency to the extent practicable where debtfinancing is desirable or necessary. Considerations which influence the amount of such borrowings includelong- and short-term business plans, tax implications, and the availability ofborrowings with acceptable interest rates and terms.  In those countries where the local currency isthe designated functional currency, this strategy mitigates the risk ofreported losses or gains in the event the foreign currency strengthens orweakens against the U.S. dollar.  Inthose countries where the U.S. dollar is the designated functional currency,however, local currency borrowings expose the Company to reported losses orgains in the event the foreign currency strengthens or weakens against the U.S.dollar.

 

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Available excess funds ofa subsidiary may be redeployed through intercompany loansto other subsidiaries for debt repayment, capital investment, or other cashrequirements.  Generally, eachintercompany loan is denominated in the lender’s local currency giving rise toforeign currency exchange rate risk for the borrower.  To mitigate this risk, the borrower generallyenters into a forward exchange contract which effectively swaps theintercompany loan and related interest to its local currency.

 

TheCompany believes the near term exposure to foreign currency exchange rate riskof its foreign currency risk sensitive instruments was not material at December 31,2009 and 2008.

 

***InterestRate Risk***

 

The Company’s interestexpense is most sensitive to changes in the general level of U.S. interestrates applicable to its U.S. dollar indebtedness.  The Company’s interest rate risk managementobjective is to limit the impact of interest rate changes on net income andcash flow, while minimizing interest payments and expense.  To achieve this objective, the Companyregularly evaluates its mix of fixed and floating-rate debt, and, from time totime, may enter into interest rate swap agreements.

 

The following tableprovides information about the Company’s interest rate sensitivity related toits significant debt obligations at December 31, 2009.  The table presents principal cash flows andrelated weighted-average interest rates by expected maturity date.

 
| ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Fair**       | ** ** |
|-----------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **There-** | ** ** | ** ** | ** ** | **Value at**   | ** ** |
| **(dollars  in millions)**        | ** ** | **2010**   | ** ** | **2011**   | ** ** | **2012**   | ** ** | **2013**   | ** ** | **2014**   | ** ** | **after**  | ** ** | **Total**  | ** ** | **12/31/2009** | ** ** |
|                              |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |           |       |
| Long-term  debt at variable rate: |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |           |       |
| Principal  by expected maturity   |       | $          | 21.4       |       | $          | 136.1      |       | $          | 165.4      |       | $          | 471.9      |       | $          | 11.7       |           | $          | 22.2 |   | $ | 828.7 |   | $ | 828.7 |   |
| Avg.  principal outstanding       |       | 818.0      |       | 739.3      |       | 588.5      |       | 269.9      |       | 28.1       |       | 11.1       |       |       |       |           |       |
| Avg.  interest rate               |       | 2.40       | %          | 2.40       | %          | 2.40       | %          | 2.40       | %          | 2.40       | %          | 2.40       | %          |       |       |           |       |
|                              |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |           |       |
| Long-term  debt at fixed rate:    |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |           |       |
| Principal  by expected maturity   |       | $          | 28.1       |       |       |       |       |       | $          | 450.0      |       | $          | 724.7      |       | $          | 1,282.9        |       | $ | 2,485.7 |   | $ | 2,518.5 |   |
| Avg.  principal outstanding       |       | 2,468.1    |       | $          | 2,457.6    |       | $          | 2,457.6    |       | 2,176.4    |       | 1,282.9    |       | 1,282.9    |       |           |       |   |   |
| Avg.  interest rate               |       | 7.33       | %          | 7.30       | %          | 7.30       | %          | 7.11       | %          | 7.35       | %          | 7.35       | %          |       |       |           |       |

 

The Company believes thenear term exposure to interest rate risk of its debt obligations has notchanged materially since December 31, 2008.

 

***CommodityPrice Risk***

 

TheCompany has exposure to commodity price risk, principally related toenergy.  The Company mitigates a portionof this risk by passing commodity cost changes through to customers.  In addition, the Company enters intocommodity futures contracts related to forecasted natural gas requirements, theobjectives of which are to limit the effects of fluctuations in the futuremarket price paid for natural gas and the related volatility in cashflows.  The Company continually evaluatesthe natural gas market with respect to its forecasted usage requirements overthe next twelve to twenty-four months and periodically enters into commodityfutures contracts in order to hedge a portion of its usage requirements overthat period.  At December 31, 2009, the Company hadentered into commodity futures contracts covering approximately 4,800,000 MM BTUs over that period.

 

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TheCompany believes the near term exposure to commodity price risk of itscommodity futures contracts was not material at December 31, 2009.

 

***ForwardLooking Statements***

 

This documentcontains “forward looking” statements within the meaning of Section 21E ofthe Securities Exchange Act of 1934 and Section 27A of the Securities Actof 1933. Forward-looking statements reflect the Company’s current expectationsand projections about future events at the time, and thus involve uncertaintyand risk. It is possible the Company’s future financial performance may differfrom expectations due to a variety of factors including, but not limited to thefollowing: (1) foreign currency fluctuations relative to the U.S. dollar, (2) changesin capital availability or cost, including interest rate fluctuations, (3) thegeneral political, economic and competitive conditions in markets and countrieswhere the Company has its operations, including disruptions in capital markets,disruptions in the supply chain, competitive pricing pressures, inflation ordeflation, and changes in tax rates and laws, (4) consumer preferences foralternative forms of packaging, (5) fluctuations in raw material and laborcosts, (6) availability of raw materials, (7) costs and availabilityof energy, (8) transportation costs, (9) the ability of the Companyto raise selling prices commensurate with energy and other cost increases, (10) consolidationamong competitors and customers, (11) the ability of the Company to integrateoperations of acquired businesses and achieve expected synergies, (12)unanticipated expenditures with respect to environmental, safety and healthlaws, (13) the performance by customers of their obligations under purchaseagreements, and (14) the timing and occurrence of events which are beyond thecontrol of the Company, including events related to OI Inc.’s asbestos-relatedclaims. It is not possible to foresee or identify all such factors. Any forwardlooking statements in this document are based on certain assumptions andanalyses made by the Company in light of its experience and perception ofhistorical trends, current conditions, expected future developments, and otherfactors it believes are appropriate in the circumstances. Forward-lookingstatements are not a guarantee of future performance and actual results ordevelopments may differ materially from expectations. While the Companycontinually reviews trends and uncertainties affecting the Company’s results ofoperations and financial condition, the Company does not assume any obligationto update or supplement any particular forward looking statements contained inthis document.

 

## **ITEM8.                  FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 
| ** **                                                      | ** ** | **Page** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|
|                                                            |       |     |       |
|                                                            |       |     |       |
| Report of Independent Registered Public Accounting  Firm        |       | 41       |       |
|                                                            |       |     |       |
| Consolidated Balance Sheets at December 31, 2009  and 2008 |       | 43-44    |       |
|                                                            |       |     |       |
| For the years ended December 31, 2009, 2008,  and 2007:    |       |     |       |
|                                                            |       |     |       |
| Consolidated Results of Operations                              |       | 42       |       |
| Consolidated Share Owner’s Equity                          |       | 45       |       |
| Consolidated Cash Flows                                         |       | 46       |       |
|                                                            |       |     |       |
| Notes to Consolidated Financial Statements                      |       | 47       |       |
|                                                            |       |     |       |
| Selected Quarterly Financial Data                               |       | 97       |       |

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

The Board of Directorsand Share Owner of

Owens-Illinois Group, Inc.

 

We have audited theaccompanying consolidated balance sheets of Owens-Illinois Group, Inc. andsubsidiaries as of December 31, 2009 and 2008, and the relatedconsolidated statements of results of operations, share owners’ equity, andcash flows for each of the three years in the period ended December 31,2009. Our audits also included the financial statement schedule listed in theIndex at Item 15(a). These financial statements and schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements and schedule based on our audits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the financialstatements referred to above present fairly, in all material respects, theconsolidated financial position of Owens-Illinois Group, Inc. andsubsidiaries at December 31, 2009 and 2008, and the consolidated resultsof their operations and their cash flows for each of the three years in theperiod ended December 31, 2009, in conformity with U.S. generally acceptedaccounting principles. Also, in our opinion, the related financial statementschedule, when considered in relation to the basic financial statements takenas a whole, presents fairly in all material respects the information set forththerein.

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), Owens-Illinois Group, Inc.’s internal control over financialreporting as of December 31, 2009, based on criteria established inInternal Control-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated February 10,2010 expressed an unqualified opinion thereon.

 

As discussed in Note 1 to theconsolidated financial statements, the accompanying consolidated financialstatements have been retrospectively adjusted for the adoption of a newaccounting standard which changed the presentation of noncontrolling interestsin subsidiaries.

 

 
|                    | /s/  Ernst & Young LLP |
|-------------------------|---------------------------------|
|                    |                            |
| Toledo,  Ohio           |                            |
| February 10,  2010 |                            |

 

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**CONSOLIDATED RESULTS OF OPERATIONS** Owens-Illinois Group, Inc.

Dollars inmillions, except per share amounts

 
| **Years  ended December 31,**                       | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                     |       |     |       |     |       |     |       |
| Net  sales                                               |       | $        | 7,066.5    |     | $          | 7,884.7  |       | $ | 7,566.7 |   |
| Manufacturing,  shipping, and delivery                   |       | (5,582.6 | )          | (6,208.1 | )          | (5,971.4 | )          |
| Gross  profit                                            |       | 1,483.9  |       | 1,676.6  |       | 1,595.3  |       |
|                                                     |       |     |       |     |       |     |       |
| Selling  and administrative expense                      |       | (506.4   | )          | (511.9   | )          | (520.6   | )          |
| Research,  development, and engineering expense          |       | (58.8    | )          | (66.6    | )          | (65.8    | )          |
| Interest  expense                                        |       | (221.7   | )          | (253.0   | )          | (348.6   | )          |
| Interest  income                                         |       | 28.6     |       | 38.6     |       | 42.3     |       |
| Equity  earnings                                         |       | 52.6     |       | 50.8     |       | 34.1     |       |
| Royalties  and net technical assistance                  |       | 12.9     |       | 18.6     |       | 19.7     |       |
| Other  income                                            |       | 11.2     |       | 9.5      |       | 16.4     |       |
| Other  expense                                           |       | (297.0   | )          | (154.2   | )          | (151.2   | )          |
|                                                     |       |     |       |     |       |     |       |
| Earnings  from continuing operations before income taxes |       | 505.3    |       | 808.4    |       | 621.6    |       |
| Provision  for income taxes                              |       | (154.7   | )          | (237.9   | )          | (147.8   | )          |
|                                                     |       |     |       |     |       |     |       |
| Earnings  from continuing operations                     |       | 350.6    |       | 570.5    |       | 473.8    |       |
| Net  earnings of discontinued operations                 |       |     |       |     |       | 3.0      |       |
| Gain  on sale of discontinued operations                 |       |     |       | 6.8      |       | 1,038.5  |       |
| Net  earnings                                            |       | 350.6    |       | 577.3    |       | 1,515.3  |       |
| Net  earnings attributable to noncontrolling interests   |       | (36.0    | )          | (70.2    | )          | (59.7    | )          |
| Net  earnings attributable to the Company                |       | $        | 314.6      |     | $          | 507.1    |       | $ | 1,455.6 |   |
|                                                     |       |     |       |     |       |     |       |
| Amounts  attributable to the Company:                    |       |     |       |     |       |     |       |
| Earnings  from continuing operations                     |       | $        | 314.6      |     | $          | 500.3    |       | $ | 414.3 |   |
| Net  earnings of discontinued operations                 |       |     |       |     |       | 2.8      |       |
| Gain  on sale of discontinued operations                 |       |     |       | 6.8      |       | 1,038.5  |       |
| Net  earnings                                            |       | $        | 314.6      |     | $          | 507.1    |       | $ | 1,455.6 |   |

 

See accompanying Notes to the Consolidated Financial Statements.

 

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**CONSOLIDATEDBALANCE SHEETS**Owens-Illinois Group, Inc.

Dollars in millions

 
| **December 31,**                                                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                            |       |     |       |     |       |
| **Assets**                                                                      |       |     |       |     |       |
| **Current assets:**                                                             |       |     |       |     |       |
| Cash, including time deposits of $561.4 ($307.5 in  2008)                       |       | $        | 811.7      |     | $          | 379.5 |   |
| Short-term investments                                                          |       | 0.9      |       | 25.0     |       |
| Receivables, less allowances of $36.5 ($39.7 in  2008) for losses and discounts |       | 1,004.2  |       | 988.8    |       |
| Inventories                                                                     |       | 900.3    |       | 999.5    |       |
| Prepaid expenses                                                                |       | 79.6     |       | 51.9     |       |
|                                                                            |       |     |       |     |       |
| Total current assets                                                            |       | 2,796.7  |       | 2,444.7  |       |
| **Other assets:**                                                               |       |     |       |     |       |
| Equity investments                                                              |       | 114.3    |       | 101.7    |       |
| Repair parts inventories                                                        |       | 125.1    |       | 132.5    |       |
| Prepaid pension                                                                 |       | 46.3     |       |     |       |
| Deposits, receivables, and other assets                                         |       | 521.7    |       | 444.5    |       |
| Goodwill                                                                        |       | 2,381.0  |       | 2,207.5  |       |
| Total other assets                                                              |       | 3,188.4  |       | 2,886.2  |       |
| **Property, plant, and equipment:**                                             |       |     |       |     |       |
| Land, at cost                                                                   |       | 248.5    |       | 248.1    |       |
| Buildings and equipment, at cost:                                               |       |     |       |     |       |
| Buildings and building equipment                                                |       | 1,175.8  |       | 1,078.4  |       |
| Factory machinery and equipment                                                 |       | 4,771.6  |       | 4,345.3  |       |
| Transportation, office, and miscellaneous  equipment                            |       | 131.1    |       | 114.6    |       |
| Construction in progress                                                        |       | 291.9    |       | 196.7    |       |
|                                                                            |       | 6,618.9  |       | 5,983.1  |       |
| Less accumulated depreciation                                                   |       | 3,876.6  |       | 3,337.5  |       |
| Net property, plant, and equipment                                              |       | 2,742.3  |       | 2,645.6  |       |
|                                                                            |       |     |       |     |       |
| Total assets                                                                    |       | $        | 8,727.4    |     | $          | 7,976.5 |   |

 

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**CONSOLIDATED BALANCE SHEETS** Owens-Illinois Group, Inc.(continued)

Millionsof dollars

 
| **December 31,**                                                                               | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                |       |     |       |     |       |
| **Liabilities and Share Owners’  Equity**                                                      |       |     |       |     |       |
| **Current liabilities:**                                                                            |       |     |       |     |       |
| Short-term loans                                                                                    |       | $        | 302.3      |     | $          | 375.6 |   |
| Accounts payable                                                                                    |       | 863.2    |       | 838.2    |       |
| Salaries and wages                                                                                  |       | 170.8    |       | 141.6    |       |
| U.S. and foreign income taxes                                                                       |       | 39.8     |       | 78.7     |       |
| Other accrued liabilities                                                                           |       | 433.5    |       | 376.0    |       |
| Long-term debt due within one year                                                                  |       | 49.7     |       | 18.2     |       |
|                                                                                                |       |     |       |     |       |
| Total current liabilities                                                                           |       | 1,859.3  |       | 1,828.3  |       |
|                                                                                                |       |     |       |     |       |
| **Long-term debt**                                                                                  |       | 3,257.5  |       | 2,931.4  |       |
| ** **                                                                                          |       |     |       |     |       |
| **Deferred taxes**                                                                                  |       | 186.3    |       | 77.6     |       |
| ** **                                                                                          |       |     |       |     |       |
| **Pension benefits**                                                                                |       | 577.6    |       | 741.8    |       |
| ** **                                                                                          |       |     |       |     |       |
| **Nonpension postretirement  benefits**                                                             |       | 266.7    |       | 239.7    |       |
| ** **                                                                                          |       |     |       |     |       |
| **Other liabilities**                                                                               |       | 358.5    |       | 369.0    |       |
| ** **                                                                                          |       |     |       |     |       |
| **Share owners’ equity:**                                                                      |       |     |       |     |       |
| Common stock, par value $.01 per share, 1,000  shares authorized, 100 shares issued and outstanding |       | —   |       | —   |       |
| Other contributed capital                                                                           |       | 782.8    |       | 940.0    |       |
| Retained earnings                                                                                   |       | 2,531.1  |       | 2,216.5  |       |
| Accumulated other comprehensive loss                                                                |       | (1,290.6 | )          | (1,620.6 | )          |
|                                                                                                |       |     |       |     |       |
| Total share owner’s equity of the Company                                                      |       | 2,023.3  |       | 1,535.9  |       |
| Noncontrolling interests                                                                            |       | 198.2    |       | 252.8    |       |
| Total share owners’ equity                                                                     |       | 2,221.5  |       | 1,788.7  |       |
| Total liabilites and share owners’ equity                                                      |       | $        | 8,727.4    |     | $          | 7,976.5 |   |

 

See accompanyingNotes to the Consolidated Financial Statements.

 

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**CONSOLIDATEDSHARE OWNERS’ EQUITY**Owens-Illinois Group, Inc.

Dollars in millions

 
| ** **                                                             | ** ** | ** **                            | ** **  | **Share Owner’s Equity of the Company**      | ** ** | ** **                        | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------|-------------|---------------------------------------------------|------------|-----------------------------------|------------|
| **Years  ended December 31,**                                     | ** ** | **Total Share  Owners’  Equity** | ** **  | **Common Stock  and Other  Contributed  Capital** | ** ** | **Retained  Earnings  (Deficit)** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Non-  controlling  Interests** | ** ** |
|                                                                   |       |                                  |        |                                              |       |                              |       |   |   |   |   |
| Balance on January 1, 2007                                        |       | $                                     | 1,250.9     |                                              | $          | 1,384.7                           |       | $ | 253.8 |   | $ | (594.2 | ) | $ | 206.6 |   |
|                                                                   |       |                                  |        |                                              |       |                              |       |   |   |   |   |
| Net distribution to parent                                             |       | (274.3                                | )           | (274.3                                            | )          |                              |       |   |   |   |   |
| Comprehensive income:                                                  |       |                                  |        |                                              |       |                              |       |   |   |   |   |
| Net earnings                                                           |       | 1,515.3                               |        |                                              |       | 1,455.6                           |       |   |   | 59.7 |   |
| Foreign currency translation adjustments                               |       | 339.3                                 |        |                                              |       |                              |       | 325.3 |   | 14.0 |   |
| Pension and other postretirement benefit  adjustments, net of tax      |       | 63.8                                  |        |                                              |       |                              |       | 63.8 |   |   |   |
| Change in fair value of derivative instruments,  net of tax            |       | 28.2                                  |        |                                              |       |                              |       | 28.2 |   |   |   |
| Total comprehensive income                                             |       | 1,946.6                               |        |                                              |       |                              |       |   |   |   |   |
| Dividends paid to noncontrolling interests on  subsidiary common stock |       | (28.6                                 | )           |                                              |       |                              |       |   |   | (28.6 | ) |
| Balance on December 31, 2007                                      |       | $                                     | 2,894.6     |                                              | $          | 1,110.4                           |       | $ | 1,709.4 |   | $ | (176.9 | ) | $ | 251.7 |   |
|                                                                   |       |                                  |        |                                              |       |                              |       |   |   |   |   |
| Net distribution to parent                                             |       | (170.4                                | )           | (170.4                                            | )          |                              |       |   |   |   |   |
| Comprehensive income:                                                  |       |                                  |        |                                              |       |                              |       |   |   |   |   |
| Net earnings                                                           |       | 577.3                                 |        |                                              |       | 507.1                             |       |   |   | 70.2 |   |
| Foreign currency translation adjustments                               |       | (451.4                                | )           |                                              |       |                              |       | (431.9 | ) | (19.5 | ) |
| Pension and other postretirement benefit  adjustments, net of tax      |       | (978.9                                | )           |                                              |       |                              |       | (978.9 | ) |   |   |
| Change in fair value of derivative instruments,  net of tax            |       | (32.9                                 | )           |                                              |       |                              |       | (32.9 | ) |   |   |
| Total comprehensive loss                                               |       | (885.9                                | )           |                                              |       |                              |       |   |   |   |   |
| Dividends paid to noncontrolling interests on  subsidiary common stock |       | (49.6                                 | )           |                                              |       |                              |       |   |   | (49.6 | ) |
| Balance on December 31, 2008                                      |       | $                                     | 1,788.7     |                                              | $          | 940.0                             |       | $ | 2,216.5 |   | $ | (1,620.6 | ) | $ | 252.8 |   |
|                                                                   |       |                                  |        |                                              |       |                              |       |   |   |   |   |
| Net distribution to parent                                             |       | (157.2                                | )           | (157.2                                            | )          |                              |       |   |   |   |   |
| Comprehensive income:                                                  |       |                                  |        |                                              |       |                              |       |   |   |   |   |
| Net earnings                                                           |       | 350.6                                 |        |                                              |       | 314.6                             |       |   |   | 36.0 |   |
| Foreign currency translation adjustments                               |       | 200.5                                 |        |                                              |       |                              |       | 228.9 |   | (28.4 | ) |
| Pension and other postretirement benefit  adjustments, net of tax      |       | 70.5                                  |        |                                              |       |                              |       | 70.5 |   |   |   |
| Change in fair value of derivative instruments,  net of tax            |       | 30.6                                  |        |                                              |       |                              |       | 30.6 |   |   |   |
| Total comprehensive income                                             |       | 652.2                                 |        |                                              |       |                              |       |   |   |   |   |
| Dividends paid to noncontrolling interests on  subsidiary common stock |       | (62.2                                 | )           |                                              |       |                              |       |   |   | (62.2 | ) |
| **Balance on December 31, 2009**                                  | ** ** | **$**                                 | **2,221.5** | ** **                                        | **$**      | **782.8**                         | ** ** | **$** | **2,531.1** | ** ** | **$** | **(1,290.6** | **)** | **$** | **198.2** | ** ** |

 

See accompanying Notes to the Consolidated Financial Statements.

 

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**CONSOLIDATED CASH FLOWS** Owens-Illinois Group, Inc.

Dollars in millions

 
| **Years  ended December 31,**                          | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Operating activities:**                                   |       |     |       |     |       |     |       |
| Net earnings                                                |       | $        | 350.6      |     | $          | 577.3    |       | $ | 1,515.3 |   |
| Net earnings attributable to noncontrolling  interests      |       | (36.0    | )          | (70.2    | )          | $        | (59.7      | ) |
| Net earnings of discontinued operations                     |       |     |       |     |       | (2.8     | )          |
| Gain on sale of discontinued operations                     |       |     |       | (6.8     | )          | (1,038.5 | )          |
| Non-cash charges (credits):                                 |       |     |       |     |       |     |       |
| Depreciation                                                |       | 374.8    |       | 431.0    |       | 423.4    |       |
| Amortization of intangibles and other deferred  items       |       | 21.1     |       | 28.9     |       | 28.9     |       |
| Amortization of finance fees and debt discount              |       | 10.4     |       | 7.9      |       | 8.6      |       |
| Deferred tax provision                                      |       | 51.9     |       | 21.0     |       | 3.2      |       |
| Non-cash tax benefit                                        |       | (20.7    | )          |     |       |     |       |
| Restructuring and asset impairment                          |       | 213.6    |       | 133.3    |       | 100.3    |       |
| Other                                                       |       | 107.2    |       | 140.0    |       | 78.7     |       |
| Cash paid for restructuring                                 |       | (68.3    | )          | (48.9    | )          | (17.8    | )          |
| Change in non-current operating assets                      |       | 21.3     |       | 1.4      |       | (7.4     | )          |
| Reduction of non-current liabilities                        |       | (178.9   | )          | (90.1    | )          | (67.6    | )          |
| Change in components of working capital                     |       | 143.3    |       | (158.6   | )          | 36.2     |       |
| Cash provided by continuing operating activities            |       | 990.3    |       | 966.2    |       | 1,000.8  |       |
| Cash provided by discontinued operating activities          |       |     |       |     |       | 11.3     |       |
| Total cash provided by operating activities                 |       | 990.3    |       | 966.2    |       | 1,012.1  |       |
| **Investing activities:**                                   |       |     |       |     |       |     |       |
| Additions to property, plant, and equipment -  continuing   |       | (427.6   | )          | (361.7   | )          | (292.5   | )          |
| Additions to property, plant, and equipment -  discontinued |       |     |       |     |       | (23.3    | )          |
| Acquisitions, net of cash acquired                          |       | (5.4     | )          |     |       | (9.8     | )          |
| Advances to affiliate                                       |       | 1.6      |       | (1.6     | )          |     |       |
| Net cash proceeds from divestitures and other               |       | 13.4     |       | (13.9    | )          | 1,770.0  |       |
| Cash provided by (utilized in) investing activities         |       | (418.0   | )          | (377.2   | )          | 1,444.4  |       |
| **Financing activities:**                                   |       |     |       |     |       |     |       |
| Additions to long-term debt                                 |       | 1,080.1  |       | 686.4    |       | 406.4    |       |
| Repayments of long-term debt                                |       | (609.7   | )          | (695.4   | )          | (2,093.2 | )          |
| Net change in payable to parent                             |       | (221.9   | )          | (250.0   | )          | (300.0   | )          |
| Distribution to parent                                      |       | (183.3   | )          | (199.9   | )          | (305.8   | )          |
| Decrease in short-term loans                                |       | (79.4    | )          | (20.6    | )          | (21.5    | )          |
| Net receipts (payments) for hedging activity                |       | 14.3     |       | (45.2    | )          | 5.7      |       |
| Payment of finance fees                                     |       | (14.0    | )          |     |       | (6.3     | )          |
| Dividends paid to noncontrolling interests                  |       | (62.2    | )          | (49.6    | )          | (28.6    | )          |
| Cash utilized in financing activities                       |       | (76.1    | )          | (574.3   | )          | (2,343.3 | )          |
| Effect of exchange rate fluctuations on cash                |       | (64.0    | )          | (22.9    | )          | 51.8     |       |
| Increase (decrease) in cash                                 |       | 432.2    |       | (8.2     | )          | 165.0    |       |
| Cash at beginning of year                                   |       | 379.5    |       | 387.7    |       | 222.7    |       |
| Cash at end of year                                         |       | $        | 811.7      |     | $          | 379.5    |       | $ | 387.7 |   |

 

See accompanying Notes to the Consolidated FinancialStatements.

 

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**Owens-IllinoisGroup, Inc**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Tabulardata dollars in millions, except per share amounts**

 

**1.  Significant Accounting Policies**

 

**Basis ofConsolidated Statements** The consolidated financialstatements of Owens-Illinois Group, Inc. (“Company”) include the accountsof its subsidiaries.  Newly acquiredsubsidiaries have been included in the consolidated financial statements fromdates of acquisition.

 

The Company uses theequity method of accounting for investments in which it has a significantownership interest, generally 20% to 50%. Other investments are accounted for at cost.  The Company monitors other than temporarydeclines in fair value and records reductions in carrying values when appropriate.

 

Results ofoperations for the plastics packaging business sold during 2007 have been presented as a discontinuedoperation. The format of the Company’s 2007 consolidated income statements hasbeen reclassified to conform to the presentation used in the currentperiod.  The individual captions withinthe financial statements did not change.

 

The format of the Company’s consolidated cash flowsfor the years ended December 31, 2008 and 2007 has been reclassified toconform to the 2009 presentation. Amounts related to cash paid for restructuring activities have beenreclassified from changes in working capital and non-current liabilities andare now shown separately.

 

The Company has evaluated subsequent events throughFebruary 10, 2010, the date the financial statements were issued.

 

**Relationship with Owens-Illinois, Inc.**   The Company is a wholly-owned subsidiary ofOwens-Illinois, Inc. (“OI Inc.”). Although OI Inc. does not conduct any operations, it hassubstantial obligations related to outstanding indebtedness andasbestos-related payments. OI Inc. relies primarily on distributions fromits direct and indirect subsidiaries to meet these obligations.

 

For federal and certainstate income tax purposes, the taxable income of the Company is included in theconsolidated tax returns of OI Inc. and income taxes are allocated to theCompany on a basis consistent with separate returns.  Current income taxes are recorded by theCompany on a basis consistent with separate returns.

 

**Newly Adopted Financial StatementPronouncements**  Effective January 1, 2009, the Companyadopted the provisions of a new accounting standard which changed thepresentation of noncontrolling interests in subsidiaries. The format of theCompany’s consolidated results of operations, consolidated share owners’equity, and consolidated cash flows for the years ended December 31, 2008and 2007, and consolidated balance sheet at December 31, 2008 have beenreclassified to conform to the new presentation which is required to be appliedretrospectively.

 

**Nature ofOperations**  The Company is a leading manufacturer ofglass container products.  The Company’sprincipal product lines are glass containers for the food and beverageindustries.  The Company has glasscontainer operations located in 21 countries. The principal markets and operations for the Company’s products are inEurope, North America, South America, and Australia.

 

**Use ofEstimates**  The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires management of the Company to make estimates and assumptions thataffect certain amounts reported in the financial statements and accompanyingnotes.  Actual results may differ fromthose estimates, at which time the Company would revise its estimates

 

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**Owens-IllinoisGroup, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

accordingly.  For further information on certain of theCompany’s significant estimates relative to contingent liabilities, see Note16.

 

**Cash**  The Company defines “cash” as cash and timedeposits with maturities of three months or less when purchased.  Outstanding checks in excess of funds ondeposit are included in accounts payable.

 

**FairValue Measurements**  Fair value is defined as an exit price,representing the amount that would be received to sell an asset or paid totransfer a liability (exit price) in the principal or most advantageous marketfor the asset or liability in an orderly transaction between marketparticipants.  Generally acceptedaccounting principles defined a three-tier fair value hierarchy, whichprioritizes the inputs used in measuring fair value as follows:

 

*Level 1:* Observable inputs such as quoted prices in active markets;

*Level2: *Inputs, other than quoted prices in active markets,that are observable either directly or indirectly; and

*Level3: *Unobservable inputs for which there is little or nomarket data, which requires the Company to develop assumptions.

 

The carrying amountsreported for cash, short-term investments and short-term loans approximate fairvalue.  In addition, carrying amountsapproximate fair value for certain long-term debt obligations subject tofrequently redetermined interest rates. Fair values for the Company’s significant fixed rate debt obligationsare generally based on published market quotations.

 

The Company’s derivativeassets and liabilities consist of interest rate swaps, natural gas forwards,and foreign exchange option and forward contracts.  The Company uses an income approach tovaluing these contracts.  Interest rateyield curves, natural gas forward rates, and foreign exchange rates are thesignificant inputs into the valuation models. These inputs are observable in active markets over the terms of theinstruments the Company holds, and accordingly, the Company classifies itsderivative assets and liabilities as Level 2 in the hierarchy.  The Company also evaluates counterparty riskin determining fair values.

 

**Derivative Instruments**  The Company usescurrency swaps, interest rate swaps, options, and commodity futures contractsto manage risks generally associated with foreign exchange rate, interest rateand commodity market volatility.  Derivative financial instruments areincluded on the balance sheet at fair value. Whenever possible, derivative instruments are designatedas and are effective as hedges, in accordance with accounting principlesgenerally accepted in the United States. If the underlying hedged transaction ceases to exist, all changes infair value of the related derivatives that have not been settled are recognizedin current earnings.  The Company doesnot enter into derivative financial instruments for trading purposes and is nota party to leveraged derivatives. Cash flows from fair value hedges of debt andshort-term forward exchange contracts are classified as a financing activity.  Cash flows of currency swaps, interest rateswaps, and commodity futures contracts are classified as operating activities.See Note 8 for additional information related to derivative instruments.

 

**InventoryValuation**  The Company values most U.S. inventories atthe lower of last-in, first-out (LIFO) cost or market.  Other inventories are valued at the lower ofstandard costs (which approximate average costs) or market.

 

**Goodwill**  Goodwill represents the excess of cost overfair value of assets of businesses acquired. Goodwill is evaluated annually, as of October 1, for impairment ormore frequently if an impairment indicator exists.

 

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**Owens-IllinoisGroup, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

**IntangibleAssets and Other Long-Lived Assets**  Intangibleassets are amortized over the expected useful life of the asset.  Amortization expense directly attributed tothe manufacturing of the Company’s products is included in manufacturing,shipping, and delivery.  Amortizationexpense related to non-manufacturing activities is included in selling andadministrative and other. The Company evaluates the recoverability ofintangible assets and other long-lived assets based on undiscounted projectedcash flows, excluding interest and taxes, when factors indicate that impairmentmay exist.  If impairment exists, theasset is written down to fair value.

 

**Property,Plant, and Equipment   **Property, plant, and equipment (“PP&E”) is carriedat cost and includes expenditures for new facilities and equipment and thosecosts which substantially increase the useful lives or capacity of existingPP&E.  In general, depreciation iscomputed using the straight-line method and recorded over the estimated usefullife of the asset.  Factory machinery andequipment is depreciated over periods ranging from 5 to 25 years with themajority of such assets (principally glass-melting furnaces and forming machines)depreciated over 7-15 years.  Buildingsand building equipment are depreciated over periods ranging from 10 to 50years. Depreciation expense directly attributed to the manufacturing of theCompany’s products is included in manufacturing, shipping, and delivery.  Depreciation expense related tonon-manufacturing activities is included in selling and administrative.Maintenance and repairs are expensed as incurred.  Costs assigned to PP&E of acquiredbusinesses are based on estimated fair values at the date of acquisition.  The Company evaluates the recoverability ofproperty, plant, and equipment based on undiscounted projected cash flows,excluding interest and taxes, when factors indicate that impairment may exist.  If impairment exists, the asset is writtendown to fair value.

 

**RevenueRecognition**  The Company recognizes sales, net ofestimated discounts and allowances, when the title to the products and risk ofloss are transferred to customers. Provisions for rebates to customers are provided in the same period thatthe related sales are recorded.

 

**Shippingand Handling Costs**  Shipping and handling costs are included withmanufacturing, shipping, and delivery costs in the Consolidated Results ofOperations.

 

**IncomeTaxes on Undistributed Earnings**  In general, the Company plans to continue toreinvest the undistributed earnings of foreign subsidiaries and foreigncorporate joint ventures accounted for by the equity method.  Accordingly, taxes are provided only on thatamount of undistributed earnings in excess of planned reinvestments.

 

**ForeignCurrency Translation**  The assets and liabilities ofsubstantially all subsidiaries and associates are translated at currentexchange rates and any related translation adjustments are recorded directly inshare owners’ equity.

 

**AccountsReceivable  **Receivables are stated at amountsestimated by management to be the net realizable value.  The Company charges off accounts receivablewhen it becomes apparent based upon age or customer circumstances that amountswill not be collected.

 

**Allowancefor Doubtful Accounts  **The allowance for doubtful accounts isestablished through charges to the provision for bad debts.  The Company evaluates the adequacy of theallowance for doubtful accounts on a periodic basis.  The evaluation includes historical trends incollections and write-offs, management’s judgment of the probability ofcollecting accounts and management’s evaluation of business risk.

 

**NewAccounting Standards  **In June 2009,the FASB issued a new standard which amends certain guidance for determiningwhether an entity is a variable interest entity (VIE). An enterprise isrequired to 

 

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**Owens-IllinoisGroup, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

performan analysis to determine whether the Company’s variable interests give it acontrolling financial interest in a VIE. A company would be required to assesswhether it has an implicit financial responsibility to ensure that a VIEoperates as designed when determining whether it has the power to direct theactivities of the VIE that most significantly impact the entity’s economicperformance. In addition, the new provisions require ongoing reassessments ofwhether an enterprise is the primary beneficiary of a VIE. The new provisionsare effective for financial statements issued for fiscal years beginning after November 15,2009. The Company does not expect the adoption of this Statement to have animpact on its results of operations, financial position or cash flows.

 

**Stock Options****andOther Stock-Based Compensation**  The Company participates in OI Inc.’s five non-qualified plans, whichare described more fully in Note 11.  Costs resulting from all share-based paymenttransactions are required to be recognized in the financial statements.  A public entity is required to measure thecost of employee services received in exchange for an award of equity instrumentsbased on the grant-date fair value of the award.  That cost is recognized over the requiredservice period (usually the vesting period). No compensation cost is recognized for equity instruments for whichemployees do not render the required service.

 

The fair value of eachoption grant is estimated on the date of grant using the Black-Scholes optionpricing model with the following assumptions:

 
| ** **                                         | ** ** | **2009**    | ** ** | **2008**    | ** ** | **2007**    | ** ** |
|----------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
|                                               |       |        |       |        |       |        |       |
| Range of expected lives of options (years)         |       | 4.75        |       | 4.75        |       | 4.75        |       |
| Range of expected stock price volatilities         |       | 42.0%-52.0% |       | 29.0%-39.8% |       | 37.1%-40.0% |       |
| Weighted average expected stock price volatilities |       | 46.3%       |       | 31.4%       |       | 39.9%       |       |
| Range of risk-free interest rates                  |       | 1.3%-2.1%   |       | 1.5%-3.7%   |       | 4.1%-4.6%   |       |
| Expected dividend yield                            |       | 0.0%        |       | 0.0%        |       | 0.0%        |       |

 

The expected life ofoptions is based on the assumption that, on average, options will be exercisedat the mid-point between the vesting date and the expiration date.  The expected stock price volatility isdetermined by reference to historical prices over a period equal to theexpected life.

 

The fair value of otherequity awards, consisting of restricted shares and performance vestedrestricted share units, is equal to the quoted market value at the time ofgrant.

 

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**Owens-IllinoisGroup, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

**2.  Supplemental Cash Flow Information  **Changes in the components of working capital relatedto operations (net of the effects related to acquisitions and divestitures)were as follows:

 
| ** **                                  | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                        |       |     |       |     |       |     |       |
| Decrease (increase) in current assets:      |       |     |       |     |       |     |       |
| Receivables                                 |       | $        | (3.3       | )        | $          | 57.8     |       | $ | (16.5 | ) |
| Inventories                                 |       | 151.9    |       | (74.1    | )          | 63.0     |       |
| Prepaid expenses and other                  |       | (18.4    | )          | 35.2     |       | (21.4    | )          |
| Increase (decrease) in current liabilities: |       |     |       |     |       |     |       |
| Accounts payable                            |       | 32.6     |       | (56.7    | )          | (2.9     | )          |
| Accrued liabilities                         |       | (17.7    | )          | (52.9    | )          | (63.2    | )          |
| Salaries and wages                          |       | 20.4     |       | (37.2    | )          | 38.3     |       |
| U.S. and foreign income taxes               |       | (22.2    | )          | (30.7    | )          | 24.5     |       |
|                                        |       | $        | 143.3      |     | $          | (158.6   | )          | $ | 21.8 |   |
|                                        |       |     |       |     |       |     |       |
| Continuing operations                       |       | $        | 143.3      |     | $          | (158.6   | )          | $ | 36.2 |   |
| Discontinued operations                     |       |     |       |     |       | (14.4    | )          |
|                                        |       |     |       |     |       |     |       |
|                                        |       | $        | 143.3      |     | $          | (158.6   | )          | $ | 21.8 |   |

 

Interest paid incash, including note repurchase premiums in 2009 and 2007, aggregated $195.1million for 2009, $251.9 million for 2008, and $452.4 million for 2007.

 

Income taxes paid(received) in cash were as follows:

 
| ** ** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
|       |       |     |       |     |       |     |       |
| Domestic   |       | $        | (1.7       | )        | $          | (1.2     | )          | $ | 31.8 |   |
| Foreign    |       | 196.0    |       | 162.5    |       | 151.1    |       |
|       |       |     |       |     |       |     |       |
|       |       | $        | 194.3      |     | $          | 161.3    |       | $ | 182.9 |   |

 

**3.  Inventories**  Major classesof inventory are as follows:

 
| ** **         | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
|               |       |     |       |     |       |
| Finished goods     |       | $        | 741.5      |     | $          | 831.7 |   |
| Work in process    |       | 0.8      |       | 0.8      |       |
| Raw materials      |       | 106.6    |       | 109.8    |       |
| Operating supplies |       | 51.4     |       | 57.2     |       |
|               |       |     |       |     |       |
|               |       | $        | 900.3      |     | $          | 999.5 |   |

 

If the inventories whichare valued on the LIFO method had been valued at standard costs, whichapproximate current costs, consolidated inventories would be higher thanreported by $42.6 million and $32.5 million at December 31, 2009 and 2008,respectively.

 

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**Owens-IllinoisGroup, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

Inventories which arevalued at the lower of standard costs (which approximate average costs) ormarket at December 31, 2009 and 2008 were approximately $772.6 million and$861.7 million, respectively.

 

**4. EquityInvestments  **Summarized information pertaining to theCompany’s equity associates follows:

 
| ** **                        | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
|                              |       |     |       |     |       |
| At end of year:                   |       |     |       |     |       |
| Equity in undistributed earnings: |       |     |       |     |       |
| Foreign                           |       | $        | 44.5       |     | $          | 32.0 |   |
| Domestic                          |       | 25.8     |       | 19.6     |       |
|                              |       |     |       |     |       |
| Total                             |       | $        | 70.3       |     | $          | 51.6 |   |

 
| ** **          | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------|------------|----------|------------|----------|------------|----------|------------|
|                |       |     |       |     |       |     |       |
| For the year:       |       |     |       |     |       |     |       |
| Equity in earnings: |       |     |       |     |       |     |       |
| Foreign             |       | $        | 12.5       |     | $          | 14.1     |       | $ | 5.3 |   |
| Domestic            |       | 40.1     |       | 36.7     |       | 28.8     |       |
|                |       |     |       |     |       |     |       |
| Total               |       | $        | 52.6       |     | $          | 50.8     |       | $ | 34.1 |   |
|                |       |     |       |     |       |     |       |
| Dividends received  |       | $        | 33.8       |     | $          | 24.5     |       | $ | 21.7 |   |

 

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**Owens-IllinoisGroup, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

Summarized combined financial information forequity associates is as follows:

 
| ** **                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
|                                 |       |     |       |     |       |
| At end of year:                      |       |     |       |     |       |
| Current assets                       |       | $        | 218.0      |     | $          | 208.3 |   |
| Non-current assets                   |       | 314.1    |       | 325.9    |       |
| Total assets                         |       | 532.1    |       | 534.2    |       |
|                                 |       |     |       |     |       |
| Current liabilities                  |       | 138.5    |       | 167.5    |       |
| Other liabilities and deferred items |       | 145.9    |       | 137.9    |       |
| Total liabilities and deferred items |       | 284.4    |       | 305.4    |       |
|                                 |       |     |       |     |       |
| Net assets                           |       | $        | 247.7      |     | $          | 228.8 |   |

 
| ** **    | ** ** | **2009** | ** ** | **2008** | ** ** | **2007 (a)** | ** ** |
|---------------|------------|----------|------------|----------|------------|--------------|------------|
|          |       |     |       |     |       |         |       |
| For the year: |       |     |       |     |       |         |       |
| Net sales     |       | $        | 548.6      |     | $          | 635.8        |       | $ | 535.9 |   |
|          |       |     |       |     |       |         |       |
| Gross profit  |       | $        | 199.6      |     | $          | 227.5        |       | $ | 176.5 |   |
|          |       |     |       |     |       |         |       |
| Net earnings  |       | $        | 158.0      |     | $          | 153.9        |       | $ | 112.4 |   |

 

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(a) Amounts for 2007exclude the Company’s Caribbean investment due to the impairment recordedduring 2007.

 

TheCompany’s significant equity method investments include:  (1) 50% of the common shares of VetriSpeciali SpA, a specialty glass manufacturer; (2) a 25% partnershipinterest in General Chemical Soda Ash (Partners), a soda ash supplier; and (3) a50% partnership interest in Rocky Mountain Bottle Company, a glass containermanufacturer.

 

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**Owens-IllinoisGroup, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

**5.  Debt**  The followingtable summarizes the long-term debt of the Company at December 31, 2009and 2008:

 
| ** **                                              | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|
| Secured Credit Agreement:                               |       |     |       |     |       |
| Revolving Credit Facility:                              |       |     |       |     |       |
| Revolving Loans                                         |       | $        | —     |     | $          | 18.7 |   |
| Term Loans:                                             |       |     |       |     |       |
| Term Loan A (160.0 million AUD at Dec. 31,  2009)  |       | 143.9    |       | 155.7    |       |
| Term Loan B                                             |       | 189.5    |       | 191.5    |       |
| Term Loan C (110.8 million CAD at Dec. 31,  2009)  |       | 105.4    |       | 90.9     |       |
| Term Loan D (€189.5 million at Dec. 31, 2009) |       | 273.5    |       | 269.6    |       |
| Senior Notes:                                           |       |     |       |     |       |
| 8.25%, due 2013                                         |       | 460.4    |       | 470.0    |       |
| 6.75%, due 2014                                         |       | 400.0    |       | 400.0    |       |
| 6.75%, due 2014 (€225 million)                     |       | 324.7    |       | 316.8    |       |
| 7.375%, due 2016                                        |       | 582.1    |       |     |       |
| 6.875%, due 2017 (€300 million)                    |       | 432.9    |       | 422.4    |       |
| Payable to OI Inc.                                      |       | 278.3    |       | 509.5    |       |
| Other                                                   |       | 116.5    |       | 113.4    |       |
| Total long-term debt                                    |       | 3,307.2  |       | 2,958.5  |       |
| Less amounts due within one year                        |       | 49.7     |       | 18.2     |       |
| Long-term debt                                          |       | $        | 3,257.5    |     | $          | 2,940.3 |   |

 

On June 14, 2006,the Company’s subsidiary borrowers entered into the Secured Credit Agreement(the “Agreement”).  At December 31,2009, the Agreement included a $900.0 million revolving credit facility, a160.0 million Australian dollar term loan, and a 110.8 million Canadian dollarterm loan, each of which has a final maturity date of June 15, 2012.  It also included a $189.5 million term loanand a €189.5 million term loan, each of which has a final maturity date of June 14,2013.  During 2009, the Company’ssubsidiary borrowers repaid 65.0 million Australian dollars, $2.0 million and€2.0 million of term loans under the Agreement.

 

As a result of the2008 bankruptcy of Lehman Brothers Holdings Inc. and several of itssubsidiaries, the Company believes that the maximum amount available under therevolving credit facility was reduced by $32.3 million.  After further deducting amounts attributableto letters of credit and overdraft facilities that are supported by therevolving credit facility, at December 31, 2009 the Company’s subsidiaryborrowers had unused credit of $760.0 million available under the Agreement.

 

The Agreementcontains various covenants that restrict, among other things and subject tocertain exceptions, the ability of the Company to incur certain liens, makecertain investments and acquisitions, become liable under contingentobligations in certain defined instances only, make restricted junior payments,make certain asset sales within guidelines and limits, make capitalexpenditures beyond a certain threshold, engage in material transactions withshareholders and affiliates, participate in sale and leaseback financingarrangements, alter its fundamental business, amend certain outstanding debtobligations, and prepay certain outstanding debt obligations.

 

The Agreement alsocontains one financial maintenance covenant, a Leverage Ratio, that requiresthe Company not to exceed a ratio calculated by dividing consolidated totaldebt, less cash and cash equivalents, by Consolidated Adjusted EBITDA, asdefined in the Agreement.  The LeverageRatio could

 

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**Owens-IllinoisGroup, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

restrict theability of the Company to undertake additional financing to the extent thatsuch financing would cause the Leverage Ratio to exceed the specified maximum.

 

Failure to complywith these covenants and restrictions could result in an event of default underthe Agreement.  In such an event, theCompany could not request borrowings under the revolving facility, and allamounts outstanding under the Agreement, together with accrued interest, couldthen be declared immediately due and payable. If an event of default occurs under the Agreement and the lenders causeall of the outstanding debt obligations under the Agreement to become due andpayable, this would result in a default under a number of other outstandingdebt securities and could lead to an acceleration of obligations related tothese debt securities.  A default or eventof default under the Agreement, indentures or agreements governing otherindebtedness could also lead to an acceleration of debt under other debtinstruments that contain cross acceleration or cross-default provisions.

 

The leverage ratioalso determines pricing under the Agreement. The interest rate on borrowings under the Agreement is, at the Company’soption, the Base Rate or the Eurocurrency Rate, as defined in theAgreement.  These rates include a marginlinked to the leverage ratio and the borrowers’ senior secured debtrating.  The margins range from 0.875% to1.75% for Eurocurrency Rate loans and from -0.125% to 0.75% for Base Rateloans.  In addition, a facility fee is payableon the revolving credit facility commitments ranging from 0.20% to 0.50% perannum linked to the leverage ratio.  Theweighted average interest rate on borrowings outstanding under the Agreement atDecember 31, 2009 was 2.40%.  As of December 31,2009, the Company was in compliance with all covenants and restrictions in theAgreement.  In addition, the Companybelieves that it will remain in compliance and that its ability to borrow fundsunder the Agreement will not be adversely affected by the covenants andrestrictions.

 

Borrowings underthe Agreement are secured by substantially all of the assets of the Company’sdomestic subsidiaries and certain foreign subsidiaries, which have a book valueof approximately $2.7 billion. Borrowings are also secured by a pledge of intercompany debt and equityin most of the Company’s domestic subsidiaries and stock of certain foreignsubsidiaries.  All borrowings under theagreement are guaranteed by substantially all domestic subsidiaries of theCompany for the term of the Agreement.

 

During the second quarterof 2008, the Company used cash from operations and borrowings under theAgreement to retire $250 million principal amount of 7.35% Senior Notes whichmatured in May 2008.

 

During May 2009,a subsidiary of the Company issued senior notes with a face value of $600.0million at 96.72% of face value for an effective interest rate of 8.00%.  The notes bear interest at 7.375% and are dueMay 15, 2016.  The notes areguaranteed by substantially all of the Company’s domestic subsidiaries.  The net proceeds, after deducting commissionsand expenses from the notes, approximated $568 million and were used to repurchase$221.9 million of intercompany debt with OI Inc. and to reduce borrowings underthe revolving credit facility.  Thebalance of the proceeds increased cash. As a part of the issuance of these notes and the related debt repayment,the Company recorded additional interest charges in 2009 of $5.2 million fornote repurchase premiums and the related write-off of unamortized finance fees,net of a gain from the termination of related interest rate swap agreements.

 

During October 2006,the Company entered into a European accounts receivable securitization program,which had a limit of €250 million at December 31, 2009.  The program extends through October 2011,subject to annual renewal of backup credit lines.  In addition, the Company participates in areceivables financing program in the Asia Pacific region with a revolvingfunding commitment of 89 million Australian dollars and 10 million New Zealanddollars that expire February 2010 and November 2010, respectively.

 

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**Owens-IllinoisGroup, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

Informationrelated to the Company’s accounts receivable securitization program as of December 31,2009 and 2008 is as follows:

 
| ** **                             | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
|                                   |       |     |       |     |       |
| Balance (included in short-term loans) |       | $        | 289.0      |     | $          | 293.7 |   |
|                                   |       |     |       |     |       |
| Weighted average interest rate         |       | 2.52     | %          | 5.31     | %          |
|                                        |            |          |            |          |            |  |  |

 

The Companycapitalized $16.8 million and $25.6 million in 2009 and 2008, respectively,under capital lease obligations with the related financing recorded as longterm debt.  These amounts are included inother in the long-term debt table above.

 

Annual maturitiesfor all of the Company’s long-term debt through 2014 are as follows:  2010, $49.7 million; 2011, $136.1 million;2012, $165.4 million; 2013, $932.3 million; and 2014, $736.4 million.

 

Fair values at December 31,2009, of the Company’s significant fixed rate debt obligations were as follows:

 
| ** **                           | ** ** | **Principal Amount** | ** ** | **Indicated** | ** ** | **Fair Value**   | ** ** |
|--------------------------------------|------------|----------------------|------------|---------------|------------|------------------|------------|
| ** **                           | ** ** | **(millions of**     | ** ** | **Market**    | ** ** | **(millions of** | ** ** |
| ** **                           | ** ** | **dollars)**         | ** ** | **Price**     | ** ** | **dollars)**     | ** ** |
|                                 |       |                 |       |          |       |             |       |
| Senior Notes:                        |       |                 |       |          |       |             |       |
| 8.25%, due 2013                      |       | $                    | 450.0      |          | 103.35     |             | $          | 465.1 |   |
| 6.75%, due 2014                      |       | 400.0                |       | 102.25        |       | 409.0            |       |
| 6.75%, due 2014 (€225 million)  |       | 324.7                |       | 98.33         |       | 319.3            |       |
| 7.375%, due 2016                     |       | 600.0                |       | 104.00        |       | 624.0            |       |
| 6.875%, due 2017 (€300 million) |       | 432.9                |       | 96.97         |       | 419.8            |       |
|                                      |            |                      |            |               |            |                  |            |  |  |

 

**6.  Operating Leases**  Rent expense attributable to all warehouse,office buildings and equipment operating leases was $110.2 million in 2009,$98.9 million in 2008, and $92.8 million in 2007.  Minimum future rentals under operating leasesare as follows:  2010, $60.8 million;2011, $45.2 million; 2012, $32.6 million; 2013, $22.3 million; 2014, $14.5million; and 2015 and thereafter, $23.6 million.

 

**7.  Foreign Currency Transactions**  Aggregate foreign currency exchange gains(losses) included in other expense were $(29.2) million in 2009, $0.6 millionin 2008, and $(8.1) million in 2007.

 

During 2009, the Companyentered into a series of parallel market transactions to exchange Venezuelanbolivars into U.S. dollars.  In theparallel market, bolivars were valued significantly lower than the officialgovernment rate, giving rise to exchange losses from such transactions.  As a result, the Company recognized foreigncurrency exchange losses of $28.0 million for the year.

 

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**Owens-IllinoisGroup, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

**8.  Derivative Instruments  **The Company has certain derivative assets andliabilities which consist of interest rate swaps, natural gas forwards, andforeign exchange option and forward contracts. The Company records derivative assets and liabilities at fair value andclassifies them as “Level 2” in the fair value hierarchy.

 

### ***Interest Rate Swaps Designated as Fair Value Hedges***

 

### **In the fourth quarter of 2003 and the first quarter of2004, the Company entered into a series of interest rate swap agreements with atotal notional amount of $700 million that were to mature in 2010and 2013. The swaps were executed in order to: (i) convert a portionof the senior notes and senior debentures fixed-rate debt into floating-ratedebt; (ii) maintain a capital structure containing appropriate amounts offixed and floating-rate debt; and (iii) reduce net interest payments andexpense in the near-term.**

 

The Company’sfixed-to-floating interest rate swaps were accounted for as fair value hedges.Because the relevant terms of the swap agreements matched the correspondingterms of the notes, there was no hedge ineffectiveness. Accordingly, theCompany recorded the net of the fair market values of the swaps as a long-termasset (liability) along with a corresponding net increase (decrease) in thecarrying value of the hedged debt.

 

For derivativeinstruments that are designated and qualify as fair value hedges, the change inthe fair value of the derivative instrument related to the future cash flows(gain or loss on the derivative) as well as the offsetting change in the fairvalue of the hedged item attributable to the hedged risk are recognized incurrent earnings.  The Company includesthe gain or loss on the hedged items (i.e. long-term debt) in the same lineitem (interest expense) as the offsetting loss or gain on the related interestrate swaps.

 

During the second quarterof 2009, the Company extinguished $221.9 million of its intercompany debt withOI Inc. and terminated the related interest rate swap agreements for proceedsof $5.0 million.  The Company recognized$4.4 million of the proceeds as a reduction of interest expense upon thetermination of the interest rate swap agreements, while the remaining $0.6million is recorded as an adjustment to the debt and will be recognized as areduction of interest expense over the remaining life of the outstanding intercompanydebt due 2010.  See Note 5 for additionalinformation.

 

During the second quarterof 2009, the Company’s interest rate swaps related to the $450 million seniornotes due 2013 were terminated.  TheCompany received proceeds of $12.4 million which were recorded as an adjustmentto debt and will be recognized as a reduction of interest expense over theremaining life of the senior notes due 2013.

 

As of December 31,2009, the balance of unamortized proceeds from terminated interest rate swapsincluded in long-term debt was $10.6 million.

 

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**Owens-IllinoisGroup, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

The effect of theinterest rate swaps on the results of operations for the year ended December 31,2009 and 2008 is as follows:

 
| ** **                                                            | ** ** | **Amount of Gain (Loss)**

**Recognized in Interest  Expense** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2009**                                                       | ** ** | **2008** | ** ** |
|                                                                  |       |                                                           |       |   |   |
| Interest rate swaps                                                   |       | $                                                              | (11.0      | ) | $ | 26.1 |   |
| Related long-term debt                                                |       | 11.0                                                           |       | (26.1 | ) |
| Proceeds recognized and amortized for terminated  interest rate swaps |       | 6.7                                                            |       |   |   |
|                                                                  |       |                                                           |       |   |   |
| Net impact on interest expense                                        |       | $                                                              | 6.7        |   | $ | — |   |

 

*Commodity Futures ContractsDesignated as Cash Flow Hedges*

 

The Company enters intocommodity futures contracts related to forecasted natural gas requirements, theobjectives of which are to limit the effects of fluctuations in the futuremarket price paid for natural gas and the related volatility in cash flows. TheCompany continually evaluates the natural gas market with respect to itsforecasted usage requirements over the next twelve to twenty-four months andperiodically enters into commodity futures contracts in order to hedge aportion of its usage requirements over that period. At December 31, 2009,the Company had entered into commodity futures contracts covering approximately4,800,000 MM BTUs over that period.

 

The Company accounts forthe above futures contracts as cash flow hedges at December 31, 2009 andrecognizes them on the balance sheet at fair value. The effective portion ofchanges in the fair value of a derivative that is designated as, and meets therequired criteria for, a cash flow hedge is recorded in the Accumulated OtherComprehensive Income component of share owners’ equity (“OCI”) and reclassifiedinto earnings in the same period or periods during which the underlying hedgeditem affects earnings. At December 31, 2009, an unrecognized loss of $1.3million (pretax) related to the commodity futures contracts was included inAccumulated OCI, and will be reclassified into earnings over the next twelve totwenty-four months.  Any material portionof the change in the fair value of a derivative designated as a cash flow hedgethat is deemed to be ineffective is recognized in current earnings.  The ineffectiveness related to these naturalgas hedges for the year ended December 31, 2009 and 2008 was not material.

 

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**Owens-IllinoisGroup, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

The effect of thecommodity futures contracts on the results of operations for the year ended December 31,2009 and 2008 is as follows:

 
| ** **                       | ** ** | ** **                        | ** ** | **Amount of Gain (Loss)** | ** ** |
|----------------------------------|------------|-----------------------------------|------------|---------------------------|------------|
| ** **                       | ** ** | ** **                        | ** ** | **Reclassified from**     | ** ** |
| **Amount of Gain (Loss)**        | ** ** | **Accumulated OCI into**          | ** ** |
| **Recognized in OCI on**         | ** ** | **Income (reported in**           | ** ** |
| **Commodity Futures  Contracts** | ** ** | **manufacturing, shipping, and**  | ** ** |
| **(Effective Portion)**          | ** ** | **delivery) (Effective Portion)** | ** ** |
| **2009**                         | ** ** | **2008**                          | ** ** | **2009**                  | ** ** | **2008** | ** ** |
|                             |       |                              |       |                      |       |   |   |
| $                                | (24.8)     |                              | $          | (27.2                     | )          | $ | (60.9 | ) | $ | 5.7 |   |
|                                  |            |                                   |            |                           |            |  |  |  |  |  |  |

 

*Senior Notes Designated as NetInvestment Hedge*

 

During December 2004,a U.S. subsidiary of the Company issued Senior Notes totaling €225million.  These notes were designated bythe Company’s subsidiary as a hedge of a portion of its net investment in anon-U.S. subsidiary with a Euro functional currency.  Because the amount of the Senior Notesmatches the hedged portion of the net investment, there is no hedgeineffectiveness. Accordingly, the Company recorded the impact of changes in theforeign currency exchange rate on the Euro-denominated notes in OCI.  The amount recorded in OCI will bereclassified into earnings when the Company sells or liquidates its netinvestment in the non-U.S. subsidiary.

 

The effect of the netinvestment hedge on the results of operations for the year ended December 31,2009 and 2008 is as follows:

 
| ** **                | ** ** | ** **                              | ** ** | **Amount of Gain (Loss)**         | ** ** |
|---------------------------|------------|-----------------------------------------|------------|-----------------------------------|------------|
| **Amount of Gain (Loss)** | ** ** | **Location of Gain (Loss)**             | ** ** | **Reclassified from Accumulated** | ** ** |
| **Recognized in OCI**     | ** ** | **Reclassified  from Accumulated** | ** ** | **OCI into Income**               | ** ** |
| **2009**                  | ** ** | **2008**                                | ** ** | **OCI into Income**               | ** ** | **2009** | ** ** | **2008** | ** ** |
|                      |       |                                    |       |                              |       |   |   |   |   |
| $                         | (8.8)      |                                    | $          | 15.2                              |       | N/A |   | $ | —   |   | $ | — |   |
|                           |            |                                         |            |                                   |            |  |  |  |  |  |  |  |  |

 

*Forward Exchange Contracts notDesignated as Hedging Instruments*

 

The Company’ssubsidiaries may enter into short-term forward exchange or option agreements topurchase foreign currencies at set rates in the future. These agreements areused to limit exposure to fluctuations in foreign currency exchange rates forsignificant planned purchases of fixed assets or commodities that aredenominated in currencies other than the subsidiaries’ functional currency.Subsidiaries may also use forward exchange agreements to offset the foreigncurrency risk for receivables and payables, including intercompany receivablesand payables, not denominated in, or indexed to, their functional currencies.The Company records these short-term forward exchange agreements on the balancesheet at fair value and changes in the fair value are recognized in currentearnings.

 

At December 31,2009, various subsidiaries of the Company had outstanding forward exchange andoption agreements denominated in various currencies covering the equivalent ofapproximately $1.0 billion related primarily to intercompany transactions andloans.

 

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**Owens-IllinoisGroup, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

The effect of the forwardexchange contracts on the results of operations for the year ended December 31,2009 and 2008 is as follows:

 
| ** **                     | ** ** | **Amount of Loss**             | ** ** |
|--------------------------------|------------|--------------------------------|------------|
| **Location of Loss**           | ** ** | **Recognized in Income on**    | ** ** |
| **Recognized in Income on**    | ** ** | **Forward Exchange Contracts** | ** ** |
| **Forward Exchange Contracts** | ** ** | **2009**                       | ** ** | **2008** | ** ** |
|                           |       |                           |       |   |   |
| Other expense                  |       | $                              | (8.3       | ) | $ | (4.2 | ) |
|                                |            |                                |            |  |  |  |  |

 

*Balance Sheet Classification*

 

The Company records thefair values of derivative financial instruments on the balance sheet asfollows: (1) receivables if the instrument has a positive fair value andmaturity within one year, (2) deposits, receivables, and other assets ifthe instrument has a positive fair value and maturity after one year, (3) accountspayable and other current liabilities if the instrument has a negative fairvalue and maturity within one year, and (4) other liabilities if theinstrument has a negative fair value and maturity after one year.  The following table shows the amount andclassification of the Company’s derivatives as of December 31, 2009 and2008:

 
| ** **                                               | ** ** | **2009**                   | ** ** | **2008**  | ** ** |
|----------------------------------------------------------|------------|----------------------------|------------|-----------|------------|
| ** **                                               | ** ** | **Balance Sheet**          | ** ** | **Fair**  | ** ** | **Balance Sheet** | ** ** | **Fair** | ** ** |
| ** **                                               | ** ** | **Location**               | ** ** | **Value** | ** ** | **Location** | ** ** | **Value** | ** ** |
| Asset Derivatives:                                       |       |                       |       |      |       |   |   |   |   |
| Derivatives designated as hedging instruments            |       |                       |       |      |       |   |   |   |   |
| Interest rate swaps                                      |       |                       |       |      |       | Deposits,  receivables, and other assets |   | $ | 29.4 |   |
| Commodity futures contracts                              |       | Receivables                |       | $         | 0.4        |   |   |   |   |   |
| Commodity futures contracts                              |       | Other  accrued liabilities |       | 0.1       |       |   |   |   |   |
| Total derivatives designated as hedging instruments      |       |                       |       | 0.5       |       |   |   | 29.4 |   |
|                                                     |       |                       |       |      |       |   |   |   |   |
| Derivatives not designated as hedging instruments        |       |                       |       |      |       |   |   |   |   |
| Foreign exchange contracts                               |       | Receivables                |       | 6.0       |       | Receivables |   | 19.4 |   |
| Foreign exchange contracts                               |       | Other  accrued liabilities |       | 0.2       |       |   |   |   |   |
| Total derivatives not designated as hedging  instruments |       |                       |       | 6.2       |       |   |   | 19.4 |   |
|                                                     |       |                       |       |      |       |   |   |   |   |
| Total asset derivatives                                  |       |                       |       | $         | 6.7        |   |   |   | $ | 48.8 |   |
|                                                     |       |                       |       |      |       |   |   |   |   |
| Liability Derivatives:                                   |       |                       |       |      |       |   |   |   |   |
| Derivatives designated as hedging instruments            |       |                       |       |      |       |   |   |   |   |
| Commodity futures contracts                              |       | Other  accrued liabilities |       | $         | 1.8        |   | Other  accrued liabilities |   | $ | 37.4 |   |
| Total derivatives designated as hedging instruments      |       |                       |       | 1.8       |       |   |   | 37.4 |   |
|                                                     |       |                       |       |      |       |   |   |   |   |
| Derivatives not designated as hedging instruments        |       |                       |       |      |       |   |   |   |   |
| Foreign exchange contracts                               |       | Other  accrued liabilities |       | 2.9       |       | Receivables |   | 0.4 |   |
| Foreign exchange contracts                               |       |                       |       |      |       | Other  accrued liabilities |   | 11.6 |   |
| Foreign exchange contracts                               |       |                       |       |      |       | Other  liabilities |   | 0.1 |   |
| Total derivatives not designated as hedging  instruments |       |                       |       | 2.9       |       |   |   | 12.1 |   |
|                                                     |       |                       |       |      |       |   |   |   |   |
| Total liability derivatives                              |       |                       |       | $         | 4.7        |   |   |   | $ | 49.5 |   |

 

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**Owens-Illinois Group, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 

**9.  Accumulated Other Comprehensive Income (Loss)** The components ofcomprehensive income are: (a) net earnings; (b) change in fair valueof certain derivative instruments; (c) pension and other postretirementbenefit adjustments; and (d) foreign currency translationadjustments.  The net effect of exchangerate fluctuations generally reflects changes in the relative strength of theU.S. dollar against major foreign currencies between the beginning and end ofthe year.

 

The following table liststhe beginning balance, yearly activity and ending balance of each component ofaccumulated other comprehensive income (loss):

 
| ** **                      | ** ** | **Net Effect of  Exchange Rate  Fluctuations** | ** ** | **Deferred Tax  Effect for  Translation** | ** ** | **Unfunded  Pension  Liability** | ** ** | **Change in  Certain  Derivative  Instruments** | ** ** | **Employee  Benefit Plans** | ** ** | **Total  Accumulated  Comprehensive  Income (Loss)** | ** ** |
|---------------------------------|------------|------------------------------------------------|------------|-------------------------------------------|------------|----------------------------------|------------|-------------------------------------------------|------------|-----------------------------|------------|------------------------------------------------------|------------|
|                            |       |                                           |       |                                      |       |                             |       |                                            |       |                        |       |                                                 |       |
| Balance on January 1, 2007 |       | $                                              | 168.0      |                                      | $          | 12.7                             |       | $                                               | (122.9     | )                           | $          | (34.9                                                | )          | $ | (617.1 | ) | $ | (594.2 | ) |
|                            |       |                                           |       |                                      |       |                             |       |                                            |       |                        |       |                                                 |       |
| 2007 Change                     |       | 325.3                                          |       |                                      |       |                             |       | 28.2                                            |       | 79.1                        |       | 432.6                                                |       |
| Translation effect              |       |                                           |       |                                      |       |                             |       |                                            |       | (6.7                        | )          | (6.7                                                 | )          |
| Reclass                         |       |                                           |       |                                      |       | 122.9                            |       | 2.2                                             |       | (125.1                      | )          |                                                 |       |
| Tax effect                      |       |                                           |       |                                      |       |                             |       |                                            |       | (8.6                        | )          | (8.6                                                 | )          |
|                            |       |                                           |       |                                      |       |                             |       |                                            |       |                        |       |                                                 |       |
| Balance on Dec. 31, 2007   |       | 493.3                                          |       | 12.7                                      |       | —                           |       | (4.5                                            | )          | (678.4                      | )          | (176.9                                               | )          |
|                            |       |                                           |       |                                      |       |                             |       |                                            |       |                        |       |                                                 |       |
| 2008 Change                     |       | (431.9                                         | )          |                                      |       |                             |       | (32.9                                           | )          | (1,080.1                    | )          | (1,544.9                                             | )          |
| Translation effect              |       |                                           |       |                                      |       |                             |       |                                            |       | 46.1                        |       | 46.1                                                 |       |
| Tax effect                      |       |                                           |       |                                      |       |                             |       |                                            |       | 55.1                        |       | 55.1                                                 |       |
|                            |       |                                           |       |                                      |       |                             |       |                                            |       |                        |       |                                                 |       |
| Balance on Dec. 31, 2008   |       | 61.4                                           |       | 12.7                                      |       | —                           |       | (37.4                                           | )          | (1,657.3                    | )          | (1,620.6                                             | )          |
|                            |       |                                           |       |                                      |       |                             |       |                                            |       |                        |       |                                                 |       |
| 2009 Change                     |       | 228.9                                          |       |                                      |       |                             |       | 36.1                                            |       | 133.5                       |       | 398.5                                                |       |
| Translation effect              |       |                                           |       |                                      |       |                             |       |                                            |       | (33.7                       | )          | (33.7                                                | )          |
| Tax effect                      |       |                                           |       |                                      |       |                             |       |                                            |       | (14.1                       | )          | (14.1                                                | )          |
| Intraperiod tax allocation      |       |                                           |       |                                      |       |                             |       | (5.5                                            | )          | (15.2                       | )          | (20.7                                                | )          |
| Balance on Dec. 31, 2009   |       | $                                              | 290.3      |                                      | $          | 12.7                             |       | $                                               | —     |                        | $          | (6.8                                                 | )          | $ | (1,586.8 | ) | $ | (1,290.6 | ) |

 

Exchange ratefluctuations in 2009 include a loss of $132.5 million related to the Company’sdecision to translate the balance sheets of its Venezuelan subsidiaries usingthe parallel market rate at December 31, 2009 instead of the historicofficial rate.  See Note 20 to theConsolidated Financial Statements for further information.

 

The intraperiod taxallocation in 2009 related to a non-cash tax benefit transferred to continuingoperations.  See Note 10 to theConsolidated Financial Statements for further information.

 

**10. Income Taxes**  Deferred income taxes reflect: (1) thenet tax effects of temporary differences between the carrying amounts of assetsand liabilities for financial reporting purposes and the amounts used forincome tax purposes; and (2) carryovers and credits for income taxpurposes.

 

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**Owens-Illinois Group, Inc**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –(Continued)**

 

Significantcomponents of the Company’s deferred tax assets and liabilities at December 31,2009 and 2008 are as follows:

 
| ** **                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
|                            |       |     |       |     |       |
| Deferred tax assets:            |       |     |       |     |       |
| Accrued postretirement benefits |       | $        | 87.8       |     | $          | 84.0 |   |
| Foreign tax credit              |       | 312.0    |       | 295.5    |       |
| Tax loss and credit carryovers  |       | 392.8    |       | 342.9    |       |
| Capital loss carryovers         |       | 24.7     |       | 23.7     |       |
| Alternative minimum tax credits |       | 25.2     |       | 20.5     |       |
| Accrued liabilities             |       | 169.5    |       | 159.3    |       |
| Pension liability               |       | 127.2    |       | 181.0    |       |
| Other                           |       | 69.9     |       | 26.5     |       |
|                            |       |     |       |     |       |
| Total deferred tax assets       |       | 1,209.1  |       | 1,133.4  |       |
|                            |       |     |       |     |       |
| Deferred tax liabilities:       |       |     |       |     |       |
| Property, plant, and equipment  |       | 148.7    |       | 151.1    |       |
| Inventory                       |       | 12.0     |       | 13.4     |       |
| Other                           |       | 67.3     |       | 49.3     |       |
|                            |       |     |       |     |       |
| Total deferred tax liabilities  |       | 228.0    |       | 213.8    |       |
| Valuation allowance             |       | (926.0   | )          | (874.1   | )          |
|                            |       |     |       |     |       |
| Net deferred taxes              |       | $        | 55.1       |     | $          | 45.5 |   |

 

Deferredtaxes are included in the Consolidated Balance Sheets at December 31, 2009and 2008 as follows:

 
| ** **                               | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
|                                     |       |     |       |     |       |
| Prepaid  expenses                        |       | $        | 7.9        |     | $          | 24.1 |   |
| Deposits,  receivables, and other assets |       | 233.5    |       | 99.0     |       |
| Deferred  taxes                          |       | (186.3   | )          | (77.6    | )          |
|                                     |       |     |       |     |       |
| Net  deferred taxes                      |       | $        | 55.1       |     | $          | 45.5 |   |

 

TheCompany reviews the likelihood that it will realize the benefit of its deferredtax assets and therefore the need for valuation allowances on a quarterlybasis, or whenever events indicate that a review is required. In determiningthe requirement for a valuation allowance, the historical and projectedfinancial results of the legal entity or consolidated group recording the netdeferred tax asset is considered, along with other positive and negativeevidence.

 

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**Owens-Illinois Group, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

Thefollowing details the valuation allowance activity:

 
| **Year** | ** ** | **Beginning  Year Balance** | ** ** | **Foreign Currency  Translation** | ** ** | **Other Changes** | ** ** | **Goodwill** | ** ** | **Comprehensive  Income** | ** ** | **Ending Year  Balance** | ** ** |
|----------|------------|-----------------------------|------------|-----------------------------------|------------|-------------------|------------|--------------|------------|---------------------------|------------|--------------------------|------------|
| 2007     |       | $                           | (1,021.6   | )                                 | $          | (17.4             | )          | $            | 432.9      |                      | $          | 24.9                     |       | $ | 12.7 |   | $ | (568.5 | ) |
| 2008     |       | (568.5                      | )          | 21.6                              |       | 1.0               |       | 0.6          |       | (328.8                    | )          | (874.1                   | )          |
| 2009     |       | (874.1                      | )          | (12.6                             | )          | (85.8             | )          | —       |       | 46.5                      |       | (926.0                   | )          |
|          |            |                             |            |                                   |            |                   |            |              |            |                           |            |                          |            |  |  |  |  |  |  |

 

In2007, the Company reduced the valuation allowance recorded against its deferredtax assets in the United States by $506.3 million through the utilization ofnet operating and capital loss carryforwards.

 

Theprovision (benefit) for income taxes consists of the following:

 
| ** **                         | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |     |       |
| Current:                           |       |     |       |     |       |     |       |
| U.S.  Federal                      |       | $        | 0.7        |     | $          | (2.7     | )          | $ | — |   |
| State                              |       | (0.5     | )          | 0.6      |       | 31.1     |       |
| Foreign                            |       | 123.3    |       | 213.0    |       | 145.2    |       |
|                               |       | 123.5    |       | 210.9    |       | 176.3    |       |
|                               |       |     |       |     |       |     |       |
| Deferred:                          |       |     |       |     |       |     |       |
| U.S.  Federal                      |       | (20.4    | )          | 14.6     |       | 8.0      |       |
| State                              |       | (2.5     | )          | (0.8     | )          | 1.0      |       |
| Foreign                            |       | 54.1     |       | 8.4      |       | (1.7     | )          |
|                               |       | 31.2     |       | 22.2     |       | 7.3      |       |
|                               |       |     |       |     |       |     |       |
| Total:                             |       |     |       |     |       |     |       |
| U.S.  Federal                      |       | (19.7    | )          | 11.9     |       | 8.0      |       |
| State                              |       | (3.0     | )          | (0.2     | )          | 32.1     |       |
| Foreign                            |       | 177.4    |       | 221.4    |       | 143.5    |       |
|                               |       | $        | 154.7      |     | $          | 233.1    |       | $ | 183.6 |   |
|                               |       |     |       |     |       |     |       |
| Total  for continuing operations   |       | $        | 154.7      |     | $          | 237.9    |       | $ | 147.8 |   |
| Total  for discontinued operations |       | —   |       | (4.8     | )          | 35.8     |       |
|                               |       | $        | 154.7      |     | $          | 233.1    |       | $ | 183.6 |   |

 

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**Owens-Illinois Group, Inc**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –(Continued)**

 

Theprovision (benefit) for income taxes was calculated based on the followingcomponents of earnings (loss) before income taxes:

 
| **Continuing  operations** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|
| Domestic                   |       | $        | (35.0      | )        | $          | 109.4    |       | $ | (65.7 | ) |
| Foreign                    |       | 540.3    |       | 699.0    |       | 687.3    |       |
|                       |       | $        | 505.3      |     | $          | 808.4    |       | $ | 621.6 |   |

 
| **Discontinued  operations** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Domestic                     |       | $        | —     |     | $          | 2.0      |       | $ | (1.1 | ) |
| Foreign                      |       | —   |       | —   |       | 1.7      |       |
|                         |       | $        | —     |     | $          | 2.0      |       | $ | 0.6 |   |

 

Areconciliation of the provision (benefit) for income taxes based on thestatutory U.S. Federal tax rate of 35% to the provision for income taxes is asfollows:

 
| ** **                                                                                                        | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                              |       |     |       |     |       |     |       |
| Tax  provision (benefit) on pretax earnings (loss) from continuing operations at  statutory U.S. Federal tax rate |       | $        | 176.9      |     | $          | 282.9    |       | $ | 217.6 |   |
| Increase  (decrease) in provision for income taxes due to:                                                        |       |     |       |     |       |     |       |
|                                                                                                              |       |     |       |     |       |     |       |
| Valuation  allowance - U.S.                                                                                       |       | 10.7     |       | (16.9    | )          | (506.3   | )          |
| Foreign  subsidiary ownership restructuring and incentives                                                        |       | 10.8     |       | 35.1     |       | 535.9    |       |
| Foreign  source income taxable in the U.S.                                                                        |       | 6.1      |       | 11.3     |       | 29.3     |       |
| Intraperiod  tax allocation - U.S.                                                                                |       | (20.7    | )          |     |       |     |       |
| Reversal  of non-U.S. tax valuation allowance                                                                     |       | (0.9     | )          |     |       | (13.4    | )          |
| Foreign  tax credit utilization                                                                                   |       |     |       |     |       | (40.4    | )          |
| State  taxes, net of federal benefit                                                                              |       |     |       | 5.0      |       | (2.9     | )          |
| Rate  differences on non-U.S. earnings                                                                            |       | (22.4    | )          | (55.3    | )          | (65.7    | )          |
| Adjustment  for non-U.S. tax law changes                                                                          |       | (0.6     | )          | (20.1    | )          | (9.9     | )          |
| Other  items                                                                                                      |       | (5.2     | )          | (4.1     | )          | 3.6      |       |
|                                                                                                              |       |     |       |     |       |     |       |
| Provision  for income taxes                                                                                       |       | $        | 154.7      |     | $          | 237.9    |       | $ | 147.8 |   |

 

Incometax expense or benefit from continuing operations is generally determinedwithout regard to other categories of earnings, such as other comprehensiveincome.  An exception is provided whenthere is aggregate pretax income from other categories and a pretax loss fromcontinuing operations in the current year. In such an instance, the tax benefit allocated to continuing operationsis the amount by which the loss from continuing operations reduces the taxexpenses recorded with respect to the other categories of earnings, even when avaluation allowance has been established against the deferred tax assets.  In instances where a valuation allowance isestablished against current year losses, income from other sources, includingother comprehensive income, is considered when determining whether sufficientfuture taxable income exists to realize the deferred tax assets.  During 2009, other comprehensive income waspartially offset by certain pretax losses from continuing operations as aresult of the exception noted

 

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**Owens-Illinois Group, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

above,resulting in a reduction of the current year valuation allowance and a benefitallocated to income tax expense from continuing operations of $20.7 million.

 

In2007 the Company implemented a plan to restructure the ownership andintercompany obligations of certain foreign subsidiaries. These actionsresulted in the taxation of a significant portion of previously unremittedforeign earnings.  The Company alsorealigned its debt service obligations to operations outside the U.S. in orderto better balance its future operating cash flows with its global financingcosts. The foreign earnings reported as taxable in the U.S. were offset by netoperating loss carryforwards and foreign tax credits. Foreign tax creditcarryforwards arising from the restructuring were fully offset by an increasein the valuation allowance.

 

TheCompany has recognized tax benefits as a result of incentives in certainnon-U.S. jurisdictions which expire between 2012 to 2015.

 

AtDecember 31, 2009, before valuation allowance, the Company has unusedresearch tax credits of $17.8 million expiring from 2013 to 2029 and foreigntax credits of $312.0 million expiring in 2017. The Company also has unusedalternative minimum tax credits of $25.2 million which do not expire and whichwill be available to offset future U.S. Federal income tax. Approximately$107.8 million of the deferred tax assets relate to net operating and capitalloss carryforwards that can be carried over indefinitely with the remaining$140.3 million expiring between 2010 and 2029. As a result of U.S. tax legislation enacted in 2008 and 2009, theCompany realized $2.3 million and $2.1 million, respectively, of benefits fromits research and alternative minimum tax credit carryforwards.  The related valuation on these credits wasreduced accordingly.

 

AtDecember 31, 2009, the Company’s equity in the undistributed earnings offoreign subsidiaries for which income taxes had not been provided approximated$1,823.4 million. The Company intends to reinvest these earnings indefinitelyin the non-U.S. operations. It is not practicable to estimate the U.S. andforeign tax which would be payable should these earnings be distributed.

 

TheCompany records a liability for unrecognized tax benefits related to uncertaintax positions. In 2008, the Company reclassified $28.5 million of deferred taxassets related to general business credits and net operating losses that werepreviously offset by a full valuation allowance to the liability forunrecognized tax benefits. This balance sheet reclassification had no effect onshare owners’ equity. The Company accrues interest and penalties associatedwith unrecognized tax benefits as a component of its income tax expense.

 

Thefollowing is a reconciliation of the Company’s total gross unrecognized taxbenefits for the years ended December 31, 2009, 2008 and 2007:

 
| ** **                                                            | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Balance  at January 1                                            |       | $        | 103.1      |     | $          | 53.0     |       | $ | 45.8 |   |
| Additions  for tax positions of prior years                           |       | 20.1     |       | 51.2     |       | 0.1      |       |
| Reductions  for tax positions of prior years                          |       |     |       | (2.1     | )          | (2.5     | )          |
| Additions  based on tax positions related to the current year         |       | 17.1     |       | 6.1      |       | 11.0     |       |
| Reductions  due to the lapse of the applicable statute of limitations |       | (4.1     | )          | (3.1     | )          | (1.4     | )          |
| Foreign  currency translation                                         |       | (7.8     | )          |     |       |     |       |
| Reductions  due to settlements                                        |       |     |       | (2.0     | )          |     |       |
| Balance  at December 31                                          |       | $        | 128.4      |     | $          | 103.1    |       | $ | 53.0 |   |

 

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**Owens-Illinois Group, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 

AtDecember 31, 2009 and 2008, accrued interest and penalties related tounrecognized tax benefits were $23.2 million and $14.5 million,respectively. Tax expense for the years ended December 31, 2009, 2008 and2007 included interest and penalties of $10.6 million, $10.7 million and$0.6 million, respectively, on unrecognized tax benefits.

 

Theunrecognized tax benefit liability, including interest and penalties, as of December 31,2009 and 2008 was $151.6 million and $117.6 million respectively. Approximately$97.3 million and $72.7 million as of December 31, 2009 and 2008,respectively, relate to unrecognized tax benefits, which if recognized, wouldimpact the Company’s effective income tax rate. This amount differs from the gross unrecognized tax benefits presentedin the table above because of the unrecognized tax benefits that would resultin the utilization of certain tax attribute carryforwards that are currentlysubject to a full valuation allowance due to uncertainties about their futureperiod utilization.

 

TheCompany and/or one of its subsidiaries files a U.S. federal income tax returnas well as income tax returns in multiple state and foreign jurisdictions.  Tax years through 1999 have been settled withthe U.S. Internal Revenue Service.  AnIRS examination for the years 2007 and 2008 began in late 2009.  Due to the existence of tax attributecarryforwards (which are currently offset by full valuation allowances) in theU.S., the Company treats certain post-1999 tax positions as unsettled becauseof the taxing authorities’ ability to modify these attributes.  The 2000 tax year is the earliest open yearfor the Company’s other major tax jurisdictions.

 

TheCompany does not anticipate a significant change in the total amount ofunrecognized income tax benefits within the next twelve months.

 

**11.  Stock Options and Other Stock BasedCompensation**  The Company participates in OI Inc.’s fivenonqualified plans under which OI Inc. has granted stock options, restrictedshares and performance vested restricted share units:  (1) the Stock Option Plan for KeyEmployees of Owens-Illinois, Inc.; (2) the Stock Option Plan forDirectors of Owens-Illinois, Inc.; (3) the 1997 Equity ParticipationPlan of Owens-Illinois, Inc.; (4) the 2004 Equity Incentive Plan forDirectors of Owens-Illinois, Inc.; and (5) the 2005 Equity IncentivePlan of Owens-Illinois, Inc. At December 31, 2009, there were7,254,749 shares authorized and available for grants under these plans.  Total compensation cost for all grants ofshares and units under all of these plans was $20.2 million ($18.2 millionafter tax) for the year ended December 31, 2009.  Total compensation cost for grants of sharesand units was $21.4 million ($19.1 million after tax) in 2008 and $23.6 million($21.9 million after tax) in 2007.

 

*Stock Options*

 

Foroptions granted prior to March 22, 2005, no options may be exercised inwhole or in part during the first year after the date granted. In general,subject to accelerated exercisability provisions related to the performance ofOI Inc.’s common stock or change of control, 50% of the options becomeexercisable on the fifth anniversary of the date of the option grant, with theremaining 50% becoming exercisable on the sixth anniversary date of the optiongrant.** **In general, options expire followingtermination of employment or the day after the tenth anniversary date of theoption grant.

 

Foroptions granted after March 21, 2005, no options may be exercised in wholeor in part during the first year after the date granted.  In general, subject to change in control,these options become exercisable 25% per year beginning on the firstanniversary.  In general, options expirefollowing termination of employment or the seventh anniversary of the optiongrant.

 

Thefair value of options granted before March 22, 2005, is amortized ratablyover five years or a shorter period if the grant becomes subject to acceleratedexercisability provisions related to the performance of

 

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**Owens-Illinois Group, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 

OIInc.’s common stock.  The fair value ofoptions granted after March 21, 2005, is amortized over the vestingperiods which range from one to four years.

 

Stockoption information at December 31, 2009 and for the year then ended is asfollows:

** **
| ** **                                                | ** ** | ** **      | ** ** | ** **      | ** ** | **Weighted**    | ** ** | ** **    | ** ** |
|-----------------------------------------------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|---------------|------------|
| ** **                                                | ** ** | ** **      | ** ** | **Weighted**    | ** ** | **Average**     | ** ** | ** **    | ** ** |
| ** **                                                | ** ** | ** **      | ** ** | **Average**     | ** ** | **Remaining**   | ** ** | ** **    | ** ** |
| ** **                                                | ** ** | **Number of**   | ** ** | **Exercise**    | ** ** | **Contractual** | ** ** | **Aggregate** | ** ** |
| ** **                                                | ** ** | **Shares**      | ** ** | **Price**       | ** ** | **Term**        | ** ** | **Intrinsic** | ** ** |
| ** **                                                | ** ** | **(thousands)** | ** ** | **(per share)** | ** ** | **(years)**     | ** ** | **Value**     | ** ** |
| Options  outstanding at January 1, 2009              |       | 3,213           |       | $               | 23.56      |            |       |          |       |   |
| Granted                                                   |       | 1,644           |       | 10.30           |       |            |       |          |       |
| Exercised                                                 |       | (417            | )          | 16.80           |       |            |       |          |       |
| Forfeited  or expired                                     |       | (379            | )          | 23.03           |       |            |       |          |       |
| Options  outstanding at Dec. 31, 2009                |       | 4,061           |       | 18.93           |       | 4.8             |       | $             | 56.6       |   |
| Options  vested or expected to vest at Dec. 31, 2009 |       | 4,009           |       | $               | 18.93      |            | 4.8        |          | $          | 55.9 |   |
| Options  exercisable at Dec. 31, 2009                |       | 1,800           |       | $               | 20.55      |            | 3.7        |          | $          | 24.2 |   |

 

Certain additionalinformation related to stock options is as follows for the periods indicated:

 
| ** **                                                             | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Weighted  average grant-date fair value of options granted (per share) |       | $        | 4.23       |     | $          | 16.21    |       | $ | 9.87 |   |
| Aggregate  intrinsic value of options exercised                        |       | $        | 3.3        |     | $          | 17.3     |       | $ | 44.5 |   |
| Aggregate  cash received from options exercised                        |       | $        | 7.0        |     | $          | 14.5     |       | $ | 62.8 |   |

 

*Restricted Shares*

 

Sharesgranted to employees prior to March 22, 2005, generally vest after threeyears or upon retirement, whichever is later. Shares granted after March 21, 2005, vest 25% per year beginning onthe first anniversary and unvested shares are forfeited upon termination ofemployment.  Shares granted to directorsprior to 2008 were immediately vested but may not be sold until the third anniversaryof the share grant or the end of the director’s then current term on the board,whichever is later.  Shares granted todirectors after 2007 vest after one year.

 

Thefair value of the shares is equal to the market price of the shares on the dateof the grant.  The fair value ofrestricted shares granted before March 22, 2005, is amortized ratably overthe vesting period.  The fair value ofrestricted shares granted after March 21, 2005, is amortized over thevesting periods which range from one to four years.

 

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**Owens-Illinois Group, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

Restrictedshare activity is as follows:

 
| ** **                        | ** ** | ** **      | ** ** | **Weighted**    | ** ** |
|-----------------------------------|------------|-----------------|------------|-----------------|------------|
| ** **                        | ** ** | **Number of**   | ** ** | **Average**     | ** ** |
| ** **                        | ** ** | **Restricted**  | ** ** | **Grant-Date**  | ** ** |
| ** **                        | ** ** | **Shares**      | ** ** | **Fair Value**  | ** ** |
| ** **                        | ** ** | **(thousands)** | ** ** | **(per share)** | ** ** |
|                              |       |            |       |            |       |
| Nonvested at January 1, 2009 |       | 492             |       | $               | 22.63      |   |
| Granted                           |       | 267             |       | 11.85           |       |
| Vested                            |       | (148            | )          | 25.13           |       |
| Forfeited                         |       | (42             | )          | 24.93           |       |
| Nonvested at Dec. 31, 2009   |       | 569             |       | 16.73           |       |
|                              |       |            |       |            |       |
| Awards granted during 2008        |       |            |       | $               | 52.02      |   |
| Awards granted during 2007        |       |            |       | $               | 26.07      |   |

** **
| ** **                         | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Total  fair value of shares vested |       | $        | 3.5        |     | $          | 2.9      |       | $ | 10.9 |   |
|                                    |            |          |            |          |            |          |            |  |  |  |

 

*Performance Vested Restricted Share Units*

 

Restrictedshare units vest on January 1 of the third year following the year inwhich they are granted.  Holders ofvested units receive 0.5 to 1.5 shares of OI Inc.’s common stock for each unit,depending upon the attainment of consolidated performance goals established bythe Compensation Committee of OI Inc.’s Board of Directors.  If minimum goals are not met, no shares willbe issued.  Granted but unvestedrestricted share units are forfeited upon termination of employment, unlesscertain retirement criteria are met.

 

Thefair value of each restricted share unit is equal to the product of the fairvalue of OI Inc.’s common stock on the date of grant and the estimated numberof shares into which the restricted share unit will be converted.  The fair value of restricted share units isamortized ratably over the vesting period. Should the estimated number of shares into which the restricted shareunit will be converted change, an adjustment will be recorded to recognize theaccumulated difference in amortization between the revised and previousestimates.

 

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**Owens-Illinois Group, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

Performancevested restricted share unit activity is as follows:

 
| ** **                        | ** ** | ** **       | ** ** | **Weighted**   | ** ** |
|-----------------------------------|------------|------------------|------------|----------------|------------|
| ** **                        | ** ** | **Number of**    | ** ** | **Average**    | ** ** |
| ** **                        | ** ** | **Restricted**   | ** ** | **Grant-Date** | ** ** |
| ** **                        | ** ** | **Shares Units** | ** ** | **Fair Value** | ** ** |
| ** **                        | ** ** | **(thousands)**  | ** ** | **(per unit)** | ** ** |
|                              |       |             |       |           |       |
| Nonvested at January 1, 2009 |       | 886              |       | $              | 26.51      |   |
| Granted                           |       | 844              |       | 10.30          |       |
| Vested                            |       | (403             | )          | 18.24          |       |
| Forfeited                         |       | (58              | )          | 19.25          |       |
| Nonvested at Dec. 31, 2009   |       | 1,269            |       | 18.68          |       |
|                              |       |             |       |           |       |
| Awards granted during 2008        |       |             |       | $              | 52.23      |   |
| Awards granted during 2007        |       |             |       | $              | 24.18      |   |

 
| ** **                                                      | ** ** | **2009** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|
| Number of shares issued  to holders of vested units (thousands) |       | 605      |       |
|                                                            |       |     |       |
| Fair  value of shares at issuance date                          |       | $        | 6.1        |   |
|                                                                 |            |          |            |  |

 

Asof December 31, 2009, there was $19.6 million of total unrecognizedcompensation cost related to all unvested stock options, restricted shares andperformance vested restricted share units. That cost is expected to be recognized over a weighted average period ofapproximately four years.

 

**12.  Pension Benefit Plans and OtherPostretirement Benefits**

 

*Pension Benefit Plans*

 

Net expense (income) toresults of operations for all of the Company’s pension plans and certaindeferred compensation arrangements amounted to $42.2 million in 2009, $(3.5)million in 2008, and $24.9 million in 2007.

 

The Company has definedbenefit pension plans covering a substantial number of employees located in theUnited States, the United Kingdom, The Netherlands, Canada and Australia, aswell as many employees in Germany and France. Benefits generally are based on compensation for salaried employees andon length of service for hourly employees. The Company’s policy is to fund pension plans such that sufficientassets will be available to meet future benefit requirements.  The Company’s defined benefit pension plansuse a December 31 measurement date. The following tables relate to the Company’s principal defined benefitpension plans.

 

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**Owens-Illinois Group, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 

The changes in the pension benefit obligations for the year wereas follows:

 
| ** **                                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                |       |     |       |     |       |
| Obligations at beginning of year                                    |       | $        | 3,435.4    |     | $          | 3,817.7 |   |
|                                                                |       |     |       |     |       |
| Change in benefit obligations:                                      |       |     |       |     |       |
| Service cost                                                        |       | 41.8     |       | 46.3     |       |
| Interest cost                                                       |       | 213.2    |       | 215.2    |       |
| Actuarial (gain) loss, including effect  of changing discount rates |       | 247.6    |       | (108.5   | )          |
| Curtailments                                                        |       | (2.8     | )          | (9.5     | )          |
| Special termination benefits                                        |       | 8.6      |       | 4.4      |       |
| Settlements                                                         |       | (30.3    | )          |     |       |
| Participant contributions                                           |       | 7.4      |       | 8.8      |       |
| Benefit payments                                                    |       | (252.8   | )          | (257.8   | )          |
| Plan amendments                                                     |       |     |       | 3.0      |       |
| Foreign currency translation                                        |       | 133.5    |       | (284.2   | )          |
|                                                                |       |     |       |     |       |
| Net change in benefit obligations                                   |       | 366.2    |       | (382.3   | )          |
|                                                                |       |     |       |     |       |
| Obligations at end of year                                          |       | $        | 3,801.6    |     | $          | 3,435.4 |   |

 

The changes in the fairvalue of the pension plans’ assets for the year were as follows:

 
| ** **                         | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |
| Fair value at beginning of year    |       | $        | 2,706.9    |     | $          | 4,084.9 |   |
|                               |       |     |       |     |       |
| Change in fair value:              |       |     |       |     |       |
| Actual gain (loss) on plan assets  |       | 625.1    |       | (973.2   | )          |
| Benefit payments                   |       | (252.8   | )          | (257.8   | )          |
| Employer contributions             |       | 123.1    |       | 61.2     |       |
| Participant contributions          |       | 7.4      |       | 8.8      |       |
| Foreign currency translation       |       | 108.2    |       | (213.7   | )          |
| Settlements                        |       | (30.3    | )          |     |       |
| Other                              |       | (3.7     | )          | (3.3     | )          |
|                               |       |     |       |     |       |
| Net change in fair value of assets |       | 577.0    |       | (1,378.0 | )          |
|                               |       |     |       |     |       |
| Fair value at end of year          |       | $        | 3,283.9    |     | $          | 2,706.9 |   |

 

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**Owens-Illinois Group, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 

The funded status of thepension plans at year end was as follows:

 
| ** **                                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                 |       |     |       |     |       |
| Plan assets at fair value                            |       | $        | 3,283.9    |     | $          | 2,706.9 |   |
| Projected benefit obligations                        |       | 3,801.6  |       | 3,435.4  |       |
|                                                 |       |     |       |     |       |
| Plan assets less than projected benefit  obligations |       | (517.7   | )          | (728.5   | )          |
|                                                 |       |     |       |     |       |
| Items not yet recognized in pension expense:         |       |     |       |     |       |
| Actuarial loss                                       |       | 1,640.6  |       | 1,748.1  |       |
| Prior service credit                                 |       | (14.8    | )          | (15.6    | )          |
|                                                 |       |     |       |     |       |
|                                                 |       | 1,625.8  |       | 1,732.5  |       |
|                                                 |       |     |       |     |       |
| Net amount recognized                                |       | $        | 1,108.1    |     | $          | 1,004.0 |   |

 

The net amount recognizedis included in the Consolidated Balance Sheets at December 31, 2009 and2008 as follows:

 
| ** **                                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                |       |     |       |     |       |
| Prepaid pension                                                     |       | $        | 46.3       |     | $          | — |   |
| Current pension liability, included with Other  accrued liabilities |       | (9.2     | )          | (8.0     | )          |
| Noncurrent pension liability, included with  Pension benefits       |       | (554.8   | )          | (720.5   | )          |
| Accumulated other comprehensive income                              |       | 1,625.8  |       | 1,732.5  |       |
|                                                                |       |     |       |     |       |
| Net amount recognized                                               |       | $        | 1,108.1    |     | $          | 1,004.0 |   |

 

The following changes inplan assets and benefit obligations were recognized in accumulated othercomprehensive income at December 31, 2009 as follows:

 
| ** **                           | ** ** | ** ** | ** ** | **Tax**    | ** ** | ** **    | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|---------------|------------|
| ** **                           | ** ** | **Pretax** | ** ** | **Effect** | ** ** | **After-tax** | ** ** |
|                                 |       |       |       |       |       |          |       |
| Current year actuarial loss          |       | $          | (111.3     | )          | $          | 9.9           |       | $ | (101.4 | ) |
| Amortization of actuarial loss       |       | (44.5      | )          | 1.4        |       | (43.1         | )          |
| Amortization of prior service credit |       | 0.7        |       | (0.2       | )          | 0.5           |       |
|                                 |       |       |       |       |       |          |       |
|                                 |       | (155.1     | )          | 11.1       |       | (144.0        | )          |
| Translation                          |       |       |       |       |       | 34.7          |       |
|                                 |       | $          | (155.1     | )          | $          | 11.1          |       | $ | (109.3 | ) |

 

The accumulated benefitobligation for all defined benefit pension plans was $3,505.8 million and$3,157.0 million at December 31, 2009 and 2008, respectively.

 

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**Owens-Illinois Group, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

The components of the netpension expense (income) for the year were as follows:

 
| ** **                        | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                              |       |     |       |     |       |     |       |
| Service cost                      |       | $        | 41.8       |     | $          | 46.3     |       | $ | 54.0 |   |
| Interest cost                     |       | 213.2    |       | 215.2    |       | 212.0    |       |
| Expected asset return             |       | (276.6   | )          | (318.3   | )          | (317.6   | )          |
| Settlement cost                   |       | 9.3      |       |     |       | 18.6     |       |
| Special termination benefits      |       | 8.6      |       | 4.4      |       |     |       |
| Curtailment (gain) loss           |       | 2.0      |       | 0.1      |       | (1.5     | )          |
| Other                             |       |     |       | (1.2     | )          | 5.1      |       |
|                              |       |     |       |     |       |     |       |
| Amortization:                     |       |     |       |     |       |     |       |
| Prior service credit              |       | (0.9     | )          | (1.1     | )          | (0.8     | )          |
| Actuarial loss                    |       | 43.9     |       | 30.3     |       | 38.2     |       |
|                              |       |     |       |     |       |     |       |
| Net amortization                  |       | 43.0     |       | 29.2     |       | 37.4     |       |
|                              |       |     |       |     |       |     |       |
| Net expense (income)              |       | $        | 41.3       |     | $          | (24.3    | )          | $ | 8.0 |   |
|                              |       |     |       |     |       |     |       |
| Total for continuing operations   |       | $        | 41.3       |     | $          | (24.3    | )          | $ | 3.4 |   |
| Total for discontinued operations |       |     |       |     |       | 4.6      |       |
|                              |       | $        | 41.3       |     | $          | (24.3    | )          | $ | 8.0 |   |

 

Amounts that will beamortized from accumulated other comprehensive income into net pension expenseduring 2010:

 
| Amortization:      |   |   |   |
|--------------------|--------|--------|--------|
| Actuarial loss     |   | $      | 91.8   |   |
| Prior service cost |   | (1.0   | )      |
|               |   |   |   |
| Net amortization   |   | $      | 90.8   |   |

 

The following informationis for plans with projected and accumulated benefit obligations in excess ofthe fair value of plan assets at year end:

 
| ** **                     | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
|                           |       |     |       |     |       |
| Projected benefit obligations  |       | $        | 3,275.8    |     | $          | 3,435.4 |   |
| Fair value of plan assets      |       | 2,711.7  |       | 2,706.9  |       |
| Accumulated benefit obligation |       | 3,036.3  |       | 3,157.0  |       |
|                                |            |          |            |          |            |  |  |

 

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**Owens-Illinois Group, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 

The weighted averageassumptions used to determine benefit obligations were as follows:

 
| ** **                    | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
|                          |       |     |       |     |       |
| Discount rate                 |       | 5.76     | %          | 6.29     | %          |
| Rate of compensation increase |       | 4.00     | %          | 4.34     | %          |

 

The weighted averageassumptions used to determine net periodic pension costs were as follows:

 
| ** **                                  | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                        |       |     |       |     |       |     |       |
| Discount rate                               |       | 6.29     | %          | 5.87     | %          | 5.49     | %          |
| Rate of compensation increase               |       | 4.34     | %          | 4.32     | %          | 4.34     | %          |
| Expected long-term rate of return on assets |       | 7.61     | %          | 8.09     | %          | 8.08     | %          |

 

Future benefits areassumed to increase in a manner consistent with past experience of the plans,which, to the extent benefits are based on compensation, includes assumed salaryincreases as presented above. Amortization included in net pension expense (credits) is based on theaverage remaining service of employees.

 

For 2009, the Company’sweighted average expected long-term rate of return on assets was 7.61%.  In developing this assumption, the Companyevaluated input from its third party pension plan asset managers, includingtheir review of asset class return expectations and long-term inflationassumptions.  The Company also consideredits historical 10-year average return (through December 31, 2008), whichwas in line with the expected long-term rate of return assumption for 2009.

 

It is the Company’spolicy to invest pension plan assets in a diversified portfolio consisting ofan array of asset classes within established target asset allocationranges.  The investment risk of theassets is limited by appropriate diversification both within and between assetclasses.  The assets for both the U.S.and non-U.S. plans are primarily invested in a broad mix of domestic and internationalequities, domestic and international bonds, and real estate, subject to thetarget asset allocation ranges.  Theassets are managed with a view to ensuring that sufficient liquidity will beavailable to meet expected cash flow requirements.

 

The investment valuation policy of the Company is to value investmentsat fair value.  All investments arevalued at their respective net asset values. Equity securities for which marketquotations are readily available are valued at the last reported sales price ontheir principal exchange on valuation date or official close for certainmarkets.  Fixed income investments arevalued on a basis of valuations furnished by a trustee-approved independentpricing service, which determines valuations for normal institutional-sizetrading units of such securities which are generally recognized at fair valueas determined in good faith by the Trustee. Investments in registered investment companies or collective pooledfunds are valued at their respective net asset values.  Short-term investments are stated atamortized cost, which approximates fair value. The fair value of real estate is determined by periodic appraisals.

 

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**Owens-Illinois Group, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

The following table sets forth by level, within the fair valuehierarchy, the Company’s pension plan assets at fair value as of December 31,2009:

 
| ** **                  | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** | **Target**     | ** ** |
|-----------------------------|------------|-------------|------------|-------------|------------|-------------|------------|------------|------------|----------------|------------|
| ** **                  | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total**  | ** ** | **Allocation** | ** ** |
|                        |       |        |       |        |       |        |       |       |       |           |       |
| Cash and cash equivalents   |       | $           | 35.8       |        | $          | 10.0        |       | $          | —     |           | $          | 45.8 |   |   |   |
|                        |       |        |       |        |       |        |       |       |       |           |       |
| Equity securities           |       | 405.8       |       | 1,553.1     |       |        |       | 1,958.9    |       | 49-59          | %          |
|                        |       |        |       |        |       |        |       |       |       |           |       |
| Debt securities             |       | 515.2       |       | 684.4       |       | 8.8         |       | 1,208.4    |       | 28-38          | %          |
|                        |       |        |       |        |       |        |       |       |       |           |       |
| Real estate                 |       |        |       |        |       | 10.9        |       | 10.9       |       | 1-11           | %          |
|                        |       |        |       |        |       |        |       |       |       |           |       |
| Other                       |       | 54.4        |       | 5.5         |       |        |       | 59.9       |       | 2-12           | %          |
|                        |       |        |       |        |       |        |       |       |       |           |       |
| Total  assets at fair value |       | $           | 1,011.2    |        | $          | 2,253.0     |       | $          | 19.7       |           | $          | 3,283.9 |   |   |   |

 

The following is areconciliation of the Company’s pension plan assets recorded at fair valueusing significant unobservable inputs (Level 3):

 
| Balance at December 31, 2008 |   | $      | 29.1   |   |
|-----------------------------------|--------|--------|--------|--------|
|                              |   |   |   |
| Net decrease                      |   | (9.4   | )      |
|                              |   |   |   |
| Balance at December 31, 2009 |   | $      | 19.7   |   |

 

The net decrease in thefair value of the Company’s Level 3 pension plan assets is primarily due tosales of unlisted real estate funds.  Thechange in the fair value of Level 3 pension plan assets due to actual return onthose assets was immaterial in 2009.

 

Based on exchange ratesat the end of 2009, the Company expects to contribute approximately $10 millionto $15 million to its non-U.S. defined benefit pension plans in 2010.

 

The following estimatedfuture benefit payments, which reflect expected future service, as appropriate,are expected to be paid in the years indicated:

 
| **Year(s)** | ** ** | **Amount** | ** ** |
|-------------|------------|------------|------------|
|        |       |       |       |
| 2010        |       | $          | 251.4      |   |
| 2011        |       | 247.5      |       |
| 2012        |       | 250.2      |       |
| 2013        |       | 252.4      |       |
| 2014        |       | 256.0      |       |
| 2015 - 2019 |       | 1,294.7    |       |
|             |            |            |            |  |

 

The Company also sponsorsseveral defined contribution plans for all salaried and hourly U.S.employees.  Participation is voluntaryand participants’ contributions are based on their compensation.  The Company matches contributions ofparticipants, up to various limits, in substantially all plans.  Company

 

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**Owens-Illinois Group, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 

contributions to theseplans amounted to $7.2 million in 2009, $7.1 million in 2008, and $6.7 millionin 2007.

 

*Postretirement Benefits OtherThan Pensions*

 

The Company providescertain retiree health care and life insurance benefits covering substantiallyall U.S. salaried and certain hourly employees, and substantially all employeesin Canada and in The Netherlands. Employees are generally eligible for benefits upon retirement andcompletion of a specified number of years of creditable service.  The Company uses a December 31measurement date to measure its Postretirement Benefit Obligations.

 

The changes in the postretirement benefit obligations for the year wereas follows:

 
| ** **                                                              | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                    |       |     |       |     |       |
| Obligations at beginning of year                                        |       | $        | 260.3      |     | $          | 309.5 |   |
|                                                                    |       |     |       |     |       |
| Change in benefit obligations:                                          |       |     |       |     |       |
| Service cost                                                            |       | 1.8      |       | 2.2      |       |
| Interest cost                                                           |       | 16.4     |       | 17.2     |       |
| Actuarial (gain) loss, including the effect of  changing discount rates |       | 21.7     |       | (30.0    | )          |
| Curtailments                                                            |       |     |       | (2.9     | )          |
| Special termination benefits                                            |       |     |       | 0.9      |       |
| Benefit payments                                                        |       | (22.2    | )          | (19.9    | )          |
| Foreign currency translation                                            |       | 11.0     |       | (16.7    | )          |
| Net change in benefit obligations                                       |       | 28.7     |       | (49.2    | )          |
| Obligations at end of year                                              |       | $        | 289.0      |     | $          | 260.3 |   |

 

The funded status of the postretirement benefit plans at year end wasas follows:

 
| ** **                                                    | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                          |       |     |       |     |       |
| Postretirement benefit obligations                            |       | $        | 289.0      |     | $          | 260.3 |   |
|                                                          |       |     |       |     |       |
| Items not yet recognized in net postretirement  benefit cost: |       |     |       |     |       |
| Prior service credit                                          |       | 17.5     |       | 20.7     |       |
| Actuarial loss                                                |       | (56.9    | )          | (39.7    | )          |
|                                                          |       |     |       |     |       |
|                                                          |       | (39.4    | )          | (19.0    | )          |
|                                                          |       |     |       |     |       |
| Net amount recognized                                         |       | $        | 249.6      |     | $          | 241.3 |   |

 

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**Owens-Illinois Group, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

The net amount recognizedis included in the Consolidated Balance Sheets at December 31, 2009 and2008 as follows:

 
| ** **                                                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                |       |     |       |     |       |
| Current  nonpension postretirement benefit, included with Other accrued liabilities |       | $        | (22.3      | )        | $          | (22.3 | ) |
| Nonpension postretirement benefits                                                  |       | (266.7   | )          | (238.0   | )          |
| Accumulated other comprehensive income                                              |       | 39.4     |       | 19.0     |       |
|                                                                                |       |     |       |     |       |
| Net amount recognized                                                               |       | $        | (249.6     | )        | $          | (241.3 | ) |

 

The following changes inbenefit obligations were recognized in accumulated other comprehensive incomeat December 31, 2009 as follows:

 
| ** **                           | ** ** | ** ** | ** ** | **Tax**    | ** ** | ** **    | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|---------------|------------|
| ** **                           | ** ** | **Pretax** | ** ** | **Effect** | ** ** | **After-tax** | ** ** |
|                                 |       |       |       |       |       |          |       |
| Current year actuarial gain          |       | $          | 22.4       |       | $          | (2.2          | )          | $ | 20.2 |   |
| Amortization of actuarial loss       |       | (3.9       | )          |       |       | (3.9          | )          |
| Amortization of prior service credit |       | 3.1        |       |       |       | 3.1           |       |
|                                 |       |       |       |       |       |          |       |
|                                 |       | 21.6       |       | (2.2       | )          | 19.4          |       |
| Translation                          |       |       |       |       |       | (1.0          | )          |
|                                 |       | $          | 21.6       |       | $          | (2.2          | )          | $ | 18.4 |   |

 

The components of the netpostretirement benefit cost for the year were as follows:

 
| ** **                        | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                              |       |     |       |     |       |     |       |
| Service cost                      |       | $        | 1.8        |     | $          | 2.2      |       | $ | 3.0 |   |
| Interest cost                     |       | 16.4     |       | 17.2     |       | 17.4     |       |
| Curtailment gain                  |       |     |       |     |       | (14.9    | )          |
| Special termination benefit       |       |     |       | 0.9      |       |     |       |
| Other                             |       |     |       |     |       |     |       |
| Amortization:                     |       |     |       |     |       |     |       |
| Prior service credit              |       | (3.1     | )          | (3.1     | )          | (3.8     | )          |
| Actuarial loss                    |       | 3.9      |       | 6.2      |       | 5.8      |       |
|                              |       |     |       |     |       |     |       |
| Net amortization                  |       | 0.8      |       | 3.1      |       | 2.0      |       |
|                              |       |     |       |     |       |     |       |
| Net postretirement benefit cost   |       | $        | 19.0       |     | $          | 23.4     |       | $ | 7.5 |   |
|                              |       |     |       |     |       |     |       |
| Total for continuing operations   |       | 19.0     |       | 23.4     |       | 20.7     |       |
| Total for discontinued operations |       |     |       |     |       | (13.2    | )          |
|                              |       | $        | 19.0       |     | $          | 23.4     |       | $ | 7.5 |   |

 

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**Owens-Illinois Group, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 

Amounts that will beamortized from accumulated other comprehensive income into net postretirementbenefit cost during 2010:

 
| Amortization:        |   |   |   |
|----------------------|--------|--------|--------|
| Actuarial loss       |   | $      | 5.3    |   |
| Prior service credit |   | (3.1   | )      |
|                 |   |   |   |
| Net amortization     |   | $      | 2.2    |   |

 

The weighted averagediscount rate used to determine the accumulated postretirement benefitobligation was 5.66% and 6.40% at December 31, 2009 and 2008,respectively.

 

The weighted averagediscount rate used to determine net postretirement benefit cost was 6.40%,5.86%, and 5.56% at December 31, 2009, 2008, and 2007, respectively.

 

The weighted averageassumed health care cost trend rates at December 31 were as follows:

 
| ** **                                                                     | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Health care cost trend rate assumed for next year                              |       | 8.29     | %          | 7.38     | %          |
| Rate  to which the cost trend rate is assumed to decline (ultimate trend rate) |       | 5.00     | %          | 5.67     | %          |
| Year that the rate reaches the ultimate trend rate                             |       | 2015     |       | 2010     |       |

 

Assumed health care costtrend rates affect the amounts reported for the postretirement benefitplans.  A one-percentage-point change inassumed health care cost trend rates would have the following effects:

 
| ** **                                                | ** ** | **1-Percentage-**  | ** ** | **1-Percentage-**  | ** ** |
|-----------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                | ** ** | **Point Increase** | ** ** | **Point Decrease** | ** ** |
|                                                      |       |               |       |               |       |
| Effect on total of service and interest cost              |       | $                  | 1.4        |               | $          | (1.1 | ) |
| Effect on accumulated postretirement benefit  obligations |       | 18.6               |       | (15.7              | )          |
|                                                           |            |                    |            |                    |            |  |  |

 

Amortization included innet postretirement benefit cost is based on the average remaining service ofemployees.

 

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**Owens-Illinois Group, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

The following estimated futurebenefit payments, which reflect expected future service, as appropriate, areexpected to be paid in the years indicated:

 
| **Year(s)** | ** ** | **Amount** | ** ** |
|-------------|------------|------------|------------|
|        |       |       |       |
| 2010        |       | $          | 22.3       |   |
| 2011        |       | 22.3       |       |
| 2012        |       | 22.2       |       |
| 2013        |       | 22.1       |       |
| 2014        |       | 22.0       |       |
| 2015 - 2019 |       | 107.4      |       |
|             |            |            |            |  |

 

Benefits provided by theCompany for certain hourly retirees are determined by collectivebargaining.  Most other domestic hourlyretirees receive health and life insurance benefits from a multi-employer trustestablished by collective bargaining. Payments to the trust as required by the bargaining agreements are basedupon specified amounts per hour worked and were $7.2 million in 2009, $8.9million in 2008, and $7.4 million in 2007. Postretirement health and life benefits for retirees of foreignsubsidiaries are generally provided through the national health care programsof the countries in which the subsidiaries are located.

 

**13.  Other Expense **Other expense for the year ended December 31,2009****included the following:

 

·                  The Companyrecognized foreign currency exchange losses of $28.0 million related to theexchange of Venezuelan bolivars into U.S. dollars.  See Note 7 for additional information.

 

·                  During thefourth quarter of 2009, the Company recorded charges of $17.3 million ($17.6million after tax amount attributable to the Company) for the remeasurement ofcertain bolivar-denominated assets and liabilities held outside ofVenezuela.  See Note 20 for additionalinformation.

 

·                  The Companyrecorded charges totaling $213.6 million ($182.8 million after tax amountattributable to the Company) for restructuring and asset impairment.  The charges reflect the additional decisionsreached in the Company’s strategic review of its global manufacturingfootprint.  See Note 14 for additionalinformation.

 

Other expense for theyear ended December 31, 2008****included thefollowing:

 

·                  The Companyrecorded charges totaling $132.4 million ($110.1 million after tax amountattributable to the Company) for restructuring and asset impairment.  The charges reflect the additional decisionsreached in the Company’s strategic review of its global manufacturingfootprint.  See Note 14 for additionalinformation.

 

·                  During 2008, the Company also recorded anadditional $0.9 million (pretax and after tax amount attributable to theCompany) related to the impairment of the Company’s equity investment in theSouth American Segment’s 50%-owned Caribbean affiliate.

 

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**Owens-Illinois Group, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

Other costs and expensesfor the year ended December 31, 2007 included the following:

 

·                  In the SouthAmerican Segment’s 50%-owned Caribbean affiliate, declining productivity andcash flows resulted in impairment of the Company’s equity investment,establishment of valuation allowances against advances to the affiliate, andaccrual of certain contingent obligations for total charges of $45.0 million($43.9 million after tax amount attributable to the Company) recorded in 2007with an additional $0.9 million (before and after tax amount attributable tothe Company) recorded in the first quarter of 2008.

 

·                  The Companyrecorded charges totaling $55.3 million ($40.2 million after tax amountattributable to the Company) for restructuring and asset impairment.  The charges reflect the additional decisionsreached in the Company’s strategic review of its global manufacturingfootprint.  See Note 14 for additional information.

 

**14.  Restructuring Accruals **Beginning in 2007, the Company commenced a strategic review of itsglobal profitability and manufacturing footprint.  The combined 2007, 2008 and 2009 charges,amounting to $401.3 million ($333.1 million after tax amount attributable tothe Company), reflect the decisions reached through December 31, 2009 inthe Company’s strategic review of its global manufacturing footprint. Therelated curtailment of plant capacity and realignment of selected operationswill result in an overall reduction in the Company’s workforce of approximately3,250 jobs.  Amounts recorded by theCompany do not include any gains that may be realized upon the ultimate sale ordisposition of closed facilities.

 

TheCompany’s decisions to curtail selected production capacity have resulted inwrite downs of certain long-lived assets to the extent their carrying amountsexceeded fair value less cost to sell. The Company classified the significant assumptions used to determine thefair value of the impaired assets, which was not material, as “Level 3” in thefair value hierarchy as set forth in the general accounting principles for fairvalue measurements.

 

TheCompany also recorded liabilities for certain employee separation costs to bepaid under contractual arrangements and other exit costs.

 

2007

Duringthe third and fourth quarters of 2007, the Company recorded charges totaling$55.3 million ($40.2 million after tax amount attributable to the Company) forrestructuring and asset impairment in Europe and North America.  The curtailment of plant capacity resulted inelimination of approximately 560 jobs and a corresponding reduction in theCompany’s workforce.

 

2008

During2008, the Company recorded charges totaling $132.4 million ($110.1 millionafter tax amount attributable to the Company) for restructuring and assetimpairment across all segments as well as in Retained Corporate Costs andOther.  The curtailment of plant capacityand realignment of selected operations resulted in elimination of approximately1,240 jobs and a corresponding reduction in the Company’s workforce.

 

2009

During2009, the Company recorded charges totaling $213.6 million ($182.8 millionafter tax amount attributable to the Company) for restructuring and assetimpairment across all segments.  Thecurtailment of plant capacity will result in elimination of approximately 1,450jobs and a corresponding reduction in the Company’s workforce.

 

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**Owens-Illinois Group, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

Asof December 31, 2009, the Company has concluded its global manufacturingfootprint review, with the final actions to be implemented during the firsthalf of 2010.  The Company expects thatthe majority of the remaining estimated cash expenditures related to the abovecharges will be paid out by the end of 2010.

 

Selectedinformation related to the restructuring accrual is as follows:

 
| ** **                                                    | ** ** | **Employee  Costs** | ** ** | **Asset  Impairment** | ** ** | **Other** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|-----------|------------|-----------|------------|
|                                                          |       |                |       |                  |       |      |       |      |       |
| 2007  Charges                                                 |       | $                   | 26.1       |                  | $          | 22.3      |       | $         | 6.9        |   | $ | 55.3 |   |
| Write-down  of assets to net realizable value                 |       | —              |       | (22.3                 | )          | (2.4      | )          | (24.7     | )          |
| Total  restructuring accrual at December 31, 2007        |       | 26.1                |       | —                |       | 4.5       |       | 30.6      |       |
| 2008  charges                                                 |       | 70.1                |       | 32.5                  |       | 29.8      |       | 132.4     |       |
| Write-down  of assets to net realizable value                 |       |                |       | (32.5                 | )          | (4.7      | )          | (37.2     | )          |
| Net  cash paid, principally severance and related benefits    |       | (35.6               | )          |                  |       | (7.2      | )          | (42.8     | )          |
| Other,  principally foreign exchange translation              |       | (13.0               | )          |                  |       | (6.1      | )          | (19.1     | )          |
| Total  restructuring accrual at December 31, 2008        |       | 47.6                |       | —                |       | 16.3      |       | 63.9      |       |
| 2009  charges                                                 |       | 116.3               |       | 78.7                  |       | 18.6      |       | 213.6     |       |
| Write-down  of assets to net realizable value                 |       |                |       | (78.7                 | )          |      |       | (78.7     | )          |
| Net  cash paid, principally severance and related benefits    |       | (60.8               | )          |                  |       | (7.5      | )          | (68.3     | )          |
| Other,  principally foreign exchange translation              |       | (8.8                | )          |                  |       | (1.6      | )          | (10.4     | )          |
| Remaining  restructuring accrual as of December 31, 2009 |       | $                   | 94.3       |                  | $          | —    |       | $         | 25.8       |   | $ | 120.1 |   |

 

**15.  Additional Interest Charges from EarlyExtinguishment of Debt** During 2009, the Company recorded additional interest charges of $5.2million (pretax and after tax) for note repurchase premiums and the write-offof unamortized finance fees, net of a gain from the termination of interestrate swap agreements, related to debt that was repaid prior to itsmaturity.  During 2007, the Companyrecorded additional interest charges of $9.5 million ($8.8 million after tax)for note repurchase premiums and the write-off of unamortized finance feesrelated to debt that was repaid prior to its maturity.

 

**16.  Contingencies**  OI Inc. is one of a number of defendants in a substantial number of lawsuits filed in numerous state and federal courts by persons alleging bodily injury (including death) as a result of exposure to dust containing asbestos fibers.  From 1948 to 1958, one of OI Inc.’s former business units commercially produced and sold approximately $40 million of a high-temperature, calcium-silicate based pipe and block insulation material containing asbestos.  OI Inc. exited the pipe and block insulation business in April 1958.  The traditional asbestos personal injury lawsuits and claims relating to such production and sale of asbestos material typically allege various theories of liability, including negligence, gross negligence and strict liability and seek compensatory and in some cases, punitive damages in various amounts (herein referred to as “asbestos claims”).

 

The following table shows the approximate number of plaintiffs and claimants who had asbestos claims pending against OI Inc. at the beginning of each listed year, the number of claims disposed of during that year, the year’s filings and the claims pending at the end of each listed year (eliminating duplicate filings):

 

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**Owens-Illinois Group, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 
| ** **                   | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                         |       |     |       |     |       |     |       |
| Pending at beginning of year |       | 11,000   |       | 14,000   |       | 18,000   |       |
| Disposed                     |       | 10,000   |       | 8,000    |       | 13,000   |       |
| Filed                        |       | 6,000    |       | 5,000    |       | 9,000    |       |
| Pending at end of year       |       | 7,000    |       | 11,000   |       | 14,000   |       |

 

Based on an analysis of the lawsuits pending as of December 31, 2009, approximately 79% of plaintiffs either do not specify the monetary damages sought, or in the case of court filings, claim an amount sufficient to invoke the jurisdictional minimum of the trial court.  Approximately 20% of plaintiffs specifically plead damages of $15 million or less, and 1% of plaintiffs specifically plead damages greater than $15 million but less than $100 million.  Fewer than 1% of plaintiffs specifically plead damages $100 million or greater but less than $122 million.

 

As indicated by the foregoing summary, current pleading practice permits considerable variation in the assertion of monetary damages.  OI Inc.’s experience resolving hundreds of thousands of asbestos claims and lawsuits over an extended period, demonstrates that the monetary relief which may be alleged in a complaint bears little relevance to a claim’s merits or disposition value.  Rather, the amount potentially recoverable is determined by such factors as the plaintiff’s severity of disease, the product identification evidence against specific defendants, the defenses available to those defendants, the specific jurisdiction in which the claim is made, and the plaintiff’s history of smoking or exposure to other possible disease-causative factors.

 

In addition to the pending claims set forth above, OI Inc. has claims-handling agreements in place with many plaintiffs’ counsel throughout the country.  These agreements require evaluation and negotiation regarding whether particular claimants qualify under the criteria established by such agreements. The criteria for such claims include verification of a compensable illness and a reasonable probability of exposure to a product manufactured by OI Inc.’s former business unit during its manufacturing period ending in 1958.  Some plaintiffs’ counsel have historically withheld claims under these agreements for later presentation while focusing their attention on active litigation in the tort system.  OI Inc. believes that as of December 31, 2009 there are approximately 800 claims against other defendants which are likely to be asserted some time in the future against OI Inc.. These claims are not included in the pending “lawsuits and claims” totals set forth above.

 

OI Inc. is also a defendant in other asbestos-related lawsuits or claims involving maritime workers, medical monitoring claimants, co-defendants and property damage claimants.  Based upon its past experience, OI Inc. believes that these categories of lawsuits and claims will not involve any material liability and they are not included in the above description of pending matters or in the following description of disposed matters.

 

Since receiving its first asbestos claim, OI Inc. as of December 31, 2009, has disposed of the asbestos claims of approximately 379,000 plaintiffs and claimants at an average indemnity payment per claim of approximately $7,500.  Certain of these dispositions have included deferred amounts payable over a number of years.  Deferred amounts payable totaled approximately $36.3 million at December 31, 2009 ($34.0 million at December 31, 2008) and are included in the foregoing average indemnity payment per claim. OI Inc.’s indemnity payments for these claims have varied on a per claim basis, and are expected to continue to vary considerably over time.  As discussed above, a part of OI Inc.’s objective is to achieve, where possible, resolution of asbestos claims pursuant to claims-handling agreements.  Failure of

 

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**Owens-Illinois Group, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 

claimants to meet certain medical and product exposure criteria in OI Inc.’s administrative claims handling agreements has generally reduced the number of marginal or suspect claims that would otherwise have been received. This may have the effect of increasing OI Inc.’s per-claim average indemnity payment over time.

 

OI Inc. believes that its ultimate asbestos-related liability (i.e., its indemnity payments or other claim disposition costs plus related legal fees) cannot reasonably be estimated. Beginning with the initial liability of $975 million established in 1993, OI Inc. has accrued a total of approximately $3.65 billion through 2009, before insurance recoveries, for its asbestos-related liability.  OI Inc.’s ability to reasonably estimate its liability has been significantly affected by the volatility of asbestos-related litigation in the United States, the inherent uncertainty of future disease incidence and claiming patterns, the expanding list of non-traditional defendants that have been sued in this litigation and found liable for substantial damage awards, the use of mass litigation screenings to generate new lawsuits, the large number of claims asserted or filed by parties who claim prior exposure to asbestos materials but have no present physical impairment as a result of such exposure, and the significant number of co-defendants that have filed for bankruptcy.

 

OI Inc. has continued to monitor trends that may affect its ultimate liability and has continued to analyze the developments and variables affecting or likely to affect the resolution of pending and future asbestos claims against OI Inc.  The material components of OI Inc.’s accrued liability are based on amounts determined by OI Inc. in connection with its annual comprehensive review and consist of the following estimates, to the extent it is probable that such liabilities have been incurred and can be reasonably estimated: (i) the liability for asbestos claims already asserted against OI Inc.; (ii) the liability for preexisting but unasserted asbestos claims for prior periods arising under its administrative claims-handling agreements with various plaintiffs’ counsel; (iii) the liability for asbestos claims not yet asserted against OI Inc., but which OI Inc. believes will be asserted in the next several years; and (iv) the legal defense costs likely to be incurred in connection with the foregoing types of claims.

 

The significant assumptions underlying the material components of OI Inc.’s accrual are:

 

a)   the extent to which settlements are limited to claimants who were exposed to OI Inc.’s asbestos-containing insulation prior to its exit from that business in 1958;

 

b)  the extent to which claims are resolved under OI Inc.’s administrative claims agreements or on terms comparable to those set forth in those agreements;

 

c)   the extent of decrease or increase in the incidence of serious disease cases and claiming patterns for such cases;

 

d)  the extent to which OI Inc. is able to defend itself successfully at trial;

 

e)   the extent to which courts and legislatures eliminate, reduce or permit the diversion of financial resources for unimpaired claimants and so-called forum shopping;

 

f)  the extent to which additional defendants with substantial resources and assets are required to participate significantly in the resolution of future asbestos lawsuits and claims;

 

g)  the number and timing of additional co-defendant bankruptcies; and

 

h)  the extent to which co-defendant bankruptcy trusts direct resources to resolve claims that are also presented to OI Inc. and the timing of the payments made by the bankruptcy trusts.

 

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**Owens-Illinois Group, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 

As noted above, OI Inc. conducts a comprehensive review of its asbestos-related liabilities and costs annually in connection with finalizing and reporting its annual results of operations, unless significant changes in trends or new developments warrant an earlier review.  If the results of an annual comprehensive review indicate that the existing amount of the accrued liability is insufficient to cover its estimated future asbestos-related costs, then OI Inc. will record an appropriate charge to increase the accrued liability.  OI Inc. believes that a reasonable estimation of the probable amount of the liability for claims not yet asserted against OI Inc. is not possible beyond a period of several years.  Therefore, while the results of future annual comprehensive reviews cannot be determined, OI Inc. expects the addition of one year to the estimation period will result in an annual charge.

 

The ultimate legal and financial liability of OI Inc. with respect to the lawsuits and proceedings referred to above, in addition to other pending litigation, cannot reasonably be estimated.  OI Inc.’s reported results of operations for 2009 were materially affected by the $180.0 million (pretax and after tax) fourth quarter charge for asbestos-related costs and asbestos-related payments continue to be substantial.  Any future additional charge would likewise materially affect OI Inc.’s results of operations for the period in which it is recorded. Also, the continued use of significant amounts of cash for asbestos-related costs has affected and will continue to affect the Company’s and OI Inc.’s cost of borrowing and the ability to pursue global or domestic acquisitions. However, the Company believes that its operating cash flows and other sources of liquidity will be sufficient to fund OI Inc.’s asbestos-related payments and to fund the Company’s working capital and capital expenditure requirements on a short-term and long-term basis.

 

Other litigation is pending against the Company, in many cases involving ordinary and routine claims incidental to the business of the Company and in others presenting allegations that are non-routine and involve compensatory, punitive or treble damage claims as well as other types of relief.  The Company records a liability for such matters when it is both probable that the liability has been incurred and the amount of the liability can be reasonably estimated.  Recorded amounts are reviewed and adjusted to reflect changes in the factors upon which the estimates are based including additional information, negotiations, settlements, and other events.

 

**17.  Segment Information**  TheCompany has four reportable segments based on its four geographiclocations:  (1) Europe; (2) NorthAmerica; (3) South America; (4) Asia Pacific.  These four segments are aligned with theCompany’s internal approach to managing, reporting, and evaluating performanceof its global glass operations.  Certainassets and activities not directly related to one of the regions or to glassmanufacturing are reported with Retained Corporate Costs and Other.  These include licensing, equipmentmanufacturing, global engineering, and non-glass equity investments.  Retained Corporate Costs and Other alsoincludes certain headquarters administrative and facilities costs and certainincentive compensation and other benefit plan costs that are global in natureand are not allocable to the reportable segments.

 

TheCompany’s measure of profit for its reportable segments is Segment OperatingProfit, which consists of consolidated earnings from continuing operationsbefore interest income, interest expense, and provision for income taxes andexcludes amounts related to certain items that management considers notrepresentative of ongoing operations as well as certain retained corporatecosts.  The Company’s management usesSegment Operating Profit, in combination with selected cash flow information,to evaluate performance and to allocate resources.

 

SegmentOperating Profit for reportable segments includes an allocation of somecorporate expenses based on both a percentage of sales and direct billingsbased on the costs of specific services provided.  Beginning in 2008, the Company revised itsmethod of allocating corporate expenses. The Company decreased slightly the percentage allocation based on salesand significantly expanded the number of

 

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** **

**Owens-Illinois Group, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

functionsincluded in the allocation based on cost of services. It is notpracticable to quantify the net effect of these changes on periods prior to2008. However, the effect for 2008 was to reduce the amount of retainedcorporate costs by approximately $38.0 million. The information below is presented on a continuing operations basis,and therefore, the 2007 amounts exclude amounts related to the discontinuedoperations of the Company’s former Plastics Packaging segment. See Note 19 formore information.

 

Financial informationregarding the Company’s reportable segments is as follows:

 
| ** **                | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net Sales:                |       |     |       |     |       |     |       |
| Europe                    |       | $        | 2,917.6    |     | $          | 3,497.8  |       | $ | 3,298.7 |   |
| North America             |       | 2,074.3  |       | 2,209.7  |       | 2,271.3  |       |
| South America             |       | 1,104.1  |       | 1,135.9  |       | 970.7    |       |
| Asia Pacific              |       | 925.0    |       | 964.1    |       | 934.3    |       |
|                      |       |     |       |     |       |     |       |
| Reportable segment totals |       | 7,021.0  |       | 7,807.5  |       | 7,475.0  |       |
| Other                     |       | 45.5     |       | 77.2     |       | 91.7     |       |
| Net sales                 |       | $        | 7,066.5    |     | $          | 7,884.7  |       | $ | 7,566.7 |   |

 
| ** **                                               | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                     |       |     |       |     |       |     |       |
| Segment  Operating Profit:                               |       |     |       |     |       |     |       |
| Europe                                                   |       | $        | 332.6      |     | $          | 477.8    |       | $ | 433.0 |   |
| North America                                            |       | 281.5    |       | 185.2    |       | 265.1    |       |
| South America                                            |       | 250.6    |       | 331.0    |       | 254.9    |       |
| Asia Pacific                                             |       | 131.3    |       | 162.8    |       | 154.0    |       |
| Reportable segment totals                                |       | 996.0    |       | 1,156.8  |       | 1,107.0  |       |
|                                                     |       |     |       |     |       |     |       |
| Items excluded from Segment Operating Profit:            |       |     |       |     |       |     |       |
| Retained corporate costs and other                       |       | (66.7    | )          | (0.7     | )          | (78.8    | )          |
| Restructuring and asset impairments                      |       | (213.6   | )          | (133.3   | )          | (100.3   | )          |
| Charge for Venezuela currency remeasurement              |       | (17.3    | )          |     |       |     |       |
| Interest income                                          |       | 28.6     |       | 38.6     |       | 42.3     |       |
| Interest expense                                         |       | (221.7   | )          | (253.0   | )          | (348.6   | )          |
| Earnings  from continuing operations before income taxes |       | $        | 505.3      |     | $          | 808.4    |       | $ | 621.6 |   |

 

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**Owens-Illinois Group, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 
| ** **                             | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | **Reportable** | ** ** | **Retained**   | ** ** | ** **       | ** ** |
|----------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|-------------|------------|----------------|------------|----------------|------------|------------------|------------|
| ** **                             | ** ** | ** ** | ** ** | **North**   | ** ** | **South**   | ** ** | **Asia**    | ** ** | **Segment**    | ** ** | **Corp Costs** | ** ** | **Consolidated** | ** ** |
| ** **                             | ** ** | **Europe** | ** ** | **America** | ** ** | **America** | ** ** | **Pacific** | ** ** | **Totals**     | ** ** | **and Other**  | ** ** | **Totals**       | ** ** |
|                                   |       |       |       |        |       |        |       |        |       |           |       |           |       |             |       |
| Total assets:                          |       |       |       |        |       |        |       |        |       |           |       |           |       |             |       |
| 2009                                   |       | $          | 3,852.3    |        | $          | 1,899.8     |       | $           | 855.9      |           | $          | 1,683.0        |       | $                | 8,291.0    |   | $ | 436.4 |   | $ | 8,727.4 |   |
| 2008                                   |       | 3,758.4    |       | 1,802.9     |       | 976.2       |       | 1,239.6     |       | 7,777.1        |       | 199.4          |       | 7,976.5          |       |
| 2007                                   |       | 4,124.1    |       | 1,946.9     |       | 965.7       |       | 1,558.1     |       | 8,594.8        |       | 729.8          |       | 9,324.6          |       |
|                                   |       |       |       |        |       |        |       |        |       |           |       |           |       |             |       |
| Equity earnings:                       |       |       |       |        |       |        |       |        |       |           |       |           |       |             |       |
| 2009                                   |       | $          | 12.5       |        | $          | 14.2        |       | $           | —     |           | $          | —         |       | $                | 26.7       |   | $ | 25.9 |   | $ | 52.6 |   |
| 2008                                   |       | 14.1       |       | 12.6        |       |        |       |        |       | 26.7           |       | 24.1           |       | 50.8             |       |
| 2007                                   |       | 8.0        |       | 10.4        |       | (2.7        | )          |        |       | 15.7           |       | 18.4           |       | 34.1             |       |
|                                   |       |       |       |        |       |        |       |        |       |           |       |           |       |             |       |
| Capital expenditures (1):              |       |       |       |        |       |        |       |        |       |           |       |           |       |             |       |
| 2009                                   |       |       |       |        |       |        |       |        |       |           |       |           |       |             |       |
| Continuing                             |       | $          | 169.7      |        | $          | 103.0       |       | $           | 66.9       |           | $          | 81.5           |       | $                | 421.1      |   | $ | 6.5 |   | $ | 427.6 |   |
| 2008                                   |       |       |       |        |       |        |       |        |       |           |       |           |       |             |       |
| Continuing                             |       | 151.9      |       | 90.5        |       | 57.3        |       | 57.6        |       | 357.3          |       | 4.4            |       | 361.7            |       |
| 2007                                   |       |       |       |        |       |        |       |        |       |           |       |           |       |             |       |
| Continuing                             |       | 129.2      |       | 65.9        |       | 51.1        |       | 42.0        |       | 288.2          |       | 4.3            |       | 292.5            |       |
| Discontinued                           |       |       |       |        |       |        |       |        |       |           |       | 23.3           |       | 23.3             |       |
|                                   |       |       |       |        |       |        |       |        |       |           |       |           |       |             |       |
| Depreciation and amortization expense: |       |       |       |        |       |        |       |        |       |           |       |           |       |             |       |
| 2009                                   |       |       |       |        |       |        |       |        |       |           |       |           |       |             |       |
| Continuing                             |       | $          | 178.6      |        | $          | 98.9        |       | $           | 50.1       |           | $          | 67.1           |       | $                | 394.7      |   | $ | 11.6 |   | $ | 406.3 |   |
| 2008                                   |       |       |       |        |       |        |       |        |       |           |       |           |       |             |       |
| Continuing                             |       | 222.0      |       | 98.7        |       | 56.5        |       | 80.4        |       | 457.6          |       | 10.2           |       | 467.8            |       |
| 2007                                   |       |       |       |        |       |        |       |        |       |           |       |           |       |             |       |
| Continuing                             |       | 210.3      |       | 107.3       |       | 54.3        |       | 81.7        |       | 453.6          |       | 7.3            |       | 460.9            |       |
| Discontinued                           |       |       |       |        |       |        |       |        |       |           |       | 23.3           |       | 23.3             |       |

 

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(1)  Excludes property, plant and equipment acquired throughacquisitions.

 

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**Owens-Illinois Group, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

The Company’s netproperty, plant, and equipment by geographic segment are as follows:

 
| ** ** | ** ** | **United** | ** ** | ** **  | ** ** | ** ** | ** ** |
|------------|------------|------------|------------|-------------|------------|------------|------------|
| ** ** | ** ** | **States** | ** ** | **Foreign** | ** ** | **Total**  | ** ** |
|       |       |       |       |        |       |       |       |
| 2009       |       | $          | 639.2      |        | $          | 2,103.1    |       | $ | 2,742.3 |   |
| 2008       |       | 679.5      |       | 1,966.1     |       | 2,645.6    |       |
| 2007       |       | 678.9      |       | 2,271.1     |       | 2,950.0    |       |
|            |            |            |            |             |            |            |            |  |  |  |

 

The Company’s net sales by geographic segment are as follows:

 
| ** ** | ** ** | **United** | ** ** | ** **  | ** ** | ** ** | ** ** |
|------------|------------|------------|------------|-------------|------------|------------|------------|
| ** ** | ** ** | **States** | ** ** | **Foreign** | ** ** | **Total**  | ** ** |
|       |       |       |       |        |       |       |       |
| 2009       |       | $          | 1,877.5    |        | $          | 5,189.0    |       | $ | 7,066.5 |   |
| 2008       |       | 1,894.8    |       | 5,989.9     |       | 7,884.7    |       |
| 2007       |       | 1,920.6    |       | 5,646.1     |       | 7,566.7    |       |
|            |            |            |            |             |            |            |            |  |  |  |

 

Operationsin individual countries outside the United States that accounted for more than10% of consolidated net sales from continuing operations were in Italy (2009 -10.4%, 2008 - 10.7%, 2007 - 10.1%) and France (2009 - 13.0%, 2008 - 14.7%, 2007- 19.3%).

 

**18.****Goodwill**  The changesin the carrying amount of goodwill for the years ended December 31, 2007,2008 and 2009 are as follows:

 
| ** **                            | ** ** | **North**   | ** ** | ** ** | ** ** | **Asia**    | ** ** | **South**   | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|-------------|------------|------------|------------|-------------|------------|-------------|------------|------------|------------|------------|------------|
| ** **                            | ** ** | **America** | ** ** | **Europe** | ** ** | **Pacific** | ** ** | **America** | ** ** | **Other**  | ** ** | **Total**  | ** ** |
| Balance  as of January 1, 2007   |       | $           | 721.6      |       | $          | 1,017.0     |       | $           | 502.1      |       | $          | —     |       | $ | 14.5 |   | $ | 2,255.2 |   |
| Translation  effects                  |       | 25.1        |       | 115.3      |       | 54.6        |       |        |       |       |       | 195.0      |       |
| Other  changes                        |       | (1.1        | )          | (13.0      | )          |        |       |        |       | (8.0       | )          | (22.1      | )          |
| Balance  as of December 31, 2007 |       | 745.6       |       | 1,119.3    |       | 556.7       |       | —      |       | 6.5        |       | 2,428.1    |       |
| Translation  effects                  |       | (28.8       | )          | (58.2      | )          | (123.1      | )          |        |       | 0.3        |       | (209.8     | )          |
| Other  changes                        |       |        |       | (10.1      | )          |        |       |        |       | (0.7       | )          | (10.8      | )          |
| Balance  as of December 31, 2008 |       | 716.8       |       | 1,051.0    |       | 433.6       |       | —      |       | 6.1        |       | 2,207.5    |       |
| Translation  effects                  |       | 18.9        |       | 29.6       |       | 124.8       |       |        |       |       |       | 173.3      |       |
| Other  changes                        |       |        |       |       |       |        |       |        |       | 0.2        |       | 0.2        |       |
| Balance  as of December 31, 2009 |       | $           | 735.7      |       | $          | 1,080.6     |       | $           | 558.4      |       | $          | —     |       | $ | 6.3 |   | $ | 2,381.0 |   |

 

Goodwillfor the Asia Pacific segment is net of accumulated impairment losses of $494.0million.

 

Duringthe fourth quarters of 2009, 2008 and 2007, the Company completed its annualimpairment testing and determined that no impairment existed.

 

**19.  Discontinued Operations**On July 31, 2007, the Company completedthe sale of its plastics packaging business to Rexam PLC for approximately$1.825 billion in cash. In accordance with general accounting principles, theCompany has presented the results of operations for the plastics packaging

 

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**Owens-Illinois Group, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 

businessin the Consolidated Results of Operations for the year ended December 31,2007 as discontinued operations. Interest expense was allocated to thediscontinued operations based on debt that was required by an amendment to theSecured Credit Agreement to be repaid from the net proceeds. Amounts for 2007have been reclassified to conform to this presentation.

 

### **The following summarizes the revenuesand expenses of the discontinued operations as reported in the consolidatedresults of operations for the period indicated:**

** **
| ** **                                                                          | ** ** | **Year ended**        | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                          | ** ** | **December 31,** | ** ** |
| ** **                                                                          | ** ** | **2007**              | ** ** |
| Net sales                                                                           |       | $                     | 455.0      |   |
| Manufacturing, shipping and delivery                                                |       | (343.5                | )          |
| Gross profit                                                                        |       | 111.5                 |       |
|                                                                                |       |                  |       |
| Selling and  administrative                                                         |       | (20.7                 | )          |
| Research, development and engineering                                               |       | (8.3                  | )          |
| Interest expense                                                                    |       | (80.6                 | )          |
| Other income                                                                        |       | (0.1                  | )          |
| Other expense                                                                       |       | (1.2                  | )          |
| Earnings before items  below                                                        |       | 0.6                   |       |
| Credit for income taxes                                                             |       | 2.4                   |       |
| Earnings from  discontinued operations                                              |       | 3.0                   |       |
| Gain on sale of  discontinued operations                                            |       | 1,038.5               |       |
| Net earnings from  discontinued operations                                          |       | 1,041.5               |       |
| Net earnings from  discontinued operations attributable to noncontrolling interests |       | (0.2                  | )          |
| Net earnings from discontinued  operations attributable to the Company              |       | $                     | 1,041.3    |   |

 

### **The 2007 gain on the sale ofdiscontinued operations of $1,038.5 million includes charges totaling $62.1million for debt retirement costs, consisting principally of redemptionpremiums and write off of unamortized fees, and a gain of $8.7 million forcurtailment and settlement of pension and other postretirement benefits. Thegain also includes a net provision for income taxes of $38.2 million,consisting of taxes on the gain of $445.0 million that are substantially offsetby a credit of $406.8 million for the reversal of valuation allowances againstexisting tax loss carryforwards. The sale agreement provides for an adjustmentof the selling price based on working capital levels and certain other factors.**

### ** **

The gain on sale ofdiscontinued operations of $6.8 million reported in 2008 relates to anadjustment of the 2007 gain on the sale of the plastics packaging businessmainly related to finalizing certain tax allocations and an adjustment to theselling price in accordance with procedures set forth in the final contract.

 

**20.  Venezuelan Operations**Venezuelan government restrictions ontransfers of cash out of the country have limited the Company’s ability toimmediately access cash at the government’s official exchange rate, which, asof December 31, 2009, had remained fixed at 2.15 bolivars to the U.S.dollar since early 2005. The Company has been able to obtain U.S. dollars atthe official rate to pay for some of its key raw

 

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**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 

materialsand other imports. However, in 2009, the Venezuelan government significantlyslowed the process of exchanging bolivars to U.S. dollars at the official rate.As a result, the Company’s cash balance in Venezuela increased as earningsaccumulated. The Company has the ability to access the cash in Venezuela morequickly through a market-driven parallel exchange process which, at December 31,2009, valued the bolivar about 60% lower than the official exchange rate. Duringthe last half of 2009, the Company entered into a series of parallel markettransactions in order to exchange Venezuelan bolivars into U.S. dollars, andrecognized foreign currency exchange losses of $28.0 million. The Company willcontinue to pursue currency exchange at official rates to pay for its approvedimports and to remit earnings. However, it will also monitor conditions inVenezuela and presently intends to continue transferring cash generated in thecountry through parallel market transactions.

 

Dueto the government restrictions on currency exchange in Venezuela discussedabove, the Company used the parallel market rate to translate the balancesheets of its Venezuelan subsidiaries as of December 31, 2009. The impactof this change from the official exchange rate was an approximate 60% reductionin the reported U.S. dollar amounts for all assets and liabilities of theCompany’s Venezuelan subsidiaries, and a resulting $132.5 million chargerecorded in the cumulative translation adjustment component of othercomprehensive income and $45.9 million charge recorded against noncontrollinginterests. In addition, the Company remeasured certain bolivar-denominatedassets and liabilities held outside of Venezuela to the parallel market rateand recorded a charge of $17.3 million in December 2009. The adoption ofthe parallel market rate will have an adverse impact on the Company’s SouthAmerican segment operating profit in future periods as most of the revenues andcosts of the Company’s Venezuelan operations will be translated into fewer U.S.dollars. The Company’s Venezuelan operations represented approximately 40% ofthe South American segment operating profit for 2009, including the $28.0million foreign exchange losses recognized by the Company from the parallelmarket transactions noted above.

 

Inaddition, inflation in Venezuela has continued at an accelerated rate, and,beginning January 1, 2010, Venezuela’s economy will be considered highlyinflationary. For accounting purposes, an economy is deemed to be highlyinflationary when the three-year cumulative rate of inflation exceeds 100%. Underthe highly-inflationary basis of accounting, the Company must adopt the U.S.dollar as the functional currency for its Venezuelan operations as of January 1,2010. Any subsequent movements in the bolivar to U.S. dollar exchange rate willbe recognized in the results of operations. In addition, monetary assets (suchas cash and receivables) and liabilities (such as payables and accruals) willbe remeasured at the end of each reporting period using the currency exchangerate at that date. Because the Company has elected to adopt the parallel marketrate and because that rate is subject to market fluctuation, such remeasurementwill increase the volatility of reported results of operations.

 

OnJanuary 8, 2010, the Venezuelan government announced the devaluation ofthe bolivar and the creation of a two-tiered official exchange rate. Theofficial exchange rate will move from 2.15 bolivars to the U.S. dollar to 2.60for essential goods and 4.30 for non-essential goods. The Venezuelan governmentalso announced that it will intervene in the parallel exchange market. TheCompany is still evaluating the impact of the bolivar devaluation on itsVenezuelan operations. The Company had been able to receive the official rateof 2.15 for certain raw materials it imports into Venezuela, and believes thatit will receive the essential goods rate of 2.60 for these raw materials in thefuture.

 

**21.****Financial Information for Subsidiary Guarantors and Non-Guarantors  **Thefollowing presents condensed consolidating financial information for theCompany, segregating: (1) Owens-Illinois Group, Inc. (the “Parent”); (2) Owens-BrockwayGlass Container Inc. (the “Issuer”); (3) those domestic subsidiaries thatguarantee the 8 1⁄4%, 6 3⁄4%, and 6 3⁄4% Euro Senior Notes of the Issuer (the “GuarantorSubsidiaries”); and (4) all other subsidiaries (the “Non-GuarantorSubsidiaries”). The Guarantor Subsidiaries are 100% owned direct and indirectsubsidiaries of the Parent and their guarantees are full,

 

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**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 

unconditional and jointand several. The Parent is also a guarantor, and its guarantee is full,unconditional and joint and several.

 

Subsidiariesof the Parent and of the Issuer are presented on the equity basis ofaccounting. Certain reclassifications have been made to conform all of thefinancial information to the financial presentation on a consolidated basis. Theprincipal eliminations relate to investments in subsidiaries and inter-companybalances and transactions.

 
| ** **                                               | ** ** | **December 31,  2009** | ** ** |
|----------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                               | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                               | ** ** | ** **                  | ** ** | ** ** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Balance Sheet**                                        | ** ** | **Parent**                  | ** ** | **Issuer** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Current assets:                                          |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Accounts receivable                                      |       | $                           | —     |   | $ | 73.1 |   | $ | (8.7 | ) | $ | 939.8 |   | $ | — |   | $ | 1,004.2 |   |
| Inventories                                              |       |                        |       | 141.0 |   | 0.5 |   | 759.3 |   | (0.5 | ) | 900.3 |   |
| Other current assets                                     |       |                        |       | 74.4 |   | 257.5 |   | 560.2 |   | 0.1 |   | 892.2 |   |
|                                                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Total current assets                                     |       | —                      |       | 288.5 |   | 249.3 |   | 2,259.3 |   | (0.4 | ) | 2,796.7 |   |
|                                                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Investments in and advances to subsidiaries              |       | 2,301.4                     |       | 3,483.0 |   | (19.5 | ) |   |   | (5,764.9 | ) | — |   |
|                                                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Goodwill                                                 |       |                        |       | 560.8 |   | 9.5 |   | 1,810.7 |   |   |   | 2,381.0 |   |
|                                                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Other non-current assets                                 |       |                        |       | 137.4 |   | 88.7 |   | 578.8 |   | 2.5 |   | 807.4 |   |
|                                                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Total other assets                                       |       | 2,301.4                     |       | 4,181.2 |   | 78.7 |   | 2,389.5 |   | (5,762.4 | ) | 3,188.4 |   |
|                                                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Property, plant and equipment, net                       |       |                        |       | 606.2 |   | 40.6 |   | 2,095.5 |   |   |   | 2,742.3 |   |
|                                                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Total assets                                             |       | $                           | 2,301.4    |   | $ | 5,075.9 |   | $ | 368.6 |   | $ | 6,744.3 |   | $ | (5,762.8 | ) | $ | 8,727.4 |   |
|                                                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Current liabilities :                                    |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable and accrued liabilities                 |       | $                           | —     |   | $ | 369.2 |   | $ | 46.8 |   | $ | 1,092.0 |   | $ | (0.7 | ) | $ | 1,507.3 |   |
| Short-term loans and long-term debt due within one  year |       | 28.1                        |       | 0.3 |   |   |   | 323.5 |   | 0.1 |   | 352.0 |   |
| Total current liabilities                                |       | 28.1                        |       | 369.5 |   | 46.8 |   | 1,415.5 |   | (0.6 | ) | 1,859.3 |   |
|                                                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Long-term debt                                           |       | 250.0                       |       | 1,956.7 |   | 17.7 |   | 1,033.1 |   |   |   | 3,257.5 |   |
| Other non-current liabilities                            |       |                        |       | 79.6 |   | 474.7 |   | 834.9 |   | (0.1 | ) | 1,389.1 |   |
| Investments by and advances from parent                  |       |                        |       | 2,670.1 |   | (170.6 | ) | 3,262.6 |   | (5,762.1 | ) | — |   |
| Total share owner’s equity of the Company           |       | 2,023.3                     |       |   |   |   |   |   |   |   |   | 2,023.3 |   |
| Noncontrolling interests                                 |       |                        |       |   |   |   |   | 198.2 |   |   |   | 198.2 |   |
|                                                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Total liabilities and share owners’ equity          |       | $                           | 2,301.4    |   | $ | 5,075.9 |   | $ | 368.6 |   | $ | 6,744.3 |   | $ | (5,762.8 | ) | $ | 8,727.4 |   |

 

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**Owens-Illinois Group, Inc**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –(Continued)**

 
| ** **                                               | ** ** | **December 31,  2008** | ** ** |
|----------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                               | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                               | ** ** | ** **                  | ** ** | ** ** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Balance Sheet**                                        | ** ** | **Parent**                  | ** ** | **Issuer** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Current assets:                                          |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Accounts receivable                                      |       | $                           | —     |   | $ | 67.2 |   | $ | 25.7 |   | $ | 895.9 |   | $ | — |   | $ | 988.8 |   |
| Inventories                                              |       |                        |       | 154.2 |   | 0.4 |   | 846.3 |   | (1.4 | ) | 999.5 |   |
| Other current assets                                     |       |                        |       | 4.8 |   | 10.7 |   | 439.1 |   | 1.8 |   | 456.4 |   |
|                                                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Total current assets                                     |       | —                      |       | 226.2 |   | 36.8 |   | 2,181.3 |   | 0.4 |   | 2,444.7 |   |
|                                                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Investments in and advances to subsidiaries              |       | 2,035.9                     |       | 2,767.9 |   | (72.9 | ) |   |   | (4,730.9 | ) | — |   |
| Goodwill                                                 |       |                        |       | 560.8 |   | 9.5 |   | 1,637.2 |   |   |   | 2,207.5 |   |
| Other non-current assets                                 |       |                        |       | 170.7 |   | 60.2 |   | 448.6 |   | (0.8 | ) | 678.7 |   |
|                                                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Total other assets                                       |       | 2,035.9                     |       | 3,499.4 |   | (3.2 | ) | 2,085.8 |   | (4,731.7 | ) | 2,886.2 |   |
|                                                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Property, plant and equipment, net                       |       |                        |       | 641.4 |   | 44.3 |   | 1,959.9 |   |   |   | 2,645.6 |   |
|                                                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Total assets                                             |       | $                           | 2,035.9    |   | $ | 4,367.0 |   | $ | 77.9 |   | $ | 6,227.0 |   | $ | (4,731.3 | ) | $ | 7,976.5 |   |
|                                                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Current liabilities :                                    |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable and accrued liabilities                 |       | $                           | —     |   | $ | 321.3 |   | $ | 47.5 |   | $ | 1,066.0 |   | $ | (0.4 | ) | $ | 1,434.4 |   |
| Short-term loans and long-term debt due within one  year |       |                        |       | 0.1 |   |   |   | 393.8 |   |   |   | 393.9 |   |
|                                                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Total current liabilities                                |       | —                      |       | 321.4 |   | 47.5 |   | 1,459.8 |   | (0.4 | ) | 1,828.3 |   |
|                                                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Long-term debt                                           |       | 500.0                       |       | 1,397.4 |   | 18.2 |   | 1,015.8 |   |   |   | 2,931.4 |   |
| Other non-current liabilities                            |       |                        |       | 58.9 |   | 565.5 |   | 744.7 |   | 59.0 |   | 1,428.1 |   |
| Investments by and advances from parent                  |       |                        |       | 2,589.3 |   | (553.3 | ) | 2,753.9 |   | (4,789.9 | ) | — |   |
| Total share owner’s equity of the Company           |       | 1,535.9                     |       |   |   |   |   |   |   |   |   | 1,535.9 |   |
| Noncontrolling interests                                 |       |                        |       |   |   |   |   | 252.8 |   |   |   | 252.8 |   |
|                                                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Total liabilities and share owners’ equity          |       | $                           | 2,035.9    |   | $ | 4,367.0 |   | $ | 77.9 |   | $ | 6,227.0 |   | $ | (4,731.3 | ) | $ | 7,976.5 |   |

 

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**Owens-Illinois Group, Inc**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –(Continued)**

 
| ** **                                                    | ** ** | **Year ended December 31, 2009** | ** **  |
|---------------------------------------------------------------|------------|---------------------------------------|-------------|
| ** **                                                    | ** ** | ** **                            | ** **  | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | ** **                            | ** **  | ** ** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Results  of Operations**                                    | ** ** | **Parent**                            | ** **  | **Issuer** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                          |       |                                  |        |   |   |   |   |   |   |   |   |   |   |
| Net  sales                                                    |       | $                                     | —      |   | $ | 1,929.0 |   | $ | — |   | $ | 5,209.0 |   | $ | (71.5 | ) | $ | 7,066.5 |   |
| Manufacturing,  shipping, and delivery                        |       |                                  |        | (1,597.7 | ) | 10.6 |   | (4,123.5 | ) | 128.0 |   | (5,582.6 | ) |
|                                                          |       |                                  |        |   |   |   |   |   |   |   |   |   |   |
| Gross  profit                                                 |       | —                                |        | 331.3 |   | 10.6 |   | 1,085.5 |   | 56.5 |   | 1,483.9 |   |
|                                                          |       |                                  |        |   |   |   |   |   |   |   |   |   |   |
| Research,  engineering, selling, administrative, and other    |       |                                  |        | (246.6 | ) | (98.5 | ) | (517.1 | ) |   |   | (862.2 | ) |
| Net  intercompany interest                                    |       | (39.1                                 | )           | (108.3 | ) | (1.2 | ) | (73.1 | ) |   |   | (221.7 | ) |
| Other  interest expense                                       |       | 39.1                                  |        | (64.5 | ) | 31.1 |   | (5.7 | ) |   |   | — |   |
| Interest  income                                              |       |                                  |        | — |   | 0.2 |   | 28.4 |   |   |   | 28.6 |   |
| Equity  earnings from subsidiaries                            |       | 341.8                                 |        | 435.4 |   | (89.0 | ) |   |   | (688.2 | ) | — |   |
| Other  equity earnings                                        |       |                                  |        | 14.2 |   | 25.9 |   | 12.5 |   |   |   | 52.6 |   |
| Other  revenue                                                |       |                                  |        | 68.2 |   | 1.7 |   | 9.9 |   | (55.7 | ) | 24.1 |   |
|                                                          |       |                                  |        |   |   |   |   |   |   |   |   |   |   |
| Earnings  (loss) before income taxes                          |       | 341.8                                 |        | 429.7 |   | (119.2 | ) | 540.4 |   | (687.4 | ) | 505.3 |   |
| Provision  for income taxes                                   |       |                                  |        | (2.8 | ) | 19.7 |   | (171.6 | ) |   |   | (154.7 | ) |
| Net  earnings (loss)                                          |       | 341.8                                 |        | 426.9 |   | (99.5 | ) | 368.8 |   | (687.4 | ) | 350.6 |   |
|                                                          |       |                                  |        |   |   |   |   |   |   |   |   |   |   |
| Net  earnings (loss) attributable to noncontrolling interests |       |                                  |        |   |   | 1.9 |   | (22.5 | ) | (15.4 | ) | (36.0 | ) |
|                                                          |       |                                  |        |   |   |   |   |   |   |   |   |   |   |
| Net  earnings (loss) attributable to the Company              |       | $                                     |  341.8 |   | $ | 426.9 |   | $ | (97.6 | ) | $ | 346.3 |   | $ | (702.8 | ) | $ | 314.6 |   |

 

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**Owens-Illinois Group, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 
| ** **                                                      | ** ** | **Year ended December 31, 2008** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                      | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                      | ** ** | ** **                            | ** ** | ** ** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Results  of Operations**                                      | ** ** | **Parent**                            | ** ** | **Issuer** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                            |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Net  sales                                                      |       | $                                     | —     |   | $ | 1,968.6 |   | $ | — |   | $ | 6,038.8 |   | $ | (122.7 | ) | $ | 7,884.7 |   |
| Manufacturing,  shipping, and delivery                          |       |                                  |       | (1,719.0 | ) | 4.2 |   | (4,676.7 | ) | 183.4 |   | (6,208.1 | ) |
|                                                            |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Gross  profit                                                   |       | —                                |       | 249.6 |   | 4.2 |   | 1,362.1 |   | 60.7 |   | 1,676.6 |   |
|                                                            |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Research,  engineering, selling, administrative, and other      |       |                                  |       | (74.5 | ) | (77.5 | ) | (580.7 | ) |   |   | (732.7 | ) |
| Net  intercompany interest                                      |       | 45.8                                  |       | (97.5 | ) | 69.2 |   | (17.5 | ) |   |   | — |   |
| Other  interest expense                                         |       | (45.8                                 | )          | (84.4 | ) | (1.9 | ) | (120.9 | ) |   |   | (253.0 | ) |
| Interest  income                                                |       |                                  |       | — |   | 2.3 |   | 36.3 |   |   |   | 38.6 |   |
| Equity  earnings from subsidiaries                              |       | 500.3                                 |       | 512.2 |   | (97.0 | ) |   |   | (915.5 | ) | — |   |
| Other  equity earnings                                          |       |                                  |       | 12.6 |   | 24.1 |   | 14.1 |   |   |   | 50.8 |   |
| Other  revenue                                                  |       |                                  |       | 78.7 |   | 3.2 |   | 7.1 |   | (60.9 | ) | 28.1 |   |
|                                                            |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Earnings  (loss) from continuing operations before income taxes |       | 500.3                                 |       | 596.7 |   | (73.4 | ) | 700.5 |   | (915.7 | ) | 808.4 |   |
| Provision  for income taxes                                     |       |                                  |       | (0.5 | ) | (18.6 | ) | (218.8 | ) |   |   | (237.9 | ) |
| Earnings  (loss) from continuing operations                     |       | 500.3                                 |       | 596.2 |   | (92.0 | ) | 481.7 |   | (915.7 | ) | 570.5 |   |
|                                                            |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Net  earnings of discontinued operations                        |       | 6.8                                   |       |   |   | 6.8 |   |   |   | (6.8 | ) | 6.8 |   |
| Net  earnings (loss)                                            |       | 507.1                                 |       | 596.2 |   | (85.2 | ) | 481.7 |   | (922.5 | ) | 577.3 |   |
|                                                            |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Net  earnings (loss) attributable to noncontrolling interests   |       |                                  |       |   |   | 13.2 |   | (66.5 | ) | (16.9 | ) | (70.2 | ) |
|                                                            |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Net  earnings (loss) attributable to the Company                |       | 507.1                                 |       | 596.2 |   | (72.0 | ) | 415.2 |   | (939.4 | ) | 507.1 |   |
|                                                                 |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Owens-Illinois Group, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 
| ** **                                                 | ** ** | **Year ended December 31, 2007** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                 | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | ** **                            | ** ** | ** ** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Results  of Operations**                                 | ** ** | **Parent**                            | ** ** | **Issuer** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                       |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Net  sales                                                 |       | $                                     | —     |   | $ | 1,966.3 |   | $ | 1.1 |   | $ | 5,694.5 |   | $ | (95.2 | ) | $ | 7,566.7 |   |
| Manufacturing,  shipping, and delivery                     |       |                                  |       | (1,658.1 | ) | (2.6 | ) | (4,463.5 | ) | 152.8 |   | (5,971.4 | ) |
|                                                       |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Gross  profit                                              |       | —                                |       | 308.2 |   | (1.5 | ) | 1,231.0 |   | 57.6 |   | 1,595.3 |   |
|                                                       |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Research,  engineering, selling, administrative, and other |       |                                  |       | (73.7 | ) | (175.5 | ) | (488.7 | ) | 0.3 |   | (737.6 | ) |
| Net  intercompany interest                                 |       | 66.9                                  |       | (0.7 | ) | (72.8 | ) | 6.6 |   |   |   | — |   |
| Other  interest expense                                    |       | (66.9                                 | )          | (255.5 | ) | 78.5 |   | (104.7 | ) |   |   | (348.6 | ) |
| Interest  income                                           |       |                                  |       | — |   | 16.1 |   | 26.2 |   |   |   | 42.3 |   |
| Equity  earnings from subsidiaries                         |       | 414.3                                 |       | 419.6 |   | 80.8 |   |   |   | (914.7 | ) | — |   |
| Other  equity earnings                                     |       |                                  |       | 10.4 |   | 15.6 |   | 8.1 |   |   |   | 34.1 |   |
| Other  revenue                                             |       |                                  |       | 118.2 |   | 1,405.9 |   | 11.7 |   | (1,499.7 | ) | 36.1 |   |
|                                                       |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Earnings  from continuing operations before income taxes   |       | 414.3                                 |       | 526.5 |   | 1,347.1 |   | 690.2 |   | (2,356.5 | ) | 621.6 |   |
| Provision  for income taxes                                |       |                                  |       | (0.4 | ) | (8.8 | ) | (138.6 | ) |   |   | (147.8 | ) |
| Earnings  from continuing operations                       |       | 414.3                                 |       | 526.1 |   | 1,338.3 |   | 551.6 |   | (2,356.5 | ) | 473.8 |   |
|                                                       |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Net  earnings of discontinued operations                   |       | 1,041.3                               |       |   |   | 1,040.6 |   | 0.9 |   | (1,041.3 | ) | 1,041.5 |   |
| Net  earnings                                              |       | 1,455.6                               |       | 526.1 |   | 2,378.9 |   | 552.3 |   | (3,397.8 | ) | 1,515.3 |   |
|                                                       |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Net  earnings attributable to noncontrolling interests     |       |                                  |       |   |   | (1.5 | ) | (52.1 | ) | (6.1 | ) | (59.7 | ) |
|                                                       |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Net  earnings attributable to the Company                  |       | 1,455.6                               |       | 526.1 |   | 2,377.4 |   | 500.4 |   | (3,403.9 | ) | 1,455.6 |   |
|                                                            |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Owens-Illinois Group, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 
| ** **                                              | ** ** | **Year  ended December 31, 2009** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                              | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | ** **                             | ** ** | ** ** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cash Flows**                                          | ** ** | **Parent**                             | ** ** | **Issuer** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                    |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Cash provided by (used in) operating activities         |       | $                                      | —     |   | $ | 578.7 |   | $ | (105.4 | ) | $ | 809.0 |   | $ | (292.0 | ) | $ | 990.3 |   |
| Investing Activities:                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Additions to property, plant, and  equipment-continuing |       |                                   |       | (72.2 | ) | (1.6 | ) | (353.8 | ) |   |   | (427.6 | ) |
| Advances to foreign affiliate                           |       |                                   |       |   |   | 1.6 |   |   |   |   |   | 1.6 |   |
| Acquisition, net of cash acquired                       |       |                                   |       |   |   |   |   | (5.4 | ) |   |   | (5.4 | ) |
| Proceeds from sales                                     |       |                                   |       | 4.2 |   |   |   | 9.2 |   |   |   | 13.4 |   |
|                                                    |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Cash provided by (used in) investing activities         |       | —                                 |       | (68.0 | ) | — |   | (350.0 | ) | — |   | (418.0 | ) |
| Financing Activities:                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Net distribution to OI Inc.                             |       | (405.2                                 | )          |   |   |   |   |   |   |   |   | (405.2 | ) |
| Change in intercompany transactions                     |       | 405.2                                  |       | (1,056.4 | ) | 385.3 |   | (24.9 | ) | 290.8 |   | — |   |
| Change in short term debt                               |       |                                   |       |   |   |   |   | (79.4 | ) |   |   | (79.4 | ) |
| Payments of long term debt                              |       |                                   |       | (450.3 | ) | (1.0 | ) | (158.4 | ) |   |   | (609.7 | ) |
| Borrowings of long term debt                            |       |                                   |       | 1,010.0 |   |   |   | 70.1 |   |   |   | 1,080.1 |   |
| Net payments for debt-related hedging activity          |       |                                   |       |   |   |   |   | 14.3 |   |   |   | 14.3 |   |
| Noncontrolling dividends                                |       |                                   |       |   |   |   |   | (62.2 | ) |   |   | (62.2 | ) |
| Payment of finance fees                                 |       |                                   |       | (14.0 | ) |   |   |   |   |   |   | (14.0 | ) |
|                                                    |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Cash provided by (used in) financing activities         |       | —                                 |       | (510.7 | ) | 384.3 |   | (240.5 | ) | 290.8 |   | (76.1 | ) |
| Effect of exchange rate change on cash                  |       |                                   |       |   |   |   |   | (64.0 | ) |   |   | (64.0 | ) |
|                                                    |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Net change in cash                                      |       | —                                 |       | — |   | 278.9 |   | 154.5 |   | (1.2 | ) | 432.2 |   |
| Cash at beginning of period                             |       | —                                 |       | — |   | 4.4 |   | 373.9 |   | 1.2 |   | 379.5 |   |
| Cash at end of period                                   |       | $                                      | —     |   | $ | — |   | $ | 283.3 |   | $ | 528.4 |   | 0.0 |   | $ | 811.7 |   |
|                                                         |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Owens-Illinois Group, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 
| ** **                                              | ** ** | **Year  ended December 31, 2008** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                              | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | ** **                             | ** ** | ** ** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cash Flows**                                          | ** ** | **Parent**                             | ** ** | **Issuer** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                    |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Cash provided by (used in) operating activities         |       | $                                      | —     |   | $ | 108.3 |   | $ | (34.0 | ) | $ | 930.0 |   | $ | (38.1 | ) | $ | 966.2 |   |
| Investing Activities:                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Additions to property, plant, and  equipment-continuing |       |                                   |       | (84.6 | ) | (0.7 | ) | (276.4 | ) |   |   | (361.7 | ) |
| Advances to foreign affiliate                           |       |                                   |       |   |   | (1.6 | ) |   |   |   |   | (1.6 | ) |
| Proceeds from sales                                     |       |                                   |       | 2.4 |   | (16.9 | ) | 0.6 |   |   |   | (13.9 | ) |
|                                                    |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Cash provided by (used in) investing activities         |       | —                                 |       | (82.2 | ) | (19.2 | ) | (275.8 | ) | — |   | (377.2 | ) |
| Financing Activities:                                   |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Net distribution to OI Inc.                             |       | (449.9                                 | )          |   |   |   |   |   |   |   |   | (449.9 | ) |
| Change in intercompany transactions                     |       | 449.9                                  |       | (26.1 | ) | (3.9 | ) | (458.5 | ) | 38.6 |   | — |   |
| Change in short term debt                               |       |                                   |       |   |   |   |   | (20.6 | ) |   |   | (20.6 | ) |
| Payments of long term debt                              |       |                                   |       | (35.0 | ) | (0.8 | ) | (659.6 | ) |   |   | (695.4 | ) |
| Borrowings of long term debt                            |       |                                   |       | 35.0 |   | 18.6 |   | 632.8 |   |   |   | 686.4 |   |
| Net payments for debt-related hedging activity          |       |                                   |       |   |   |   |   | (45.2 | ) |   |   | (45.2 | ) |
| Noncontrolling dividends                                |       |                                   |       |   |   |   |   | (49.6 | ) |   |   | (49.6 | ) |
|                                                    |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Cash provided by (used in) financing activities         |       | —                                 |       | (26.1 | ) | 13.9 |   | (600.7 | ) | 38.6 |   | (574.3 | ) |
| Effect of exchange rate change on cash                  |       |                                   |       |   |   |   |   | (22.9 | ) |   |   | (22.9 | ) |
|                                                    |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Net change in cash                                      |       | —                                 |       | 0.0 |   | (39.3 | ) | 30.6 |   | 0.5 |   | (8.2 | ) |
| Cash at beginning of period                             |       | —                                 |       | — |   | 43.7 |   | 343.3 |   | 0.7 |   | 387.7 |   |
| Cash at end of period                                   |       | $                                      | —     |   | $ | 0.0 |   | $ | 4.4 |   | $ | 373.9 |   | 1.2 |   | $ | 379.5 |   |
|                                                         |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Owens-Illinois Group, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 
| ** **                                                | ** ** | **Year  ended December 31, 2007** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | ** **                             | ** ** | ** ** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cash Flows**                                            | ** ** | **Parent**                             | ** ** | **Issuer** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                      |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Cash provided by (used in) operating activities           |       | $                                      | —     |   | $ | 161.8 |   | $ | 1,303.4 |   | $ | 981.3 |   | $ | (1,434.4 | ) | $ | 1,012.1 |   |
|                                                      |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Investing Activities:                                     |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Additions to property, plant, and  equipment-continuing   |       |                                   |       | (48.0 | ) | (3.6 | ) | (240.9 | ) |   |   | (292.5 | ) |
| Additions to property, plant, and  equipment-discontinued |       |                                   |       |   |   | (21.6 | ) | (1.7 | ) |   |   | (23.3 | ) |
| Acquisitions, net of cash acquired                        |       |                                   |       |   |   |   |   | (9.8 | ) |   |   | (9.8 | ) |
| Proceeds from sales                                       |       |                                   |       | 5.8 |   | 1,673.5 |   | 90.7 |   |   |   | 1,770.0 |   |
|                                                      |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Cash provided by (used in) investing activities           |       | —                                 |       | (42.2 | ) | 1,648.3 |   | (161.7 | ) | — |   | 1,444.4 |   |
|                                                      |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Financing Activities:                                     |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Net distribution to OI Inc.                               |       | (605.8                                 | )          |   |   |   |   |   |   |   |   | (605.8 | ) |
| Change in intercompany transactions                       |       | 605.8                                  |       | 1,853.4 |   | (2,916.8 | ) | (977.5 | ) | 1,435.1 |   | — |   |
| Change in short term debt                                 |       |                                   |       |   |   |   |   | (21.5 | ) |   |   | (21.5 | ) |
| Payments of long term debt                                |       |                                   |       | (1,973.0 | ) | (1.0 | ) | (119.2 | ) |   |   | (2,093.2 | ) |
| Borrowings of long term debt                              |       |                                   |       |   |   |   |   | 406.4 |   |   |   | 406.4 |   |
| Net payments for debt-related hedging activity            |       |                                   |       |   |   |   |   | 5.7 |   |   |   | 5.7 |   |
| Payment of finance fees                                   |       |                                   |       |   |   |   |   | (6.3 | ) |   |   | (6.3 | ) |
| Noncontrolling dividends                                  |       |                                   |       |   |   |   |   | (28.6 | ) |   |   | (28.6 | ) |
|                                                      |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Cash provided by (used in) financing activities           |       | —                                 |       | (119.6 | ) | (2,917.8 | ) | (741.0 | ) | 1,435.1 |   | (2,343.3 | ) |
| Effect of exchange rate change on cash                    |       |                                   |       |   |   |   |   | 51.8 |   |   |   | 51.8 |   |
|                                                      |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Net change in cash                                        |       | —                                 |       | 0.0 |   | 33.9 |   | 130.4 |   | 0.7 |   | 165.0 |   |
| Cash at beginning of period                               |       | —                                 |       | — |   | 9.8 |   | 212.9 |   | — |   | 222.7 |   |
|                                                      |       |                                   |       |   |   |   |   |   |   |   |   |   |   |
| Cash at end of period                                     |       | $                                      | —     |   | $ | 0.0 |   | $ | 43.7 |   | $ | 343.3 |   | 0.7 |   | $ | 387.7 |   |
|                                                           |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Selected Quarterly Financial Data (unaudited)**  The following tables present selectedfinancial data by quarter for the years ended December 31, 2009 and 2008:

 

2009

 
| ** **                                           | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** | **Year  to** | ** ** |
|------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|--------------|------------|
| ** **                                           | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Date**     | ** ** |
|                                                 |       |        |       |        |       |        |       |        |       |         |       |
| Net sales                                            |       | $           | 1,519.0    |        | $          | 1,807.0     |       | $           | 1,874.6    |         | $          | 1,865.9 |   | $ | 7,066.5 |   |
|                                                 |       |        |       |        |       |        |       |        |       |         |       |
| Gross profit                                         |       | $           | 296.8      |        | $          | 407.4       |       | $           | 448.7      |         | $          | 331.0 |   | $ | 1,483.9 |   |
|                                                 |       |        |       |        |       |        |       |        |       |         |       |
| Net earnings (loss) attributable to the Company  (a) |       | $           | 45.1       |        | $          | 149.3       |       | $           | 126.7      |         | $          | (6.5 | ) | $ | 314.6 |   |

 

----

(a)          Amount for the first quarter includescharges of $50.4 million ($47.7 million after tax amount attributable to theCompany) for restructuring and asset impairment.

 

Amount for the secondquarter includes charges totaling $10.4 million (pretax and after tax amountattributable to the Company) for the following: (1) $5.2 million for noterepurchase premiums and the write-off of finance fees related to debt that wasrepaid prior to its maturity; and (2) $5.2 million for restructuring andasset impairment.

 

Amount for the thirdquarter includes charges of $57.5 million ($36.0 million after tax amountattributable to the Company) for restructuring and asset impairment.

 

Amount for the fourthquarter includes charges totaling $117.8 million ($111.4 million after taxamount attributable to the Company) for the following: (1) $100.5 million($93.8 million after tax amount attributable to the Company) for restructuringand asset impairment; and (2) $17.3 million ($17.6 million after taxamount attributable to the Company) for the remeasurement of certainbolivar-denominated assets and liabilities held outside of Venezuela.

 

Amount for the fourthquarter includes a non-cash tax benefit transferred from other comprehensiveincome (equity) of $20.7 million.

 

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2008

 
| ** **                                     | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | **Year** | ** ** |
|------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|----------|------------|
| ** **                                     | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** | **to**   | ** ** |
| ** **                                     | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Date** | ** ** |
|                                           |       |        |       |        |       |        |       |        |       |     |       |
| Net sales - continuing operations              |       | $           | 1,960.5    |        | $          | 2,210.6     |       | $           | 2,008.6    |     | $          | 1,705.0 |   | $ | 7,884.7 |   |
|                                           |       |        |       |        |       |        |       |        |       |     |       |
| Gross profit - continuing operations           |       | $           | 456.8      |        | $          | 525.2       |       | $           | 407.3      |     | $          | 287.3 |   | $ | 1,676.6 |   |
|                                           |       |        |       |        |       |        |       |        |       |     |       |
| Amounts attributable to the Company:           |       |        |       |        |       |        |       |        |       |     |       |
| Earnings from continuing operations (a)        |       | 174.0       |       | 227.5       |       | 78.6        |       | 20.2        |       | 500.3    |       |
| Gain (loss) on sale of discontinued operations |       | 4.1         |       | 3.8         |       |        |       | (1.1        | )          | 6.8      |       |
| Net earnings                                   |       | $           | 178.1      |        | $          | 231.3       |       | $           | 78.6       |     | $          | 19.1 |   | $ | 507.1 |   |

 

----

(a)                                  Amount for the first quarter includescharges of $12.9 million ($9.7 million after tax amount attributable to theCompany) for restructuring and asset impairment.

 

Amount for the secondquarter includes charges of $8.2 million ($4.2 million after tax amountattributable to the Company) for restructuring and asset impairment.

 

Amount for the thirdquarter includes charges of $90.6 million ($79.7 million after tax amountattributable to the Company) for restructuring and asset impairment.  Amount for the third quarter also includes anet benefit of $6.2 million ($4.6 million after tax amount attributable to theCompany) related to tax legislation and restructuring in Europe.

 

Amount for the fourthquarter includes a charge of $21.6 million ($16.5 million after tax amountattributable to the Company) for restructuring and asset impairment.

 

Amount for the fourthquarter includes expense of $39.5 million related to tax restructuring and other.

 

**ITEM 9.        CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTINGAND FINANCIAL DISCLOSURE**

## ** **

None.

 

## **ITEM 9A.**        CONTROLSAND PROCEDURES

## ** **

TheCompany maintains disclosure controls and procedures that are designed toensure that information required to be disclosed in the Company’s Exchange Actreports is recorded, processed, summarized and reported within the time periodsspecified in the Securities and Exchange Commission’s rules and forms andthat such information is accumulated and communicated to the Company’smanagement, including its Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure.  In designing and evaluating the disclosurecontrols and procedures, management recognizes that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement is required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.  Also, the

 

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Companyhas investments in certain unconsolidated entities.  As the Company does not control or managethese entities, its disclosure controls and procedures with respect to suchentities are necessarily substantially more limited than those maintained withrespect to its consolidated subsidiaries.

 

Asrequired by Rule 13a-15(b) of the Exchange Act, the Company carriedout an evaluation, under the supervision and with the participation ofmanagement, including its Chief Executive Officer and Chief Financial Officer,of the effectiveness of the design and operation of the Company’s disclosurecontrols and procedures as of the end of the period covered by thisreport.  Based on the foregoing, theCompany’s Chief Executive Officer and Chief Financial Officer concluded thatthe Company’s disclosure controls and procedures were effective at thereasonable assurance level as of December 31, 2009.

 

Managementconcluded that the Company’s system of internal control over financialreporting was effective as of December 31, 2009.  There has been nochange in the Company’s internal controls over financial reporting during theCompany’s most recent fiscal quarter that has materially affected, or isreasonably likely to materially affect, the Company’s internal controls overfinancial reporting. The Company is undertaking the phased implementation of aglobal Enterprise Resource Planning software system and believes it ismaintaining and monitoring appropriate internal controls during theimplementation period.  The Company believes that the internal controlenvironment will be enhanced as a result of implementation.

 

**Management’sReport on Internal Control over Financial Reporting**

 

Themanagement of Owens-Illinois Group, Inc. is responsible for establishingand maintaining adequate internal control over financial reporting.  The Company’s internal control over financialreporting is designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles in theUnited States.  However, all internalcontrol systems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined tobe effective can provide only reasonable assurance with respect to financialstatement preparation and reporting.

 

Managementassessed the effectiveness of the Company’s internal control over financialreporting as of December 31, 2009. In making this assessment management used the criteria for effectiveinternal control over financial reporting as described in “Internal Control —Integrated Framework” issued by the Committee of Sponsoring Organizations ofthe Treadway Commission (the COSO framework).

 

Basedon this assessment, using the criteria above, management concluded that the Company’ssystem of internal control over financial reporting was effective as of December 31,2009.

 

TheCompany’s independent registered public accounting firm, Ernst & YoungLLP, that audited the Company’s consolidated financial statements, has issuedan attestation report on the Company’s internal control over financialreporting which is included below.

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

**The Board of Directors and ShareOwner of**

**Owens-Illinois Group, Inc.**

** **

We have auditedOwens-Illinois Group, Inc.’s internal control over financial reporting asof December 31, 2009, based on criteriaestablished in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (the COSO criteria).Owens-Illinois Group, Inc.’s management is responsible for maintainingeffective internal control over financial reporting, and for its assessment ofthe effectiveness of internal control over financial reporting included in theaccompanying Management’s Report on Internal Control over FinancialReporting.  Our responsibility is toexpress an opinion on the company’s internal control over financial reportingbased on our audit.

 

We conducted ouraudit in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal controlover financial reporting, assessing the risk that a material weakness exists,testing and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

 

A company’sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permit preparationof financial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use or disposition of the company’sassets that could have a material effect on the financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.

 

Inour opinion, Owens-Illinois Group, Inc. maintained, in all materialrespects, effective internal control over financial reporting as of December 31,2009, based on****the COSO criteria.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofOwens-Illinois Group, Inc. and subsidiaries as of December 31, 2009and 2008, and the related consolidated statements of results of operations,share owners’ equity, and cash flows for each of the three years in the periodended December 31, 2009 and our report dated February 10, 2010expressed an unqualified opinion thereon.

 
|                    | /s/  Ernst & Young LLP |
|-------------------------|---------------------------------|
|                    |                            |
| Toledo,  Ohio           |                            |
| February 10,  2010 |                            |

 

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## **ITEM9B.**                         OTHER INFORMATION

## ** **

None.

 

# **PART III**

# ** **

**ITEM 14.****                          ****PRINCIPAL ACCOUNTANT FEES ANDSERVICES**

 

Information with respectto principal accountant fees and services is included in OI Inc.’s 2010 ProxyStatement in the section entitled “Independent Registered Public AccountingFirm” and such information is incorporated herein by reference.

 

**PART IV**

 

## **ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

## ** **

**FINANCIAL STATEMENTS ANDFINANCIAL STATEMENT SCHEDULES**

 

Index of FinancialStatements and Financial Statement Schedules Covered by Report of IndependentAuditors.

 
| ** **                                                                                                                                                         | ** ** | **Page**           |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|
|                                                                                                                                                               |       |               |
| (i) Registrant                                                                                                                                                |       |               |
|                                                                                                                                                               |       |               |
| Report of  Independent Registered Public Accounting Firm                                                                                                           |       | 41                 |
|                                                                                                                                                               |       |               |
| Consolidated  Balance Sheets at December 31, 2009 and 2008                                                                                                    |       | 43-44              |
|                                                                                                                                                               |       |               |
| For  the years ended December 31, 2009, 2008, and 2007                                                                                                        |       |               |
|                                                                                                                                                               |       |               |
| Consolidated  Results of Operations                                                                                                                                |       | 42                 |
| Consolidated Share Owners’ Equity                                                                                                                             |       | 45                 |
| Consolidated Cash Flows                                                                                                                                            |       | 46                 |
|                                                                                                                                                               |       |               |
| Notes to the Consolidated Financial Statements                                                                                                                     |       | 47                 |
|                                                                                                                                                               |       |               |
| Exhibit Index                                                                                                                                                 |       | 102                |
|                                                                                                                                                               |       |               |
| **Financial Statement Schedule**                                                                                                                                   | ** ** | **Schedule  Page** |
|                                                                                                                                                               |       |               |
| For  the years ended December 31, 2009, 2008, and 2007:                                                                                                       |       |               |
|                                                                                                                                                               |       |               |
| II - Valuation and Qualifying Accounts (Consolidated)                                                                                                              |       | S-1                |
|                                                                                                                                                               |       |               |
| All  other schedules have been omitted since the required information is not  present or not present in amounts sufficient to require submission of the  schedule. |       |               |
|                                                                                                                                                               |       |               |
| (ii) Separate  Financial Statements of Affiliates Whose Securities Are Pledged As Collateral                                                                  |       | 107                |

 

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**EXHIBITINDEX**

 
| **S-K  Item 601 No.** | ** ** | **Document**                                                                                                                                                                                                                                                                                                                                                                                                              |
|-----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.1                   | —     | Certificate of  Incorporation of OII Group, Inc., dated as of March 10, 1987 (filed  as Exhibit 3.95 to Owens-Illinois Group, Inc.’s Form S-4, File  No. 333-85690, and incorporated herein by reference).                                                                                                                                                                             |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.2                   | —     | Certificate of  Amendment of Certificate of Incorporation of OII Group, Inc., dated as  of March 24, 1987 (filed as Exhibit 3.96 to Owens-Illinois  Group, Inc.’s Form S-4, File No. 333-85690, and incorporated  herein by reference).                                                                                                                                                |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.3                   | —     | Certificate of  Ownership Merging OIB Consumers Glass Inc. into Owens-Illinois  Group, Inc., dated as of June 29, 1990 (filed as Exhibit 3.97  to Owens-Illinois Group, Inc.’s Form S-4, File No. 333-85690,  and incorporated herein by reference).                                                                                                                                   |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.4                   | —     | Certificate of  Ownership and Merger Merging OIB Finance FTS Inc. into Owens-Illinois  Group, Inc., dated as of December 30, 1991 (filed as  Exhibit 3.98 to Owens-Illinois Group, Inc.’s Form S-4, File  No. 333-85690, and incorporated herein by reference).                                                                                                                        |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.5                   | —     | Form of Bylaws for  Owens-Illinois Group, Inc. (filed as Exhibit 3.117 to  Owens-Illinois Group, Inc.’s Form S-4, File No. 333-85690, and  incorporated herein by reference).                                                                                                                                                                                                          |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.1                   | —     | Indenture dated as of  May 20, 1998, between Owens-Illinois, Inc. and The Bank of New  York, as Trustee (filed as Exhibit 4.1 to Owens-Illinois, Inc.’s  Form 8-K dated May 20, 1998, File No. 1-9576, and incorporated  herein by reference).                                                                                                                                    |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.2                   | —     | Officers’ Certificate,  dated May 20, 1998, establishing the terms of the 7.50% Senior Notes due  2010; including the Form of 7.50% Senior Note due 2010 (filed as  Exhibits 4.4 and 4.8, respectively, to Owens-Illinois, Inc.’s  Form 8-K dated May 20, 1998, File No. 1-9576, and incorporated  herein by reference).                                                          |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.3                   | —     | Officers’ Certificate,  dated May 20, 1998, establishing the terms of the 7.80% Senior Notes due  2018; including the Form of 7.80% Senior Note due 2018 (filed as  Exhibits 4.5 and 4.9, respectively, to Owens-Illinois, Inc.’s  Form 8-K dated May 20, 1998, File No. 1-9576, and incorporated  herein by reference).                                                          |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.4                   | —     | Supplemental Indenture,  dated as of June 26, 2001 among Owens-Illinois, Inc.,  Owens-Illinois Group, Inc., Owens-Brockway Packaging, Inc. and The  Bank of New York, as Trustee (May 20, 1998 Indenture) (filed as  Exhibit 4.1 to Owens-Illinois Inc.’s Form 10-Q for the quarter  ended September 30, 2001, File No. 1-9576, and incorporated herein  by reference). |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.5                   | —     | Second Supplemental  Indenture, dated as of December 1, 2004 among Owens-Illinois, Inc.,  Owens-Illinois Group, Inc., Owens-Brockway Packaging, Inc. and The Bank  of New York, as Trustee (filed as Exhibit 4.1 to Owens-Illinois Inc.’s  Form 8-K dated December 1, 2004, File No. 1-9576, and  incorporated herein by reference).                                         |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.6                   | —     | Indenture,  dated as of December 1, 2004, by and among Owens-Brockway Glass Container  Inc., the guarantors party thereto and Law Debenture Trust Company of New  York, as Trustee (filed as Exhibit 4.26 to Owens-Illinois Group, Inc.’s  Form S-4, File No. 333-123960, and incorporated herein by reference).                                                                            |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.7                   | —     | Indenture,  dated as of March 14, 2007, by and among OI European Group B.V., the  guarantors party thereto and Law Debenture Trust Company of New York, as  Trustee (filed as Exhibit 4.1 to Owens-Illinois Group, Inc.’s  Form 8-K dated March 14, 2007, File No. 33-13061, and  incorporated herein by reference).                                                                   |

 

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| **S-K  Item 601 No.** | ** ** | **Document**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|-----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.8                   | —     | Indenture,  dated as of May 12, 2009, by and among Owens-Brockway Glass Container  Inc., the guarantors party thereto and U.S. Bank National Association, as  Trustee (filed as Exhibit 4.1 to Owens-Illinois Group, Inc.’s  Form 8-K dated May 12, 2009, File No. 33-13061, and incorporated  herein by reference).                                                                                                                                                                        |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.9                   | —     | Credit  Agreement, dated as of June 14, 2006, by and among the Borrowers named  therein, Owens-Illinois General, Inc., as Borrower’s agent, Deutsche  Bank AG, New York Branch, as Administrative Agent, and the other Agents,  Arrangers and Lenders named therein (filed as exhibit 4.1 to Owens-Illinois  Group, Inc.’s Form 8-K dated June 14, 2006, File  No. 33-13061, and incorporated herein by reference).                                                                    |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.10                  | —     | Second  Amendment to Credit Agreement and Consent, dated June 11, 2007 (filed as  Exhibit 4.1 to Owens-Illinois Group, Inc.’s Form 8-K dated  June 11, 2007, File No. 33-13061, and incorporated herein by  reference).                                                                                                                                                                                                                                                                     |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.11                  | —     | Second  Amended and Restated Intercreditor Agreement, dated as of June 14, 2006,  by and among Deutsche Bank AG, New York Branch, as Administrative Agent for  the lenders party to the Credit Agreement (as defined therein) and Deutsche  Bank Trust Company Americas, as Collateral Agent (as defined therein) and any  other parties thereto (filed as exhibit 4.2 to Owens-Illinois Group, Inc.’s  Form 8-K dated June 14, 2006, File No. 33-13061, and  incorporated herein by reference). |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.12                  | —     | Second  Amended and Restated Pledge Agreement, dated as of June 14, 2006,  between Owens-Illinois Group, Inc., Owens-Brockway Packaging, Inc.,  and Deutsche Bank Trust Company Americas, as Collateral Agent (as defined  therein) and any other parties thereto (filed as exhibit 4.3 to  Owens-Illinois Group, Inc.’s Form 8-K dated June 14, 2006,  File No. 33-13061, and incorporated herein by reference).                                                                      |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.13                  | —     | Second  Amended and Restated Security Agreement, dated as of June 14, 2006,  between Owens-Illinois Group, Inc., each of the direct and indirect  subsidiaries of Owens-Illinois Group, Inc. signatory thereto, and  Deutsche Bank Trust Company Americas, as Collateral Agent (as defined  therein) (filed as exhibit 4.4 to Owens-Illinois Group, Inc.’s  Form 8-K dated June 14, 2006, File No. 33-13061, and  incorporated herein by reference).                                   |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.1*                 | —     | Amended  and Restated Owens-Illinois Supplemental Retirement Benefit Plan (filed as  Exhibit 10.1 to Owens-Illinois, Inc.’s Form 10-Q for the  quarter ended June 30, 1998, File No. 1-9576, and incorporated  herein by reference).                                                                                                                                                                                                                                                             |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.2*                 | —     | First  Amendment to Amended and Restated Owens-Illinois Supplemental Retirement Benefit  Plan (filed as Exhibit 10.3 to Owens-Illinois, Inc.’s  Form 10-K for the year ended December 31, 2000, File  No. 1-9576, and incorporated herein by reference).                                                                                                                                                                                                                                         |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3*                 | —     | Second  Amendment to Amended and Restated Owens-Illinois Supplemental Retirement Benefit  Plan (filed as Exhibit 10.1 to Owens-Illinois, Inc.’s  Form 10-Q for the quarter ended March 31, 2002, File  No. 1-9576, and incorporated herein by reference).                                                                                                                                                                                                                                        |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.4*                 | —     | Third  Amendment to Amended and Restated Owens-Illinois Supplemental Retirement  Benefit Plan (filed as Exhibit 10.1 to Owens-Illinois, Inc.’s  Form 10-Q for the quarter ended March 31, 2003, File  No. 1-9576, and incorporated herein by reference).                                                                                                                                                                                                                                         |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.5*                 | —     | Form of Employment  Agreement between Owens-Illinois, Inc. and various Employees (filed as  Exhibit 10(m) to Owens-Illinois, Inc.’s Form 10-K for the  year ended December 31, 1987, File No. 1-9576, and incorporated  herein by reference).                                                                                                                                                                                                                                     |

 

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| **S-K  Item 601 No.** | ** ** | **Document**                                                                                                                                                                                                                                                                                                                                                  |
|-----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                  |       |                                                                                                                                                                                                                                                                                                                                                          |
| 10.6*                 | —     | Second Amended and  Restated Stock Option Plan for Key Employees of Owens-Illinois, Inc.  (filed as Exhibit 10.20 to Owens-Illinois, Inc.’s Form 10-K  for the year ended December 31, 1994, File No. 1-9576, and  incorporated herein by reference).                                                                      |
|                  |       |                                                                                                                                                                                                                                                                                                                                                          |
| 10.7*                 | —     | First Amendment to  Second Amended and Restated Stock Option Plan for Key Employees of  Owens-Illinois, Inc. (filed as Exhibit 10.13 to  Owens-Illinois, Inc.’s Form 10-K for the year ended  December 31, 1995, File No. 1-9576, and incorporated herein by  reference).                                                  |
|                  |       |                                                                                                                                                                                                                                                                                                                                                          |
| 10.8*                 | —     | Second Amendment to  Second Amended and Restated Stock Option Plan for Key Employees of  Owens-Illinois, Inc. (filed as Exhibit 10.1 to Owens-Illinois, Inc.’s  Form 10-Q for the quarter ended June 30, 1997, File  No. 1-9576, and incorporated herein by reference).                                                    |
|                  |       |                                                                                                                                                                                                                                                                                                                                                          |
| 10.9*                 | —     | Third Amendment to  Second Amended and Restated Stock Option Plan for Key Employees of  Owens-Illinois, Inc. (filed as Exhibit 10.1 to  Owens-Illinois, Inc.’s Form 10-Q for the quarter ended  September 30, 2000, File No. 1-9576, and incorporated herein by  reference.)                                               |
|                  |       |                                                                                                                                                                                                                                                                                                                                                          |
| 10.10*                | —     | Form of  Non-Qualified Stock Option Agreement for use under the Second Amended and  Restated Stock Option Plan for Key Employees of Owens-Illinois, Inc.  (filed as Exhibit 10.21 to Owens-Illinois, Inc.’s Form 10-K  for the year ended December 31, 1994, File No. 1-9576, and  incorporated herein by reference). |
|                  |       |                                                                                                                                                                                                                                                                                                                                                          |
| 10.11*                | —     | Amended and Restated  Owens-Illinois, Inc. Performance Award Plan (filed as Exhibit 10.16  to Owens-Illinois, Inc.’s Form 10-K for the year ended  December 31, 1993, File No. 1-9576, and incorporated herein by  reference).                                                                                             |
|                  |       |                                                                                                                                                                                                                                                                                                                                                          |
| 10.12*                | —     | First Amendment to  Amended and Restated Owens-Illinois, Inc. Performance Award Plan (filed  as Exhibit 10.4 to Owens-Illinois, Inc.’s Form 10-Q for the  quarter ended June 30, 1997, File No. 1-9576, and incorporated  herein by reference).                                                                            |
|                  |       |                                                                                                                                                                                                                                                                                                                                                          |
| 10.13*                | —     | Owens-Illinois, Inc.  Directors Deferred Compensation Plan (filed as Exhibit 10.26 to  Owens-Illinois, Inc.’s Form 10-K for the year ended  December 31, 1995, File No. 1-9576, and incorporated herein by  reference).                                                                                                    |
|                  |       |                                                                                                                                                                                                                                                                                                                                                          |
| 10.14*                | —     | First Amendment to  Owens-Illinois, Inc. Directors Deferred Compensation Plan (filed as  Exhibit 10.27 to Owens-Illinois, Inc.’s Form 10-K for the year  ended December 31, 1995, File No. 1-9576, and incorporated herein  by reference).                                                                                 |
|                  |       |                                                                                                                                                                                                                                                                                                                                                          |
| 10.15*                | —     | Second Amendment to  Owens-Illinois, Inc. Directors Deferred Compensation Plan (filed as  Exhibit 10.2 to Owens-Illinois, Inc.’s Form 10-Q for the  quarter ended March 31, 1997, File No. 1-9576, and incorporated  herein by reference).                                                                                 |
|                  |       |                                                                                                                                                                                                                                                                                                                                                          |
| 10.16*                | —     | Amended and Restated  1997 Equity Participation Plan of Owens-Illinois, Inc. (filed as  Exhibit 10.1 to Owens-Illinois, Inc.’s Form 10-Q for the  quarter ended June 30, 1999, File No. 1-9576, and incorporated  herein by reference).                                                                                    |
|                  |       |                                                                                                                                                                                                                                                                                                                                                          |
| 10.17*                | —     | First Amendment to  Amended and Restated 1997 Equity Participation Plan of  Owens-Illinois, Inc. (filed as Exhibit 10.1 to  Owens-Illinois, Inc.’s Form 10-Q for the quarter ended  June 30, 2002, File No. 1-9576, and incorporated herein by  reference).                                                                |
|                  |       |                                                                                                                                                                                                                                                                                                                                                          |
| 10.18*                | —     | Owens-Illinois, Inc.  Executive Deferred Savings Plan (filed as Exhibit 10.1 to  Owens-Illinois, Inc.’s Form 10-Q for the quarter ended September 30,  2001, File No. 1-9576, and incorporated herein by reference).                                                                                                       |
|                  |       |                                                                                                                                                                                                                                                                                                                                                          |
| 10.19*                | —     | 2004 Equity Incentive  Plan for Directors of Owens-Illinois, Inc. (filed as Exhibit 10.1  to Owens-Illinois, Inc.’s Form 10-Q for the quarter ended  June 30, 2004, File No. 1-9576, and incorporated herein by  reference).                                                                                               |

 

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| **S-K  Item 601 No.** | ** ** | **Document**                                                                                                                                                                                                                                                                                                         |
|-----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                  |       |                                                                                                                                                                                                                                                                                                                 |
| 10.20*                | —     | Owens-Illinois, Inc.  Incentive Bonus Plan (filed as Exhibit 10.2 to  Owens-Illinois, Inc.’s Form 10-Q for the quarter ended  June 30, 2004, File No. 1-9576, and incorporated herein by  reference).                                                                             |
|                  |       |                                                                                                                                                                                                                                                                                                                 |
| 10.21*                | —     | Owens-Illinois 2004  Executive Life Insurance Plan (filed as Exhibit 10.32  to Owens-Illinois, Inc.’s Form 10-K for the year ended  December 31, 2004, File No. 1-9576, and incorporated herein by  reference).                                                                        |
|                  |       |                                                                                                                                                                                                                                                                                                                 |
| 10.22*                | —     | Owens-Illinois 2004  Executive Life Insurance Plan for Non-U.S. Employees (filed as  Exhibit 10.33 to Owens-Illinois, Inc.’s Form 10-K for the year  ended December 31, 2004, File No. 1-9576, and incorporated herein  by reference).                                                 |
|                  |       |                                                                                                                                                                                                                                                                                                                 |
| 10.23*                | —     | Second Amended and  Restated Owens-Illinois, Inc. Senior Management Incentive Plan (filed as  Exhibit 10.34 to Owens-Illinois, Inc.’s Form 10-K for the year  ended December 31, 2004, File No. 1-9576, and incorporated herein  by reference).                                   |
|                  |       |                                                                                                                                                                                                                                                                                                                 |
| 10.24*                | —     | Amended and Restated  Owens-Illinois, Inc. 2005 Incentive Award Plan dated as of  April 24, 2009 (filed as Exhibit 10.1 to Owens-Illinois, Inc.’s  Form 10-Q for the quarter ended March 31, 2009, File  No. 1-9576, and incorporated herein by reference).                  |
|                  |       |                                                                                                                                                                                                                                                                                                                 |
| 10.25*                | —     | Form of  Non-Qualified Stock Option Agreement for use under the  Owens-Illinois, Inc. 2005 Incentive Award Plan (filed as  Exhibit 10.29 to Owens-Illinois, Inc.’s Form 10-K for the year  ended December 31, 2005, File No. 1-9576, and incorporated herein  by reference). |
|                  |       |                                                                                                                                                                                                                                                                                                                 |
| 10.26*                | —     | Form of Restricted  Stock Agreement for use under the Owens-Illinois, Inc. 2005 Incentive  Award Plan (filed as Exhibit 10.30 to  Owens-Illinois, Inc.’s Form 10-K for the year ended  December 31, 2005, File No. 1-9576, and incorporated herein by  reference).           |
|                  |       |                                                                                                                                                                                                                                                                                                                 |
| 10.27*                | —     | Form of Phantom  Stock Agreement for use under the Owens-Illinois, Inc. 2005 Incentive  Award Plan (filed as Exhibit 10.31 to  Owens-Illinois, Inc.’s Form 10-K for the year ended  December 31, 2005, File No. 1-9576, and incorporated herein by  reference).              |
|                  |       |                                                                                                                                                                                                                                                                                                                 |
| 10.28*                | —     | Form of Restricted  Stock Unit Agreement for use under the Owens-Illinois, Inc. 2005  Incentive Award Plan (filed as Exhibit 10.32 to  Owens-Illinois, Inc.’s Form 10-K for the year ended  December 31, 2005, File No. 1-9576, and incorporated herein by  reference).      |
|                  |       |                                                                                                                                                                                                                                                                                                                 |
| 10.29*                | —     | Letter agreement  between Owens-Illinois, Inc. and Albert P.L. Stroucken (filed as  Exhibit 10.2 to Owens-Illinois, Inc.’s Form 8-K dated  November 8, 2006, File No. 1-9576, and incorporated herein by  reference).                                                             |
|                  |       |                                                                                                                                                                                                                                                                                                                 |
| 10.30*                | —     | Employment agreement  between Owens-Illinois, Inc. and Albert P.L. Stroucken, dated January 3,  2007 (filed as exhibit 10.37 to Owens-Illinois, Inc.’s Form 10-K  for the year ended December 31, 2006, File No. 1-9576, and  incorporated herein by reference).                  |
|                  |       |                                                                                                                                                                                                                                                                                                                 |
| 12                    | —     | Computation of Ratio of  Earnings to Fixed Charges (filed herewith).                                                                                                                                                                                                                                                 |
|                  |       |                                                                                                                                                                                                                                                                                                                 |
| 21                    | —     | Subsidiaries of  Owens-Illinois, Inc. (filed herewith).                                                                                                                                                                                                                                                         |
|                  |       |                                                                                                                                                                                                                                                                                                                 |
| 24                    | —     | Owens-Illinois  Group, Inc. Power of Attorney (filed herewith).                                                                                                                                                                                                                                                 |
|                  |       |                                                                                                                                                                                                                                                                                                                 |
| 31.1                  | —     | Certification of  Principal Executive Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                      |
|                  |       |                                                                                                                                                                                                                                                                                                                 |
| 31.2                  | —     | Certification of  Principal Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                      |
|                  |       |                                                                                                                                                                                                                                                                                                                 |
| 32.1                  | —     | Certification of  Principal Executive Officer pursuant to 18 U.S.C Section 1350 (filed  herewith).                                                                                                                                                                                                              |

 

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| **S-K  Item 601 No.** | ** ** | **Document**                                                                                            |
|-----------------------|------------|---------------------------------------------------------------------------------------------------------|
|                  |       |                                                                                                    |
| 32.2                  | —     | Certification of  Principal Financial Officer pursuant to 18 U.S.C Section 1350 (filed  herewith). |

 

----

*                 Indicates a management contract orcompensatory plan or arrangement required to be filed as an exhibit to thisform pursuant to Item 15(c).

 

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**SEPARATE FINANCIAL STATEMENTS OF AFFILIATES WHOSESECURITIES ARE PLEDGED AS COLLATERAL.**

 

1)              Financial statements of Owens-BrockwayPackaging, Inc. and subsidiaries including consolidated balance sheets asof December 31, 2009 and 2008, and the related results of operations,share owners’ equity, and cash flows for the years ended December 31,2009, 2008 and 2007.

 

2)              Financial statements of Owens-BrockwayGlass Container Inc. and subsidiaries including consolidated balance sheets asof December 31, 2009 and 2008, and the related results of operations,share owners’ equity, and cash flows for the years ended December 31,2009, 2008 and 2007.

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

TheBoard of Directors and Share Owner of

Owens-BrockwayPackaging, Inc.

 

We have audited the accompanyingconsolidated balance sheets of Owens-Brockway Packaging, Inc. andsubsidiaries as of December 31, 2009 and 2008, and the relatedconsolidated statements of results of operations, share owners’ equity, andcash flows for each of the three years in the period ended December 31,2009. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. We were not engaged to perform an audit of the Company’sinternal control over financial reporting. Our audits included consideration ofinternal control over financial reporting as a basis for designing auditprocedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the Company’s internal controlover financial reporting. Accordingly, we express no such opinion. An auditalso includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the financialstatements referred to above present fairly, in all material respects, theconsolidated financial position of Owens-Brockway Packaging, Inc. andsubsidiaries at December 31, 2009 and 2008, and the consolidated resultsof their operations and their cash flows for each of the three years in theperiod ended December 31, 2009, in conformity with U.S. generally acceptedaccounting principles.

 

As discussed in Note 1 to theconsolidated financial statements, the accompanying consolidated financialstatements have been retrospectively adjusted for the adoption of a newaccounting standard which changed the presentation of noncontrolling interestsin subsidiaries

 
|                    | /s/  Ernst & Young LLP |
|-------------------------|---------------------------------|
|                    |                            |
| Toledo,  Ohio           |                            |
| February 10,  2010 |                            |

 

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| **CONSOLIDATED RESULTS OF  OPERATIONS**    Owens-Brockway Packaging, Inc. |
|------------------------------------------------------------------------------------------|
| Dollars in millions                                                                      |

 
| **Years  ended December 31,**                     | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                   |       |     |       |     |       |     |       |
| Net sales                                              |       | $        | 7,066.5    |     | $          | 7,884.7  |       | $ | 7,566.7 |   |
| Manufacturing, shipping, and delivery                  |       | (5,591.2 | )          | (6,212.3 | )          | (5,968.6 | )          |
| Gross profit                                           |       | 1,475.3  |       | 1,672.4  |       | 1,598.1  |       |
|                                                   |       |     |       |     |       |     |       |
| Selling and administrative expense                     |       | (428.4   | )          | (440.7   | )          | (401.5   | )          |
| Research, development, and engineering expense         |       | (58.8    | )          | (66.7    | )          | (65.8    | )          |
| Net intercompany interest income (expense)             |       | 13.6     |       | (32.3    | )          | 4.0      |       |
| Other interest expense                                 |       | (181.4   | )          | (205.3   | )          | (360.2   | )          |
| Other expense                                          |       | (282.3   | )          | (149.2   | )          | (142.3   | )          |
| Other income                                           |       | 102.6    |       | 111.9    |       | 92.4     |       |
|                                                   |       |     |       |     |       |     |       |
| Earnings before income taxes                           |       | 640.6    |       | 890.1    |       | 724.7    |       |
| Provision for income taxes                             |       | (177.8   | )          | (223.8   | )          | (139.1   | )          |
|                                                   |       |     |       |     |       |     |       |
| Net earnings                                           |       | 462.8    |       | 666.3    |       | 585.6    |       |
| Net earnings attributable to noncontrolling  interests |       | (36.0    | )          | (70.2    | )          | (59.5    | )          |
|                                                   |       |     |       |     |       |     |       |
| Net earnings attributable to the Company               |       | $        | 426.8      |     | $          | 596.1    |       | $ | 526.1 |   |

 

See accompanyingNotes to the Consolidated Financial Statements.

 

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| **CONSOLIDATED BALANCE SHEETS**   Owens-Brockway Packaging, Inc. |
|---------------------------------------------------------------------------------|
| Dollars in millions                                                             |

 
| **December 31,**                                                                                                                         | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                                          |       |     |       |     |       |
| **Assets**                                                                                                                                    |       |     |       |     |       |
| **Current assets:**                                                                                                                           |       |     |       |     |       |
| Cash, including time deposits of $279.9 ($307.5 in  2008)                                                                                     |       | $        | 528.7      |     | $          | 397.9 |   |
| Receivables including amount from related parties of  $3.8 ($3.8 in 2008), less allowances of $34.9 ($38.1 in 2008) for losses and  discounts |       | 1,000.5  |       | 988.2    |       |
| Inventories                                                                                                                                   |       | 899.7    |       | 999.1    |       |
| Prepaid expenses                                                                                                                              |       | 110.5    |       | 46.8     |       |
|                                                                                                                                          |       |     |       |     |       |
| Total current assets                                                                                                                          |       | 2,539.4  |       | 2,432.0  |       |
| **Other assets:**                                                                                                                             |       |     |       |     |       |
| Equity investments                                                                                                                            |       | 114.3    |       | 101.7    |       |
| Repair parts inventories                                                                                                                      |       | 125.1    |       | 132.5    |       |
| Prepaid pension                                                                                                                               |       | 46.3     |       |     |       |
| Deposits, receivables, and other assets                                                                                                       |       | 472.2    |       | 418.3    |       |
| Goodwill                                                                                                                                      |       | 2,381.0  |       | 2,207.5  |       |
|                                                                                                                                          |       |     |       |     |       |
| Total other assets                                                                                                                            |       | 3,138.9  |       | 2,860.0  |       |
| **Property, plant, and equipment:**                                                                                                           |       |     |       |     |       |
| Land, at cost                                                                                                                                 |       | 243.7    |       | 243.3    |       |
| Buildings and equipment, at cost:                                                                                                             |       |     |       |     |       |
| Buildings and building equipment                                                                                                              |       | 1,122.9  |       | 1,021.9  |       |
| Factory machinery and equipment                                                                                                               |       | 4,765.5  |       | 4,339.0  |       |
| Transportation, office, and miscellaneous  equipment                                                                                          |       | 112.8    |       | 96.9     |       |
| Construction in progress                                                                                                                      |       | 288.4    |       | 194.2    |       |
|                                                                                                                                          |       | 6,533.3  |       | 5,895.3  |       |
| Less accumulated depreciation                                                                                                                 |       | 3,830.5  |       | 3,292.9  |       |
| Net property, plant, and equipment                                                                                                            |       | 2,702.8  |       | 2,602.4  |       |
|                                                                                                                                          |       |     |       |     |       |
| Total assets                                                                                                                                  |       | $        | 8,381.1    |     | $          | 7,894.4 |   |

 

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**CONSOLIDATED BALANCE SHEETS**  Owens-Brockway Packaging, Inc.(continued)

Dollarsin millions

 
| **December 31,**                                                        | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                         |       |     |       |     |       |
| **Liabilities and Share Owners’ Equity**                                |       |     |       |     |       |
| **Current liabilities:**                                                     |       |     |       |     |       |
| Short-term  loans                                                            |       | $        | 302.3      |     | $          | 375.6 |   |
| Accounts  payable including amount to related parties of $7.7 ($7.1 in 2008) |       | 844.8    |       | 811.8    |       |
| Salaries  and wages                                                          |       | 160.6    |       | 138.2    |       |
| U.S.  and foreign income taxes                                               |       | 110.0    |       | 152.4    |       |
| Other  accrued liabilities                                                   |       | 356.2    |       | 295.2    |       |
| Long-term  debt due within one year                                          |       | 21.6     |       | 18.2     |       |
|                                                                         |       |     |       |     |       |
| Total  current liabilities                                                   |       | 1,795.5  |       | 1,791.4  |       |
|                                                                         |       |     |       |     |       |
| **External long-term debt**                                                  |       | 2,989.8  |       | 2,413.1  |       |
|                                                                         |       |     |       |     |       |
| **Deferred taxes**                                                           |       | 253.4    |       | 117.5    |       |
|                                                                         |       |     |       |     |       |
| **Other liabilities**                                                        |       | 672.2    |       | 729.8    |       |
|                                                                         |       |     |       |     |       |
| **Share owners’ equity:**                                               |       |     |       |     |       |
| Investment  by and advances from Parent                                      |       | 2,425.5  |       | 2,799.0  |       |
| Accumulated  other comprehensive income (loss)                               |       | 46.5     |       | (209.2   | )          |
| Total  share owner’s equity of the Company                              |       | 2,472.0  |       | 2,589.8  |       |
| Noncontrolling  interests                                                    |       | 198.2    |       | 252.8    |       |
| Total  share owners’ equity                                             |       | 2,670.2  |       | 2,842.6  |       |
|                                                                         |       |     |       |     |       |
| Total  liabilities and share owners’ equity                             |       | $        | 8,381.1    |     | $          | 7,894.4 |   |

 

See accompanying Notes to the Consolidated Financial Statements.

 

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**CONSOLIDATED SHARE OWNERS’ EQUITY **Owens-BrockwayPackaging, Inc.

Dollarsin millions

 
| ** **                                                             | ** ** | ** **                            | ** **  | **Share Owner’s Equity of the Company** | ** ** | ** **                                           | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------|-------------|-----------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                             | ** ** | **Total Share  Owners’  Equity** | ** **  | **Investment by and  Advances from  Parent**                          | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Non-  controlling  Interests** | ** ** |
|                                                                   |       |                                  |        |                                                                  |       |                                                 |       |   |   |
| Balance on January 1, 2007                                        |       | $                                     | 1,489.9     |                                                                  | $          | 1,287.6                                              |       | $ | (4.5 | ) | $ | 206.8 |   |
|                                                                   |       |                                  |        |                                                                  |       |                                                 |       |   |   |
| Net intercompany transactions                                          |       | 955.9                                 |        | 955.9                                                                 |       |                                                 |       |   |   |
| Comprehensive income:                                                  |       |                                  |        |                                                                  |       |                                                 |       |   |   |
| Net earnings                                                           |       | 585.6                                 |        | 526.1                                                                 |       |                                                 |       | 59.5 |   |
| Foreign currency translation adjustments                               |       | 319.3                                 |        |                                                                  |       | 305.3                                                |       | 14.0 |   |
| Pension and other postretirement benefit  adjustments, net of tax      |       | 26.2                                  |        |                                                                  |       | 26.2                                                 |       |   |   |
| Change in fair value of derivative instruments,  net of tax            |       | 28.2                                  |        |                                                                  |       | 28.2                                                 |       |   |   |
| Total comprehensive income                                             |       | 959.3                                 |        |                                                                  |       |                                                 |       |   |   |
| Dividends paid to noncontrolling interests on  subsidiary common stock |       | (28.6                                 | )           |                                                                  |       |                                                 |       | (28.6 | ) |
| Balance on December 31, 2007                                      |       | $                                     | 3,376.5     |                                                                  | $          | 2,769.6                                              |       | $ | 355.2 |   | $ | 251.7 |   |
|                                                                   |       |                                  |        |                                                                  |       |                                                 |       |   |   |
| Net intercompany transactions                                          |       | (566.7                                | )           | (566.7                                                                | )          |                                                 |       |   |   |
| Comprehensive income:                                                  |       |                                  |        |                                                                  |       |                                                 |       |   |   |
| Net earnings                                                           |       | 666.3                                 |        | 596.1                                                                 |       |                                                 |       | 70.2 |   |
| Foreign currency translation adjustments                               |       | (451.4                                | )           |                                                                  |       | (431.9                                               | )          | (19.5 | ) |
| Pension and other postretirement benefit  adjustments, net of tax      |       | (99.6                                 | )           |                                                                  |       | (99.6                                                | )          |   |   |
| Change in fair value of derivative instruments,  net of tax            |       | (32.9                                 | )           |                                                                  |       | (32.9                                                | )          |   |   |
| Total comprehensive income                                             |       | 82.4                                  |        |                                                                  |       |                                                 |       |   |   |
| Dividends paid to noncontrolling interests on subsidiary  common stock |       | (49.6                                 | )           |                                                                  |       |                                                 |       | (49.6 | ) |
| Balance on December 31, 2008                                      |       | $                                     | 2,842.6     |                                                                  | $          | 2,799.0                                              |       | $ | (209.2 | ) | $ | 252.8 |   |
|                                                                   |       |                                  |        |                                                                  |       |                                                 |       |   |   |
| Net intercompany transactions                                          |       | (800.3                                | )           | (800.3                                                                | )          |                                                 |       |   |   |
| Comprehensive income:                                                  |       |                                  |        |                                                                  |       |                                                 |       |   |   |
| Net earnings                                                           |       | 462.8                                 |        | 426.8                                                                 |       |                                                 |       | 36.0 |   |
| Foreign currency translation adjustments                               |       | 200.5                                 |        |                                                                  |       | 228.9                                                |       | (28.4 | ) |
| Pension and other postretirement benefit  adjustments, net of tax      |       | (9.3                                  | )           |                                                                  |       | (9.3                                                 | )          |   |   |
| Change in fair value of derivative instruments,  net of tax            |       | 36.1                                  |        |                                                                  |       | 36.1                                                 |       |   |   |
| Total comprehensive income                                             |       | 690.1                                 |        |                                                                  |       |                                                 |       |   |   |
| Dividends paid to noncontrolling interests on  subsidiary common stock |       | (62.2                                 | )           |                                                                  |       |                                                 |       | (62.2 | ) |
| **Balance on December 31, 2009**                                  | ** ** | **$**                                 | **2,670.2** | ** **                                                            | **$**      | **2,425.5**                                          | ** ** | **$** | **46.5** | ** ** | **$** | **198.2** | ** ** |

 

See accompanying Notes to the Consolidated FinancialStatements

 

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**CONSOLIDATED CASH FLOWS **Owens-Brockway Packaging, Inc.

Dollars in millions

 
| **Years  ended December 31,**                     | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Operating activities:**                              |       |     |       |     |       |     |       |
| Net earnings                                           |       | $        | 462.8      |     | $          | 666.3    |       | $ | 585.6 |   |
| Net earnings attributable to noncontrolling  interests |       | (36.0    | )          | (70.2    | )          | (59.5    | )          |
| Non-cash charges (credits):                            |       |     |       |     |       |     |       |
| Depreciation                                           |       | 371.8    |       | 427.5    |       | 419.7    |       |
| Amortization of intangibles and other deferred  items  |       | 15.7     |       | 32.7     |       | 36.1     |       |
| Amortization of finance fees and debt discount         |       | 10.0     |       |     |       |     |       |
| Deferred tax provision (credit)                        |       | 52.2     |       | 10.6     |       | (5.6     | )          |
| Restructuring and asset impairment                     |       | 213.6    |       | 133.3    |       | 100.3    |       |
| Other                                                  |       | 79.1     |       | 103.0    |       | 7.9      |       |
| Cash paid for restructuring activities                 |       | (68.3    | )          | (48.9    | )          | (17.8    | )          |
| Change in non-current operating assets                 |       | 34.6     |       | 8.7      |       | 6.4      |       |
| Change in non-current liabilities                      |       | (163.3   | )          | (82.0    | )          | (6.0     | )          |
| Change in components of working capital                |       | 122.1    |       | (147.3   | )          | 26.2     |       |
| Cash provided by operating activities                  |       | 1,094.3  |       | 1,033.7  |       | 1,093.3  |       |
| ** **                                             |       |     |       |     |       |     |       |
| **Investing activities:**                              |       |     |       |     |       |     |       |
| Additions to property, plant, and equipment            |       | (425.7   | )          | (360.9   | )          | (290.4   | )          |
| Acquisitions, net of cash acquired                     |       | (5.4     | )          |     |       |     |       |
| Advances to equity affiliate - net                     |       | 1.6      |       | (1.6     | )          |     |       |
| Net cash proceeds from divestitures and other          |       | 13.4     |       | 3.0      |       | 14.1     |       |
| Cash utilized in investing activities                  |       | (416.1   | )          | (359.5   | )          | (276.3   | )          |
| ** **                                             |       |     |       |     |       |     |       |
| **Financing activities:**                              |       |     |       |     |       |     |       |
| Additions to long-term debt                            |       | 1,080.1  |       | 686.4    |       | 406.4    |       |
| Repayments of long-term debt                           |       | (609.7   | )          | (695.4   | )          | (2,092.2 | )          |
| Increase (decrease) in short-term loans                |       | (79.4    | )          | (20.6    | )          | (21.5    | )          |
| Net change in intercompany debt                        |       | (808.1   | )          | (530.9   | )          | 1,032.8  |       |
| Net receipts (payments) for hedging activity           |       | 14.3     |       | (45.2    | )          | 0.7      |       |
| Dividends paid to noncontrolling interests             |       | (62.2    | )          | (49.6    | )          | (28.6    | )          |
| Payment of finance fees                                |       | (14.0    | )          |     |       | (6.3     | )          |
| Cash utilized in financing activities                  |       | (479.0   | )          | (655.3   | )          | (708.7   | )          |
| Effect of exchange rate fluctuations on cash           |       | (68.4    | )          | (22.9    | )          | 51.8     |       |
| Increase (decrease) in cash                            |       | 130.8    |       | (4.0     | )          | 160.1    |       |
|                                                   |       |     |       |     |       |     |       |
| Cash at beginning of year                              |       | 397.9    |       | 401.9    |       | 241.8    |       |
| Cash at end of year                                    |       | $        | 528.7      |     | $          | 397.9    |       | $ | 401.9 |   |

 

See accompanying Notes to Consolidated FinancialStatements.

 

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**Owens-Brockway Packaging, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**Tabular data dollars in millions**

 

**1. Significant AccountingPolicies**

 

**Basis ofConsolidated Statements**   The consolidated financialstatements of Owens-Brockway Packaging, Inc. (“Company”) include theaccounts of its subsidiaries.  Newlyacquired subsidiaries have been included in the consolidated financialstatements from dates of acquisition.

 

The Company uses theequity method of accounting for investments in which it has a significantownership interest, generally 20% to 50%. Other investments are accounted for at cost. The Company monitors otherthan temporary declines in fair value and records reductions in carrying valueswhen appropriate.

 

The format of the Company’s consolidated cash flowsfor the years ended December 31, 2008 and 2007 has been reclassified toconform to the 2009 presentation. Amounts related to cash paid for restructuring activities have beenreclassified from changes in working capital and non-current liabilities andare now shown separately.

 

The Company has evaluated subsequent events through February 10,2010, the date the financial statements were issued.

 

**Newly Adopted Financial StatementPronouncements**   Effective January 1, 2009, the Companyadopted the provisions of a new accounting standard which changed thepresentation of noncontrolling interests in subsidiaries. The format of theCompany’s consolidated results of operations, consolidated share owners’equity, and consolidated cash flows for the years ended December 31, 2008and 2007, and consolidated balance sheet at December 31, 2008 have beenreclassified to conform to the new presentation which is required to be appliedretrospectively.

 

**Relationshipwith Owens-Illinois Group, Inc.****and Owens-Illinois, Inc.  **The Company is a wholly-ownedsubsidiary of Owens-Illinois Group, Inc. (“OI Group”) and an indirectsubsidiary of Owens-Illinois, Inc. (“OI Inc.”).  Although OI Inc. does not conduct anyoperations, it has substantial obligations related to outstanding indebtednessand asbestos-related payments. OI Inc. relies primarily on distributionsfrom its direct and indirect subsidiaries to meet these obligations.

 

For federal and certainstate income tax purposes, the taxable income of the Company is included in theconsolidated tax returns of OI Inc. and income taxes are allocated to theCompany on a basis consistent with separate returns.

 

**Nature ofOperations**   The Company is a leading manufacturer ofglass container products. The Company’s principal product lines are glasscontainers for the food and beverage industries.  The Company has glass container operationslocated in 21 countries. The principal markets and operations for the Company’sproducts are in Europe, North America, South America, and Australia.

 

**Use ofEstimates**   The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires management of the Company to make estimates and assumptions thataffect certain amounts reported in the financial statements and accompanyingnotes.  Actual results may differ fromthose estimates, at which time the Company would revise its estimates accordingly.

 

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**Owens-BrockwayPackaging, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

** **

**Cash**  The Company defines “cash” as cash and time deposits with maturities ofthree months or less when purchased. Outstanding checks in excess of funds ondeposit are included in accounts payable.

 

**FairValue Measurements**   Fair value is defined as an exit price, representingthe amount that would be received to sell an asset or paid to transfer aliability (exit price) in the principal or most advantageous market for theasset or liability in an orderly transaction between market participants.  Generally accepted accounting principlesdefined a three-tier fair value hierarchy, which prioritizes the inputs used inmeasuring fair value as follows:

 

*Level 1:* Observable inputs such as quoted prices in active markets;

*Level2: *Inputs, other than quoted prices in active markets,that are observable either directly or indirectly; and

*Level3: *Unobservable inputs for which there is little or nomarket data, which requires the Company to develop assumptions.

 

The carrying amountsreported for cash, short-term investments and short-term loans approximate fairvalue.  In addition, carrying amountsapproximate fair value for certain long-term debt obligations subject tofrequently redetermined interest rates. Fair values for the Company’s significant fixed rate debt obligationsare generally based on published market quotations.

 

The Company’s derivativeassets and liabilities consist of interest rate swaps, natural gas forwards,and foreign exchange option and forward contracts.  The Company uses an income approach to valuingthese contracts.  Interest rate yieldcurves, natural gas forward rates, and foreign exchange rates are thesignificant inputs into the valuation models. These inputs are observable in active markets over the terms of theinstruments the Company holds, and accordingly, the Company classifies itsderivative assets and liabilities as Level 2 in the hierarchy.  The Company also evaluates counterparty riskin determining fair values.

 

**Derivative Instruments**  The Company usescurrency swaps, interest rate swaps, options, and commodity futures contractsto manage risks generally associated with foreign exchange rate, interest rateand commodity market volatility.  Derivative financial instruments areincluded on the balance sheet at fair value. Whenever possible, derivative instruments are designatedas and are effective as hedges, in accordance with accounting principlesgenerally accepted in the United States. If the underlying hedged transaction ceases to exist, all changes infair value of the related derivatives that have not been settled are recognizedin current earnings.  The Company doesnot enter into derivative financial instruments for trading purposes and is nota party to leveraged derivatives. Cash flows from fair value hedges of debt andshort-term forward exchange contracts are classified as a financingactivity.  Cash flows of currency swaps,interest rate swaps, and commodity futures contracts are classified asoperating activities. See Note 9 for additional information related toderivative instruments.

 

**InventoryValuation**   The Company values most U.S. inventories atthe lower of last-in, first-out (LIFO) cost or market.  Other inventories are valued at the lower ofstandard costs (which approximate average costs) or market.

 

**Goodwill**  Goodwill represents the excess of cost overfair value of assets of businesses acquired. Goodwill is evaluated annually, as of October 1, for impairment ormore frequently if an impairment indicator exists.

 

**IntangibleAssets and Other Long-Lived Assets**  Intangibleassets are amortized over the expected useful life of the asset.  Amortization expense directly attributed tothe manufacturing of the Company’s 

 

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**Owens-BrockwayPackaging, Inc**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –(Continued)**

 

products is included inmanufacturing, shipping, and delivery. Amortization expense related to non-manufacturing activities is includedin selling and administrative and other. The Company evaluates therecoverability of intangible assets and other long-lived assets based onundiscounted projected cash flows, excluding interest and taxes, when factorsindicate that impairment may exist.  Ifimpairment exists, the asset is written down to fair value.

 

**Property,Plant, and Equipment  **Property, plant, and equipment (“PP&E”)is carried at cost and includes expenditures for new facilities and equipmentand those costs which substantially increase the useful lives or capacity ofexisting PP&E.  In general,depreciation is computed using the straight-line method and recorded over theestimated useful life of the asset. Factory machinery and equipment is depreciated over periods ranging from5 to 25 years with the majority of such assets (principally glass-meltingfurnaces and forming machines) depreciated over 7-15 years.  Buildings and building equipment aredepreciated over periods ranging from 10 to 50 years.  Depreciation expense directly attributed tothe manufacturing of the Company’s products is included in manufacturing,shipping, and delivery.  Depreciationexpense related to non-manufacturing activities is included in selling andadministrative. Maintenance and repairs are expensed as incurred.  Costs assigned to PP&E of acquiredbusinesses are based on estimated fair values at the date of acquisition.  The Company evaluates the recoverability ofproperty, plant, and equipment based on undiscounted projected cash flows,excluding interest and taxes, when factors indicate that impairment mayexist.  If impairment exists, the assetis written down to fair value.

 

**RevenueRecognition**  The Company recognizes sales, net ofestimated discounts and allowances, when the title to the products and risk ofloss are transferred to customers. Provisions for rebates to customers are provided in the same period thatthe related sales are recorded.

 

**Shippingand Handling Costs**  Shipping and handling costs are included withmanufacturing, shipping, and delivery costs in the Consolidated Results ofOperations.

 

**IncomeTaxes on Undistributed Earnings  **In general, the Company plans to continueto reinvest the undistributed earnings of foreign subsidiaries and foreigncorporate joint ventures accounted for by the equity method.  Accordingly, taxes are provided only on thatamount of undistributed earnings in excess of planned reinvestments.

 

**ForeignCurrency Translation**   The assets and liabilities of substantiallyall subsidiaries and associates are translated at current exchange rates andany related translation adjustments are recorded directly in share owners’equity.

 

**AccountsReceivable  **Receivables are stated at amountsestimated by management to be the net realizable value.  The Company charges off accounts receivablewhen it becomes apparent based upon age or customer circumstances that amountswill not be collected.

 

**Allowancefor Doubtful Accounts  **The allowance for doubtful accounts isestablished through charges to the provision for bad debts.  The Company evaluates the adequacy of theallowance for doubtful accounts on a periodic basis.  The evaluation includes historical trends incollections and write-offs, management’s judgment of the probability ofcollecting accounts and management’s evaluation of business risk.

 

**NewAccounting Standards  **In June 2009,the FASB issued a new standard which amends certain guidance for determiningwhether an entity is a variable interest entity (VIE). An enterprise isrequired to perform an analysis to determine whether the Company’s variableinterests give it a controlling financial 

 

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**Owens-BrockwayPackaging, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

interestin a VIE. A company would be required to assess whether it has an implicitfinancial responsibility to ensure that a VIE operates as designed whendetermining whether it has the power to direct the activities of the VIE thatmost significantly impact the entity’s economic performance. In addition, thenew provisions require ongoing reassessments of whether an enterprise is theprimary beneficiary of a VIE. The new provisions are effective for financialstatements issued for fiscal years beginning after November 15, 2009. TheCompany does not expect the adoption of this Statement to have an impact on itsresults of operations, financial position or cash flows.

 

**Participation in OI Inc. Stock OptionPlans and Other Stock Based Compensation**  The Companyparticipates in the equity compensation plans of OI Inc. under which employeesof the Company may be granted options to purchase common shares of OI Inc.,restricted common shares of OI Inc., or restricted share units of OI Inc.

 

*StockOptions*

 

Foroptions granted prior to March 22, 2005, no options may be exercised inwhole or in part during the first year after the date granted. In general,subject to accelerated exercisability provisions related to the performance ofOI Inc.’s common stock or change of control, 50% of the options becomeexercisable on the fifth anniversary of the date of the option grant, with theremaining 50% becoming exercisable on the sixth anniversary date of the optiongrant.** **In general, options expirefollowing termination of employment or the day after the tenth anniversary dateof the option grant.

 

Foroptions granted after March 21, 2005, no options may be exercised in wholeor in part during the first year after the date granted.  In general, subject to change in control,these options become exercisable 25% per year beginning on the firstanniversary.  In general, options expirefollowing termination of employment or the seventh anniversary of the optiongrant.

 

Thefair value of options granted before March 22, 2005, is amortized ratablyover five years or a shorter period if the grant becomes subject to acceleratedexercisability provisions related to the performance of OI Inc.’s commonstock.  The fair value of options grantedafter March 21, 2005, is amortized over the vesting periods which rangefrom one to four years.

 

*Restricted Shares*

 

Sharesgranted to employees prior to March 22, 2005, generally vest after threeyears or upon retirement, whichever is later. Shares granted after March 21, 2005, vest 25% per year beginning onthe first anniversary and unvested shares are forfeited upon termination ofemployment.  Shares granted to directorsprior to 2008 were immediately vested but may not be sold until the thirdanniversary of the share grant or the end of the director’s then current termon the board, whichever is later.  Sharesgranted to the directors after 2007 vest after one year.

 

Thefair value of the shares is equal to the market price of the shares on the dateof the grant.  The fair value ofrestricted shares granted before March 22, 2005, is amortized ratably overthe vesting period.  The fair value ofrestricted shares granted after March 21, 2005, is amortized over thevesting periods which range from one to four years.

 

*Performance Vested Restricted Share Units*

 

Restrictedshare units vest on January 1 of the third year following the year inwhich they are granted.  Holders ofvested units receive 0.5 to 1.5 shares of OI Inc.’s common stock for each unit,depending upon the attainment of consolidated performance goals established bythe Compensation Committee of OI 

 

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**Owens-BrockwayPackaging, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

Inc.’sBoard of Directors.  If minimum goals arenot met, no shares will be issued. Granted but unvested restricted share units are forfeited upon terminationof employment, unless certain retirement criteria are met.

 

Thefair value of each restricted share unit is equal to the product of the fairvalue of OI Inc.’s common stock on the date of grant and the estimated numberof shares into which the restricted share unit will be converted.  The fair value of restricted share units isamortized ratably over the vesting period. Should the estimated number of shares into which the restricted shareunit will be converted change, an adjustment will be recorded to recognize theaccumulated difference in amortization between the revised and previousestimates.

 

*Accounting*

 

OI Inc. adopted newaccounting guidance related to share-based payments effective January 1,2006 using the modified-prospective method of adoption, which requiresrecognition of compensation cost in the financial statements beginning on thedate of adoption.

 

Asdiscussed in Note 12, costs incurred under these plans by OI Inc. related tostock-based compensation awards granted directly to the Company’s employees areincluded in the allocable costs charged to the Company and other operatingsubsidiaries of OI Inc. on an intercompany basis.

 

**2.  Supplemental Cash Flow Information**Changes in the components of workingcapital related to operations (net of the effects related to acquisitions anddivestitures) were as follows:

 
| ** **                                  | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                        |       |     |       |     |       |     |       |
| Decrease (increase) in current assets:      |       |     |       |     |       |     |       |
| Receivables                                 |       | $        | (0.2       | )        | $          | 73.8     |       | $ | (30.1 | ) |
| Inventories                                 |       | 152.0    |       | (77.8    | )          | 70.5     |       |
| Prepaid expenses                            |       | (43.3    | )          | (7.0     | )          | 6.8      |       |
| Increase (decrease) in current liabilities: |       |     |       |     |       |     |       |
| Accounts payable and accrued liabilities    |       | (73.2    | )          | (123.9   | )          | (13.5    | )          |
| Salaries and wages                          |       | (13.6    | )          | (18.8    | )          | 24.9     |       |
| U.S. and foreign income taxes               |       | 73.2     |       | 6.4      |       | (32.4    | )          |
|                                        |       | $        | 122.1      |     | $          | (147.3   | )          | $ | 26.2 |   |

 

Interest paid incash, including note repurchase premiums in 2009 and 2007, aggregated $157.5million for 2009, $209.3 million for 2008, and $390.3 million for 2007.

 

Income taxes paid(received) in cash were as follows:

 
| ** ** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
|       |       |     |       |     |       |     |       |
| Domestic   |       | $        | 4.1        |     | $          | (0.3     | )          | $ | 0.2 |   |
| Foreign    |       | 196.0    |       | 158.4    |       | 149.2    |       |
|       |       | $        | 200.1      |     | $          | 158.1    |       | $ | 149.4 |   |

 

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**Owens-BrockwayPackaging, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

**3.  Inventories**  Major classesof inventory are as follows:

 
| ** **          | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
|                |       |     |       |     |       |
| Finished  goods     |       | $        | 741.5      |     | $          | 831.7 |   |
| Work  in process    |       | 0.8      |       | 0.8      |       |
| Raw  materials      |       | 106.6    |       | 109.8    |       |
| Operating  supplies |       | 50.8     |       | 56.8     |       |
|                |       | $        | 899.7      |     | $          | 999.1 |   |

 

If the inventories whichare valued on the LIFO method had been valued at standard costs, whichapproximate current costs, consolidated inventories would be higher thanreported by $42.6 million and $32.5 million, at December 31, 2009 and2008, respectively.

 

Inventories which arevalued at the lower of standard costs (which approximate average costs), ormarket at December 31, 2009 and 2008 were approximately $772.1 million and$861.4 million, respectively.

 

**4.  Equity Investments **Summarized information pertaining to the Company’sequity associates follows:

** **
| ** **                         | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |
| At  end of year:                   |       |     |       |     |       |
| Equity  in undistributed earnings: |       |     |       |     |       |
| Foreign                            |       | $        | 43.5       |     | $          | 31.0 |   |
| Domestic                           |       | 25.8     |       | 19.6     |       |
| Total                              |       | $        | 69.3       |     | $          | 50.6 |   |

 
| ** **           | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------|------------|----------|------------|----------|------------|----------|------------|
|                 |       |     |       |     |       |     |       |
| For  the year:       |       |     |       |     |       |     |       |
| Equity  in earnings: |       |     |       |     |       |     |       |
| Foreign              |       | $        | 12.5       |     | $          | 14.1     |       | $ | 5.3 |   |
| Domestic             |       | 40.1     |       | 36.7     |       | 28.8     |       |
| Total                |       | $        | 52.6       |     | $          | 50.8     |       | $ | 34.1 |   |
| Dividends  received  |       | $        | 33.8       |     | $          | 24.5     |       | $ | 21.7 |   |

 

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**Owens-BrockwayPackaging, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

Summarized combined financial information forequity associates is as follows:

** **
| ** **                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
|                                 |       |     |       |     |       |
| At end of year:                      |       |     |       |     |       |
| Current assets                       |       | $        | 218.0      |     | $          | 208.3 |   |
| Non-current assets                   |       | 314.1    |       | 325.9    |       |
| Total assets                         |       | 532.1    |       | 534.2    |       |
|                                 |       |     |       |     |       |
| Current liabilities                  |       | 138.5    |       | 167.5    |       |
| Other liabilities and deferred items |       | 145.9    |       | 137.9    |       |
| Total liabilities and deferred items |       | 284.4    |       | 305.4    |       |
|                                 |       |     |       |     |       |
| Net assets                           |       | $        | 247.7      |     | $          | 228.8 |   |

 
| ** **    | ** ** | **2009** | ** ** | **2008** | ** ** | **2007 (a)** | ** ** |
|---------------|------------|----------|------------|----------|------------|--------------|------------|
|          |       |     |       |     |       |         |       |
| For the year: |       |     |       |     |       |         |       |
| Net sales     |       | $        | 548.6      |     | $          | 635.8        |       | $ | 535.9 |   |
|          |       |     |       |     |       |         |       |
| Gross profit  |       | $        | 199.6      |     | $          | 227.5        |       | $ | 176.5 |   |
|          |       |     |       |     |       |         |       |
| Net earnings  |       | $        | 158.0      |     | $          | 153.9        |       | $ | 112.4 |   |

 

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(a) Amountsfor 2007 exclude the Company’s Caribbean investment due to the impairmentrecorded during 2007.

 

TheCompany’s significant equity method investments include:  (1) 50% of the common shares of VetriSpeciali SpA, a specialty glass manufacturer; (2) a 25% partnershipinterest in General Chemical Soda Ash (Partners), a soda ash supplier; and (3) a50% partnership interest in Rocky Mountain Bottle Company, a glass containermanufacturer.

 

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**Owens-Brockway Packaging, Inc**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS –(Continued)**

 

**5.  External Debt**   The following table summarizes the externallong-term debt of the Company at December 31, 2009 and 2008:

 
| ** **                                               | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                     |       |     |       |     |       |
| Secured  Credit Agreement:                               |       |     |       |     |       |
| Revolving  Credit Facility:                              |       |     |       |     |       |
| Revolving  Loans                                         |       | $        | —     |     | $          | 18.7 |   |
| Term  Loans:                                             |       |     |       |     |       |
| Term  Loan A (160.0 million AUD at Dec. 31, 2009)   |       | 143.9    |       | 155.7    |       |
| Term  Loan B                                             |       | 189.5    |       | 191.5    |       |
| Term  Loan C (110.8 million CAD at Dec. 31, 2009)   |       | 105.4    |       | 90.9     |       |
| Term  Loan D (€189.5 million at Dec. 31, 2009) |       | 273.5    |       | 269.6    |       |
| Senior  Notes:                                           |       |     |       |     |       |
| 8.25%,  due 2013                                         |       | 460.4    |       | 461.1    |       |
| 6.75%,  due 2014                                         |       | 400.0    |       | 400.0    |       |
| 6.75%,  due 2014 (€225 million)                     |       | 324.7    |       | 316.8    |       |
| 7.375%,  due 2016                                        |       | 582.1    |       |     |       |
| 6.875%,  due 2017 (€300 million)                    |       | 432.9    |       | 422.4    |       |
| Other                                                    |       | 99.0     |       | 104.6    |       |
|                                                     |       |     |       |     |       |
|                                                     |       | 3,011.4  |       | 2,431.3  |       |
| Less  amounts due within one year                        |       | 21.6     |       | 18.2     |       |
|                                                     |       |     |       |     |       |
| External  long-term debt                                 |       | $        | 2,989.8    |     | $          | 2,413.1 |   |

 

On June 14,2006, the Company’s subsidiary borrowers entered into the Secured CreditAgreement (the “Agreement”).  At December 31,2009, the Agreement included a $900.0 million revolving credit facility, a160.0 million Australian dollar term loan, and a 110.8 million Canadian dollarterm loan, each of which has a final maturity date of June 15, 2012.  It also included a $189.5 million term loanand a €189.5 million term loan, each of which has a final maturity date of June 14,2013.  During 2009, the Company’ssubsidiary borrowers repaid 65.0 million Australian dollars, $2.0 million and€2.0 million of term loans under the Agreement.

 

As a result of the2008 bankruptcy of Lehman Brothers Holdings Inc. and several of itssubsidiaries, the Company believes that the maximum amount available under therevolving credit facility was reduced by $32.3 million.  After further deducting amounts attributableto letters of credit and overdraft facilities that are supported by therevolving credit facility, at December 31, 2009 the Company’s subsidiaryborrowers had unused credit of $760.0 million available under the Agreement.

 

The Agreementcontains various covenants that restrict, among other things and subject tocertain exceptions, the ability of the Company to incur certain liens, makecertain investments and acquisitions, become liable under contingentobligations in certain defined instances only, make restricted junior payments,make certain asset sales within guidelines and limits, make capitalexpenditures beyond a certain threshold, engage in material transactions withshareholders and affiliates, participate in sale and leaseback financingarrangements, alter its fundamental business, amend certain outstanding debtobligations, and prepay certain outstanding debt obligations.

 

The Agreement alsocontains one financial maintenance covenant, a Leverage Ratio, that requiresthe Company not to exceed a ratio calculated by dividing consolidated totaldebt, less cash and cash equivalents, by Consolidated Adjusted EBITDA, asdefined in the Agreement.  The Leverage Ratiocould

 

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**Owens-BrockwayPackaging, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

restrict theability of the Company to undertake additional financing to the extent thatsuch financing would cause the Leverage Ratio to exceed the specified maximum.

 

Failure to complywith these covenants and restrictions could result in an event of default underthe Agreement.  In such an event, theCompany could not request borrowings under the revolving facility, and allamounts outstanding under the Agreement, together with accrued interest, couldthen be declared immediately due and payable. If an event of default occurs under the Agreement and the lenders causeall of the outstanding debt obligations under the Agreement to become due andpayable, this would result in a default under a number of other outstandingdebt securities and could lead to an acceleration of obligations related to thesedebt securities.  A default or event ofdefault under the Agreement, indentures or agreements governing otherindebtedness could also lead to an acceleration of debt under other debtinstruments that contain cross acceleration or cross-default provisions.

 

The leverage ratioalso determines pricing under the Agreement. The interest rate on borrowings under the Agreement is, at the Company’soption, the Base Rate or the Eurocurrency Rate, as defined in theAgreement.  These rates include a marginlinked to the leverage ratio and the borrowers’ senior secured debtrating.  The margins range from 0.875% to1.75% for Eurocurrency Rate loans and from -0.125% to 0.75% for Base Rateloans.  In addition, a facility fee is payableon the revolving credit facility commitments ranging from 0.20% to 0.50% perannum linked to the leverage ratio.  Theweighted average interest rate on borrowings outstanding under the Agreement atDecember 31, 2009 was 2.40%. As of December 31, 2009, the Company wasin compliance with all covenants and restrictions in the Agreement.  In addition, the Company believes that itwill remain in compliance and that its ability to borrow funds under theAgreement will not be adversely affected by the covenants and restrictions.

 

Borrowings under theAgreement are secured by substantially all of the assets of the Company’sdomestic subsidiaries and certain foreign subsidiaries, which have a book valueof approximately $2.4 billion. Borrowings are also secured by a pledge of intercompany debt and equityin most of the Company’s domestic subsidiaries and stock of certain foreignsubsidiaries.  All borrowings under theagreement are guaranteed by substantially all domestic subsidiaries of theCompany for the term of the Agreement.

 

During May 2009,a subsidiary of the Company issued senior notes with a face value of $600.0million at 96.72% of face value for an effective interest rate of 8.00%.  The notes bear interest at 7.375% and are dueMay 15, 2016.  The notes areguaranteed by substantially all of the Company’s domestic subsidiaries.  The net proceeds, after deducting commissionsand expenses from the notes, approximated $568 million and were used to repay$221.9 million of the Company’s $250.0 million intercompany debt with OI Incand to reduce borrowings under the revolving credit facility.  The balance of the proceeds increasedcash.  As a part of the issuance of thesenotes and the related repayment of the intercompany debt, the Company recordedadditional interest charges in 2009 of $5.2 million for note repurchasepremiums and the related write-off of unamortized finance fees, net of a gainfrom the termination of interest rate swap agreements related to the notes.

 

During October 2006,the Company entered into a European accounts receivable securitization program,which had a limit of €250 million at December 31, 2009.  The programextends through October 2011, subject to annual renewal of backup creditlines.  In addition, the Companyparticipates in a receivables financing program in the Asia Pacific region witha revolving funding commitment of 89 million Australian dollars and 10 millionNew Zealand dollars that expire February 2010 and November 2010,respectively.

 

Informationrelated to the Company’s accounts receivable securitization program as of December 31,2009 and 2008 is as follows:

 

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**Owens-BrockwayPackaging, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 
| ** **                             | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
|                                   |       |     |       |     |       |
| Balance (included in short-term loans) |       | $        | 289.0      |     | $          | 293.7 |   |
|                                   |       |     |       |     |       |
| Weighted average interest rate         |       | 2.52     | %          | 5.31     | %          |
|                                        |            |          |            |          |            |  |  |

 

The Companycapitalized $16.8 million and $25.6 million in 2009 and 2008, respectively, undercapital lease obligations with the related financing recorded as long termdebt.  These amounts are included inother in the long-term debt table above.

 

Annual maturitiesfor all of the Company’s long-term debt through 2014 are as follows:  2010, $21.6 million; 2011, $135.0 million;2012, $164.2 million; 2013, $931.1 million; and 2014, $735.1 million.

 

Fair values at December 31,2009, of the Company’s significant fixed rate debt obligations were as follows:

 
| ** **                           | ** ** | **Principal Amount** | ** ** | **Indicated** | ** ** | **Fair Value**   | ** ** |
|--------------------------------------|------------|----------------------|------------|---------------|------------|------------------|------------|
| ** **                           | ** ** | **(millions of**     | ** ** | **Market**    | ** ** | **(millions of** | ** ** |
| ** **                           | ** ** | **dollars)**         | ** ** | **Price**     | ** ** | **dollars)**     | ** ** |
| Senior Notes:                        |       |                 |       |          |       |             |       |
| 8.25%, due 2013                      |       | $                    | 450.0      |          | 103.35     |             | $          | 465.1 |   |
| 6.75%, due 2014                      |       | 400.0                |       | 102.25        |       | 409.0            |       |
| 6.75%, due 2014 (€225 million)  |       | 324.7                |       | 98.33         |       | 319.3            |       |
| 7.375%, due 2016                     |       | 600.0                |       | 104.00        |       | 624.0            |       |
| 6.875%, due 2017 (€300 million) |       | 432.9                |       | 96.97         |       | 419.8            |       |
|                                      |            |                      |            |               |            |                  |            |  |  |

** **

**6.Guarantees of Debt **OI Group andthe Company guarantee OI Inc.’s senior notes and debentures on a subordinatedbasis.  The fair value of the OI Inc.debt being guaranteed was $281.3 at December 31, 2009.

 

**7.  Operating Leases**  Rent expense attributable to all warehouse, office buildings, andequipment operating leases was $106.6 million in 2009, $95.4 million in 2008,and $87.4 million in 2007.  Minimumfuture rentals under operating leases are as follows:  2010, $55.9 million; 2011, $40.8 million;2012, $28.4 million; 2013, $18.4 million; 2014, $10.8 million; and 2015 andthereafter, $7.9 million.

 

**8.  Foreign Currency Transactions**  Aggregate foreign currency exchange gains (losses) included in otherexpense were $(29.2) million for 2009, $0.6 million in 2008, and $(8.1) millionin 2007.

 

During 2009, the Companyentered into a series of parallel market transactions to exchange Venezuelanbolivars into U.S. dollars.  In theparallel market, bolivars are valued significantly lower than the officialgovernment rate, giving rise to exchange losses from such transactions.  As a result, the Company recognized foreign currencyexchange losses of $28.0 million for the year.

 

**9.  Derivative Instruments  **The Company has certain derivative assets andliabilities which consist of interest rate swaps, natural gas forwards, andforeign exchange option and forward contracts. The Company records derivative assets and liabilities at fair value andclassifies them as “Level 2” in the fair value hierarchy.

 

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**Owens-BrockwayPackaging, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

### ***Interest Rate Swaps Designated as Fair Value Hedges***

### ** **

### **In the fourth quarter of 2003 and the first quarter of2004, the Company entered into a series of interest rate swap agreements with atotal notional amount of $700 million that were to mature in 2010and 2013. The swaps were executed in order to: (i) convert a portionof the senior notes and senior debentures fixed-rate debt into floating-ratedebt; (ii) maintain a capital structure containing appropriate amounts offixed and floating-rate debt; and (iii) reduce net interest payments andexpense in the near-term.**

### ** **

The Company’sfixed-to-floating interest rate swaps were accounted for as fair value hedges.Because the relevant terms of the swap agreements matched the correspondingterms of the notes, there was no hedge ineffectiveness. Accordingly, theCompany recorded the net of the fair market values of the swaps as a long-termasset (liability) along with a corresponding net increase (decrease) in thecarrying value of the hedged debt.

 

For derivativeinstruments that are designated and qualify as fair value hedges, the change inthe fair value of the derivative instrument related to the future cash flows(gain or loss on the derivative) as well as the offsetting change in the fairvalue of the hedged item attributable to the hedged risk are recognized incurrent earnings.  The Company includesthe gain or loss on the hedged items (i.e. long-term debt) in the same lineitem (interest expense) as the offsetting loss or gain on the related interestrate swaps.

 

During the second quarterof 2009, the Company repaid $221.9 million of its $250 million intercompanydebt with OI Inc.  As a result of the debtrepayment, the Company terminated the related interest rate swap agreements forproceeds of $5.0 million.  The Companyrecognized $4.4 million of the proceeds as a reduction of interest expense uponthe termination of the interest rate swap agreements, while the remaining $0.6million is recorded as an adjustment to the debt and will be recognized as areduction of interest expense over the remaining life of the outstandingintercompany debt due 2010.  See Note 5for additional information.

 

During the second quarterof 2009, the Company’s interest rate swaps related to the $450 million seniornotes due 2013 were terminated.  TheCompany received proceeds of $12.4 million which were recorded as an adjustmentto debt and will be recognized as a reduction of interest expense over theremaining life of the senior notes due 2013.

 

As of December 31,2009, the balance of unamortized proceeds from terminated interest rate swapsincluded in long-term debt was $10.6 million.

 

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**Owens-BrockwayPackaging, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 

The effect of theinterest rate swaps on the results of operations for the year ended December 31,2009 and 2008 is as follows:

 
| ** **                                                            | ** ** | **Amount of Gain (Loss)  Recognized in Interest  Expense** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2009**                                                   | ** ** | **2008** | ** ** |
|                                                                  |       |                                                       |       |   |   |
| Interest rate swaps                                                   |       | $                                                          | (11.0      | ) | $ | 26.1 |   |
| Related long-term debt                                                |       | 11.0                                                       |       | (26.1 | ) |
| Proceeds recognized and amortized for terminated  interest rate swaps |       | 6.7                                                        |       |   |   |
| Net impact on interest expense                                        |       | $                                                          | 6.7        |   | $ | — |   |

 

*Commodity Futures ContractsDesignated as Cash Flow Hedges*

 

The Company enters intocommodity futures contracts related to forecasted natural gas requirements, theobjectives of which are to limit the effects of fluctuations in the futuremarket price paid for natural gas and the related volatility in cash flows. TheCompany continually evaluates the natural gas market with respect to itsforecasted usage requirements over the next twelve to twenty-four months andperiodically enters into commodity futures contracts in order to hedge aportion of its usage requirements over that period. At December 31, 2009,the Company had entered into commodity futures contracts covering approximately4,800,000 MM BTUs over that period.

 

The Company accounts forthe above futures contracts as cash flow hedges at December 31, 2009 andrecognizes them on the balance sheet at fair value. The effective portion ofchanges in the fair value of a derivative that is designated as, and meets therequired criteria for, a cash flow hedge is recorded in the Accumulated OtherComprehensive Income component of share owners’ equity (“OCI”) and reclassifiedinto earnings in the same period or periods during which the underlying hedgeditem affects earnings. At December 31, 2009, an unrecognized loss of $1.3million (pretax) related to the commodity futures contracts was included inAccumulated OCI, and will be reclassified into earnings over the next twelve totwenty-four months.  Any material portionof the change in the fair value of a derivative designated as a cash flow hedgethat is deemed to be ineffective is recognized in current earnings.  The ineffectiveness related to these naturalgas hedges for the year ended December 31, 2009 and 2008 was not material.

 

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**Owens-BrockwayPackaging, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 

The effect of thecommodity futures contracts on the results of operations for the year ended December 31,2009 and 2008 is as follows:

 
| ** **                      | ** ** | ** **                        | ** ** | **Amount of Gain (Loss)** | ** ** |
|---------------------------------|------------|-----------------------------------|------------|---------------------------|------------|
| ** **                      | ** ** | ** **                        | ** ** | **Reclassified from**     | ** ** |
| **Amount of Gain (Loss)**       | ** ** | **Accumulated OCI into**          | ** ** |
| **Recognized in OCI on**        | ** ** | **Income (reported in**           | ** ** |
| **Commodity Futures Contracts** | ** ** | **manufacturing, shipping, and**  | ** ** |
| **(Effective Portion)**         | ** ** | **delivery) (Effective Portion)** | ** ** |
| **2009**                        | ** ** | **2008**                          | ** ** | **2009**                  | ** ** | **2008** | ** ** |
|                            |       |                              |       |                      |       |   |   |
| $                               | (24.8      | )                                 | $          | (27.2                     | )          | $ | (60.9 | ) | $ | 5.7 |   |
|                                 |            |                                   |            |                           |            |  |  |  |  |  |  |

 

*Senior Notes Designated as NetInvestment Hedge*

 

During December 2004,a U.S. subsidiary of the Company issued Senior Notes totaling €225million.  These notes were designated bythe Company’s subsidiary as a hedge of a portion of its net investment in anon-U.S. subsidiary with a Euro functional currency.  Because the amount of the Senior Notesmatches the hedged portion of the net investment, there is no hedgeineffectiveness. Accordingly, the Company recorded the impact of changes in theforeign currency exchange rate on the Euro-denominated notes in OCI.  The amount recorded in OCI will be reclassifiedinto earnings when the Company sells or liquidates its net investment in thenon-U.S. subsidiary.

 

The effect of the netinvestment hedge on the results of operations for the year ended December 31,2009 and 2008 is as follows:

 
| ** **                | ** ** | ** **                        | ** ** | ** **                        | ** ** | **Amount of Gain (Loss)** | ** ** |
|---------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|---------------------------|------------|
| **Amount of Gain (Loss)** | ** ** | **Location of Gain (Loss)**       | ** ** | **Reclassified from Accumulated** | ** ** |
| **Recognized in OCI**     | ** ** | **Reclassified from Accumulated** | ** ** | **OCI into Income**               | ** ** |
| **2009**                  | ** ** | **2008**                          | ** ** | **OCI into Income**               | ** ** | **2009**                  | ** ** | **2008** | ** ** |
|                      |       |                              |       |                              |       |                      |       |   |   |
| $                         | (8.8       | )                                 | $          | 15.2                              |       | N/A                       |       | $ | — |   | $ | — |   |
|                           |            |                                   |            |                                   |            |                           |            |  |  |  |  |  |  |

 

*Forward Exchange Contracts notDesignated as Hedging Instruments*

 

The Company’ssubsidiaries may enter into short-term forward exchange or option agreements topurchase foreign currencies at set rates in the future. These agreements areused to limit exposure to fluctuations in foreign currency exchange rates forsignificant planned purchases of fixed assets or commodities that aredenominated in currencies other than the subsidiaries’ functional currency.Subsidiaries may also use forward exchange agreements to offset the foreigncurrency risk for receivables and payables, including intercompany receivablesand payables, not denominated in, or indexed to, their functional currencies.The Company records these short-term forward exchange agreements on the balancesheet at fair value and changes in the fair value are recognized in currentearnings.

 

At December 31,2009, various subsidiaries of the Company had outstanding forward exchange andoption agreements denominated in various currencies covering the equivalent ofapproximately $1.0 billion related primarily to intercompany transactions andloans.

 

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**Owens-BrockwayPackaging, Inc**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)**

 

The effect of the forward exchange contracts on the results ofoperations for the year ended December 31, 2009 and 2008 is as follows:

 
| ** **                     | ** ** | **Amount of Loss**             | ** ** |
|--------------------------------|------------|--------------------------------|------------|
| **Location of Loss**           | ** ** | **Recognized in Income on**    | ** ** |
| **Recognized in Income on**    | ** ** | **Forward Exchange Contracts** | ** ** |
| **Forward Exchange Contracts** | ** ** | **2009**                       | ** ** | **2008** | ** ** |
|                           |       |                           |       |   |   |
| Other expense                  |       | $                              | (8.3       | ) | $ | (4.2 | ) |
|                                |            |                                |            |  |  |  |  |

 

*Balance Sheet Classification*

 

The Company records thefair values of derivative financial instruments on the balance sheet asfollows: (1) receivables if the instrument has a positive fair value andmaturity within one year, (2) deposits, receivables, and other assets ifthe instrument has a positive fair value and maturity after one year, (3) accountspayable and other current liabilities if the instrument has a negative fairvalue and maturity within one year, and (4) other liabilities if theinstrument has a negative fair value and maturity after one year.  The following table shows the amount andclassification of the Company’s derivatives as of December 31, 2009 and2008:

 
| ** **                                               | ** ** | **2009**                   | ** ** | **2008**  | ** ** |
|----------------------------------------------------------|------------|----------------------------|------------|-----------|------------|
| ** **                                               | ** ** | **Balance  Sheet**         | ** ** | **Fair**  | ** ** | **Balance  Sheet** | ** ** | **Fair** | ** ** |
| ** **                                               | ** ** | **Location**               | ** ** | **Value** | ** ** | **Location** | ** ** | **Value** | ** ** |
| Asset  Derivatives:                                      |       |                       |       |      |       |   |   |   |   |
| Derivatives  designated as hedging instruments           |       |                       |       |      |       |   |   |   |   |
| Interest  rate swaps                                     |       |                       |       |      |       | Deposits, receivables,  and other assets |   | $ | 29.4 |   |
| Commodity  futures contracts                             |       | Receivables                |       | $         | 0.4        |   |   |   |   |   |
| Commodity  futures contracts                             |       | Other accrued  liabilities |       | 0.1       |       |   |   |   |   |
| Total  derivatives designated as hedging instruments     |       |                       |       | 0.5       |       |   |   | 29.4 |   |
|                                                     |       |                       |       |      |       |   |   |   |   |
| Derivatives  not designated as hedging instruments       |       |                       |       |      |       |   |   |   |   |
| Foreign  exchange contracts                              |       | Receivables                |       | 6.0       |       | Receivables |   | 19.4 |   |
| Foreign  exchange contracts                              |       | Other accrued  liabilities |       | 0.2       |       |   |   |   |   |
| Total  derivatives not designated as hedging instruments |       |                       |       | 6.2       |       |   |   | 19.4 |   |
|                                                     |       |                       |       |      |       |   |   |   |   |
| Total  asset derivatives                                 |       |                       |       | $         | 6.7        |   |   |   | $ | 48.8 |   |
|                                                     |       |                       |       |      |       |   |   |   |   |
| Liability  Derivatives:                                  |       |                       |       |      |       |   |   |   |   |
| Derivatives  designated as hedging instruments           |       |                       |       |      |       |   |   |   |   |
| Commodity  futures contracts                             |       | Other accrued  liabilities |       | $         | 1.8        |   | Other accrued  liabilities |   | $ | 37.4 |   |
| Total  derivatives designated as hedging instruments     |       |                       |       | 1.8       |       |   |   | 37.4 |   |
|                                                     |       |                       |       |      |       |   |   |   |   |
| Derivatives  not designated as hedging instruments       |       |                       |       |      |       |   |   |   |   |
| Foreign  exchange contracts                              |       | Other accrued  liabilities |       | 2.9       |       | Receivables |   | 0.4 |   |
| Foreign  exchange contracts                              |       |                       |       |      |       | Other accrued liabilities |   | 11.6 |   |
| Foreign  exchange contracts                              |       |                       |       |      |       | Other liabilities |   | 0.1 |   |
| Total  derivatives not designated as hedging instruments |       |                       |       | 2.9       |       |   |   | 12.1 |   |
|                                                     |       |                       |       |      |       |   |   |   |   |
| Total  liability derivatives                             |       |                       |       | $         | 4.7        |   |   |   | $ | 49.5 |   |

 

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**Owens-BrockwayPackaging, Inc**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

**10.  Accumulated Other Comprehensive Income (Loss)**   The components of comprehensive income are: (a) netearnings; (b) change in fair value of certain derivative instruments; (c) pensionand other postretirement benefit adjustments; and (d) foreign currencytranslation adjustments.  The net effectof exchange rate fluctuations generally reflects changes in the relativestrength of the U.S. dollar against major foreign currencies between thebeginning and end of the year.

 

The following table liststhe beginning balance, yearly activity and ending balance of each component ofaccumulated other comprehensive income (loss):

 
| ** **                    | ** ** | **Net  Effect of  Exchange Rate  Fluctuations** | ** ** | **Deferred Tax  Effect for  Translation** | ** ** | **Unfunded  Pension  Liability** | ** ** | **Change in  Certain  Derivative  Instruments** | ** ** | **Employee  Benefit  Plans** | ** ** | **Total  Accumulated  Comprehensive   Income (Loss)** | ** ** |
|-------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------|------------|----------------------------------|------------|-------------------------------------------------|------------|------------------------------|------------|-------------------------------------------------------|------------|
|                          |       |                                            |       |                                      |       |                             |       |                                            |       |                         |       |                                                  |       |
| Balance on Jan. 1, 2007  |       | $                                               | 188.0      |                                      | $          | 12.7                             |       | $                                               | (122.9     | )                            | $          | (34.9                                                 | )          | $ | (47.4 | ) | $ | (4.5 | ) |
|                          |       |                                            |       |                                      |       |                             |       |                                            |       |                         |       |                                                  |       |   |
| 2007 Change                   |       | 305.3                                           |       |                                      |       |                             |       | 28.2                                            |       | 41.5                         |       | 375.0                                                 |       |
| Translation effect            |       |                                            |       |                                      |       |                             |       |                                            |       | (6.7                         | )          | (6.7                                                  | )          |
| Reclass                       |       |                                            |       |                                      |       | 122.9                            |       | 2.2                                             |       | (125.1                       | )          | —                                                |       |
| Tax effect                    |       |                                            |       |                                      |       |                             |       |                                            |       | (8.6                         | )          | (8.6                                                  | )          |
|                          |       |                                            |       |                                      |       |                             |       |                                            |       |                         |       |                                                  |       |
| Balance on Dec. 31, 2007 |       | 493.3                                           |       | 12.7                                      |       | —                           |       | (4.5                                            | )          | (146.3                       | )          | 355.2                                                 |       |
|                          |       |                                            |       |                                      |       |                             |       |                                            |       |                         |       |                                                  |       |
| 2008 Change                   |       | (431.9                                          | )          |                                      |       |                             |       | (32.9                                           | )          | (200.8                       | )          | (665.6                                                | )          |
| Translation effect            |       |                                            |       |                                      |       |                             |       |                                            |       | 46.1                         |       | 46.1                                                  |       |
| Tax effect                    |       |                                            |       |                                      |       |                             |       |                                            |       | 55.1                         |       | 55.1                                                  |       |
|                          |       |                                            |       |                                      |       |                             |       |                                            |       |                         |       |                                                  |       |
| Balance on Dec. 31, 2008 |       | 61.4                                            |       | 12.7                                      |       | —                           |       | (37.4                                           | )          | (245.9                       | )          | (209.2                                                | )          |
|                          |       |                                            |       |                                      |       |                             |       |                                            |       |                         |       |                                                  |       |
| 2009 Change                   |       | 228.9                                           |       |                                      |       |                             |       | 36.1                                            |       | 32.8                         |       | 297.8                                                 |       |
| Translation effect            |       |                                            |       |                                      |       |                             |       |                                            |       | (33.7                        | )          | (33.7                                                 | )          |
| Tax effect                    |       |                                            |       |                                      |       |                             |       |                                            |       | (8.4                         | )          | (8.4                                                  | )          |
|                          |       |                                            |       |                                      |       |                             |       |                                            |       |                         |       |                                                  |       |
| Balance on Dec. 31, 2009 |       | $                                               | 290.3      |                                      | $          | 12.7                             |       | $                                               | —     |                         | $          | (1.3                                                  | )          | $ | (255.2 | ) | $ | 46.5 |   |

 

Exchange ratefluctuations in 2009 include a loss of $132.5 million related to the Company’sdecision to translate the balance sheets of its Venezuelan subsidiaries usingthe parallel market rate at December 31, 2009 instead of the historicofficial rate.  See Note 20 to theConsolidated Financial Statements for further information.

 

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**Owens-BrockwayPackaging, Inc**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

**11.  Income Taxes**  Deferredincome taxes reflect:  (1) the nettax effects of temporary differences between the carrying amounts of assets andliabilities for financial reporting purposes and the amounts used for incometax purposes and (2) carryovers and credits for income tax purposes.

 

Significant components ofthe Company’s deferred tax assets and liabilities at December 31, 2009 and2008 are as follows:

 
| ** **                              | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
|                                    |       |     |       |     |       |
| Deferred  tax assets:                   |       |     |       |     |       |
| Tax  loss carryovers                    |       | $        | 223.8      |     | $          | 233.5 |   |
| Capital  loss carryovers                |       | 24.7     |       | 23.7     |       |
| Accrued  postretirement benefits        |       | 20.9     |       | 20.2     |       |
| Other,  principally accrued liabilities |       | 228.5    |       | 190.0    |       |
| Total  deferred tax assets              |       | 497.9    |       | 467.4    |       |
|                                    |       |     |       |     |       |
| Deferred  tax liabilities:              |       |     |       |     |       |
| Property,  plant and equipment          |       | 141.8    |       | 143.9    |       |
| Inventory                               |       | 12.0     |       | 13.4     |       |
| Other                                   |       | 65.1     |       | 46.1     |       |
|                                    |       |     |       |     |       |
| Total  deferred tax liabilities         |       | 218.9    |       | 203.4    |       |
| Valuation  allowance                    |       | (268.2   | )          | (255.4   | )          |
| Net  deferred tax liabilities           |       | $        | 10.8       |     | $          | 8.6 |   |

 

Deferred taxes areincluded in the Consolidated Balance Sheets at December 31, 2009 and 2008as follows:

 
| ** **                               | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
|                                     |       |     |       |     |       |
| Prepaid  expenses                        |       | $        | 45.2       |     | $          | 24.8 |   |
| Deposits,  receivables, and other assets |       | 219.0    |       | 101.3    |       |
| Deferred  taxes                          |       | (253.4   | )          | (117.5   | )          |
|                                     |       |     |       |     |       |
| Net  deferred tax liabilities            |       | $        | 10.8       |     | $          | 8.6 |   |

 

TheCompany reviews the likelihood that it will realize the benefit of its deferredtax assets and therefore the need for valuation allowances on a quarterlybasis, or whenever events indicate that a review is required.  In determining the requirement for avaluation allowance, the historical and projected financial results of thelegal entity or consolidated group recording the net deferred tax asset isconsidered, along with other positive and negative evidence.

 

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**Owens-BrockwayPackaging, Inc**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

The provision for incometaxes consists of the following:

 
| ** **    | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------|------------|----------|------------|----------|------------|----------|------------|
|          |       |     |       |     |       |     |       |
| Current:      |       |     |       |     |       |     |       |
| U.S.  Federal |       | $        | 2.8        |     | $          | (0.4     | )          | $ | — |   |
| State         |       | (0.5     | )          | 0.6      |       | 0.4      |       |
| Foreign       |       | 123.3    |       | 213.0    |       | 144.3    |       |
|          |       | 125.6    |       | 213.2    |       | 144.7    |       |
| Deferred:     |       |     |       |     |       |     |       |
| U.S.  Federal |       |     |       | 4.0      |       | 0.3      |       |
| State         |       | (1.3     | )          | (3.2     | )          | (4.0     | )          |
| Foreign       |       | 53.5     |       | 9.8      |       | (1.9     | )          |
|          |       | 52.2     |       | 10.6     |       | (5.6     | )          |
| Total:        |       |     |       |     |       |     |       |
| U.S.  Federal |       | 2.8      |       | 3.6      |       | 0.3      |       |
| State         |       | (1.8     | )          | (2.6     | )          | (3.6     | )          |
| Foreign       |       | 176.8    |       | 222.8    |       | 142.4    |       |
|          |       | $        | 177.8      |     | $          | 223.8    |       | $ | 139.1 |   |

 

The provision for incometaxes was calculated based on the following components of earnings beforeincome taxes:

 
| ** ** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
|       |       |     |       |     |       |     |       |
| Domestic   |       | $        | 100.3      |     | $          | 191.2    |       | $ | 37.4 |   |
| Foreign    |       | 540.3    |       | 698.9    |       | 687.3    |       |
|       |       | $        | 640.6      |     | $          | 890.1    |       | $ | 724.7 |   |

 

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**Owens-BrockwayPackaging, Inc**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

A reconciliation of theprovision for income taxes based on the statutory U.S. Federal tax rate of 35%to the provision for income taxes is as follows:

 
| ** **                                                                                                        | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                              |       |     |       |     |       |     |       |
| Tax  provision (benefit) on pretax earnings (loss) from continuing operations at  statutory U.S. Federal tax rate |       | $        | 224.2      |     | $          | 311.5    |       | $ | 253.7 |   |
| Increase  (decrease) in provision for income taxes due to:                                                        |       |     |       |     |       |     |       |
|                                                                                                              |       |     |       |     |       |     |       |
| Valuation  allowance - U.S.                                                                                       |       | (34.0    | )          | (53.7    | )          | (538.3   | )          |
| Foreign  subsidiary ownership restructuring and incentives                                                        |       | 10.8     |       | 35.1     |       | 535.9    |       |
| Foreign  source income taxable in the U.S.                                                                        |       | 6.1      |       | 11.3     |       | 29.3     |       |
| Reversal  of non-U.S. tax valuation allowance                                                                     |       | (0.9     | )          |     |       | (13.4    | )          |
| Foreign  tax credit utilization                                                                                   |       |     |       |     |       | (47.9    | )          |
| State  taxes, net of federal benefit                                                                              |       | 0.8      |       | (1.3     | )          | (4.8     | )          |
| Rate  differences on non-U.S. earnings                                                                            |       | (24.1    | )          | (55.3    | )          | (65.8    | )          |
| Adjustment  for non-U.S. tax law changes                                                                          |       | (0.6     | )          | (20.1    | )          | (9.9     | )          |
| Other  items                                                                                                      |       | (4.5     | )          | (3.7     | )          | 0.3      |       |
|                                                                                                              |       |     |       |     |       |     |       |
| Provision  for income taxes                                                                                       |       | $        | 177.8      |     | $          | 223.8    |       | $ | 139.1 |   |

 

In2007 the Company implemented a plan to restructure the ownership andintercompany obligations of certain foreign subsidiaries.  These actions resulted in taxation of asignificant portion of previously unremitted foreign earnings and will transfera portion of the Company’s debt service obligations to operations outside theU.S. in order to better balance operating cash flows with financing costs on aglobal basis.  The foreign earningsreported as taxable in the U.S. were offset by net operating loss carryforwardsand foreign tax credits.  Foreign taxcredit carryforwards arising from the restructuring were fully offset by anincrease in the valuation allowance.

 

The Company hasrecognized tax benefits as a result of incentives in certain non-U.S.jurisdictions which expire between 2012 and 2015.

 

The Company is includedin OI Inc.’s consolidated tax returns. OI Inc. has net operating losses, capital losses, alternative minimumtax credits, and research and development credits available to offset futureU.S. Federal income tax.

 

At December 31,2009, the Company’s equity in the undistributed earnings of foreignsubsidiaries for which income taxes had not been provided approximated $1,823.4million.  The Company intends to reinvestthese earnings indefinitely in the non-U.S. operations. It is not practicableto estimate the U.S. and foreign tax which would be payable should theseearnings be distributed.

 

TheCompany records a liability for unrecognized tax benefits related to uncertaintax positions. In 2008, the Company reclassified $28.5 million of deferred taxassets related to general business credits and net operating losses that werepreviously offset by a full valuation allowance to the liability forunrecognized tax benefits.  This balancesheet reclassification had no effect on share owners’ equity.  The Company accrues interest and penaltiesassociated with unrecognized tax benefits as a component of its income taxexpense.

 

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**Owens-BrockwayPackaging, Inc**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

Thefollowing is a reconciliation of the Company’s total gross unrecognized tax benefitsfor the years ended December 31, 2009, 2008 and 2007:

 
| ** **                                                            | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Balance  at January 1                                            |       | $        | 103.1      |     | $          | 53.0     |       | $ | 45.8 |   |
| Additions  for tax positions of prior years                           |       | 20.1     |       | 51.2     |       | 0.1      |       |
| Reductions  for tax positions of prior years                          |       |     |       | (2.1     | )          | (2.5     | )          |
| Additions  based on tax positions related to the current year         |       | 17.1     |       | 6.1      |       | 11.0     |       |
| Reductions  due to the lapse of the applicable statute of limitations |       | (4.1     | )          | (3.1     | )          | (1.4     | )          |
| Foreign  currency translation                                         |       | (7.8     | )          |     |       |     |       |
| Reductions  due to settlements                                        |       |     |       | (2.0     | )          |     |       |
| Balance  at December 31                                          |       | $        | 128.4      |     | $          | 103.1    |       | $ | 53.0 |   |

 

AtDecember 31, 2009 and 2008, accrued interest and penalties related tounrecognized tax benefits were $23.2 million and $14.5 million,respectively.  Tax expense for the yearsended December 31, 2009, 2008 and 2007 included interest and penalties of$10.6 million, $10.7 million and $0.6 million, respectively, onunrecognized tax benefits.

 

Theunrecognized tax benefit liability, including interest and penalties, as of December 31,2009 and 2008 was $151.6 million and $117.6 million, respectively.  Approximately $97.3 million and $72.7 millionas of December 31, 2009 and 2008, respectively, relate to unrecognized taxbenefits, which if recognized, would impact the Company’s effective income taxrate.  This amount differs from the grossunrecognized tax benefits presented in the table above because of theunrecognized tax benefits that would result in the utilization of certain taxattribute carryforwards that are currently subject to a full valuation allowancedue to uncertainties about their future period utilization.

 

For federal and certainstate income tax purposes, the taxable income of the Company is included in theconsolidated tax returns of OI Inc. and income taxes are allocated to theCompany on a basis consistent with separate returns.  Tax years through 1999 have been settled withthe U.S. Internal Revenue Service and there is no current IRS examination inprogress.  Due to the existence of taxattribute carryforwards (which are currently offset by full valuationallowances) in the U.S., the Company treats certain post-1999 tax positions asunsettled because of the taxing authorities’ ability to modify theseattributes.  The 2000 tax year is theearliest open year for the Company’s other major tax jurisdictions.

 

TheCompany does not anticipate a significant change in the total amount ofunrecognized income tax benefits within the next twelve months.

 

**12.  Related Party Transactions  **Charges for administrative services are allocated tothe Company by OI Inc. based on an annual utilization level.  Such services include compensation andbenefits administration, payroll processing, use of certain general accountingsystems, auditing, income tax planning and compliance, and treasuryservices.  Beginning in 2008, theCompany revised its method of allocating corporate expenses.  The Company decreased slightly the percentageallocation based on sales and significantly expanded the number of functionsincluded in the allocation based on cost of services.

 

Allocated costs also include charges associated withOI Inc.’s equity compensation plans.  Asubstantial number of the options, restricted shares and restricted share unitsgranted under these plans have been granted to key employees of anothersubsidiary of OI Inc., some of whose compensation costs, including stock-basedcompensation, are included in an allocation of costs to all operatingsubsidiaries of OI Inc., including the Company.

 

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**Owens-Brockway Packaging, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 

Management believes that such transactions are onterms no less favorable to the Company than those that could be obtained fromunaffiliated third parties.

 

The following informationsummarizes the Company’s significant related party transactions:

 
| ** **                                                                  | ** ** | **Years ended December 31,**  | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                  | ** ** | **2009**                           | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                        |       |                               |       |   |   |   |   |
| Revenues:                                                                   |       |                               |       |   |   |   |   |
| Sales to affiliated companies                                               |       | $                                  | —     |   | $ | — |   | $ | 0.3 |   |
|                                                                        |       |                               |       |   |   |   |   |
| Expenses:                                                                   |       |                               |       |   |   |   |   |
| Administrative services                                                     |       | 14.2                               |       | 15.0 |   | 19.5 |   |
| Corporate management fee                                                    |       | 70.9                               |       | 60.9 |   | 29.1 |   |
| Trademark royalties                                                         |       | 19.4                               |       | 19.9 |   |   |   |
| Total expenses                                                              |       | $                                  | 104.5      |   | $ | 95.8 |   | $ | 48.6 |   |
|                                                                        |       |                               |       |   |   |   |   |
| The above expenses are recorded in the statement  of operations as follows: |       |                               |       |   |   |   |   |
|                                                                        |       |                               |       |   |   |   |   |
|                                                                        |       | **Years  ended December 31,** |       |
|                                                                        |       | **2009**                           | ** ** | **2008** | ** ** | **2007** |   |
|                                                                        |       |                               |       |   |   |   |   |
| Cost of sales                                                               |       | $                                  | 1.2        |   | $ | 0.9 |   | $ | 16.9 |   |
| Selling, general, and adminstrative expenses                                |       | 103.3                              |       | 94.9 |   | 31.7 |   |
| Total expenses                                                              |       | $                                  | 104.5      |   | $ | 95.8 |   | $ | 48.6 |   |

 

Intercompanyinterest is charged to the Company from OI Inc. based on intercompany debtbalances.  An interest rate is calculatedmonthly based on OI Inc.’s total consolidated monthly external debt balance andthe related interest expense, including finance fee amortization and commitmentfees. The calculated rate (7.2% at December 31, 2009) is applied monthlyto the intercompany debt balance to determine intercompany interest expense.

 

**13.  Pension Benefit Plans and Other PostretirementBenefits**

 

*Pension Benefit Plans*

 

The Company participatesin OI Inc.’s defined benefit pension plans for substantially all employeeslocated in the United States.  Benefitsgenerally are based on compensation for salaried employees and on length ofservice for hourly employees.  OI Inc.’spolicy is to fund pension plans such that sufficient assets will be availableto meet future benefit requirements. Independent actuaries determine pension costs for each subsidiary of OIInc. included in the plans; however, accumulated benefit obligation informationand plan assets pertaining to each subsidiary have not been separatelydetermined.  As such, the accumulatedbenefit obligation and the plan assets related to the pension plans fordomestic employees have been retained by another subsidiary of OI Inc.  Net credits to results of operations for theCompany’s allocated portion of the domestic pension costs amounted to $3.8million in 2009, $39.9 million in 2008, and $23.0 million in 2007.

 

OI Inc. also sponsors severaldefined contribution plans for all salaried and hourly U.S. employees of theCompany.   Participation is voluntary andparticipants’ contributions are based on their compensation.  OI

 

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**Owens-Brockway Packaging, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 

Inc. matchescontributions of participants, up to various limits, in substantially allplans.  OI Inc. charges the Company forits share of the match.  The Company’sshare of the contributions to these plans amounted to $6.1 million in 2009,$6.0 million in 2008, and $5.7 million in 2007.

 

The Company’ssubsidiaries in the United Kingdom, the Netherlands, Canada, Australia, andmany employees of Germany and France also have pension plans coveringsubstantially all employees.  Thefollowing tables relate to the Company’s principal defined benefit pensionplans in the United Kingdom, the Netherlands, Canada, Australia, Germany andFrance (the International Pension Plans).

 

The International PensionPlans use a December 31 measurement date.

 

The changes in theInternational Pension Plans benefit obligations for the year were as follows:

 
| ** **                                                               | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                     |       |     |       |     |       |
| Obligations at beginning of year                                         |       | $        | 1,299.4    |     | $          | 1,617.1 |   |
|                                                                     |       |     |       |     |       |
| Change in benefit obligations:                                           |       |     |       |     |       |
| Service cost                                                             |       | 17.6     |       | 22.0     |       |
| Interest cost                                                            |       | 79.1     |       | 82.9     |       |
| Actuarial (gain) loss, including the effect of  change in discount rates |       | 62.4     |       | (52.7    | )          |
| Participant contributions                                                |       | 7.4      |       | 8.8      |       |
| Benefit payments                                                         |       | (73.1    | )          | (89.4    | )          |
| Plan amendments                                                          |       |     |       |     |       |
| Curtailments                                                             |       | (1.8     | )          | (9.5     | )          |
| Settlements                                                              |       | (30.3    | )          |     |       |
| Special termination benefits                                             |       |     |       | 4.4      |       |
| Foreign currency translation                                             |       | 133.5    |       | (284.2   | )          |
|                                                                     |       |     |       |     |       |
| Net change in benefit obligations                                        |       | 194.8    |       | (317.7   | )          |
|                                                                     |       |     |       |     |       |   |   |
| Obligations at end of year                                               |       | $        | 1,494.2    |     | $          | 1,299.4 |   |

 

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** **

**Owens-Brockway Packaging, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 

The changes in the fairvalue of the International Pension Plans’ assets for the year were as follows:

 
| ** **                         | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |
| Fair value at beginning of year    |       | $        | 922.0      |     | $          | 1,376.8 |   |
|                               |       |     |       |     |       |
| Change in fair value:              |       |     |       |     |       |
| Actual gain (loss) on plan assets  |       | 166.4    |       | (220.6   | )          |
| Benefit payments                   |       | (73.1    | )          | (89.4    | )          |
| Employer contributions             |       | 122.0    |       | 60.1     |       |
| Participant contributions          |       | 7.4      |       | 8.8      |       |
| Settlements                        |       | (30.3    | )          |     |       |
| Foreign currency translation       |       | 108.2    |       | (213.7   | )          |
|                               |       |     |       |     |       |
| Net change in fair value of assets |       | 300.6    |       | (454.8   | )          |
|                               |       |     |       |     |       |
| Fair value at end of year          |       | $        | 1,222.6    |     | $          | 922.0 |   |

 

The funded status of theInternational Pension Plans at year end was as follows:

 
| ** **                                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                 |       |     |       |     |       |
| Plan assets at fair value                            |       | $        | 1,222.6    |     | $          | 922.0 |   |
| Projected benefit obligations                        |       | 1,494.2  |       | 1,299.4  |       |
|                                                 |       |     |       |     |       |
|                                                 |       |     |       |     |       |
| Plan assets less than projected benefit  obligations |       | (271.6   | )          | (377.4   | )          |
| Items not yet recognized in pension expense:         |       |     |       |     |       |
| Actuarial loss                                       |       | 368.9    |       | 362.9    |       |
| Prior service credit                                 |       | (14.4    | )          | (15.1    | )          |
|                                                 |       |     |       |     |       |
|                                                 |       | 354.5    |       | 347.8    |       |
|                                                 |       |     |       |     |       |
| Net amount recognized                                |       | $        | 82.9       |     | $          | (29.6 | ) |

 

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**Owens-Brockway Packaging, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 

The net amount recognizedis included in the Consolidated Balance Sheets at December 31, 2009 and2008 as follows:

 
| ** **                                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                |       |     |       |     |       |
| Prepaid pension                                                     |       | $        | 46.3       |     | $          | — |   |
| Current pension liability, included with Other  accrued liabilities |       | (7.9     | )          | (7.2     | )          |
| Noncurrent pension liability, included with Other  liabilities      |       | (310.0   | )          | (370.2   | )          |
| Accumulated other comprehensive income                              |       | 354.5    |       | 347.8    |       |
|                                                                |       |     |       |     |       |
| Net amount recognized                                               |       | $        | 82.9       |     | $          | (29.6 | ) |

 

The following changes inplan assets and benefit obligations were recognized in accumulated othercomprehensive income at December 31, 2009 as follows:

 
| ** **                           | ** ** | ** ** | ** ** | **Tax**    | ** ** | ** **    | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|---------------|------------|
| ** **                           | ** ** | **Pretax** | ** ** | **Effect** | ** ** | **After-tax** | ** ** |
|                                 |       |       |       |       |       |          |       |
| Current year actuarial (gain) loss   |       | $          | (36.9      | )          | $          | 9.9           |       | $ | (27.0 | ) |
| Amortization of actuarial loss       |       | (5.5       | )          | 1.4        |       | (4.1          | )          |
| Amortization of prior service credit |       | 0.7        |       | (0.2       | )          | 0.5           |       |
|                                 |       |       |       |       |       |          |       |
|                                 |       | (41.7      | )          | 11.1       |       | (30.6         | )          |
| Translation                          |       |       |       |       |       | 34.7          |       |
|                                 |       | $          | (41.7      | )          | $          | 11.1          |       | $ | 4.1 |   |

 

The accumulated benefitobligation for all defined benefit pension plans was $1,303.6 million and$1,129.5 million at December 31, 2009 and 2008, respectively.

 

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**Owens-Brockway Packaging, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 

The components of theInternational Pension Plans’ net pension expense were as follows:

 
| ** **                  | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|----------|------------|
|                        |       |     |       |     |       |     |       |
| Service cost                |       | $        | 17.6       |     | $          | 21.9     |       | $ | 25.0 |   |
| Interest cost               |       | 79.1     |       | 82.9     |       | 78.8     |       |
| Expected asset return       |       | (78.9    | )          | (96.5    | )          | (94.5    | )          |
| Curtailment cost            |       |     |       | 0.1      |       | 0.1      |       |
| Settlement cost             |       | 9.3      |       |     |       |     |       |
| Special termination benefit |       |     |       | 4.4      |       |     |       |
| Other                       |       |     |       | (1.1     | )          | 5.2      |       |
|                        |       |     |       |     |       |     |       |
| Amortization:               |       |     |       |     |       |     |       |
| Prior service credit        |       | (0.7     | )          | (0.6     | )          | (0.1     | )          |
| Actuarial loss              |       | 5.5      |       | 5.2      |       | 11.4     |       |
|                        |       |     |       |     |       |     |       |
| Net amortization            |       | 4.8      |       | 4.6      |       | 11.3     |       |
|                        |       |     |       |     |       |     |       |
| Net expense                 |       | $        | 31.9       |     | $          | 16.3     |       | $ | 25.9 |   |

 

Amounts that will beamortized from accumulated other comprehensive income into net pension expenseduring 2010:

 
| Amortization:        |   |   |   |
|----------------------|--------|--------|--------|
| Actuarial loss       |   | $      | 21.7   |   |
| Prior service credit |   | (0.7   | )      |
| Net amortization     |   | $      | 21.0   |   |

 

The following informationis for plans with projected benefit obligations in excess of the fair value ofplan assets at year end:

 
| ** **                   | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
|                         |       |     |       |     |       |
| Projected benefit obligation |       | $        | 968.4      |     | $          | 1,299.4 |   |
| Fair value of plan assets    |       | 650.4    |       | 922.0    |       |
|                              |            |          |            |          |            |  |  |

 

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**Owens-Brockway Packaging, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

The following informationis for plans with accumulated benefit obligations in excess of the fair valueof plan assets at year end:

 
| ** **                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
|                            |       |     |       |     |       |
| Accumulated benefit obligations |       | $        | 834.1      |     | $          | 1,129.5 |   |
| Fair value of plan assets       |       | 650.4    |       | 922.0    |       |
|                                 |            |          |            |          |            |  |  |

 

The weighted averageassumptions used to determine benefit obligations were as follows:

 
| ** **                    | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
|                          |       |     |       |     |       |
| Discount rate                 |       | 5.64     | %          | 5.88     | %          |
| Rate of compensation increase |       | 3.54     | %          | 2.65     | %          |

 

The weighted averageassumptions used to determine net periodic pension costs were as follows:

 
| ** **                                  | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                        |       |     |       |     |       |     |       |
| Discount rate                               |       | 5.88     | %          | 5.46     | %          | 4.92     | %          |
| Rate of compensation increase               |       | 2.65     | %          | 3.39     | %          | 3.34     | %          |
| Expected long-term rate of return on assets |       | 6.95     | %          | 6.96     | %          | 7.16     | %          |

 

Future benefits areassumed to increase in a manner consistent with past experience of the plans,which, to the extent benefits are based on compensation, includes assumedsalary increases as presented above. Amortization included in net pensionexpense is based on the average remaining service of employees.

 

For 2009, the Company’sweighted average expected long-term rate of return on assets was 6.95%. Indeveloping this assumption, the Company evaluated input from its third partypension plan asset managers, including their review of asset class returnexpectations and long-term inflation assumptions. The Company also consideredits historical 10-year average return (through December 31, 2008), whichwas in line with the expected long-term rate of return assumption for 2009.

 

It is the Company’spolicy to invest pension plan assets in a diversified portfolio consisting ofan array of asset classes within established target asset allocation ranges. Theinvestment risk of the assets is limited by appropriate diversification bothwithin and between asset classes. The assets for both the U.S. and non-U.S.plans are primarily invested in a broad mix of domestic and internationalequities, domestic and international bonds, and real estate, subject to thetarget asset allocation ranges. The assets are managed with a view to ensuringthat sufficient liquidity will be available to meet expected cash flowrequirements.

 

The investment valuation policy of the Company is to value investmentsat fair value. All investments are valued at their respective net asset values.Equity securities for which market quotations are readily available are valuedat the last reported sales price on their principal exchange on valuation dateor official close for certain markets. Fixed income investments are valued on abasis of valuations furnished by a trustee-approved independent pricingservice, which determines valuations for normal institutional-size tradingunits of such securities which are generally recognized at fair value asdetermined in good

 

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**Owens-Brockway Packaging, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 

faith by the Trustee. Investments in registered investment companies orcollective pooled funds are valued at their respective net asset values. Short-terminvestments are stated at amortized cost, which approximates fair value. Thefair value of real estate is determined by periodic appraisals.

 

The following table sets forth by level, within the fair valuehierarchy, the Company’s pension plan assets at fair value as of December 31,2009:

 
| ** **                 | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** | **Target**     | ** ** |
|----------------------------|------------|-------------|------------|-------------|------------|-------------|------------|------------|------------|----------------|------------|
| ** **                 | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total**  | ** ** | **Allocation** | ** ** |
|                       |       |        |       |        |       |        |       |       |       |           |       |
| Cash and cash equivalents  |       | $           | 35.8       |        | $          | 9.9         |       | $          | —     |           | $          | 45.7 |   |   |   |
|                       |       |        |       |        |       |        |       |       |       |           |       |
| Equity securities          |       | 405.8       |       | 95.3        |       |        |       | 501.1      |       | 36-46          | %          |
|                       |       |        |       |        |       |        |       |       |       |           |       |
| Debt securities            |       | 515.2       |       | 81.1        |       | 8.8         |       | 605.1      |       | 38-48          | %          |
|                       |       |        |       |        |       |        |       |       |       |           |       |
| Real estate                |       |        |       |        |       | 10.9        |       | 10.9       |       | 0-7            | %          |
|                       |       |        |       |        |       |        |       |       |       |           |       |
| Other                      |       | 54.4        |       | 5.4         |       |        |       | 59.8       |       | 4-14           | %          |
|                       |       |        |       |        |       |        |       |       |       |           |       |
| Total assets at fair value |       | $           | 1,011.2    |        | $          | 191.7       |       | $          | 19.7       |           | $          | 1,222.6 |   |   |   |

 

The following is areconciliation of the Company’s pension plan assets recorded at fair valueusing significant unobservable inputs (Level 3):

 
| Balance at December 31, 2008 |   | $      | 29.1   |   |
|-----------------------------------|--------|--------|--------|--------|
|                              |   |   |   |
| Net decrease                      |   | (9.4   | )      |
|                              |   |   |   |
| Balance at December 31, 2009 |   | $      | 19.7   |   |

 

The net decrease in thefair value of the Company’s Level 3 pension plan assets is primarily due tosales of unlisted real estate funds. The change in the fair value of Level 3pension plan assets due to actual return on those assets was immaterial in2009.

 

Based on exchange ratesat the end of 2009, the Company expects to contribute approximately $10 millionto $15 million to its defined benefit pension plans in 2010.

 

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**Owens-Brockway Packaging, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 

The followingestimated future benefit payments, which reflect expected future service, asappropriate, are expected to be paid in the years indicated:

 
| **Year(s)** | ** ** | **Amount** | ** ** |
|-------------|------------|------------|------------|
| 2010        |       | $          | 79.7       |   |
| 2011        |       | 77.8       |       |
| 2012        |       | 81.1       |       |
| 2013        |       | 84.8       |       |
| 2014        |       | 87.7       |       |
| 2015 - 2019 |       | 443.5      |       |
|             |            |            |            |  |

*PostretirementBenefits Other Than Pensions*

 

OI Inc. provides certainretiree health care and life insurance benefits covering substantially all U.S.salaried and certain hourly employees and substantially all employees in Canadaand The Netherlands. Employees are generally eligible for benefits uponretirement and completion of a specified number of years of creditable service.Independent actuaries determine postretirement benefit costs for eachsubsidiary of OI Inc.; however, accumulated postretirement benefit obligationinformation pertaining to each subsidiary has not been separately determined. Assuch, the accumulated postretirement benefit obligation has been retained byanother subsidiary of OI Inc.

 

The Company’s netperiodic postretirement benefit cost, as allocated by OI Inc., for domesticemployees was $6.5 million, $5.8 million, and $8.1 million, at December 31,2009, 2008, and 2007, respectively.

 

The Company’ssubsidiaries in Canada and the Netherlands also have postretirement benefitplans covering substantially all employees. The following tables relate to theCompany’s postretirement benefit plan in Canada and the Netherlands (theInternational Postretirement Benefit Plans).

 

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**Owens-Brockway Packaging, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 

The changes in the International Postretirement Benefit Plansobligations were as follows:

 
| ** **                                                                                       | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                             |       |     |       |     |       |
|                                                                                             |       |     |       |     |       |
| Obligations at beginning of year                                                                 |       | $        | 67.0       |     | $          | 95.0 |   |
|                                                                                             |       |     |       |     |       |
| Change in benefit obligations:                                                                   |       |     |       |     |       |
| Service cost                                                                                     |       | 0.9      |       | 1.2      |       |
| Interest cost                                                                                    |       | 4.5      |       | 4.5      |       |
| Actuarial (gain) loss, including the effect of  changing discount rates                          |       | 7.9      |       | (11.9    | )          |
| Curtailments                                                                                     |       |     |       | (2.9     | )          |
| Special termination benefits                                                                     |       |     |       | 0.9      |       |
| Benefit payments                                                                                 |       | (3.1     | )          | (3.1     | )          |
| Foreign currency translation                                                                     |       | 11.0     |       | (16.7    | )          |
|                                                                                             |       |     |       |     |       |
| Net change in benefit obligations                                                                |       | 21.2     |       | (28.0    | )          |
|                                                                                             |       |     |       |     |       |
| Obligations at end of year                                                                       |       | $        | 88.2       |     | $          | 67.0 |   |
|                                                                                             |       |     |       |     |       |
| The funded status of the International  Postretirement Benefit Plans at year end was as follows: |       |     |       |     |       |
|                                                                                             |       |     |       |     |       |
|                                                                                             |       | **2009** | ** ** | **2008** | ** ** |
|                                                                                             |       |     |       |     |       |
| Postretirement benefit obligations                                                               |       | $        | 88.2       |     | $          | 67.0 |   |
|                                                                                             |       |     |       |     |       |
| Items not yet recognized in net postretirement  benefit cost:                                    |       |     |       |     |       |
| Actuarial gain (loss)                                                                            |       | (0.6     | )          | 6.8      |       |
|                                                                                             |       |     |       |     |       |
| Net amount recognized                                                                            |       | $        | 87.6       |     | $          | 73.8 |   |

 

The net amount recognizedis included in the Consolidated Balance Sheets at December 31, 2009 and2008 as follows:

 
| ** **                                                                          | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|-------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current nonpension postretirement benefit,  included with Other accrued liabilities |       | $          | (3.9       | )          | $          | (3.1 | ) |
| Nonpension postretirement benefits                                                  |       | (84.3      | )          | (63.9      | )          |
| Accumulated other comprehensive (income) loss                                       |       | 0.6        |       | (6.8       | )          |
|                                                                                |       |       |       |       |       |
| Net liability recognized                                                            |       | $          | (87.6      | )          | $          | (73.8 | ) |

 

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**Owens-Brockway Packaging, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 

The following changes inbenefit obligations were recognized in accumulated other comprehensive incomeat December 31, 2009 as follows:

 
| ** **                     | ** ** | **Pretax** | ** ** | **Tax  Effect** | ** ** | **After-tax** | ** ** |
|--------------------------------|------------|------------|------------|-----------------|------------|---------------|------------|
|                           |       |       |       |            |       |          |       |
| Current year actuarial loss    |       | $          | 8.6        |            | $          | (2.2          | )          | $ | 10.8 |   |
| Amortization of actuarial loss |       | 0.2        |       |            |       | 0.2           |       |
|                           |       |       |       |            |       |          |       |
|                           |       | 8.8        |       | (2.2            | )          | 11.0          |       |
| Translation                    |       |       |       |            |       | (1.0          | )          |
|                           |       | $          | 8.8        |            | $          | (2.2          | )          | $ | 10.0 |   |

 

The Company’s nonpensionpostretirement benefit obligations are included with other long termliabilities on the balance sheet.

 

The components ofInternational Postretirement Benefit Plans net postretirement benefit cost wereas follows:

 
|                            |   | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------|--------|----------|------------|----------|------------|----------|------------|
|                            |   |     |       |     |       |     |       |
| Service cost                    |   | $        | 0.9        |     | $          | 1.2      |       | $ | 1.3 |   |
| Interest cost                   |   | 4.5      |       | 4.5      |       | 4.0      |       |
| Curtailment                     |   |     |       |     |       |     |       |
| Special termination benefit     |   |     |       | 0.9      |       |     |       |
| Other                           |   |     |       | 0.1      |       |     |       |
|                            |   |     |       |     |       |     |       |
| Amortization:                   |   |     |       |     |       |     |       |
| Gain                            |   | (0.1     | )          | (0.1     | )          | (0.3     | )          |
|                            |   |     |       |     |       |     |       |
| Net postretirement benefit cost |   | $        | 5.3        |     | $          | 6.6      |       | $ | 5.0 |   |

 

The weighted averagediscount rate used to determine the accumulated postretirement benefitobligation was 5.6% and 6.4% at December 31, 2009 and 2008, respectively.

 

The weighted averagediscount rate used to determine net postretirement benefit cost was 6.4% at December 31,2009, 4.8% at December 31, 2008, and 5.2% at December 31, 2007.

 

The weighted averageassumed health care cost trend rates at December 31 were as follows:

 
| ** **                                                                     | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Health care cost trend rate assumed for next year                              |       | 9.00     | %          | 9.00     | %          |
| Rate to which the cost trend rate is assumed to  decline (ultimate trend rate) |       | 5.00     | %          | 5.00     | %          |
| Year that the rate reaches the ultimate trend rate                             |       | 2013     |       | 2010     |       |

 

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**Owens-Brockway Packaging, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

Assumed health care costtrend rates affect the amounts reported for the postretirement benefitplans.  A one-percentage-point change inassumed health care cost trend rates would have the following effects:

 
| ** **                                                | ** ** | **1-Percentage-**  | ** ** | **1-Percentage-**  | ** ** |
|-----------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                | ** ** | **Point Increase** | ** ** | **Point Decrease** | ** ** |
|                                                      |       |               |       |               |       |
| Effect on total of service and interest cost              |       | $                  | 0.8        |               | $          | (0.7 | ) |
| Effect on accumulated postretirement benefit  obligations |       | 11.3               |       | (9.4               | )          |
|                                                           |            |                    |            |                    |            |  |  |

 

Amortization included innet postretirement benefit cost is based on the average remaining service ofemployees.

 

The following estimatedfuture benefit payments, which reflect expected future service, as appropriate,are expected to be paid in the years indicated:

 
| **Year(s)** | ** ** | **Amount** | ** ** |
|-------------|------------|------------|------------|
| 2010        |       | $          | 3.9        |   |
| 2011        |       | 4.2        |       |
| 2012        |       | 4.6        |       |
| 2013        |       | 5.0        |       |
| 2014        |       | 5.3        |       |
| 2015 - 2019 |       | 31.2       |       |
|             |            |            |            |  |

 

Benefits provided by OIInc. for certain hourly retirees of the Company are determined by collectivebargaining.  Most other domestic hourlyretirees receive health and life insurance benefits from a multi-employer trustestablished by collective bargaining. Payments to the trust as required by the bargaining agreements are basedupon specified amounts per hour worked and were $7.2 million in 2009, $8.9million in 2008, and $7.4 million in 2007. Postretirement health and life benefits for retirees of foreignsubsidiaries are generally provided through the national health care programsof the countries in which the subsidiaries are located.

 

**14.  Other Expense  **Other expense for the year ended December 31,2009 included the following:

 

·                  The Company recognized foreign currencyexchange losses of $28.0 million related to the exchange of Venezuelan bolivarsinto U.S. dollars.  See Note 8 foradditional information.

 

·                  During the fourth quarter of 2009, theCompany recorded charges of $17.3 million ($17.6 million after tax amountattributable to the Company) for the remeasurement of certainbolivar-denominated assets and liabilities held outside of Venezuela.  See Note 20 for additional information.

 

·                  The Company recorded charges totaling$213.6 million ($182.8 million after tax amount attributable to the Company)for restructuring and asset impairment. The charges reflect the

 

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**Owens-Brockway Packaging, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 

additionaldecisions reached in the Company’s strategic review of its global manufacturingfootprint.  See Note 15 for additionalinformation.

 

Other expense for theyear ended December 31, 2008****included thefollowing:

 

·                  The Company recorded charges totaling$132.4 million ($110.1 million after tax amount attributable to the Company)for restructuring and asset impairment. The charges reflect the additional decisions reached in the Company’sstrategic review of its global manufacturing footprint.  SeeNote 15 for additionalinformation.

 

·                  During 2008, the Companyalso recorded an additional $0.9 million (pretax and after tax amountattributable to the Company) related to the impairment of the Company’s equityinvestment in the South American Segment’s 50%-owned Caribbean affiliate.

 

Other costs and expensesfor the year ended December 31, 2007 included the following:

 

·                  In the South American Segment’s 50%-ownedCaribbean affiliate, declining productivity and cash flows resulted inimpairment of the Company’s equity investment, establishment of valuationallowances against advances to the affiliate, and accrual of certain contingentobligations for total charges of $45.0 million ($43.9 million after tax amountattributable to the Company) recorded in 2007 with an additional $0.9 million(before and after tax amount attributable to the Company) recorded in the firstquarter of 2008.

 

·                  The Company recorded charges totaling$55.3 million ($40.2 million after tax amount attributable to the Company) forrestructuring and asset impairment.  Thecharges reflect the additional decisions reached in the Company’s strategicreview of its global manufacturing footprint. See Note 15 for additionalinformation.

 

**15.  Restructuring Accruals  **Beginning in 2007, theCompany commenced a strategic review of its global profitability andmanufacturing footprint.  The combined2007, 2008 and 2009 charges, amounting to $401.3 million ($333.1 million aftertax amount attributable to the Company), reflect the decisions reached through December 31,2009 in the Company’s strategic review of its global manufacturing footprint.The related curtailment of plant capacity and realignment of selectedoperations will result in an overall reduction in the Company’s workforce ofapproximately 3,250 jobs.  Amountsrecorded by the Company do not include any gains that may be realized upon theultimate sale or disposition of closed facilities.

 

TheCompany’s decisions to curtail selected production capacity have resulted inwrite downs of certain long-lived assets to the extent their carrying amountsexceeded fair value less cost to sell. The Company classified the significant assumptions used to determine thefair value of the impaired assets, which was not material, as “Level 3” in thefair value hierarchy as set forth in the general accounting principles for fairvalue measurements.

 

TheCompany also recorded liabilities for certain employee separation costs to bepaid under contractual arrangements and other exit costs.

 

2007

Duringthe third and fourth quarters of 2007, the Company recorded charges totaling$55.3 million ($40.2 million after tax amount attributable to the Company) forrestructuring and asset impairment in Europe

 

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**Owens-Brockway Packaging, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 

andNorth America.  The curtailment of plantcapacity resulted in elimination of approximately 560 jobs and a correspondingreduction in the Company’s workforce.

 

2008

During2008, the Company recorded charges totaling $132.4 million ($110.1 millionafter tax amount attributable to the Company) for restructuring and assetimpairment across all segments as well as in Retained Corporate Costs andOther.  The curtailment of plant capacityand realignment of selected operations resulted in elimination of approximately1,240 jobs and a corresponding reduction in the Company’s workforce.

 

2009

During2009, the Company recorded charges totaling $213.6 million ($182.8 millionafter tax amount attributable to the Company) for restructuring and assetimpairment across all segments.  Thecurtailment of plant capacity will result in elimination of approximately 1,450jobs and a corresponding reduction in the Company’s workforce.

 

TheCompany expects that the majority of the remaining estimated cash expendituresrelated to the above charges will be paid out by the end of 2010.

 

Selectedinformation related to the restructuring accrual is as follows:

 
| ** **                                                 | ** ** | **Employee  Costs** | ** ** | **Asset  Impairment** | ** ** | **Other**  | ** ** | **Total**  | ** ** |
|------------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|------------|------------|------------|------------|
| ** **                                                 | ** ** | ** **          | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| 2007 Charges                                               |       | $                   | 26.1       |                  | $          | 22.3       |       | $          | 6.9        |   | $ | 55.3 |   |
| Write-down of  assets to net realizable value              |       | —              |       | (22.3                 | )          | (2.4       | )          | (24.7      | )          |
| Total  restructuring accrual at December 31, 2007          |       | 26.1                |       | —                |       | 4.5        |       | 30.6       |       |
| 2008 charges                                               |       | 70.1                |       | 32.5                  |       | 29.8       |       | 132.4      |       |
| Write-down of  assets to net realizable value              |       |                |       | (32.5                 | )          | (4.7       | )          | (37.2      | )          |
| Net cash paid,  principally severance and related benefits |       | (35.6               | )          |                  |       | (7.2       | )          | (42.8      | )          |
| Other,  principally foreign exchange translation           |       | (13.0               | )          |                  |       | (6.1       | )          | (19.1      | )          |
| Total  restructuring accrual at December 31, 2008          |       | 47.6                |       | —                |       | 16.3       |       | 63.9       |       |
| 2009 charges                                               |       | 116.3               |       | 78.7                  |       | 18.6       |       | 213.6      |       |
| Write-down of  assets to net realizable value              |       |                |       | (78.7                 | )          |       |       | (78.7      | )          |
| Net cash paid,  principally severance and related benefits |       | (60.8               | )          |                  |       | (7.5       | )          | (68.3      | )          |
| Other,  principally foreign exchange translation           |       | (8.8                | )          |                  |       | (1.6       | )          | (10.4      | )          |
| Remaining  restructuring accrual as of December 31, 2009   |       | $                   | 94.3       |                  | $          | —     |       | $          | 25.8       |   | $ | 120.1 |   |

 

**16. Contingencies  **Certain litigation is pending against the Company, inmany cases involving ordinary and routine claims incidental to the business ofthe Company and in others presenting allegations that are nonroutine andinvolve compensatory, punitive or treble damage claims as well as other typesof relief.  The Company records aliability for such matters when it is both probable that the liability has beenincurred and the amount of the liability can be reasonably estimated.  Recorded amounts are reviewed and adjusted toreflect changes in the factors upon which the estimates are based includingadditional information, negotiations, settlements, and other events. Theultimate legal and financial liability of the Company in respect to thispending litigation cannot reasonably be estimated.  However, the Company believes, based on itsexamination and review of such matters and experience to date, that suchultimate liability will not have a material adverse effect on its results ofoperations or financial condition.

 

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**Owens-Brockway Packaging, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 

**17.  Segment Information **The Company hasfour reportable segments based on its four geographic locations:  (1) Europe; (2) North America; (3) SouthAmerica; (4) Asia Pacific.  Thesefour segments are aligned with the Company’s internal approach to managing,reporting, and evaluating performance of its global glass operations.  Certain assets and activities not directlyrelated to one of the regions or to glass manufacturing are reported withOther.  These include licensing,equipment manufacturing, global engineering, and non-glass equity investments.

 

TheCompany’s measure of profit for its reportable segments is Segment OperatingProfit, which consists of consolidated earnings before interest income,interest expense, and provision for income taxes and excludes amounts relatedto certain items that management considers not representative of ongoingoperations.  The Company’s managementuses Segment Operating Profit, in combination with selected cash flowinformation, to evaluate performance and to allocate resources.

 

SegmentOperating Profit for reportable segments includes an allocation of somecorporate expenses based on both a percentage of sales and direct billingsbased on the costs of specific services provided. Beginning in 2008, the OIInc. revised its method of allocating corporate expenses.  OI Inc. decreased slightly the percentageallocation based on sales and significantly expanded the number of functionsincluded in the allocation based on cost of services. It is not practicable to quantify the net effect ofthese changes on periods prior to 2008.

 

Financialinformation regarding the Company’s reportable segments is as follows:

 
| **Net  Sales:**           | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|
| Europe                    |       | $        | 2,917.6    |     | $          | 3,497.8  |       | $ | 3,298.7 |   |
| North America             |       | 2,074.3  |       | 2,209.7  |       | 2,271.3  |       |
| South America             |       | 1,104.1  |       | 1,135.9  |       | 970.7    |       |
| Asia Pacific              |       | 925.0    |       | 964.1    |       | 934.3    |       |
|                      |       |     |       |     |       |     |       |
| Reportable segment totals |       | 7,021.0  |       | 7,807.5  |       | 7,475.0  |       |
| Other                     |       | 45.5     |       | 77.2     |       | 91.7     |       |
| Net sales                 |       | $        | 7,066.5    |     | $          | 7,884.7  |       | $ | 7,566.7 |   |

 
| **Segment  Operating Profit:**                | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Europe                                        |       | $        | 332.6      |     | $          | 477.8    |       | $ | 433.0 |   |
| North America                                 |       | 281.5    |       | 185.2    |       | 265.1    |       |
| South America                                 |       | 250.6    |       | 331.0    |       | 254.9    |       |
| Asia Pacific                                  |       | 131.3    |       | 162.8    |       | 154.0    |       |
| Reportable segment totals                     |       | 996.0    |       | 1,156.8  |       | 1,107.0  |       |
|                                          |       |     |       |     |       |     |       |
| Items excluded from Segment Operating Profit: |       |     |       |     |       |     |       |
| Other                                         |       | 15.8     |       | 68.1     |       | 47.3     |       |
| Restructuring and asset impairments           |       | (213.6   | )          | (133.3   | )          | (100.3   | )          |
| Charge for Venezuela currency remeasurement   |       | (17.3    | )          |     |       |     |       |
| Interest income                               |       | 41.1     |       | 36.1     |       | 26.9     |       |
| Interest expense                              |       | (181.4   | )          | (237.6   | )          | (356.2   | )          |
| Earnings before income taxes                  |       | $        | 640.6      |     | $          | 890.1    |       | $ | 724.7 |   |

 

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**Owens-Brockway Packaging, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 
| ** **                             | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | **Total**      | ** ** | ** ** | ** ** | ** **       | ** ** |
|----------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|-------------|------------|----------------|------------|------------|------------|------------------|------------|
| ** **                             | ** ** | ** ** | ** ** | **North**   | ** ** | **South**   | ** ** | **Asia**    | ** ** | **Reportable** | ** ** | ** ** | ** ** | **Consolidated** | ** ** |
| ** **                             | ** ** | **Europe** | ** ** | **America** | ** ** | **America** | ** ** | **Pacific** | ** ** | **Segments**   | ** ** | **Other**  | ** ** | **Totals**       | ** ** |
| Total assets:                          |       |       |       |        |       |        |       |        |       |           |       |       |       |             |       |
| 2009                                   |       | $          | 3,852.3    |        | $          | 1,889.5     |       | $           | 855.9      |           | $          | 1,683.0    |       | $                | 8,280.7    |   | $ | 100.4 |   | $ | 8,381.1 |   |
| 2008                                   |       | 3,758.4    |       | 1,792.3     |       | 976.2       |       | 1,239.6     |       | 7,766.5        |       | 127.9      |       | 7,894.4          |       |
| 2007                                   |       | 4,124.1    |       | 1,936.0     |       | 965.7       |       | 1,558.1     |       | 8,583.9        |       | 94.6       |       | 8,678.5          |       |
| Equity earnings:                       |       |       |       |        |       |        |       |        |       |           |       |       |       |             |       |
| 2009                                   |       | $          | 12.5       |        | $          | 14.2        |       | $           | —     |           |       |       | $          | 26.7             |       | $ | 25.9 |   | $ | 52.6 |   |
| 2008                                   |       | 14.1       |       | 12.6        |       |        |       |        |       | 26.7           |       | 24.1       |       | 50.8             |       |
| 2007                                   |       | 8.0        |       | 10.4        |       | (2.7        | )          |        |       | 15.7           |       | 18.4       |       | 34.1             |       |
| Capital expenditures (1):              |       |       |       |        |       |        |       |        |       |           |       |       |       |             |       |
| 2009                                   |       | $          | 169.7      |        | $          | 103.0       |       | $           | 66.9       |           | $          | 81.5       |       | $                | 421.1      |   | $ | 4.6 |   | $ | 425.7 |   |
| 2008                                   |       | 151.9      |       | 90.5        |       | 57.3        |       | 57.6        |       | 357.3          |       | 3.6        |       | 360.9            |       |
| 2007                                   |       | 129.2      |       | 65.9        |       | 51.1        |       | 42.0        |       | 288.2          |       | 2.2        |       | 290.4            |       |
| Depreciation and amortization expense: |       |       |       |        |       |        |       |        |       |           |       |       |       |             |       |
| 2009                                   |       | $          | 178.6      |        | $          | 98.9        |       | $           | 50.1       |           | $          | 67.1       |       | $                | 394.7      |   | $ | 2.8 |   | $ | 397.5 |   |
| 2008                                   |       | 222.0      |       | 98.7        |       | 56.5        |       | 80.4        |       | 457.6          |       | 2.6        |       | 460.2            |       |
| 2007                                   |       | 210.3      |       | 107.3       |       | 54.3        |       | 81.7        |       | 453.6          |       | 2.2        |       | 455.8            |       |

 

----

(1)  Excludes property, plant and equipment acquired throughacquisitions.

 

The Company’s netproperty, plant, and equipment by geographic segment are as follows:

 
| ** ** | ** ** | **United** | ** ** | ** **  | ** ** | ** ** | ** ** |
|------------|------------|------------|------------|-------------|------------|------------|------------|
| ** ** | ** ** | **States** | ** ** | **Foreign** | ** ** | **Total**  | ** ** |
|       |       |       |       |        |       |       |       |
| 2009       |       | $          | 599.7      |        | $          | 2,103.1    |       | $ | 2,702.8 |   |
| 2008       |       | 636.3      |       | 1,966.1     |       | 2,602.4    |       |
| 2007       |       | 633.1      |       | 2,271.1     |       | 2,904.2    |       |
|            |            |            |            |             |            |            |            |  |  |  |

 

The Company’s net sales by geographic segment are as follows:

 
| ** ** | ** ** | **United** | ** ** | ** **  | ** ** | ** ** | ** ** |
|------------|------------|------------|------------|-------------|------------|------------|------------|
| ** ** | ** ** | **States** | ** ** | **Foreign** | ** ** | **Total**  | ** ** |
|       |       |       |       |        |       |       |       |
| 2009       |       | $          | 1,877.5    |        | $          | 5,189.0    |       | $ | 7,066.5 |   |
| 2008       |       | 1,894.8    |       | 5,989.9     |       | 7,884.7    |       |
| 2007       |       | 1,920.6    |       | 5,646.1     |       | 7,566.7    |       |
|            |            |            |            |             |            |            |            |  |  |  |

 

Operations in individual countries outside the United States thataccounted for more than 10% of consolidated net sales were in Italy (2009 -10.4%, 2008 - 10.7%, 2007 - 10.1%) and France (2009 - 13.0%, 2008 - 14.7%, 2007- 19.3%).

 

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**Owens-Brockway Packaging, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 

**18.  Additional Interest Charges from EarlyExtinguishment of Debt**      During 2009, the Companyrecorded additional interest charges of $5.2 million (pretax and after tax) fornote repurchase premiums and the write-off of unamortized finance fees relatedto intercompany debt that was repaid prior to its maturity.  During 2007, the Company recorded additionalinterest charges of $9.5 million ($8.8 million after tax) for note repurchasepremiums and the write-off of unamortized finance fees related to debt that wasrepaid prior to its maturity.

 

**19.**  **Goodwill**   The changesin the carrying amount of goodwill for the years ended December 31, 2007,2008 and 2009 are as follows:

 
| ** **                            | ** ** | **North**   | ** ** | ** ** | ** ** | **Asia**    | ** ** | **South**   | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|-------------|------------|------------|------------|-------------|------------|-------------|------------|------------|------------|------------|------------|
| ** **                            | ** ** | **America** | ** ** | **Europe** | ** ** | **Pacific** | ** ** | **America** | ** ** | **Other**  | ** ** | **Total**  | ** ** |
| Balance  as of January 1, 2007   |       | $           | 721.6      |       | $          | 1,017.0     |       | $           | 502.1      |       | $          | —     |       | $ | 14.5 |   | $ | 2,255.2 |   |
| Translation  effects                  |       | 25.1        |       | 115.3      |       | 54.6        |       |        |       |       |       | 195.0      |       |
| Other  changes                        |       | (1.1        | )          | (13.0      | )          |        |       |        |       | (8.0       | )          | (22.1      | )          |
| Balance  as of December 31, 2007 |       | 745.6       |       | 1,119.3    |       | 556.7       |       | —      |       | 6.5        |       | 2,428.1    |       |
| Translation  effects                  |       | (28.8       | )          | (58.2      | )          | (123.1      | )          |        |       | 0.3        |       | (209.8     | )          |
| Other  changes                        |       |        |       | (10.1      | )          |        |       |        |       | (0.7       | )          | (10.8      | )          |
| Balance  as of December 31, 2008 |       | 716.8       |       | 1,051.0    |       | 433.6       |       | —      |       | 6.1        |       | 2,207.5    |       |
| Translation  effects                  |       | 18.9        |       | 29.6       |       | 124.8       |       |        |       |       |       | 173.3      |       |
| Other  changes                        |       |        |       |       |       |        |       |        |       | 0.2        |       | 0.2        |       |
| Balance  as of December 31, 2009 |       | $           | 735.7      |       | $          | 1,080.6     |       | $           | 558.4      |       | $          | —     |       | $ | 6.3 |   | $ | 2,381.0 |   |

 

Goodwillfor the Asia Pacific segment is net of accumulated impairment losses of $494.0million.

 

Duringthe fourth quarters of 2009, 2008 and 2007, the Company completed its annualimpairment testing and determined that no impairment existed.

 

**20.  Venezuelan Operations **Venezuelan governmentrestrictions on transfers of cash out of the country have limited the Company’sability to immediately access cash at the government’s official exchange rate,which, as of December 31, 2009, had remained fixed at 2.15 bolivars to theU.S. dollar since early 2005.  TheCompany has been able to obtain U.S. dollars at the official rate to pay forsome of its key raw materials and other imports.  However, in 2009, the Venezuelan governmentsignificantly slowed the process of exchanging bolivars to U.S. dollars at theofficial rate.  As a result, the Company’scash balance in Venezuela increased as earnings accumulated.  The Company has the ability to access thecash in Venezuela more quickly through a market-driven parallel exchangeprocess which, at December 31, 2009, valued the bolivar about 60% lowerthan the official exchange rate.  Duringthe last half of 2009, the Company entered into a series of parallel markettransactions in order to exchange Venezuelan bolivars into U.S. dollars, andrecognized foreign currency exchange losses of $28.0 million.  The Company will continue to pursue currencyexchange at official rates to pay for its approved imports and to remitearnings.  However, it will also monitorconditions in Venezuela and presently intends to continue transferring cashgenerated in the country through parallel market transactions.

 

Due to the government restrictions on currency exchange in Venezueladiscussed above, the Company used the parallel market rate to translate thebalance sheets of its Venezuelan subsidiaries as of December 31,2009.  The impact of this change from theofficial exchange rate was an approximate 60% reduction in the reported U.S.dollar amounts for all assets and liabilities of the Company’s Venezuelansubsidiaries, and a resulting $132.5 million charge recorded in the cumulativetranslation adjustment

 

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**Owens-Brockway Packaging, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS – (Continued)**

 

component of other comprehensive income and $45.9 million chargerecorded against noncontrolling interests. In addition, the Company remeasured certain bolivar-denominated assetsand liabilities held outside of Venezuela to the parallel market rate andrecorded a charge of $17.3 million in December 2009.  The adoption of the parallel market rate willhave an adverse impact on the Company’s South American segment operating profitin future periods as most of the revenues and costs of the Company’s Venezuelanoperations will be translated into fewer U.S. dollars.  The Company’s Venezuelan operationsrepresented approximately 40% of the South American segment operating profitfor 2009, including the $28.0 million foreign exchange losses recognized by theCompany from the parallel market transactions noted above.

 

In addition, inflation in Venezuela has continued at an acceleratedrate, and, beginning January 1, 2010, Venezuela’s economy will beconsidered highly inflationary.  Foraccounting purposes, an economy is deemed to be highly inflationary when thethree-year cumulative rate of inflation exceeds 100%.  Under the highly-inflationary basis ofaccounting, the Company must adopt the U.S. dollar as the functional currencyfor its Venezuelan operations as of January 1, 2010.  Any subsequent movements in the bolivar toU.S. dollar exchange rate will be recognized in the results of operations.  In addition, monetary assets (such as cashand receivables) and liabilities (such as payables and accruals) will beremeasured at the end of each reporting period using the currency exchange rateat that date.  Because the Company haselected to adopt the parallel market rate and because that rate is subject tomarket fluctuation, such remeasurement will increase the volatility of reportedresults of operations.

 

On January 8, 2010, the Venezuelan government announced thedevaluation of the bolivar and the creation of a two-tiered official exchangerate.  The official exchange rate willmove from 2.15 bolivars to the U.S. dollar to 2.60 for essential goods and 4.30for non-essential goods.  The Venezuelangovernment also announced that it will intervene in the parallel exchangemarket.  The Company is still evaluatingthe impact of the bolivar devaluation on its Venezuelan operations.  The Company had been able to receive theofficial rate of 2.15 for certain raw materials it imports into Venezuela, and believesthat it will receive the essential goods rate of 2.60 for these raw materialsin the future.

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

TheBoard of Directors and Share Owner of

Owens-BrockwayGlass Container, Inc.

 

We have audited the accompanyingconsolidated balance sheets of Owens-Brockway Glass Container, Inc. andsubsidiaries as of December 31, 2009 and 2008, and the relatedconsolidated statements of results of operations, share owners’ equity, andcash flows for each of the three years in the period ended December 31,2009. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. We were not engaged to perform an audit of the Company’sinternal control over financial reporting. Our audits included consideration ofinternal control over financial reporting as a basis for designing auditprocedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the Company’s internal controlover financial reporting. Accordingly, we express no such opinion. An auditalso includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the financialstatements referred to above present fairly, in all material respects, theconsolidated financial position of Owens-Brockway Glass Container, Inc.and subsidiaries at December 31, 2009 and 2008, and the consolidated resultsof their operations and their cash flows for each of the three years in theperiod ended December 31, 2009, in conformity with U.S. generally acceptedaccounting principles.

 

As discussed inNote 1 to the consolidated financial statements, the accompanying consolidatedfinancial statements have been retrospectively adjusted for the adoption of anew accounting standard which changed the presentation of noncontrollinginterests in subsidiaries.

 

 

|   | /s/ Ernst & Young LLP |
|--------|--------------------------------|

 

Toledo, Ohio

February 10, 2010

 

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**CONSOLIDATED RESULTS OF OPERATIONS**   Owens-Brockway Glass Container Inc.

Dollars in millions

 
| **Years  ended December 31,**                          | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                   |       |     |       |     |       |     |       |
| Net sales                                              |       | $        | 7,066.5    |     | $          | 7,884.7  |       | $ | 7,566.7 |   |
| Manufacturing, shipping, and delivery                  |       | (5,591.2 | )          | (6,212.3 | )          | (5,968.6 | )          |
| Gross profit                                           |       | 1,475.3  |       | 1,672.4  |       | 1,598.1  |       |
|                                                   |       |     |       |     |       |     |       |
| Selling and administrative expense                     |       | (428.4   | )          | (440.7   | )          | (401.5   | )          |
| Research, development, and engineering expense         |       | (58.8    | )          | (66.7    | )          | (65.8    | )          |
| Net intercompany interest income (expense)             |       | 13.6     |       | (32.3    | )          | 4.0      |       |
| Other interest expense                                 |       | (181.4   | )          | (205.3   | )          | (360.2   | )          |
| Other expense                                          |       | (282.3   | )          | (149.2   | )          | (142.3   | )          |
| Other income                                           |       | 102.6    |       | 111.9    |       | 92.4     |       |
|                                                   |       |     |       |     |       |     |       |
| Earnings before income taxes                           |       | 640.6    |       | 890.1    |       | 724.7    |       |
| Provision for income taxes                             |       | (177.8   | )          | (223.8   | )          | (139.1   | )          |
|                                                   |       |     |       |     |       |     |       |
| Net earnings                                           |       | 462.8    |       | 666.3    |       | 585.6    |       |
| Net earnings attributable to noncontrolling  interests |       | (36.0    | )          | (70.2    | )          | (59.5    | )          |
|                                                   |       |     |       |     |       |     |       |
| Net earnings attributable to the Company               |       | $        | 426.8      |     | $          | 596.1    |       | $ | 526.1 |   |

 

See accompanyingNotes to the Consolidated Financial Statements.

 

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**CONSOLIDATED BALANCE SHEETS**   Owens-Brockway Glass Container Inc.

Dollars in millions

 
| **December  31,**                                                                                                                             | ** ** | **2009** | ** **  | **2008** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|-------------|----------|------------|
|                                                                                                                                          |       |     |        |     |       |
| **Assets**                                                                                                                                    |       |     |        |     |       |
| **Current assets:**                                                                                                                           |       |     |        |     |       |
| Cash, including time deposits of $279.9 ($307.5 in  2008)                                                                                     |       | $        |  528.7 |     | $          |  397.9 |   |
| Receivables including amount from related parties of  $3.8 ($3.8 in 2008), less allowances of $34.9 ($38.1 in 2008) for losses and  discounts |       | 1,000.5  |        | 988.2    |       |
| Inventories                                                                                                                                   |       | 899.7    |        | 999.1    |       |
| Prepaid expenses                                                                                                                              |       | 110.5    |        | 46.8     |       |
|                                                                                                                                          |       |     |        |     |       |
| Total current assets                                                                                                                          |       | 2,539.4  |        | 2,432.0  |       |
| **Other assets:**                                                                                                                             |       |     |        |     |       |
| Equity investments                                                                                                                            |       | 114.3    |        | 101.7    |       |
| Repair parts inventories                                                                                                                      |       | 125.1    |        | 132.5    |       |
| Prepaid pension                                                                                                                               |       | 46.3     |        |     |       |
| Deposits, receivables, and other assets                                                                                                       |       | 472.2    |        | 418.3    |       |
| Goodwill                                                                                                                                      |       | 2,381.0  |        | 2,207.5  |       |
|                                                                                                                                          |       |     |        |     |       |
| Total other assets                                                                                                                            |       | 3,138.9  |        | 2,860.0  |       |
| **Property, plant, and equipment:**                                                                                                           |       |     |        |     |       |
| Land, at cost                                                                                                                                 |       | 243.7    |        | 243.3    |       |
| Buildings and equipment, at cost:                                                                                                             |       |     |        |     |       |
| Buildings and building equipment                                                                                                              |       | 1,122.9  |        | 1,021.9  |       |
| Factory machinery and equipment                                                                                                               |       | 4,765.5  |        | 4,339.0  |       |
| Transportation, office, and miscellaneous  equipment                                                                                          |       | 112.8    |        | 96.9     |       |
| Construction in progress                                                                                                                      |       | 288.4    |        | 194.2    |       |
|                                                                                                                                          |       | 6,533.3  |        | 5,895.3  |       |
| Less accumulated depreciation                                                                                                                 |       | 3,830.5  |        | 3,292.9  |       |
| Net property, plant, and equipment                                                                                                            |       | 2,702.8  |        | 2,602.4  |       |
|                                                                                                                                          |       |     |        |     |       |
| Total assets                                                                                                                                  |       | $        | 8,381.1     |     | $          | 7,894.4 |   |

 

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**CONSOLIDATED BALANCE SHEETS**  Owens-Brockway Glass Container Inc.  (continued)

Dollars in millions

 
| **December  31,**                                                            | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                         |       |     |       |     |       |
| **Liabilities and Share Owners’  Equity**                               |       |     |       |     |       |
| **Current liabilities:**                                                     |       |     |       |     |       |
| Short-term loans                                                             |       | $        | 302.3      |     | $          | 375.6 |   |
| Accounts payable including amount to related parties  of $7.7 ($7.1 in 2008) |       | 844.8    |       | 811.8    |       |
| Salaries and wages                                                           |       | 160.6    |       | 138.2    |       |
| U.S. and foreign income taxes                                                |       | 110.0    |       | 152.4    |       |
| Other accrued liabilities                                                    |       | 356.2    |       | 295.2    |       |
| Long-term debt due within one year                                           |       | 21.6     |       | 18.2     |       |
|                                                                         |       |     |       |     |       |
| Total current liabilities                                                    |       | 1,795.5  |       | 1,791.4  |       |
|                                                                         |       |     |       |     |       |
| **External long-term debt**                                                  |       | 2,989.8  |       | 2,413.1  |       |
|                                                                         |       |     |       |     |       |
| **Deferred taxes**                                                           |       | 253.4    |       | 117.5    |       |
|                                                                         |       |     |       |     |       |
| **Other liabilities**                                                        |       | 672.2    |       | 729.8    |       |
|                                                                         |       |     |       |     |       |
| **Share owners’ equity:**                                               |       |     |       |     |       |
| Investment by and advances from Parent                                       |       | 2,425.5  |       | 2,799.0  |       |
| Accumulated other comprehensive income (loss)                                |       | 46.5     |       | (209.2   | )          |
| Total share owner’s equity of the Company                               |       | 2,472.0  |       | 2,589.8  |       |
| Noncontrolling interests                                                     |       | 198.2    |       | 252.8    |       |
| Total share owners’ equity                                              |       | 2,670.2  |       | 2,842.6  |       |
|                                                                         |       |     |       |     |       |
| Total liabilities and share owners’ equity                              |       | $        | 8,381.1    |     | $          | 7,894.4 |   |

 

See accompanying Notes to the Consolidated FinancialStatements.

 

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**CONSOLIDATED SHARE OWNERS’ EQUITY  **Owens-Brockway GlassContainer, Inc.

Dollars in millions

 
| ** **                                                           | ** ** | ** **                            | ** **  | **Share Owner’s Equity of the Company** | ** ** | ** **                                           | ** ** |
|----------------------------------------------------------------------|------------|---------------------------------------|-------------|----------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                           | ** ** | **Total Share  Owners’  Equity** | ** **  | **Investment by and  Advances from  Parent** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Non-  controlling  Interests** | ** ** |
|                                                                 |       |                                  |        |                                         |       |                                                 |       |   |   |
| Balance on January 1, 2007                                      |       | $                                     | 1,489.9     |                                         | $          | 1,287.6                                              |       | $ | (4.5 | ) | $ | 206.8 |   |
|                                                                 |       |                                  |        |                                         |       |                                                 |       |   |   |
| Net intercompany transactions                                        |       | 955.9                                 |        | 955.9                                        |       |                                                 |       |   |   |
| Comprehensive income:                                                |       |                                  |        |                                         |       |                                                 |       |   |   |
| Net earnings                                                         |       | 585.6                                 |        | 526.1                                        |       |                                                 |       | 59.5 |   |
| Foreign currency translation adjustments                             |       | 319.3                                 |        |                                         |       | 305.3                                                |       | 14.0 |   |
| Pension and other postretirementbenefit adjustments, net  of tax     |       | 26.2                                  |        |                                         |       | 26.2                                                 |       |   |   |
| Change in fair value of derivativeinstruments, net of tax            |       | 28.2                                  |        |                                         |       | 28.2                                                 |       |   |   |
| Total comprehensive income                                           |       | 959.3                                 |        |                                         |       |                                                 |       |   |   |
| Dividends paid to noncontrolling interestson subsidiary common stock |       | (28.6                                 | )           |                                         |       |                                                 |       | (28.6 | ) |
| Balance on December 31, 2007                                    |       | $                                     | 3,376.5     |                                         | $          | 2,769.6                                              |       | $ | 355.2 |   | $ | 251.7 |   |
|                                                                 |       |                                  |        |                                         |       |                                                 |       |   |   |
| Net intercompany transactions                                        |       | (566.7                                | )           | (566.7                                       | )          |                                                 |       |   |   |
| Comprehensive income:                                                |       |                                  |        |                                         |       |                                                 |       |   |   |
| Net earnings                                                         |       | 666.3                                 |        | 596.1                                        |       |                                                 |       | 70.2 |   |
| Foreign currency translation adjustments                             |       | (451.4                                | )           |                                         |       | (431.9                                               | )          | (19.5 | ) |
| Pension and other postretirementbenefit adjustments, net  of tax     |       | (99.6                                 | )           |                                         |       | (99.6                                                | )          |   |   |
| Change in fair value of derivativeinstruments, net of tax            |       | (32.9                                 | )           |                                         |       | (32.9                                                | )          |   |   |
| Total comprehensive income                                           |       | 82.4                                  |        |                                         |       |                                                 |       |   |   |
| Dividends paid to noncontrolling interestson subsidiary common stock |       | (49.6                                 | )           |                                         |       |                                                 |       | (49.6 | ) |
| Balance on December 31, 2008                                    |       | $                                     | 2,842.6     |                                         | $          | 2,799.0                                              |       | $ | (209.2 | ) | $ | 252.8 |   |
|                                                                 |       |                                  |        |                                         |       |                                                 |       |   |   |
| Net intercompany transactions                                        |       | (800.3                                | )           | (800.3                                       | )          |                                                 |       |   |   |
| Comprehensive income:                                                |       |                                  |        |                                         |       |                                                 |       |   |   |
| Net earnings                                                         |       | 462.8                                 |        | 426.8                                        |       |                                                 |       | 36.0 |   |
| Foreign currency translation adjustments                             |       | 200.5                                 |        |                                         |       | 228.9                                                |       | (28.4 | ) |
| Pension and other postretirementbenefit adjustments, net  of tax     |       | (9.3                                  | )           |                                         |       | (9.3                                                 | )          |   |   |
| Change in fair value of derivativeinstruments, net of tax            |       | 36.1                                  |        |                                         |       | 36.1                                                 |       |   |   |
| Total comprehensive income                                           |       | 690.1                                 |        |                                         |       |                                                 |       |   |   |
| Dividends paid to noncontrolling interestson subsidiary common stock |       | (62.2                                 | )           |                                         |       |                                                 |       | (62.2 | ) |
| **Balance on December 31, 2009**                                | ** ** | **$**                                 | **2,670.2** | ** **                                   | **$**      | **2,425.5**                                          | ** ** | **$** | **46.5** | ** ** | **$** | **198.2** | ** ** |

 

 See accompanying Notes to the ConsolidatedFinancial Statements.

 

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**CONSOLIDATED CASH FLOWS ** Owens-Brockway Glass ContainerInc.

Dollars in millions

** **
| **Years  ended December 31,**                     | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Operating activities:**                              |       |     |       |     |       |     |       |
| Net earnings                                           |       | $        | 462.8      |     | $          | 666.3    |       | $ | 585.6 |   |
| Net earnings attributable to noncontrolling  interests |       | (36.0    | )          | (70.2    | )          | (59.5    | )          |
| Non-cash charges (credits):                            |       |     |       |     |       |     |       |
| Depreciation                                           |       | 371.8    |       | 427.5    |       | 419.7    |       |
| Amortization of intangibles and other deferred  items  |       | 15.7     |       | 32.7     |       | 36.1     |       |
| Amortization of finance fees and debt discount         |       | 10.0     |       |     |       |     |       |
| Deferred tax provision (credit)                        |       | 52.2     |       | 10.6     |       | (5.6     | )          |
| Restructuring and asset impairment                     |       | 213.6    |       | 133.3    |       | 100.3    |       |
| Other                                                  |       | 79.1     |       | 103.0    |       | 7.9      |       |
| Cash paid for restructuring activities                 |       | (68.3    | )          | (48.9    | )          | (17.8    | )          |
| Change in non-current operating assets                 |       | 34.6     |       | 8.7      |       | 6.4      |       |
| Change in non-current liabilities                      |       | (163.3   | )          | (82.0    | )          | (6.0     | )          |
| Change in components of working capital                |       | 122.1    |       | (147.3   | )          | 26.2     |       |
| Cash provided by operating activities                  |       | 1,094.3  |       | 1,033.7  |       | 1,093.3  |       |
|                                                   |       |     |       |     |       |     |       |
| **Investing activities:**                              |       |     |       |     |       |     |       |
| Additions to property, plant, and equipment            |       | (425.7   | )          | (360.9   | )          | (290.4   | )          |
| Acquisitions, net of cash                              |       | (5.4     | )          |     |       |     |       |
| Advances to equity affiliate - net                     |       | 1.6      |       | (1.6     | )          |     |       |
| Net cash proceeds from divestitures and other          |       | 13.4     |       | 3.0      |       | 14.1     |       |
| Cash utilized in investing activities                  |       | (416.1   | )          | (359.5   | )          | (276.3   | )          |
|                                                   |       |     |       |     |       |     |       |
| **Financing activities:**                              |       |     |       |     |       |     |       |
| Additions to long-term debt                            |       | 1,080.1  |       | 686.4    |       | 406.4    |       |
| Repayments of long-term debt                           |       | (609.7   | )          | (695.4   | )          | (2,092.2 | )          |
| Increase (decrease) in short-term loans                |       | (79.4    | )          | (20.6    | )          | (21.5    | )          |
| Net change in intercompany debt                        |       | (808.1   | )          | (530.9   | )          | 1,032.8  |       |
| Net receipts (payments) for hedging activity           |       | 14.3     |       | (45.2    | )          | 0.7      |       |
| Dividends paid to noncontrolling interests             |       | (62.2    | )          | (49.6    | )          | (28.6    | )          |
| Payment of finance fees                                |       | (14.0    | )          |     |       | (6.3     | )          |
| Cash utilized in financing activities                  |       | (479.0   | )          | (655.3   | )          | (708.7   | )          |
| Effect of exchange rate fluctuations on cash           |       | (68.4    | )          | (22.9    | )          | 51.8     |       |
| Increase (decrease) in cash                            |       | 130.8    |       | (4.0     | )          | 160.1    |       |
| Cash at beginning of year                              |       | 397.9    |       | 401.9    |       | 241.8    |       |
| Cash at end of year                                    |       | $        | 528.7      |     | $          | 397.9    |       | $ | 401.9 |   |

 

See accompanying Notes to the Consolidated FinancialStatements.

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**Tabular data dollars in millions**

 

**1. Significant AccountingPolicies**

 

**Basis ofConsolidated Statements**   The consolidated financialstatements of Owens-Brockway Glass Container Inc. (“Company”) include theaccounts of its subsidiaries.  Newlyacquired subsidiaries have been included in the consolidated financialstatements from dates of acquisition.

 

The Company uses theequity method of accounting for investments in which it has a significantownership interest, generally 20% to 50%. Other investments are accounted for at cost. The Company monitorsinvestments for other than temporary declines in fair value and records reductionsin carrying values when appropriate.

 

The format of the Company’s consolidated cash flowsfor the years ended December 31, 2008 and 2007 has been reclassified toconform to the 2009 presentation. Amounts related to cash paid for restructuring activities have beenreclassified from changes in working capital and non-current liabilities andare now shown separately.

 

The Company has evaluated subsequent events through February 10,2010, the date the financial statements were issued.

 

**Newly Adopted Financial StatementPronouncements**  Effective January 1, 2009, the Companyadopted the provisions of a new accounting standard which changed thepresentation of noncontrolling interests in subsidiaries. The format of theCompany’s consolidated results of operations, consolidated share owners’ equity,and consolidated cash flows for the years ended December 31, 2008 and2007, and consolidated balance sheet at December 31, 2008 have beenreclassified to conform to the new presentation which is required to be appliedretrospectively.

 

**Relationshipwith Owens-Brockway Packaging, Inc., Owens-Illinois Group, Inc.****and Owens-Illinois, Inc.  **The Company is a wholly-ownedsubsidiary of Owens-Brockway Packaging, Inc. (“OB Packaging”), and anindirect subsidiary of Owens-Illinois Group, Inc. (“OI Group”) andOwens-Illinois, Inc. (“OI Inc.”). Although OI Inc. does not conduct any operations, it hassubstantial obligations related to outstanding indebtedness andasbestos-related payments. OI Inc. relies primarily on distributions fromits direct and indirect subsidiaries to meet these obligations.

 

For federal and certainstate income tax purposes, the taxable income of the Company is included in theconsolidated tax returns of OI Inc. and income taxes are allocated to theCompany on a basis consistent with separate returns.

 

**Nature ofOperations**   The Company is a leading manufacturer ofglass container products. The Company’s principal product lines are glasscontainers for the food and beverage industries.  The Company has glass container operationslocated in 21 countries. The principal markets and operations for the Company’sproducts are in Europe, North America, South America, and Australia.

 

**Use ofEstimates**   The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires management of the Company to make estimates and assumptions thataffect certain amounts reported in the financial statements and accompanyingnotes.  Actual results may differ from thoseestimates, at which time the Company would revise its estimates accordingly.

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

 

**Cash**  The Company defines “cash” as cash and time deposits with maturities ofthree months or less when purchased. Outstanding checks in excess of funds ondeposit are included in accounts payable.

 

**FairValue Measurements**   Fair value is defined as an exit price,representing the amount that would be received to sell an asset or paid totransfer a liability (exit price) in the principal or most advantageous marketfor the asset or liability in an orderly transaction between marketparticipants.  Generally acceptedaccounting principles defined a three-tier fair value hierarchy, whichprioritizes the inputs used in measuring fair value as follows:

 

*Level 1:* Observable inputs such as quoted prices in active markets;

*Level2: *Inputs, other than quoted prices in active markets,that are observable either directly or indirectly; and

*Level3: *Unobservable inputs for which there is little or nomarket data, which requires the Company to develop assumptions.

 

The carrying amounts reportedfor cash, short-term investments and short-term loans approximate fairvalue.  In addition, carrying amountsapproximate fair value for certain long-term debt obligations subject tofrequently redetermined interest rates. Fair values for the Company’s significant fixed rate debt obligationsare generally based on published market quotations.

 

The Company’s derivativeassets and liabilities consist of interest rate swaps, natural gas forwards,and foreign exchange option and forward contracts.  The Company uses an income approach tovaluing these contracts.  Interest rateyield curves, natural gas forward rates, and foreign exchange rates are thesignificant inputs into the valuation models. These inputs are observable in active markets over the terms of theinstruments the Company holds, and accordingly, the Company classifies itsderivative assets and liabilities as Level 2 in the hierarchy.  The Company also evaluates counterparty riskin determining fair values.

 

**Derivative Instruments**  The Company usescurrency swaps, interest rate swaps, options, and commodity futures contractsto manage risks generally associated with foreign exchange rate, interest rateand commodity market volatility.  Derivative financial instruments areincluded on the balance sheet at fair value. Whenever possible, derivative instruments are designatedas and are effective as hedges, in accordance with accounting principlesgenerally accepted in the United States. If the underlying hedged transaction ceases to exist, all changes infair value of the related derivatives that have not been settled are recognizedin current earnings.  The Company doesnot enter into derivative financial instruments for trading purposes and is nota party to leveraged derivatives. Cash flows from fair value hedges of debt andshort-term forward exchange contracts are classified as a financingactivity.  Cash flows of currency swaps,interest rate swaps, and commodity futures contracts are classified as operatingactivities. See Note 8 for additional information related to derivativeinstruments.

 

**InventoryValuation**   The Company values most U.S. inventories atthe lower of last-in, first-out (LIFO) cost or market.  Other inventories are valued at the lower ofstandard costs (which approximate average costs) or market.

 

**Goodwill**  Goodwill represents the excess of cost overfair value of assets of businesses acquired. Goodwill is evaluated annually, as of October 1, for impairment ormore frequently if an impairment indicator exists.

 

**IntangibleAssets and Other Long-Lived Assets**  Intangibleassets are amortized over the expected useful life of the asset.  Amortization expense directly attributed tothe manufacturing of the Company’s products is included in manufacturing,shipping, and delivery.  Amortizationexpense related to non-

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

 

manufacturing activitiesis included in selling and administrative and other. The Company evaluates therecoverability of intangible assets and other long-lived assets based onundiscounted projected cash flows, excluding interest and taxes, when factorsindicate that impairment may exist.  Ifimpairment exists, the asset is written down to fair value.

 

**Property,Plant, and Equipment  **Property, plant, and equipment (“PP&E”)is carried at cost and includes expenditures for new facilities and equipmentand those costs which substantially increase the useful lives or capacity ofexisting PP&E.  In general,depreciation is computed using the straight-line method and recorded over theestimated useful life of the asset. Factory machinery and equipment is depreciated over periods ranging from5 to 25 years with the majority of such assets (principally glass-meltingfurnaces and forming machines) depreciated over 7-15 years.  Buildings and building equipment aredepreciated over periods ranging from 10 to 50 years.  Depreciation expense directly attributed tothe manufacturing of the Company’s products is included in manufacturing,shipping, and delivery.  Depreciationexpense related to non-manufacturing activities is included in selling and administrative.Maintenance and repairs are expensed as incurred.  Costs assigned to PP&E of acquiredbusinesses are based on estimated fair values at the date of acquisition.  The Company evaluates the recoverability ofproperty, plant, and equipment based on undiscounted projected cash flows,excluding interest and taxes, when factors indicate that impairment mayexist.  If impairment exists, the assetis written down to fair value.

 

**RevenueRecognition**  The Company recognizes sales, net ofestimated discounts and allowances, when the title to the products and risk ofloss are transferred to customers. Provisions for rebates to customers are provided in the same period thatthe related sales are recorded.

 

**Shippingand Handling Costs**  Shipping and handling costs are included withmanufacturing, shipping, and delivery costs in the Consolidated Results ofOperations.

 

**IncomeTaxes on Undistributed Earnings  **In general, the Company plans to continueto reinvest the undistributed earnings of foreign subsidiaries and foreigncorporate joint ventures accounted for by the equity method.  Accordingly, taxes are provided only on thatamount of undistributed earnings in excess of planned reinvestments.

 

**ForeignCurrency Translation**   The assets and liabilities of substantiallyall subsidiaries and associates are translated at current exchange rates andany related translation adjustments are recorded directly in share owners’equity.

 

**AccountsReceivable  **Receivables are stated at amountsestimated by management to be the net realizable value.  The Company charges off accounts receivablewhen it becomes apparent based upon age or customer circumstances that amountswill not be collected.

 

**Allowancefor Doubtful Accounts  **The allowance for doubtful accounts isestablished through charges to the provision for bad debts.  The Company evaluates the adequacy of theallowance for doubtful accounts on a periodic basis.  The evaluation includes historical trends incollections and write-offs, management’s judgment of the probability ofcollecting accounts and management’s evaluation of business risk.

 

**NewAccounting Standards  **In June 2009,the FASB issued a new standard which amends certain guidance for determiningwhether an entity is a variable interest entity (VIE). An enterprise isrequired to perform an analysis to determine whether the Company’s variableinterests give it a controlling financial interest in a VIE. A company would berequired to assess whether it has an implicit financial responsibility toensure that a VIE operates as designed when determining whether it has thepower to

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

 

directthe activities of the VIE that most significantly impact the entity’s economicperformance. In addition, the new provisions require ongoing reassessments ofwhether an enterprise is the primary beneficiary of a VIE. The new provisionsare effective for financial statements issued for fiscal years beginning after November 15,2009. The Company does not expect the adoption of this Statement to have animpact on its results of operations, financial position or cash flows.

 

**Participation in OI Inc. Stock OptionPlans and Other Stock Based Compensation**  The Companyparticipates in the equity compensation plans of OI Inc. under which employeesof the Company may be granted options to purchase common shares of OI Inc.,restricted common shares of OI Inc., or restricted share units of OI Inc.

 

*StockOptions*

 

Foroptions granted prior to March 22, 2005, no options may be exercised inwhole or in part during the first year after the date granted. In general, subjectto accelerated exercisability provisions related to the performance of OI Inc.’scommon stock or change of control, 50% of the options become exercisable on thefifth anniversary of the date of the option grant, with the remaining 50%becoming exercisable on the sixth anniversary date of the option grant.** **In general, options expire following termination of employment or the dayafter the tenth anniversary date of the option grant.

 

Foroptions granted after March 21, 2005, no options may be exercised in wholeor in part during the first year after the date granted.  In general, subject to change in control,these options become exercisable 25% per year beginning on the firstanniversary.  In general, options expirefollowing termination of employment or the seventh anniversary of the optiongrant.

 

Thefair value of options granted before March 22, 2005, is amortized ratablyover five years or a shorter period if the grant becomes subject to acceleratedexercisability provisions related to the performance of OI Inc.’s commonstock.  The fair value of options grantedafter March 21, 2005, is amortized over the vesting periods which rangefrom one to four years.

 

*Restricted Shares*

 

Sharesgranted to employees prior to March 22, 2005, generally vest after threeyears or upon retirement, whichever is later. Shares granted after March 21, 2005, vest 25% per year beginning onthe first anniversary and unvested shares are forfeited upon termination ofemployment.  Shares granted to directorsprior to 2008 were immediately vested but may not be sold until the thirdanniversary of the share grant or the end of the director’s then current termon the board, whichever is later.  Sharesgranted to the directors after 2007 vest after one year.

 

Thefair value of the shares is equal to the market price of the shares on the dateof the grant.  The fair value ofrestricted shares granted before March 22, 2005, is amortized ratably overthe vesting period.  The fair value ofrestricted shares granted after March 21, 2005, is amortized over thevesting periods which range from one to four years.

 

*Performance Vested Restricted Share Units*

 

Restrictedshare units vest on January 1 of the third year following the year inwhich they are granted.  Holders ofvested units receive 0.5 to 1.5 shares of OI Inc.’s common stock for each unit,depending upon the attainment of consolidated performance goals established bythe Compensation Committee of OI Inc.’s Board of Directors.  If minimum goals are not met, no shares willbe issued.  Granted but unvestedrestricted share units are forfeited upon termination of employment, unlesscertain retirement criteria are met.

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

 

Thefair value of each restricted share unit is equal to the product of the fairvalue of OI Inc.’s common stock on the date of grant and the estimated numberof shares into which the restricted share unit will be converted.  The fair value of restricted share units isamortized ratably over the vesting period. Should the estimated number of shares into which the restricted shareunit will be converted change, an adjustment will be recorded to recognize theaccumulated difference in amortization between the revised and previousestimates.

 

*Accounting*

 

OI Inc. adopted newaccounting guidance related to share-based payments effective January 1,2006 using the modified-prospective method of adoption, which requiresrecognition of compensation cost in the financial statements beginning on thedate of adoption.

 

Asdiscussed in Note 11, costs incurred under these plans by OI Inc. related to stock-basedcompensation awards granted directly to the Company’s employees are included inthe allocable costs charged to the Company and other operating subsidiaries ofOI Inc. on an intercompany basis.

 

**2.  Supplemental Cash Flow Information**Changes in the components of workingcapital related to operations (net of the effects related to acquisitions anddivestitures) were as follows:

 
| ** **                                  | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                        |       |     |       |     |       |     |       |
| Decrease (increase) in current assets:      |       |     |       |     |       |     |       |
| Receivables                                 |       | $        | (0.2       | )        | $          | 73.8     |       | $ | (30.1 | ) |
| Inventories                                 |       | 152.0    |       | (77.8    | )          | 70.5     |       |
| Prepaid expenses                            |       | (43.3    | )          | (7.0     | )          | 6.8      |       |
| Increase (decrease) in current liabilities: |       |     |       |     |       |     |       |
| Accounts payable and accrued liabilities    |       | (73.2    | )          | (123.9   | )          | (13.5    | )          |
| Salaries and wages                          |       | (13.6    | )          | (18.8    | )          | 24.9     |       |
| U.S. and foreign income taxes               |       | 73.2     |       | 6.4      |       | (32.4    | )          |
|                                        |       | $        | 122.1      |     | $          | (147.3   | )          | $ | 26.2 |   |

 

Interest paid incash, including note repurchase premiums in 2009 and 2007, aggregated $157.5million for 2009, $209.3 million for 2008, and $390.3 million for 2007.

 

Income taxes paid(received) in cash were as follows:

 
| ** ** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
|       |       |     |       |     |       |     |       |
| Domestic   |       | $        | 4.1        |     | $          | (0.3     | )          | $ | 0.2 |   |
| Foreign    |       | 196.0    |       | 158.4    |       | 149.2    |       |
|       |       | $        | 200.1      |     | $          | 158.1    |       | $ | 149.4 |   |

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

 

**3.  Inventories**  Major classesof inventory are as follows:

 
| ** **          | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
|                |       |     |       |     |       |
| Finished  goods     |       | $        | 741.5      |     | $          | 831.7 |   |
| Work  in process    |       | 0.8      |       | 0.8      |       |
| Raw  materials      |       | 106.6    |       | 109.8    |       |
| Operating  supplies |       | 50.8     |       | 56.8     |       |
|                |       | $        | 899.7      |     | $          | 999.1 |   |

 

If the inventories whichare valued on the LIFO method had been valued at standard costs, whichapproximate current costs, consolidated inventories would be higher thanreported by $42.6 million and $32.5 million, at December 31, 2009 and2008, respectively.

 

Inventories which arevalued at the lower of standard costs (which approximate average costs), ormarket at December 31, 2009 and 2008 were approximately $772.1 million and$861.4 million, respectively.

 

**4.  Equity Investments **Summarized information pertaining to the Company’sequity associates follows:

** **
| ** **                         | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |
| At  end of year:                   |       |     |       |     |       |
| Equity  in undistributed earnings: |       |     |       |     |       |
| Foreign                            |       | $        | 43.5       |     | $          | 31.0 |   |
| Domestic                           |       | 25.8     |       | 19.6     |       |
| Total                              |       | $        | 69.3       |     | $          | 50.6 |   |

 
| ** **           | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------|------------|----------|------------|----------|------------|----------|------------|
|                 |       |     |       |     |       |     |       |
| For  the year:       |       |     |       |     |       |     |       |
| Equity  in earnings: |       |     |       |     |       |     |       |
| Foreign              |       | $        | 12.5       |     | $          | 14.1     |       | $ | 5.3 |   |
| Domestic             |       | 40.1     |       | 36.7     |       | 28.8     |       |
| Total                |       | $        | 52.6       |     | $          | 50.8     |       | $ | 34.1 |   |
| Dividends  received  |       | $        | 33.8       |     | $          | 24.5     |       | $ | 21.7 |   |

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

 

Summarized combined financial information forequity associates is as follows:

** **
| ** **                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
|                                 |       |     |       |     |       |
| At end of year:                      |       |     |       |     |       |
| Current assets                       |       | $        | 218.0      |     | $          | 208.3 |   |
| Non-current assets                   |       | 314.1    |       | 325.9    |       |
| Total assets                         |       | 532.1    |       | 534.2    |       |
|                                 |       |     |       |     |       |
| Current liabilities                  |       | 138.5    |       | 167.5    |       |
| Other liabilities and deferred items |       | 145.9    |       | 137.9    |       |
| Total liabilities and deferred items |       | 284.4    |       | 305.4    |       |
| Net assets                           |       | $        | 247.7      |     | $          | 228.8 |   |

 
| ** **    | ** ** | **2009** | ** ** | **2008** | ** ** | **2007 (a)** | ** ** |
|---------------|------------|----------|------------|----------|------------|--------------|------------|
|          |       |     |       |     |       |         |       |
| For the year: |       |     |       |     |       |         |       |
| Net sales     |       | $        | 548.6      |     | $          | 635.8        |       | $ | 535.9 |   |
| Gross profit  |       | $        | 199.6      |     | $          | 227.5        |       | $ | 176.5 |   |
| Net earnings  |       | $        | 158.0      |     | $          | 153.9        |       | $ | 112.4 |   |

 

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(a) Amountsfor 2007 exclude the Company’s Caribbean investment due to the impairmentrecorded during 2007.

 

TheCompany’s significant equity method investments include:  (1) 50% of the common shares of VetriSpeciali SpA, a specialty glass manufacturer; (2) a 25% partnershipinterest in General Chemical Soda Ash (Partners), a soda ash supplier; and (3) a50% partnership interest in Rocky Mountain Bottle Company, a glass containermanufacturer.

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

 

**5.  External Debt**   The followingtable summarizes the external long-term debt of the Company at December 31,2009 and 2008:

 
| ** **                                               | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                     |       |     |       |     |       |
| Secured  Credit Agreement:                               |       |     |       |     |       |
| Revolving  Credit Facility:                              |       |     |       |     |       |
| Revolving  Loans                                         |       | $        | —     |     | $          | 18.7 |   |
| Term  Loans:                                             |       |     |       |     |       |
| Term  Loan A (160.0 million AUD at Dec. 31, 2009)   |       | 143.9    |       | 155.7    |       |
| Term  Loan B                                             |       | 189.5    |       | 191.5    |       |
| Term  Loan C (110.8 million CAD at Dec. 31, 2009)   |       | 105.4    |       | 90.9     |       |
| Term  Loan D (€189.5 million at Dec. 31, 2009) |       | 273.5    |       | 269.6    |       |
| Senior  Notes:                                           |       |     |       |     |       |
| 8.25%,  due 2013                                         |       | 460.4    |       | 461.1    |       |
| 6.75%,  due 2014                                         |       | 400.0    |       | 400.0    |       |
| 6.75%,  due 2014 (€225 million)                     |       | 324.7    |       | 316.8    |       |
| 7.375%,  due 2016                                        |       | 582.1    |       |     |       |
| 6.875%,  due 2017 (€300 million)                    |       | 432.9    |       | 422.4    |       |
| Other                                                    |       | 99.0     |       | 104.6    |       |
|                                                     |       | 3,011.4  |       | 2,431.3  |       |
| Less  amounts due within one year                        |       | 21.6     |       | 18.2     |       |
| External  long-term debt                                 |       | $        | 2,989.8    |     | $          | 2,413.1 |   |

 

On June 14,2006, the Company’s subsidiary borrowers entered into the Secured CreditAgreement (the “Agreement”).  At December 31,2009, the Agreement included a $900.0 million revolving credit facility, a160.0 million Australian dollar term loan, and a 110.8 million Canadian dollarterm loan, each of which has a final maturity date of June 15, 2012.  It also included a $189.5 million term loanand a €189.5 million term loan, each of which has a final maturity date of June 14,2013.  During 2009, the Company’ssubsidiary borrowers repaid 65.0 million Australian dollars, $2.0 million and€2.0 million of term loans under the Agreement.

 

As a result of the2008 bankruptcy of Lehman Brothers Holdings Inc. and several of itssubsidiaries, the Company believes that the maximum amount available under therevolving credit facility was reduced by $32.3 million.  After further deducting amounts attributableto letters of credit and overdraft facilities that are supported by therevolving credit facility, at December 31, 2009 the Company’s subsidiaryborrowers had unused credit of $760.0 million available under the Agreement.

 

The Agreementcontains various covenants that restrict, among other things and subject tocertain exceptions, the ability of the Company to incur certain liens, makecertain investments and acquisitions, become liable under contingentobligations in certain defined instances only, make restricted junior payments,make certain asset sales within guidelines and limits, make capitalexpenditures beyond a certain threshold, engage in material transactions withshareholders and affiliates, participate in sale and leaseback financingarrangements, alter its fundamental business, amend certain outstanding debtobligations, and prepay certain outstanding debt obligations.

 

The Agreement alsocontains one financial maintenance covenant, a Leverage Ratio, that requiresthe Company not to exceed a ratio calculated by dividing consolidated totaldebt, less cash and cash equivalents, by Consolidated Adjusted EBITDA, asdefined in the Agreement.  The LeverageRatio could restrict the ability of the Company to undertake additionalfinancing to the extent that such financing would cause the Leverage Ratio toexceed the specified maximum.

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

 

Failure to complywith these covenants and restrictions could result in an event of default underthe Agreement.  In such an event, theCompany could not request borrowings under the revolving facility, and allamounts outstanding under the Agreement, together with accrued interest, couldthen be declared immediately due and payable. If an event of default occurs under the Agreement and the lenders causeall of the outstanding debt obligations under the Agreement to become due andpayable, this would result in a default under a number of other outstandingdebt securities and could lead to an acceleration of obligations related tothese debt securities.  A default orevent of default under the Agreement, indentures or agreements governing otherindebtedness could also lead to an acceleration of debt under other debtinstruments that contain cross acceleration or cross-default provisions.

 

The leverage ratioalso determines pricing under the Agreement. The interest rate on borrowings under the Agreement is, at the Company’soption, the Base Rate or the Eurocurrency Rate, as defined in theAgreement.  These rates include a marginlinked to the leverage ratio and the borrowers’ senior secured debtrating.  The margins range from 0.875% to1.75% for Eurocurrency Rate loans and from -0.125% to 0.75% for Base Rateloans.  In addition, a facility fee ispayable on the revolving credit facility commitments ranging from 0.20% to0.50% per annum linked to the leverage ratio. The weighted average interest rate on borrowings outstanding under the Agreementat December 31, 2009 was 2.40%.As of December 31, 2009, the Companywas in compliance with all covenants and restrictions in the Agreement.  In addition, the Company believes that itwill remain in compliance and that its ability to borrow funds under the Agreementwill not be adversely affected by the covenants and restrictions.

 

Borrowings underthe Agreement are secured by substantially all of the assets of the Company’sdomestic subsidiaries and certain foreign subsidiaries, which have a book valueof approximately $2.4 billion.  Borrowingsare also secured by a pledge of intercompany debt and equity in most of theCompany’s domestic subsidiaries and stock of certain foreign subsidiaries.  All borrowings under the agreement areguaranteed by substantially all domestic subsidiaries of the Company for theterm of the Agreement.

 

During May 2009,the Company issued senior notes with a face value of $600.0 million at 96.72%of face value for an effective interest rate of 8.00%.  The notes bear interest at 7.375% and are dueMay 15, 2016.  The notes areguaranteed by substantially all of the Company’s domestic subsidiaries.  The net proceeds, after deducting commissionsand expenses from the notes, approximated $568 million and were used to repay$221.9 million of the Company’s $250.0 million intercompany debt with OI Incand to reduce borrowings under the revolving credit facility.  The balance of the proceeds increasedcash.  As a part of the issuance of thesenotes and the related repayment of the intercompany debt, the Company recordedadditional interest charges in 2009 of $5.2 million for note repurchasepremiums and the related write-off of unamortized finance fees, net of a gainfrom the termination of interest rate swap agreements related to the notes.

 

During October 2006,the Company entered into a European accounts receivable securitization program,which had a limit of €250 million at December 31, 2009.  The programextends through October 2011, subject to annual renewal of backup creditlines.  In addition, the Companyparticipates in a receivables financing program in the Asia Pacific region witha revolving funding commitment of 89 million Australian dollars and 10 millionNew Zealand dollars that expire February 2010 and November 2010,respectively.

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

 

Informationrelated to the Company’s accounts receivable securitization program as of December 31,2009 and 2008 is as follows:

 
| ** **                             | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
|                                   |       |     |       |     |       |
| Balance (included in short-term loans) |       | $        | 289.0      |     | $          | 293.7 |   |
|                                   |       |     |       |     |       |
| Weighted average interest rate         |       | 2.52     | %          | 5.31     | %          |
|                                        |            |          |            |          |            |  |  |

 

The Companycapitalized $16.8 million and $25.6 million in 2009 and 2008, respectively,under capital lease obligations with the related financing recorded as longterm debt.  These amounts are included inother in the long-term debt table above.

 

Annual maturitiesfor all of the Company’s long-term debt through 2014 are as follows:  2010, $21.6 million; 2011, $135.0 million;2012, $164.2 million; 2013, $931.1 million, and 2014, $735.1 million.

 

Fair values at December 31,2009, of the Company’s significant fixed rate debt obligations were as follows:

 
| ** **                           | ** ** | **Principal Amount** | ** ** | **Indicated** | ** ** | **Fair Value**   | ** ** |
|--------------------------------------|------------|----------------------|------------|---------------|------------|------------------|------------|
| ** **                           | ** ** | **(millions of**     | ** ** | **Market**    | ** ** | **(millions of** | ** ** |
| ** **                           | ** ** | **dollars)**         | ** ** | **Price**     | ** ** | **dollars)**     | ** ** |
|                                 |       |                 |       |          |       |             |       |
| Senior Notes:                        |       |                 |       |          |       |             |       |
| 8.25%, due 2013                      |       | $                    | 450.0      |          | 103.35     |             | $          | 465.1 |   |
| 6.75%, due 2014                      |       | 400.0                |       | 102.25        |       | 409.0            |       |
| 6.75%, due 2014 (€225 million)  |       | 324.7                |       | 98.33         |       | 319.3            |       |
| 7.375%, due 2016                     |       | 600.0                |       | 104.00        |       | 624.0            |       |
| 6.875%, due 2017 (€300 million) |       | 432.9                |       | 96.97         |       | 419.8            |       |
|                                      |            |                      |            |               |            |                  |            |  |  |

 

**6.  Operating Leases**  Rent expense attributable to all warehouse, office buildings, andequipment operating leases was $106.6 million in 2009, $95.4 million in 2008,and $87.4 million in 2007.  Minimumfuture rentals under operating leases are as follows:  2010, $55.9 million; 2011, $40.8 million;2012, $28.4 million; 2013, $18.4 million; 2014, $10.8 million; and 2015 andthereafter, $7.9 million.

 

**7.  Foreign Currency Transactions**  Aggregate foreign currency exchange gains (losses) included in othercosts and expenses were $(29.2) million in 2009, $0.6 million in 2008, and$(8.1) million in 2007.

 

During 2009, the Companyentered into a series of parallel market transactions to exchange Venezuelanbolivars into U.S. dollars.  In theparallel market, bolivars are valued significantly lower than the officialgovernment rate, giving rise to exchange losses from such transactions.  As a result, the Company recognized foreigncurrency exchange losses of $28.0 million for the year.

 

**8.  Derivative Instruments  **The Company has certain derivative assets andliabilities which consist of interest rate swaps, natural gas forwards, andforeign exchange option and forward contracts. The Company records derivative assets and liabilities at fair value andclassifies them as “Level 2” in the fair value hierarchy.

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

 

### ***Interest Rate Swaps Designated as Fair Value Hedges***

### ** **

### **In the fourth quarter of 2003 and the first quarter of2004, the Company entered into a series of interest rate swap agreements with atotal notional amount of $700 million that were to mature in 2010and 2013. The swaps were executed in order to: (i) convert a portionof the senior notes and senior debentures fixed-rate debt into floating-ratedebt; (ii) maintain a capital structure containing appropriate amounts offixed and floating-rate debt; and (iii) reduce net interest payments andexpense in the near-term.**

### ** **

The Company’s fixed-to-floatinginterest rate swaps were accounted for as fair value hedges. Because therelevant terms of the swap agreements matched the corresponding terms of thenotes, there was no hedge ineffectiveness. Accordingly, the Company recordedthe net of the fair market values of the swaps as a long-term asset (liability)along with a corresponding net increase (decrease) in the carrying value of thehedged debt.

 

For derivativeinstruments that are designated and qualify as fair value hedges, the change inthe fair value of the derivative instrument related to the future cash flows(gain or loss on the derivative) as well as the offsetting change in the fairvalue of the hedged item attributable to the hedged risk are recognized incurrent earnings.  The Company includesthe gain or loss on the hedged items (i.e. long-term debt) in the same lineitem (interest expense) as the offsetting loss or gain on the related interestrate swaps.

 

During the second quarterof 2009, the Company repaid $221.9 million of its $250 million intercompanydebt with OI Inc.  As a result of thedebt repayment, the Company terminated the related interest rate swapagreements for proceeds of $5.0 million. The Company recognized $4.4 million of the proceeds as a reduction ofinterest expense upon the termination of the interest rate swap agreements,while the remaining $0.6 million is recorded as an adjustment to the debt andwill be recognized as a reduction of interest expense over the remaining lifeof the outstanding intercompany debt due 2010. See Note 5 for additional information.

 

During the second quarterof 2009, the Company’s interest rate swaps related to the $450 million seniornotes due 2013 were terminated.  TheCompany received proceeds of $12.4 million which were recorded as an adjustmentto debt and will be recognized as a reduction of interest expense over theremaining life of the senior notes due 2013.

 

As of December 31,2009, the balance of unamortized proceeds from terminated interest rate swapsincluded in long-term debt was $10.6 million.

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**

 

The effect of theinterest rate swaps on the results of operations for the year ended December 31,2009 and 2008 is as follows:

 
| ** **                                                            | ** ** | **Amount of Gain (Loss)  Recognized in Interest Expense** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2009**                                                  | ** ** | **2008** | ** ** |
|                                                                  |       |                                                      |       |   |   |
| Interest  rate swaps                                                  |       | $                                                         | (11.0      | ) | $ | 26.1 |   |
| Related  long-term debt                                               |       | 11.0                                                      |       | (26.1 | ) |
| Proceeds  recognized and amortized for terminated interest rate swaps |       | 6.7                                                       |       |   |   |
| Net  impact on interest expense                                       |       | $                                                         | 6.7        |   | $ | — |   |

 

*Commodity Futures ContractsDesignated as Cash Flow Hedges*

 

The Company enters intocommodity futures contracts related to forecasted natural gas requirements, theobjectives of which are to limit the effects of fluctuations in the futuremarket price paid for natural gas and the related volatility in cash flows. TheCompany continually evaluates the natural gas market with respect to itsforecasted usage requirements over the next twelve to twenty-four months andperiodically enters into commodity futures contracts in order to hedge aportion of its usage requirements over that period. At December 31, 2009,the Company had entered into commodity futures contracts covering approximately4,800,000 MM BTUs over that period.

 

The Company accounts forthe above futures contracts as cash flow hedges at December 31, 2009 andrecognizes them on the balance sheet at fair value. The effective portion ofchanges in the fair value of a derivative that is designated as, and meets therequired criteria for, a cash flow hedge is recorded in the Accumulated OtherComprehensive Income component of share owners’ equity (“OCI”) and reclassifiedinto earnings in the same period or periods during which the underlying hedgeditem affects earnings. At December 31, 2009, an unrecognized loss of $1.3million (pretax) related to the commodity futures contracts was included in AccumulatedOCI, and will be reclassified into earnings over the next twelve to twenty-fourmonths.  Any material portion of thechange in the fair value of a derivative designated as a cash flow hedge thatis deemed to be ineffective is recognized in current earnings.  The ineffectiveness related to these naturalgas hedges for the year ended December 31, 2009 and 2008 was not material.

 

The effect of thecommodity futures contracts on the results of operations for the year ended December 31,2009 and 2008 is as follows:

 
| **Amount of Gain (Loss)  Recognized in OCI on  Commodity Futures Contracts  (Effective Portion)** | ** ** | **Amount of Gain (Loss)  Reclassified from  Accumulated OCI into  Income (reported in  manufacturing, shipping, and  delivery) (Effective Portion)** |
|---------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
| **2009**                                                                                          | ** ** | **2008**                                                                                                                                             | ** ** | **2009** | ** ** | **2008** |
|                                                                                              |       |                                                                                                                                                 |   |   |   |   |
| $                                                                                                 | (24.8      | )                                                                                                                                                    | $ | (27.2 | ) | $ | (60.9 | ) | $ | 5.7 |
|                                                                                                   |            |                                                                                                                                                      |  |  |  |  |  |  |  |  |

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**

 

*Senior Notes Designated as NetInvestment Hedge*

 

During December 2004,the Company issued senior notes totaling €225 million.  These notes were designated by the Company asa hedge of a portion of its net investment in a non-U.S. subsidiary with a Eurofunctional currency.  Because the amountof the Senior Notes matches the hedged portion of the net investment, there isno hedge ineffectiveness. Accordingly, the Company recorded the impact ofchanges in the foreign currency exchange rate on the Euro-denominated notes inOCI.  The amount recorded in OCI will bereclassified into earnings when the Company sells or liquidates its netinvestment in the non-U.S. subsidiary.

 

The effect of the netinvestment hedge on the results of operations for the year ended December 31,2009 and 2008 is as follows:

 
| ** **                                   | ** ** | ** **                                                 | ** ** | **Amount of Gain (Loss)**                          | ** ** |
|----------------------------------------------|------------|------------------------------------------------------------|------------|----------------------------------------------------|------------|
| **Amount of Gain (Loss)  Recognized in OCI** | ** ** | **Location of Gain (Loss)  Reclassified from Accumulated** | ** ** | **Reclassified from Accumulated  OCI into Income** | ** ** |
| **2009**                                     | ** ** | **2008**                                                   | ** ** | **OCI into Income**                                | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                         |       |                                                       |       |                                               |       |   |   |   |   |
| $                                            |  (8.8 | )                                                          | $          |  15.2                                         |       | N/A |   | $ | — |   | $ | — |   |
|                                              |            |                                                            |            |                                                    |            |  |  |  |  |  |  |  |  |

 

*Forward Exchange Contracts notDesignated as Hedging Instruments*

 

The Company’ssubsidiaries may enter into short-term forward exchange or option agreements topurchase foreign currencies at set rates in the future. These agreements areused to limit exposure to fluctuations in foreign currency exchange rates forsignificant planned purchases of fixed assets or commodities that aredenominated in currencies other than the subsidiaries’ functional currency.Subsidiaries may also use forward exchange agreements to offset the foreigncurrency risk for receivables and payables, including intercompany receivablesand payables, not denominated in, or indexed to, their functional currencies.The Company records these short-term forward exchange agreements on the balancesheet at fair value and changes in the fair value are recognized in currentearnings.

 

At December 31,2009, various subsidiaries of the Company had outstanding forward exchange andoption agreements denominated in various currencies covering the equivalent ofapproximately $1.0 billion related primarily to intercompany transactions andloans.

 

The effect of the forwardexchange contracts on the results of operations for the year ended December 31,2009 and 2008 is as follows:

 
| **Location of Loss  Recognized in Income on** |   | **Amount of Loss  Recognized in Income on  Forward Exchange Contracts** |       |
|-----------------------------------------------|--------|-------------------------------------------------------------------------|------------|
| **Forward Exchange  Contracts**               |   | **2009**                                                                | ** ** | **2008** |   |
|                                          |   |                                                                    |       |   |   |
| Other expense                                 |   | $                                                                       | (8.3       | ) | $ | (4.2 | ) |
|                                               |        |                                                                         |            |  |  |  |  |

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**

 

*Balance Sheet Classification*

 

The Company records thefair values of derivative financial instruments on the balance sheet asfollows: (1) receivables if the instrument has a positive fair value andmaturity within one year, (2) deposits, receivables, and other assets ifthe instrument has a positive fair value and maturity after one year, (3) accountspayable and other current liabilities if the instrument has a negative fairvalue and maturity within one year, and (4) other liabilities if theinstrument has a negative fair value and maturity after one year.  The following table shows the amount andclassification of the Company’s derivatives as of December 31, 2009 and2008:

 
| ** **                                               | ** ** | **2009**                   | ** ** | **2008**  | ** ** |
|----------------------------------------------------------|------------|----------------------------|------------|-----------|------------|
| ** **                                               | ** ** | **Balance Sheet**          | ** ** | **Fair**  | ** ** | **Balance Sheet** | ** ** | **Fair** | ** ** |
| ** **                                               | ** ** | **Location**               | ** ** | **Value** | ** ** | **Location** | ** ** | **Value** | ** ** |
| Asset Derivatives:                                       |       |                       |       |      |       |   |   |   |   |
| Derivatives designated as hedging instruments            |       |                       |       |      |       |   |   |   |   |
| Interest rate swaps                                      |       |                       |       |      |       | Deposits,  receivables, and other assets |   | $ | 29.4 |   |
| Commodity futures contracts                              |       | Receivables                |       | $         | 0.4        |   |   |   |   |   |
| Commodity futures contracts                              |       | Other  accrued liabilities |       | 0.1       |       |   |   |   |   |
| Total derivatives designated as hedging instruments      |       |                       |       | 0.5       |       |   |   | 29.4 |   |
|                                                     |       |                       |       |      |       |   |   |   |   |
| Derivatives not designated as hedging instruments        |       |                       |       |      |       |   |   |   |   |
| Foreign exchange contracts                               |       | Receivables                |       | 6.0       |       | Receivables |   | 19.4 |   |
| Foreign exchange contracts                               |       | Other  accrued liabilities |       | 0.2       |       |   |   |   |   |
| Total derivatives not designated as hedging  instruments |       |                       |       | 6.2       |       |   |   | 19.4 |   |
|                                                     |       |                       |       |      |       |   |   |   |   |
| Total asset derivatives                                  |       |                       |       | $         | 6.7        |   |   |   | $ | 48.8 |   |
|                                                     |       |                       |       |      |       |   |   |   |   |
| Liability Derivatives:                                   |       |                       |       |      |       |   |   |   |   |
| Derivatives designated as hedging instruments            |       |                       |       |      |       |   |   |   |   |
| Commodity futures contracts                              |       | Other  accrued liabilities |       | $         | 1.8        |   | Other  accrued liabilities |   | $ | 37.4 |   |
| Total derivatives designated as hedging instruments      |       |                       |       | 1.8       |       |   |   | 37.4 |   |
|                                                     |       |                       |       |      |       |   |   |   |   |
| Derivatives not designated as hedging instruments        |       |                       |       |      |       |   |   |   |   |
| Foreign exchange contracts                               |       | Other  accrued liabilities |       | 2.9       |       | Receivables |   | 0.4 |   |
| Foreign exchange contracts                               |       |                       |       |      |       | Other  accrued liabilities |   | 11.6 |   |
| Foreign exchange contracts                               |       |                       |       |      |       | Other  liabilities |   | 0.1 |   |
| Total derivatives not designated as hedging  instruments |       |                       |       | 2.9       |       |   |   | 12.1 |   |
|                                                     |       |                       |       |      |       |   |   |   |   |
| Total liability derivatives                              |       |                       |       | $         | 4.7        |   |   |   | $ | 49.5 |   |

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**

 

**9.  Accumulated Other Comprehensive Income (Loss)**   The components of comprehensive income are: (a) netearnings; (b) change in fair value of certain derivative instruments; (c) pensionand other postretirement benefit adjustments; and (d) foreign currencytranslation adjustments.  The net effectof exchange rate fluctuations generally reflects changes in the relativestrength of the U.S. dollar against major foreign currencies between the beginningand end of the year.

 

The following table liststhe beginning balance, yearly activity and ending balance of each component ofaccumulated other comprehensive income (loss):

 
| ** **                    | ** ** | **Net  Effect of  Exchange Rate  Fluctuations** | ** ** | **Deferred Tax  Effect for  Translation** | ** ** | **Unfunded  Pension  Liability** | ** ** | **Change in  Certain  Derivative  Instruments** | ** ** | **Employee  Benefit  Plans** | ** ** | **Total  Accumulated  Comprehensive  Income (Loss)** | ** ** |
|-------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------|------------|----------------------------------|------------|-------------------------------------------------|------------|------------------------------|------------|------------------------------------------------------|------------|
| Balance on Jan. 1, 2007  |       | $                                               | 188.0      |                                      | $          | 12.7                             |       | $                                               | (122.9     | )                            | $          | (34.9                                                | )          | $ | (47.4 | ) | $ | (4.5 | ) |
|                          |       |                                            |       |                                      |       |                             |       |                                            |       |                         |       |                                                 |       |
| 2007 Change                   |       | 305.3                                           |       |                                      |       |                             |       | 28.2                                            |       | 41.5                         |       | 375.0                                                |       |
| Translation effect            |       |                                            |       |                                      |       |                             |       |                                            |       | (6.7                         | )          | (6.7                                                 | )          |
| Reclass                       |       |                                            |       |                                      |       | 122.9                            |       | 2.2                                             |       | (125.1                       | )          | —                                               |       |
| Tax effect                    |       |                                            |       |                                      |       |                             |       |                                            |       | (8.6                         | )          | (8.6                                                 | )          |
|                          |       |                                            |       |                                      |       |                             |       |                                            |       |                         |       |                                                 |       |
| Balance on Dec. 31, 2007 |       | 493.3                                           |       | 12.7                                      |       | —                           |       | (4.5                                            | )          | (146.3                       | )          | 355.2                                                |       |
|                          |       |                                            |       |                                      |       |                             |       |                                            |       |                         |       |                                                 |       |
| 2008 Change                   |       | (431.9                                          | )          |                                      |       |                             |       | (32.9                                           | )          | (200.8                       | )          | (665.6                                               | )          |
| Translation effect            |       |                                            |       |                                      |       |                             |       |                                            |       | 46.1                         |       | 46.1                                                 |       |
| Tax effect                    |       |                                            |       |                                      |       |                             |       |                                            |       | 55.1                         |       | 55.1                                                 |       |
|                          |       |                                            |       |                                      |       |                             |       |                                            |       |                         |       |                                                 |       |
| Balance on Dec. 31, 2008 |       | 61.4                                            |       | 12.7                                      |       | —                           |       | (37.4                                           | )          | (245.9                       | )          | (209.2                                               | )          |
|                          |       |                                            |       |                                      |       |                             |       |                                            |       |                         |       |                                                 |       |
| 2009 Change                   |       | 228.9                                           |       |                                      |       |                             |       | 36.1                                            |       | 32.8                         |       | 297.8                                                |       |
| Translation effect            |       |                                            |       |                                      |       |                             |       |                                            |       | (33.7                        | )          | (33.7                                                | )          |
| Tax effect                    |       |                                            |       |                                      |       |                             |       |                                            |       | (8.4                         | )          | (8.4                                                 | )          |
|                          |       |                                            |       |                                      |       |                             |       |                                            |       |                         |       |                                                 |       |
| Balance on Dec. 31, 2009 |       | $                                               | 290.3      |                                      | $          | 12.7                             |       | $                                               | —     |                         | $          | (1.3                                                 | )          | $ | (255.2 | ) | $ | 46.5 |   |

 

Exchange ratefluctuations in 2009 include a loss of $132.5 million related to the Company’sdecision to translate the balance sheets of its Venezuelan subsidiaries usingthe parallel market rate at December 31, 2009 instead of the historicofficial rate.  See Note 19 to theConsolidated Financial Statements for further information.

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**

 

**10.  Income Taxes**  Deferredincome taxes reflect:  (1) the nettax effects of temporary differences between the carrying amounts of assets andliabilities for financial reporting purposes and the amounts used for incometax purposes and (2) carryovers and credits for income tax purposes.

 

Significant components ofthe Company’s deferred tax assets and liabilities at December 31, 2009 and2008 are as follows:

 
| ** **                              | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
|                                    |       |     |       |     |       |
| Deferred  tax assets:                   |       |     |       |     |       |
| Tax  loss carryovers                    |       | $        | 223.8      |     | $          | 233.5 |   |
| Capital  loss carryovers                |       | 24.7     |       | 23.7     |       |
| Accrued  postretirement benefits        |       | 20.9     |       | 20.2     |       |
| Other,  principally accrued liabilities |       | 228.5    |       | 190.0    |       |
| Total  deferred tax assets              |       | 497.9    |       | 467.4    |       |
|                                    |       |     |       |     |       |
| Deferred  tax liabilities:              |       |     |       |     |       |
| Property,  plant and equipment          |       | 141.8    |       | 143.9    |       |
| Inventory                               |       | 12.0     |       | 13.4     |       |
| Other                                   |       | 65.1     |       | 46.1     |       |
|                                    |       |     |       |     |       |
| Total  deferred tax liabilities         |       | 218.9    |       | 203.4    |       |
| Valuation  allowance                    |       | (268.2   | )          | (255.4   | )          |
| Net  deferred tax liabilities           |       | $        | 10.8       |     | $          | 8.6 |   |

 

Deferred taxes are includedin the Consolidated Balance Sheets at December 31, 2009 and 2008 asfollows:

 
| ** **                               | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
|                                     |       |     |       |     |       |
| Prepaid  expenses                        |       | $        | 45.2       |     | $          | 24.8 |   |
| Deposits,  receivables, and other assets |       | 219.0    |       | 101.3    |       |
| Deferred  taxes                          |       | (253.4   | )          | (117.5   | )          |
|                                     |       |     |       |     |       |
| Net  deferred tax liabilities            |       | $        | 10.8       |     | $          | 8.6 |   |

 

TheCompany reviews the likelihood that it will realize the benefit of its deferredtax assets and therefore the need for valuation allowances on a quarterlybasis, or whenever events indicate that a review is required.  In determining the requirement for avaluation allowance, the historical and projected financial results of thelegal entity or consolidated group recording the net deferred tax asset isconsidered, along with other positive and negative evidence.

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

The provision for incometaxes consists of the following:

 
| ** **    | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------|------------|----------|------------|----------|------------|----------|------------|
|          |       |     |       |     |       |     |       |
| Current:      |       |     |       |     |       |     |       |
| U.S.  Federal |       | $        | 2.8        |     | $          | (0.4     | )          | $ | — |   |
| State         |       | (0.5     | )          | 0.6      |       | 0.4      |       |
| Foreign       |       | 123.3    |       | 213.0    |       | 144.3    |       |
|          |       |     |       |     |       |     |       |
|          |       | 125.6    |       | 213.2    |       | 144.7    |       |
|          |       |     |       |     |       |     |       |
| Deferred:     |       |     |       |     |       |     |       |
| U.S.  Federal |       |     |       | 4.0      |       | 0.3      |       |
| State         |       | (1.3     | )          | (3.2     | )          | (4.0     | )          |
| Foreign       |       | 53.5     |       | 9.8      |       | (1.9     | )          |
|          |       |     |       |     |       |     |       |
|          |       | 52.2     |       | 10.6     |       | (5.6     | )          |
|          |       |     |       |     |       |     |       |
| Total:        |       |     |       |     |       |     |       |
| U.S.  Federal |       | 2.8      |       | 3.6      |       | 0.3      |       |
| State         |       | (1.8     | )          | (2.6     | )          | (3.6     | )          |
| Foreign       |       | 176.8    |       | 222.8    |       | 142.4    |       |
|          |       |     |       |     |       |     |       |
|          |       | $        | 177.8      |     | $          | 223.8    |       | $ | 139.1 |   |

 

The provision for incometaxes was calculated based on the following components of earnings beforeincome taxes:

 
| ** ** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
|       |       |     |       |     |       |     |       |
| Domestic   |       | $        | 100.3      |     | $          | 191.2    |       | $ | 37.4 |   |
| Foreign    |       | 540.3    |       | 698.9    |       | 687.3    |       |
|       |       |     |       |     |       |     |       |
|       |       | $        | 640.6      |     | $          | 890.1    |       | $ | 724.7 |   |

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

A reconciliation of theprovision for income taxes based on the statutory U.S. Federal tax rate of 35%to the provision for income taxes is as follows:

 
| ** **                                                                                                        | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                              |       |     |       |     |       |     |       |
| Tax  provision (benefit) on pretax earnings (loss) from continuing operations at  statutory U.S. Federal tax rate |       | $        | 224.2      |     | $          | 311.5    |       | $ | 253.7 |   |
| Increase  (decrease) in provision for income taxes due to:                                                        |       |     |       |     |       |     |       |
|                                                                                                              |       |     |       |     |       |     |       |
| Valuation  allowance - U.S.                                                                                       |       | (34.0    | )          | (53.7    | )          | (538.3   | )          |
| Foreign  subsidiary ownership restructuring and incentives                                                        |       | 10.8     |       | 35.1     |       | 535.9    |       |
| Foreign  source income taxable in the U.S.                                                                        |       | 6.1      |       | 11.3     |       | 29.3     |       |
| Reversal  of non-U.S. tax valuation allowance                                                                     |       | (0.9     | )          |     |       | (13.4    | )          |
| Foreign  tax credit utilization                                                                                   |       |     |       |     |       | (47.9    | )          |
| State  taxes, net of federal benefit                                                                              |       | 0.8      |       | (1.3     | )          | (4.8     | )          |
| Rate  differences on non-U.S. earnings                                                                            |       | (24.1    | )          | (55.3    | )          | (65.8    | )          |
| Adjustment  for non-U.S. tax law changes                                                                          |       | (0.6     | )          | (20.1    | )          | (9.9     | )          |
| Other  items                                                                                                      |       | (4.5     | )          | (3.7     | )          | 0.3      |       |
|                                                                                                              |       |     |       |     |       |     |       |
| Provision  for income taxes                                                                                       |       | $        | 177.8      |     | $          | 223.8    |       | $ | 139.1 |   |

 

In2007 the Company implemented a plan to restructure the ownership andintercompany obligations of certain foreign subsidiaries.  These actions resulted in taxation of asignificant portion of previously unremitted foreign earnings and will transfera portion of the Company’s debt service obligations to operations outside theU.S. in order to better balance operating cash flows with financing costs on aglobal basis.  The foreign earningsreported as taxable in the U.S. were offset by net operating loss carryforwardsand foreign tax credits.  Foreign taxcredit carryforwards arising from the restructuring were fully offset by anincrease in the valuation allowance.

 

The Company hasrecognized tax benefits as a result of incentives in certain non-U.S.jurisdictions which expire between 2012 and 2015.

 

The Company is includedin OI Inc.’s consolidated tax returns. OI Inc. has net operating losses, capital losses, alternative minimumtax credits, and research and development credits available to offset futureU.S. Federal income tax.

 

At December 31,2009, the Company’s equity in the undistributed earnings of foreignsubsidiaries for which income taxes had not been provided approximated $1,823.4million.  The Company intends to reinvestthese earnings indefinitely in the non-U.S. operations. It is not practicableto estimate the U.S. and foreign tax which would be payable should theseearnings be distributed.

 

TheCompany records a liability for unrecognized tax benefits related to uncertaintax positions. In 2008, the Company reclassified $28.5 million of deferred taxassets related to general business credits and net operating losses that werepreviously offset by a full valuation allowance to the liability forunrecognized tax benefits.  This balancesheet reclassification had no effect on share owners’ equity.  The Company accrues interest and penaltiesassociated with unrecognized tax benefits as a component of its income taxexpense.

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

Thefollowing is a reconciliation of the Company’s total gross unrecognized taxbenefits for the years ended December 31, 2009, 2008 and 2007:

 
| ** **                                                            | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Balance  at January 1                                            |       | $        | 103.1      |     | $          | 53.0     |       | $ | 45.8 |   |
| Additions  for tax positions of prior years                           |       | 20.1     |       | 51.2     |       | 0.1      |       |
| Reductions  for tax positions of prior years                          |       |     |       | (2.1     | )          | (2.5     | )          |
| Additions  based on tax positions related to the current year         |       | 17.1     |       | 6.1      |       | 11.0     |       |
| Reductions  due to the lapse of the applicable statute of limitations |       | (4.1     | )          | (3.1     | )          | (1.4     | )          |
| Foreign  currency translation                                         |       | (7.8     | )          |     |       |     |       |
| Reductions  due to settlements                                        |       |     |       | (2.0     | )          |     |       |
| Balance  at December 31                                          |       | $        | 128.4      |     | $          | 103.1    |       | $ | 53.0 |   |

 

AtDecember 31, 2009 and 2008, accrued interest and penalties related tounrecognized tax benefits were $23.2 million and $14.5 million,respectively.  Tax expense for the yearsended December 31, 2009, 2008 and 2007 included interest and penalties of$10.6 million, $10.7 million and $0.6 million, respectively, on unrecognizedtax benefits.

 

Theunrecognized tax benefit liability, including interest and penalties, as of December 31,2009 and 2008 was $151.6 million and $117.6 million, respectively.  Approximately $97.3 million and $72.7 millionas of December 31, 2009 and 2008, respectively, relate to unrecognized taxbenefits, which if recognized, would impact the Company’s effective income taxrate.  This amount differs from the grossunrecognized tax benefits presented in the table above because of theunrecognized tax benefits that would result in the utilization of certain taxattribute carryforwards that are currently subject to a full valuationallowance due to uncertainties about their future period utilization.

 

For federal and certainstate income tax purposes, the taxable income of the Company is included in theconsolidated tax returns of OI Inc. and income taxes are allocated to theCompany on a basis consistent with separate returns.  Tax years through 1999 have been settled withthe U.S. Internal Revenue Service and there is no current IRS examination inprogress.  Due to the existence of taxattribute carryforwards (which are currently offset by full valuationallowances) in the U.S., the Company treats certain post-1999 tax positions asunsettled because of the taxing authorities’ ability to modify theseattributes.  The 2000 tax year is theearliest open year for the Company’s other major tax jurisdictions.

 

TheCompany does not anticipate a significant change in the total amount ofunrecognized income tax benefits within the next twelve months.

 

**11.  Related Party Transactions **Charges for administrative services are allocated tothe Company by OI Inc. based on an annual utilization level.  Such services include compensation andbenefits administration, payroll processing, use of certain general accountingsystems, auditing, income tax planning and compliance, and treasuryservices.  Beginning in 2008, theCompany revised its method of allocating corporate expenses.  The Company decreased slightly the percentageallocation based on sales and significantly expanded the number of functionsincluded in the allocation based on cost of services.

 

Allocated costs also include charges associated withOI Inc.’s equity compensation plans.  Asubstantial number of the options, restricted shares and restricted share unitsgranted under these plans have been granted to key employees of anothersubsidiary of OI Inc., some of whose compensation costs, including stock-basedcompensation, are included in an allocation of costs to all operatingsubsidiaries of OI Inc., including the Company.

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

Management believes that such transactions are onterms no less favorable to the Company than those that could be obtained fromunaffiliated third parties.

 

The following informationsummarizes the Company’s significant related party transactions:

 
| ** **                    | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------|------------|-----------------------------------|------------|
| ** **                    | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|                          |       |                              |       |   |   |   |   |
| Revenues:                     |       |                              |       |   |   |   |   |
| Sales to affiliated companies |       | $                                 | —     |   | $ | — |   | $ | 0.3 |   |
|                          |       |                              |       |   |   |   |   |
| Expenses:                     |       |                              |       |   |   |   |   |
| Administrative services       |       | 14.2                              |       | 15.0 |   | 19.5 |   |
| Corporate management fee      |       | 70.9                              |       | 60.9 |   | 29.1 |   |
| Trademark royalties           |       | 19.4                              |       | 19.9 |   |   |   |
| Total expenses                |       | $                                 | 104.5      |   | $ | 95.8 |   | $ | 48.6 |   |

 

The above expenses are recorded in the statement of operations asfollows:

 
| ** **                                   | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------------------|------------|
| ** **                                   | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                         |       |                              |       |   |   |   |   |
| Cost of sales                                |       | $                                 | 1.2        |   | $ | 0.9 |   | $ | 16.9 |   |
| Selling, general, and adminstrative expenses |       | 103.3                             |       | 94.9 |   | 31.7 |   |
|                                         |       |                              |       |   |   |   |   |
| Total expenses                               |       | $                                 | 104.5      |   | $ | 95.8 |   | $ | 48.6 |   |

 

Intercompanyinterest is charged to the Company from OI Inc. based on intercompany debtbalances.  An interest rate is calculatedmonthly based on OI Inc.’s total consolidated monthly external debt balance andthe related interest expense, including finance fee amortization and commitmentfees. The calculated rate (7.2% at December 31, 2009) is applied monthlyto the intercompany debt balance to determine intercompany interest expense.

 

**12.  Pension Benefit Plans and OtherPostretirement Benefits**

 

*Pension Benefit Plans*

 

The Company participatesin OI Inc.’s defined benefit pension plans for substantially all employeeslocated in the United States.  Benefitsgenerally are based on compensation for salaried employees and on length ofservice for hourly employees.  OI Inc.’spolicy is to fund pension plans such that sufficient assets will be availableto meet future benefit requirements. Independent actuaries determine pension costs for each subsidiary of OIInc. included in the plans; however, accumulated benefit obligation informationand plan assets pertaining to each subsidiary have not been separatelydetermined.  As such, the accumulatedbenefit obligation and the plan assets related to the pension plans fordomestic employees have been retained by another subsidiary of OI Inc.  Net credits to results of operations for theCompany’s allocated portion of the domestic pension costs amounted to $3.8million in 2009, $39.9 million in 2008, and $23.0 million in 2007.

 

OI Inc. also sponsorsseveral defined contribution plans for all salaried and hourly U.S. employeesof the Company.  Participation isvoluntary and participants’ contributions are based on their compensation.  OI

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

Inc. matchescontributions of participants, up to various limits, in substantially allplans.  OI Inc. charges the Company forits share of the match.  The Company’sshare of the contributions to these plans amounted to $6.1 million in 2009,$6.0 million in 2008, and $5.7 million in 2007.

 

The Company’ssubsidiaries in the United Kingdom, the Netherlands, Canada, Australia, andmany employees of Germany and France also have pension plans coveringsubstantially all employees.  Thefollowing tables relate to the Company’s principal defined benefit pensionplans in the United Kingdom, the Netherlands, Canada, Australia, Germany andFrance (the International Pension Plans).

 

The International PensionPlans use a December 31 measurement date.

 

The changes in theInternational Pension Plans benefit obligations for the year were as follows:

 
| ** **                                                               | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                     |       |     |       |     |       |
| Obligations at beginning of year                                         |       | $        | 1,299.4    |     | $          | 1,617.1 |   |
|                                                                     |       |     |       |     |       |
| Change in benefit obligations:                                           |       |     |       |     |       |
| Service cost                                                             |       | 17.6     |       | 22.0     |       |
| Interest cost                                                            |       | 79.1     |       | 82.9     |       |
| Actuarial (gain) loss, including the effect of  change in discount rates |       | 62.4     |       | (52.7    | )          |
| Participant contributions                                                |       | 7.4      |       | 8.8      |       |
| Benefit payments                                                         |       | (73.1    | )          | (89.4    | )          |
| Plan amendments                                                          |       |     |       |     |       |
| Curtailments                                                             |       | (1.8     | )          | (9.5     | )          |
| Settlements                                                              |       | (30.3    | )          |     |       |
| Special termination benefits                                             |       |     |       | 4.4      |       |
| Foreign currency translation                                             |       | 133.5    |       | (284.2   | )          |
|                                                                     |       |     |       |     |       |
| Net change in benefit obligations                                        |       | 194.8    |       | (317.7   | )          |
|                                                                     |       |     |       |     |       |
| Obligations at end of year                                               |       | $        | 1,494.2    |     | $          | 1,299.4 |   |

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

The changes in the fairvalue of the International Pension Plans’ assets for the year were as follows:

 
| ** **                         | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|------------------------------------|------------|------------|------------|------------|------------|
| ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fair value at beginning of year    |       | $          | 922.0      |       | $          | 1,376.8 |   |
|                               |       |       |       |       |       |
| Change in fair value:              |       |       |       |       |       |
| Actual gain (loss) on plan assets  |       | 166.4      |       | (220.6     | )          |
| Benefit payments                   |       | (73.1      | )          | (89.4      | )          |
| Employer contributions             |       | 122.0      |       | 60.1       |       |
| Participant contributions          |       | 7.4        |       | 8.8        |       |
| Settlements                        |       | (30.3      | )          |       |       |
| Foreign currency translation       |       | 108.2      |       | (213.7     | )          |
|                               |       |       |       |       |       |
| Net change in fair value of assets |       | 300.6      |       | (454.8     | )          |
|                               |       |       |       |       |       |
| Fair value at end of year          |       | $          | 1,222.6    |       | $          | 922.0 |   |

 

The funded status of theInternational Pension Plans at year end was as follows:

 
| ** **                                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                 |       |     |       |     |       |
| Plan assets at fair value                            |       | $        | 1,222.6    |     | $          | 922.0 |   |
| Projected benefit obligations                        |       | 1,494.2  |       | 1,299.4  |       |
|                                                 |       |     |       |     |       |
| Plan assets less than projected benefit  obligations |       | (271.6   | )          | (377.4   | )          |
| Items not yet recognized in pension expense:         |       |     |       |     |       |
| Actuarial loss                                       |       | 368.9    |       | 362.9    |       |
| Prior service credit                                 |       | (14.4    | )          | (15.1    | )          |
|                                                 |       |     |       |     |       |
|                                                 |       | 354.5    |       | 347.8    |       |
|                                                 |       |     |       |     |       |
| Net amount recognized                                |       | $        | 82.9       |     | $          | (29.6 | ) |

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

The net amount recognizedis included in the Consolidated Balance Sheets at December 31, 2009 and2008 as follows:

 
| ** **                                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                |       |     |       |     |       |
| Prepaid pension                                                     |       | $        | 46.3       |     | $          | — |   |
| Current pension liability, included with Other  accrued liabilities |       | (7.9     | )          | (7.2     | )          |
| Noncurrent pension liability, included with Other  liabilities      |       | (310.0   | )          | (370.2   | )          |
| Accumulated other comprehensive income                              |       | 354.5    |       | 347.8    |       |
|                                                                |       |     |       |     |       |
| Net amount recognized                                               |       | $        | 82.9       |     | $          | (29.6 | ) |

 

The following changes inplan assets and benefit obligations were recognized in accumulated othercomprehensive income at December 31, 2009 as follows:

 
| ** **                           | ** ** | **Pretax** | ** ** | **Tax  Effect** | ** ** | **After-tax** | ** ** |
|--------------------------------------|------------|------------|------------|-----------------|------------|---------------|------------|
|                                 |       |       |       |            |       |          |       |
| Current year actuarial (gain) loss   |       | $          | (36.9      | )               | $          | 9.9           |       | $ | (27.0 | ) |
| Amortization of actuarial loss       |       | (5.5       | )          | 1.4             |       | (4.1          | )          |
| Amortization of prior service credit |       | 0.7        |       | (0.2            | )          | 0.5           |       |
|                                 |       |       |       |            |       |          |       |
|                                 |       | (41.7      | )          | 11.1            |       | (30.6         | )          |
| Translation                          |       |       |       |            |       | 34.7          |       |
|                                 |       | $          | (41.7      | )               | $          | 11.1          |       | $ | 4.1 |   |

 

The accumulated benefitobligation for all defined benefit pension plans was $1,303.6 million and$1,129.5 million at December 31, 2009 and 2008, respectively.

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

The components of theInternational Pension Plans’ net pension expense were as follows:

 
| ** **                  | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|----------|------------|
|                        |       |     |       |     |       |     |       |
| Service cost                |       | $        | 17.6       |     | $          | 21.9     |       | $ | 25.0 |   |
| Interest cost               |       | 79.1     |       | 82.9     |       | 78.8     |       |
| Expected asset return       |       | (78.9    | )          | (96.5    | )          | (94.5    | )          |
| Curtailment cost            |       |     |       | 0.1      |       | 0.1      |       |
| Settlement cost             |       | 9.3      |       |     |       |     |       |
| Special termination benefit |       |     |       | 4.4      |       |     |       |
| Other                       |       |     |       | (1.1     | )          | 5.2      |       |
|                        |       |     |       |     |       |     |       |
| Amortization:               |       |     |       |     |       |     |       |
| Prior service credit        |       | (0.7     | )          | (0.6     | )          | (0.1     | )          |
| Actuarial loss              |       | 5.5      |       | 5.2      |       | 11.4     |       |
|                        |       |     |       |     |       |     |       |
| Net amortization            |       | 4.8      |       | 4.6      |       | 11.3     |       |
|                        |       |     |       |     |       |     |       |
| Net expense                 |       | $        | 31.9       |     | $          | 16.3     |       | $ | 25.9 |   |

 

Amounts that will beamortized from accumulated other comprehensive income into net pension expenseduring 2010:

 
| Amortization:        |   |   |   |
|----------------------|--------|--------|--------|
| Actuarial loss       |   | $      | 21.7   |   |
| Prior service credit |   | (0.7   | )      |
|                 |   |   |   |
| Net amortization     |   | $      | 21.0   |   |

 

The following informationis for plans with projected benefit obligations in excess of the fair value ofplan assets at year end:

 
| ** **                   | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
|                         |       |     |       |     |       |
| Projected benefit obligation |       | $        | 968.4      |     | $          | 1,299.4 |   |
| Fair value of plan assets    |       | 650.4    |       | 922.0    |       |
|                              |            |          |            |          |            |  |  |

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

The following informationis for plans with accumulated benefit obligations in excess of the fair valueof plan assets at year end:

 
| ** **                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
|                            |       |     |       |     |       |
| Accumulated benefit obligations |       | $        | 834.1      |     | $          | 1,129.5 |   |
| Fair value of plan assets       |       | 650.4    |       | 922.0    |       |
|                                 |            |          |            |          |            |  |  |

 

The weighted averageassumptions used to determine benefit obligations were as follows:

 
| ** **                    | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
|                          |       |     |       |     |       |
| Discount rate                 |       | 5.64     | %          | 5.88     | %          |
| Rate of compensation increase |       | 3.54     | %          | 2.65     | %          |

 

The weighted averageassumptions used to determine net periodic pension costs were as follows:

 
| ** **                                  | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                        |       |     |       |     |       |     |       |
| Discount rate                               |       | 5.88     | %          | 5.46     | %          | 4.92     | %          |
| Rate of compensation increase               |       | 2.65     | %          | 3.39     | %          | 3.34     | %          |
| Expected long-term rate of return on assets |       | 6.95     | %          | 6.96     | %          | 7.16     | %          |

 

Future benefits areassumed to increase in a manner consistent with past experience of the plans,which, to the extent benefits are based on compensation, includes assumedsalary increases as presented above. Amortization included in net pension expense is based on the averageremaining service of employees.

 

For 2009, the Company’sweighted average expected long-term rate of return on assets was 6.95%.  In developing this assumption, the Companyevaluated input from its third party pension plan asset managers, includingtheir review of asset class return expectations and long-term inflation assumptions.  The Company also considered its historical10-year average return (through December 31, 2008), which was in line withthe expected long-term rate of return assumption for 2009.

 

It is the Company’spolicy to invest pension plan assets in a diversified portfolio consisting ofan array of asset classes within established target asset allocationranges.  The investment risk of theassets is limited by appropriate diversification both within and between assetclasses.  The assets for both the U.S.and non-U.S. plans are primarily invested in a broad mix of domestic andinternational equities, domestic and international bonds, and real estate,subject to the target asset allocation ranges. The assets are managed with a view to ensuring that sufficient liquiditywill be available to meet expected cash flow requirements.

 

The investment valuation policy of the Company is to value investmentsat fair value.  All investments arevalued at their respective net asset values. Equity securities for which marketquotations are readily available are valued at the last reported sales price ontheir principal exchange on valuation date or official close for certainmarkets.  Fixed income investments arevalued on a basis of valuations furnished by a trustee-approved independentpricing service, which determines valuations for normal institutional-sizetrading units of such securities which are generally recognized at fair valueas determined in good

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

faith by the Trustee.  Investmentsin registered investment companies or collective pooled funds are valued attheir respective net asset values. Short-term investments are stated at amortized cost, which approximatesfair value.  The fair value of realestate is determined by periodic appraisals.

 

The following table sets forth by level, within the fair valuehierarchy, the Company’s pension plan assets at fair value as of December 31,2009:

 
| ** **                 | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** | **Target  Allocation** | ** ** |
|----------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-----------|------------|------------------------|------------|
|                       |       |        |       |        |       |        |       |      |       |                   |       |
| Cash and cash equivalents  |       | $           | 35.8       |        | $          | 9.9         |       | $         | —     |                   | $          | 45.7 |   |   |   |
|                       |       |        |       |        |       |        |       |      |       |                   |       |
| Equity securities          |       | 405.8       |       | 95.3        |       |        |       | 501.1     |       | 36-46%                 |       |
|                       |       |        |       |        |       |        |       |      |       |                   |       |
| Debt securities            |       | 515.2       |       | 81.1        |       | 8.8         |       | 605.1     |       | 38-48%                 |       |
|                       |       |        |       |        |       |        |       |      |       |                   |       |
| Real estate                |       |        |       |        |       | 10.9        |       | 10.9      |       | 0-7%                   |       |
|                       |       |        |       |        |       |        |       |      |       |                   |       |
| Other                      |       | 54.4        |       | 5.4         |       |        |       | 59.8      |       | 4-14%                  |       |
|                       |       |        |       |        |       |        |       |      |       |                   |       |
| Total assets at fair value |       | $           | 1,011.2    |        | $          | 191.7       |       | $         | 19.7       |                   | $          | 1,222.6 |   |   |   |

 

The following is areconciliation of the Company’s pension plan assets recorded at fair valueusing significant unobservable inputs (Level 3):

 
| Balance at December 31, 2008 |   | $      | 29.1   |   |
|-----------------------------------|--------|--------|--------|--------|
|                              |   |   |   |
| Net decrease                      |   | (9.4   | )      |
|                              |   |   |   |
| Balance at December 31, 2009 |   | $      | 19.7   |   |

 

The net decrease in thefair value of the Company’s Level 3 pension plan assets is primarily due tosales of unlisted real estate funds.  Thechange in the fair value of Level 3 pension plan assets due to actual return onthose assets was immaterial in 2009.

 

Based on exchange ratesat the end of 2009, the Company expects to contribute approximately $10 millionto $15 million to its defined benefit pension plans in 2010.

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

The following estimatedfuture benefit payments, which reflect expected future service, as appropriate,are expected to be paid in the years indicated:

 
| **Year(s)** | ** ** | **Amount** | ** ** |
|-------------|------------|------------|------------|
|        |       |       |       |
| 2010        |       | $          | 79.7       |   |
| 2011        |       | 77.8       |       |
| 2012        |       | 81.1       |       |
| 2013        |       | 84.8       |       |
| 2014        |       | 87.7       |       |
| 2015 - 2019 |       | 443.5      |       |
|             |            |            |            |  |

 

*PostretirementBenefits Other Than Pensions*

 

OI Inc. provides certainretiree health care and life insurance benefits covering substantially all U.S.salaried and certain hourly employees and substantially all employees in Canadaand The Netherlands.  Employees aregenerally eligible for benefits upon retirement and completion of a specifiednumber of years of creditable service. Independent actuaries determinepostretirement benefit costs for each subsidiary of OI Inc.; however,accumulated postretirement benefit obligation information pertaining to eachsubsidiary has not been separately determined. As such, the accumulated postretirement benefit obligation has beenretained by another subsidiary of OI Inc.

 

The Company’s netperiodic postretirement benefit cost, as allocated by OI Inc., for domesticemployees was $6.5 million, $5.8 million, and $8.1 million, at December 31,2009, 2008, and 2007, respectively.

 

The Company’ssubsidiaries in Canada and the Netherlands also have postretirement benefitplans covering substantially all employees. The following tables relate to the Company’s postretirement benefit planin Canada and the Netherlands (the International Postretirement Benefit Plans).

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

The changes in the International Postretirement Benefit Plansobligations were as follows:

 
| ** **                                                              | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                    |       |     |       |     |       |
| Obligations at beginning of year                                        |       | $        | 67.0       |     | $          | 95.0 |   |
|                                                                    |       |     |       |     |       |
| Change in benefit obligations:                                          |       |     |       |     |       |
| Service cost                                                            |       | 0.9      |       | 1.2      |       |
| Interest cost                                                           |       | 4.5      |       | 4.5      |       |
| Actuarial (gain) loss, including the effect of  changing discount rates |       | 7.9      |       | (11.9    | )          |
| Curtailments                                                            |       |     |       | (2.9     | )          |
| Special termination benefits                                            |       |     |       | 0.9      |       |
| Benefit payments                                                        |       | (3.1     | )          | (3.1     | )          |
| Foreign currency translation                                            |       | 11.0     |       | (16.7    | )          |
|                                                                    |       |     |       |     |       |
| Net change in benefit obligations                                       |       | 21.2     |       | (28.0    | )          |
|                                                                    |       |     |       |     |       |
| Obligations at end of year                                              |       | $        | 88.2       |     | $          | 67.0 |   |

 

The funded status of the International Postretirement Benefit Plans atyear end was as follows:

 
| ** **                                                    | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                          |       |     |       |     |       |
| Postretirement benefit obligations                            |       | $        | 88.2       |     | $          | 67.0 |   |
|                                                          |       |     |       |     |       |
| Items not yet recognized in net postretirement  benefit cost: |       |     |       |     |       |
| Actuarial gain (loss)                                         |       | (0.6     | )          | 6.8      |       |
|                                                          |       |     |       |     |       |
| Net amount recognized                                         |       | $        | 87.6       |     | $          | 73.8 |   |

 

The net amount recognizedis included in the Consolidated Balance Sheets at December 31, 2009 and2008 as follows:

 
| ** **                                                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                |       |     |       |     |       |
| Current nonpension postretirement benefit,  included with Other accrued liabilities |       | $        | (3.9       | )        | $          | (3.1 | ) |
| Nonpension postretirement benefits                                                  |       | (84.3    | )          | (63.9    | )          |
| Accumulated other comprehensive (income) loss                                       |       | 0.6      |       | (6.8     | )          |
|                                                                                |       |     |       |     |       |
| Net liability recognized                                                            |       | $        | (87.6      | )        | $          | (73.8 | ) |

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

The following changes inbenefit obligations were recognized in accumulated other comprehensive income atDecember 31, 2009 as follows:

 
| ** **                     | ** ** | **Pretax** | ** ** | **Tax  Effect** | ** ** | **After-tax** | ** ** |
|--------------------------------|------------|------------|------------|-----------------|------------|---------------|------------|
|                           |       |       |       |            |       |          |       |
| Current year actuarial loss    |       | $          | 8.6        |            | $          | (2.2          | )          | $ | 10.8 |   |
| Amortization of actuarial loss |       | 0.2        |       |            |       | 0.2           |       |
|                           |       |       |       |            |       |          |       |
|                           |       | 8.8        |       | (2.2            | )          | 11.0          |       |
| Translation                    |       |       |       |            |       | (1.0          | )          |
|                           |       | $          | 8.8        |            | $          | (2.2          | )          | $ | 10.0 |   |

 

The Company’s nonpensionpostretirement benefit obligations are included with other long termliabilities on the balance sheet.

 

The components ofInternational Postretirement Benefit Plans net postretirement benefit cost wereas follows:

 
| ** **                      | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                            |       |     |       |     |       |     |       |
| Service cost                    |       | $        | 0.9        |     | $          | 1.2      |       | $ | 1.3 |   |
| Interest cost                   |       | 4.5      |       | 4.5      |       | 4.0      |       |
| Curtailment                     |       |     |       |     |       |     |       |
| Special termination benefit     |       |     |       | 0.9      |       |     |       |
| Other                           |       |     |       | 0.1      |       |     |       |
|                            |       |     |       |     |       |     |       |
| Amortization:                   |       |     |       |     |       |     |       |
| Gain                            |       | (0.1     | )          | (0.1     | )          | (0.3     | )          |
|                            |       |     |       |     |       |     |       |
| Net postretirement benefit cost |       | $        | 5.3        |     | $          | 6.6      |       | $ | 5.0 |   |

 

The weighted averagediscount rate used to determine the accumulated postretirement benefitobligation was 5.6% and 6.4% at December 31, 2009 and 2008, respectively.

 

The weighted averagediscount rate used to determine net postretirement benefit cost was 6.4% at December 31,2009, 4.8% at December 31, 2008, and 5.2% at December 31, 2007.

 

The weighted averageassumed health care cost trend rates at December 31 were as follows:

 
| ** **                                                                     | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Health care cost trend rate assumed for next year                              |       | 9.00     | %          | 9.00     | %          |
| Rate to which the cost trend rate is assumed to  decline (ultimate trend rate) |       | 5.00     | %          | 5.00     | %          |
| Year that the rate reaches the ultimate trend rate                             |       | 2013     |       | 2010     |       |

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

Assumed health care costtrend rates affect the amounts reported for the postretirement benefitplans.  A one-percentage-point change inassumed health care cost trend rates would have the following effects:

 
| ** **                                                | ** ** | **1-Percentage-**  | ** ** | **1-Percentage-**  | ** ** |
|-----------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                | ** ** | **Point Increase** | ** ** | **Point Decrease** | ** ** |
|                                                      |       |               |       |               |       |
| Effect on total of service and interest cost              |       | $                  | 0.8        |               | $          | (0.7 | ) |
| Effect on accumulated postretirement benefit  obligations |       | 11.3               |       | (9.4               | )          |
|                                                           |            |                    |            |                    |            |  |  |

 

Amortization included innet postretirement benefit cost is based on the average remaining service ofemployees.

 

The following estimatedfuture benefit payments, which reflect expected future service, as appropriate,are expected to be paid in the years indicated:

 
| **Year(s)** | ** ** | **Amount** | ** ** |
|-------------|------------|------------|------------|
|        |       |       |       |
| 2010        |       | $          | 3.9        |   |
| 2011        |       | 4.2        |       |
| 2012        |       | 4.6        |       |
| 2013        |       | 5.0        |       |
| 2014        |       | 5.3        |       |
| 2015 - 2019 |       | 31.2       |       |
|             |            |            |            |  |

 

Benefits provided by OIInc. for certain hourly retirees of the Company are determined by collectivebargaining.  Most other domestic hourlyretirees receive health and life insurance benefits from a multi-employer trustestablished by collective bargaining. Payments to the trust as required by the bargaining agreements are basedupon specified amounts per hour worked and were $7.2 million in 2009, $8.9million in 2008, and $7.4 million in 2007. Postretirement health and life benefits for retirees of foreignsubsidiaries are generally provided through the national health care programsof the countries in which the subsidiaries are located.

 

**13.  Other Expense**Other expense for the year ended December 31,2009****included the following:

 

·                  The Company recognized foreign currencyexchange losses of $28.0 million related to the exchange of Venezuelan bolivarsinto U.S. dollars.  See Note 7 foradditional information.

 

·                  During the fourth quarter of 2009, theCompany recorded charges of $17.3 million ($17.6 million after tax amountattributable to the Company) for the remeasurement of certainbolivar-denominated assets and liabilities held outside of Venezuela.  See Note 19 for additional information.

 

·                  The Company recorded charges totaling$213.6 million ($182.8 million after tax amount attributable to the Company)for restructuring and asset impairment. The charges reflect the additional decisions reached in the Company’sstrategic review of its global manufacturing footprint.  SeeNote 14 for additionalinformation.

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

Other expense for theyear ended December 31, 2008****included thefollowing:

 

·                  The Company recorded charges totaling$132.4 million ($110.1 million after tax amount attributable to the Company)for restructuring and asset impairment. The charges reflect the additional decisions reached in the Company’sstrategic review of its global manufacturing footprint.  SeeNote 14 for additionalinformation.

 

·                  During 2008, the Company also recorded anadditional $0.9 million (pretax and after tax amount attributable to theCompany) related to the impairment of the Company’s equity investment in theSouth American Segment’s 50%-owned Caribbean affiliate.

 

Other costs and expensesfor the year ended December 31, 2007 included the following:

 

·                  In the South American Segment’s 50%-ownedCaribbean affiliate, declining productivity and cash flows resulted inimpairment of the Company’s equity investment, establishment of valuationallowances against advances to the affiliate, and accrual of certain contingentobligations for total charges of $45.0 million ($43.9 million after tax amountattributable to the Company) recorded in 2007 with an additional $0.9 million(before and after tax amount attributable to the Company) recorded in the firstquarter of 2008.

 

·                  The Company recorded charges totaling$55.3 million ($40.2 million after tax amount attributable to the Company) forrestructuring and asset impairment.  Thecharges reflect the additional decisions reached in the Company’s strategicreview of its global manufacturing footprint. See Note 14 for additionalinformation.

 

**14.  Restructuring Accruals**Beginning in2007, the Company commenced a strategic review of its global profitability andmanufacturing footprint.  The combined2007, 2008 and 2009 charges, amounting to $401.3 million ($333.1 million aftertax amount attributable to the Company), reflect the decisions reached through December 31,2009 in the Company’s strategic review of its global manufacturing footprint.The related curtailment of plant capacity and realignment of selectedoperations will result in an overall reduction in the Company’s workforce ofapproximately 3,250 jobs.  Amountsrecorded by the Company do not include any gains that may be realized upon theultimate sale or disposition of closed facilities.

 

TheCompany’s decisions to curtail selected production capacity have resulted inwrite downs of certain long-lived assets to the extent their carrying amountsexceeded fair value less cost to sell. The Company classified the significant assumptions used to determine thefair value of the impaired assets, which was not material, as “Level 3” in thefair value hierarchy as set forth in the general accounting principles for fairvalue measurements.

 

TheCompany also recorded liabilities for certain employee separation costs to bepaid under contractual arrangements and other exit costs.

 

2007

Duringthe third and fourth quarters of 2007, the Company recorded charges totaling$55.3 million ($40.2 million after tax amount attributable to the Company) forrestructuring and asset impairment in Europe and North America.  The curtailment of plant capacity resulted inelimination of approximately 560 jobs and a corresponding reduction in theCompany’s workforce.

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

2008

During2008, the Company recorded charges totaling $132.4 million ($110.1 millionafter tax amount attributable to the Company) for restructuring and assetimpairment across all segments as well as in Retained Corporate Costs andOther.  The curtailment of plant capacityand realignment of selected operations resulted in elimination of approximately1,240 jobs and a corresponding reduction in the Company’s workforce.

 

2009

During2009, the Company recorded charges totaling $213.6 million ($182.8 millionafter tax amount attributable to the Company) for restructuring and assetimpairment across all segments.  Thecurtailment of plant capacity will result in elimination of approximately 1,450jobs and a corresponding reduction in the Company’s workforce.

 

TheCompany expects that the majority of the remaining estimated cash expendituresrelated to the above charges will be paid out by the end of 2010.

 

Selectedinformation related to the restructuring accrual is as follows:

 
| ** **                                                    | ** ** | **Employee  Costs** | ** ** | **Asset  Impairment** | ** ** | **Other** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|-----------|------------|-----------|------------|
|                                                          |       |                |       |                  |       |      |       |      |       |
| 2007  Charges                                                 |       | $                   | 26.1       |                  | $          | 22.3      |       | $         | 6.9        |   | $ | 55.3 |   |
| Write-down  of assets to net realizable value                 |       | —              |       | (22.3                 | )          | (2.4      | )          | (24.7     | )          |
| Total  restructuring accrual at December 31, 2007        |       | 26.1           |       | —                |       | 4.5       |       | 30.6      |       |
| 2008  charges                                                 |       | 70.1                |       | 32.5                  |       | 29.8      |       | 132.4     |       |
| Write-down  of assets to net realizable value                 |       |                |       | (32.5                 | )          | (4.7      | )          | (37.2     | )          |
| Net  cash paid, principally severance and related benefits    |       | (35.6               | )          |                  |       | (7.2      | )          | (42.8     | )          |
| Other,  principally foreign exchange translation              |       | (13.0               | )          |                  |       | (6.1      | )          | (19.1     | )          |
| Total  restructuring accrual at December 31, 2008        |       | 47.6                |       | —                |       | 16.3      |       | 63.9      |       |
| 2009  charges                                                 |       | 116.3               |       | 78.7                  |       | 18.6      |       | 213.6     |       |
| Write-down  of assets to net realizable value                 |       |                |       | (78.7                 | )          |      |       | (78.7     | )          |
| Net  cash paid, principally severance and related benefits    |       | (60.8               | )          |                  |       | (7.5      | )          | (68.3     | )          |
| Other,  principally foreign exchange translation              |       | (8.8                | )          |                  |       | (1.6      | )          | (10.4     | )          |
| Remaining  restructuring accrual as of December 31, 2009 |       | $                   | 94.3       |                  | $          | —    |       | $         | 25.8       |   | $ | 120.1 |   |

 

**15. Contingencies**Certain litigation is pending against theCompany, in many cases involving ordinary and routine claims incidental to thebusiness of the Company and in others presenting allegations that arenonroutine and involve compensatory, punitive or treble damage claims as wellas other types of relief.  The Companyrecords a liability for such matters when it is both probable that the liabilityhas been incurred and the amount of the liability can be reasonablyestimated.  Recorded amounts are reviewedand adjusted to reflect changes in the factors upon which the estimates arebased including additional information, negotiations, settlements, and otherevents. The ultimate legal and financial liability of the Company in respect tothis pending litigation cannot reasonably be estimated.  However, the Company believes, based on itsexamination and review of such matters and experience to date, that suchultimate liability will not have a material adverse effect on its results ofoperations or financial condition.

 

**16.  Segment Information**The Company hasfour reportable segments based on its four geographic locations:  (1) Europe; (2) North America; (3) SouthAmerica; (4) Asia Pacific.  Thesefour segments are aligned with the Company’s internal approach to managing,reporting, and evaluating performance of its

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

global glass operations.  Certainassets and activities not directly related to one of the regions or to glassmanufacturing are reported with Other. These include licensing, equipment manufacturing, global engineering,and non-glass equity investments.

 

TheCompany’s measure of profit for its reportable segments is Segment OperatingProfit, which consists of consolidated earnings before interest income,interest expense, and provision for income taxes and excludes amounts relatedto certain items that management considers not representative of ongoingoperations.  The Company’s managementuses Segment Operating Profit, in combination with selected cash flowinformation, to evaluate performance and to allocate resources.

 

SegmentOperating Profit for reportable segments includes an allocation of somecorporate expenses based on both a percentage of sales and direct billingsbased on the costs of specific services provided. Beginning in 2008, the OIInc. revised its method of allocating corporate expenses.  OI Inc. decreased slightly the percentageallocation based on sales and significantly expanded the number of functionsincluded in the allocation based on cost of services. It is not practicable to quantify the net effect ofthese changes on periods prior to 2008.

 

Financialinformation regarding the Company’s reportable segments is as follows:

 
| ** **                | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net Sales:                |       |     |       |     |       |     |       |
| Europe                    |       | $        | 2,917.6    |     | $          | 3,497.8  |       | $ | 3,298.7 |   |
| North America             |       | 2,074.3  |       | 2,209.7  |       | 2,271.3  |       |
| South America             |       | 1,104.1  |       | 1,135.9  |       | 970.7    |       |
| Asia Pacific              |       | 925.0    |       | 964.1    |       | 934.3    |       |
|                      |       |     |       |     |       |     |       |
| Reportable segment totals |       | 7,021.0  |       | 7,807.5  |       | 7,475.0  |       |
| Other                     |       | 45.5     |       | 77.2     |       | 91.7     |       |
| Net sales                 |       | $        | 7,066.5    |     | $          | 7,884.7  |       | $ | 7,566.7 |   |

 
| ** **                                    | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Segment  Operating Profit:                    |       |     |       |     |       |     |       |
| Europe                                        |       | $        | 332.6      |     | $          | 477.8    |       | $ | 433.0 |   |
| North America                                 |       | 281.5    |       | 185.2    |       | 265.1    |       |
| South America                                 |       | 250.6    |       | 331.0    |       | 254.9    |       |
| Asia Pacific                                  |       | 131.3    |       | 162.8    |       | 154.0    |       |
| Reportable segment totals                     |       | 996.0    |       | 1,156.8  |       | 1,107.0  |       |
|                                          |       |     |       |     |       |     |       |
| Items excluded from Segment Operating Profit: |       |     |       |     |       |     |       |
| Retained corporate costs and other            |       | 15.8     |       | 68.1     |       | 47.3     |       |
| Restructuring and asset impairments           |       | (213.6   | )          | (133.3   | )          | (100.3   | )          |
| Charge for Venezuela currency remeasurement   |       | (17.3    | )          |     |       |     |       |
| Interest income                               |       | 41.1     |       | 36.1     |       | 26.9     |       |
| Interest expense                              |       | (181.4   | )          | (237.6   | )          | (356.2   | )          |
| Earnings before income taxes                  |       | $        | 640.6      |     | $          | 890.1    |       | $ | 724.7 |   |

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 
| ** **                             | ** ** | **Europe** | ** ** | **North  America** | ** ** | **South  America** | ** ** | **Asia  Pacific** | ** ** | **Total  Reportable  Segments** | ** ** | **Other** | ** ** | **Consolidated  Totals** | ** ** |
|----------------------------------------|------------|------------|------------|--------------------|------------|--------------------|------------|-------------------|------------|---------------------------------|------------|-----------|------------|--------------------------|------------|
| Total assets:                          |       |       |       |               |       |               |       |              |       |                            |       |      |       |                     |       |
| 2009                                   |       | $          | 3,852.3    |               | $          | 1,889.5            |       | $                 | 855.9      |                            | $          | 1,683.0   |       | $                        | 8,280.7    |   | $ | 100.4 |   | $ | 8,381.1 |   |
| 2008                                   |       | 3,758.4    |       | 1,792.3            |       | 976.2              |       | 1,239.6           |       | 7,766.5                         |       | 127.9     |       | 7,894.4                  |       |
| 2007                                   |       | 4,124.1    |       | 1,936.0            |       | 965.7              |       | 1,558.1           |       | 8,583.9                         |       | 94.6      |       | 8,678.5                  |       |
| Equity earnings:                       |       |       |       |               |       |               |       |              |       |                            |       |      |       |                     |       |
| 2009                                   |       | $          | 12.5       |               | $          | 14.2               |       | $                 | —     |                            |       |      | $          | 26.7                     |       | $ | 25.9 |   | $ | 52.6 |   |
| 2008                                   |       | 14.1       |       | 12.6               |       |               |       |              |       | 26.7                            |       | 24.1      |       | 50.8                     |       |
| 2007                                   |       | 8.0        |       | 10.4               |       | (2.7               | )          |              |       | 15.7                            |       | 18.4      |       | 34.1                     |       |
| Capital expenditures (1):              |       |       |       |               |       |               |       |              |       |                            |       |      |       |                     |       |
| 2009                                   |       | $          | 169.7      |               | $          | 103.0              |       | $                 | 66.9       |                            | $          | 81.5      |       | $                        | 421.1      |   | $ | 4.6 |   | $ | 425.7 |   |
| 2008                                   |       | 151.9      |       | 90.5               |       | 57.3               |       | 57.6              |       | 357.3                           |       | 3.6       |       | 360.9                    |       |
| 2007                                   |       | 129.2      |       | 65.9               |       | 51.1               |       | 42.0              |       | 288.2                           |       | 2.2       |       | 290.4                    |       |
| Depreciation and amortization expense: |       |       |       |               |       |               |       |              |       |                            |       |      |       |                     |       |
| 2009                                   |       | $          | 178.6      |               | $          | 98.9               |       | $                 | 50.1       |                            | $          | 67.1      |       | $                        | 394.7      |   | $ | 2.8 |   | $ | 397.5 |   |
| 2008                                   |       | 222.0      |       | 98.7               |       | 56.5               |       | 80.4              |       | 457.6                           |       | 2.6       |       | 460.2                    |       |
| 2007                                   |       | 210.3      |       | 107.3              |       | 54.3               |       | 81.7              |       | 453.6                           |       | 2.2       |       | 455.8                    |       |

 

----

(1)  Excludesproperty, plant and equipment acquired through acquisitions.

 

The Company’s netproperty, plant, and equipment by geographic segment are as follows:

 
| ** ** | ** ** | **United  States** | ** ** | **Foreign** | ** ** | **Total** | ** ** |
|------------|------------|--------------------|------------|-------------|------------|-----------|------------|
|       |       |               |       |        |       |      |       |
| 2009       |       | $                  | 599.7      |        | $          | 2,103.1   |       | $ | 2,702.8 |   |
| 2008       |       | 636.3              |       | 1,966.1     |       | 2,602.4   |       |
| 2007       |       | 633.1              |       | 2,271.1     |       | 2,904.2   |       |
|            |            |                    |            |             |            |           |            |  |  |  |

 

The Company’s net sales by geographic segment are as follows:

 
| ** ** | ** ** | **United  States** | ** ** | **Foreign** | ** ** | **Total** | ** ** |
|------------|------------|--------------------|------------|-------------|------------|-----------|------------|
|       |       |               |       |        |       |      |       |
| 2009       |       | $                  | 1,877.5    |        | $          | 5,189.0   |       | $ | 7,066.5 |   |
| 2008       |       | 1,894.8            |       | 5,989.9     |       | 7,884.7   |       |
| 2007       |       | 1,920.6            |       | 5,646.1     |       | 7,566.7   |       |
|            |            |                    |            |             |            |           |            |  |  |  |

 

Operationsin individual countries outside the United States that accounted for more than10% of consolidated net sales were in Italy (2009 - 10.4%, 2008 - 10.7%, 2007 -10.1%) and France (2009 - 13.0%, 2008 - 14.7%, 2007 - 19.3%).

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

**17.  Additional Interest Charges from EarlyExtinguishment of Debt** During 2009, the Company recorded additional interest charges of $5.2million (pretax and after tax amount attributable to the Company) for noterepurchase premiums and the write-off of unamortized finance fees related tointercompany debt that was repaid prior to its maturity.  During 2007, the Company recorded additionalinterest charges of $9.5 million ($8.8 million after tax amount attributable tothe Company) for note repurchase premiums and the write-off of unamortizedfinance fees related to debt that was repaid prior to its maturity.

 

**18.**  **Goodwill** The changes in the carrying amount of goodwill forthe years ended December 31, 2007, 2008 and 2009 are as follows:

 
| ** **                            | ** ** | **North  America** | ** ** | **Europe** | ** ** | **Asia  Pacific** | ** ** | **South  America** | ** ** | **Other** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|-------------------------|------------|------------|------------|-------------------|------------|--------------------|------------|-----------|------------|-----------|------------|
| Balance  as of January 1, 2007   |       | $                       | 721.6      |       | $          | 1,017.0           |       | $                  | 502.1      |      | $          | —    |       | $ | 14.5 |   | $ | 2,255.2 |   |
| Translation  effects                  |       | 25.1                    |       | 115.3      |       | 54.6              |       |               |       |      |       | 195.0     |       |
| Other  changes                        |       | (1.1                    | )          | (13.0      | )          |              |       |               |       | (8.0      | )          | (22.1     | )          |
| Balance  as of December 31, 2007 |       | 745.6                   |       | 1,119.3    |       | 556.7             |       | —             |       | 6.5       |       | 2,428.1   |       |
| Translation  effects                  |       | (28.8                   | )          | (58.2      | )          | (123.1            | )          |               |       | 0.3       |       | (209.8    | )          |
| Other  changes                        |       |                    |       | (10.1      | )          |              |       |               |       | (0.7      | )          | (10.8     | )          |
| Balance  as of December 31, 2008 |       | 716.8                   |       | 1,051.0    |       | 433.6             |       | —             |       | 6.1       |       | 2,207.5   |       |
| Translation  effects                  |       | 18.9                    |       | 29.6       |       | 124.8             |       |               |       |      |       | 173.3     |       |
| Other  changes                        |       |                    |       |       |       |              |       |               |       | 0.2       |       | 0.2       |       |
| Balance  as of December 31, 2009 |       | $                       | 735.7      |       | $          | 1,080.6           |       | $                  | 558.4      |      | $          | —    |       | $ | 6.3 |   | $ | 2,381.0 |   |

 

Goodwillfor the Asia Pacific segment is net of accumulated impairment losses of $494.0million.

 

Duringthe fourth quarters of 2009, 2008 and 2007, the Company completed its annualimpairment testing and determined that no impairment existed.

 

**19.  Venezuelan Operations**Venezuelangovernment restrictions on transfers of cash out of the country have limitedthe Company’s ability to immediately access cash at the government’s officialexchange rate, which, as of December 31, 2009, had remained fixed at 2.15bolivars to the U.S. dollar since early 2005. The Company has been able to obtain U.S. dollars at the official rate topay for some of its key raw materials and other imports.  However, in 2009, the Venezuelan governmentsignificantly slowed the process of exchanging bolivars to U.S. dollars at theofficial rate.  As a result, the Company’scash balance in Venezuela increased as earnings accumulated.  The Company has the ability to access thecash in Venezuela more quickly through a market-driven parallel exchange processwhich, at December 31, 2009, valued the bolivar about 60% lower than theofficial exchange rate.  During the lasthalf of 2009, the Company entered into a series of parallel market transactionsin order to exchange Venezuelan bolivars into U.S. dollars, and recognizedforeign currency exchange losses of $28.0 million.  The Company will continue to pursue currencyexchange at official rates to pay for its approved imports and to remitearnings.  However, it will also monitorconditions in Venezuela and presently intends to continue transferring cashgenerated in the country through parallel market transactions.

 

Due to the government restrictions on currency exchange in Venezueladiscussed above, the Company used the parallel market rate to translate thebalance sheets of its Venezuelan subsidiaries as of December 31,2009.  The impact of this change from theofficial exchange rate was an approximate 60% reduction in the reported U.S.dollar amounts for all assets and liabilities of the Company’s Venezuelansubsidiaries, and a resulting $132.5 million charge recorded in the cumulativetranslation adjustment

 

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**Owens-BrockwayGlass Container, Inc**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

component of other comprehensive income and $45.9 million chargerecorded against noncontrolling interests. In addition, the Company remeasured certain bolivar-denominated assetsand liabilities held outside of Venezuela to the parallel market rate andrecorded a charge of $17.3 million in December 2009.  The adoption of the parallel market rate willhave an adverse impact on the Company’s South American segment operating profitin future periods as most of the revenues and costs of the Company’s Venezuelanoperations will be translated into fewer U.S. dollars.  The Company’s Venezuelan operationsrepresented approximately 40% of the South American segment operating profitfor 2009, including the $28.0 million foreign exchange losses recognized by theCompany from the parallel market transactions noted above.

 

In addition, inflation in Venezuela has continued at an acceleratedrate, and, beginning January 1, 2010, Venezuela’s economy will beconsidered highly inflationary.  Foraccounting purposes, an economy is deemed to be highly inflationary when thethree-year cumulative rate of inflation exceeds 100%.  Under the highly-inflationary basis ofaccounting, the Company must adopt the U.S. dollar as the functional currencyfor its Venezuelan operations as of January 1, 2010.  Any subsequent movements in the bolivar toU.S. dollar exchange rate will be recognized in the results of operations.  In addition, monetary assets (such as cashand receivables) and liabilities (such as payables and accruals) will beremeasured at the end of each reporting period using the currency exchange rateat that date.  Because the Company haselected to adopt the parallel market rate and because that rate is subject tomarket fluctuation, such remeasurement will increase the volatility of reportedresults of operations.

 

On January 8, 2010, the Venezuelan government announced thedevaluation of the bolivar and the creation of a two-tiered official exchangerate.  The official exchange rate willmove from 2.15 bolivars to the U.S. dollar to 2.60 for essential goods and 4.30for non-essential goods.  The Venezuelangovernment also announced that it will intervene in the parallel exchangemarket.  The Company is still evaluatingthe impact of the bolivar devaluation on its Venezuelan operations.  The Company had been able to receive theofficial rate of 2.15 for certain raw materials it imports into Venezuela, andbelieves that it will receive the essential goods rate of 2.60 for these rawmaterials in the future.

 

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# **SIGNATURES**

# ** **

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned thereunto duly authorized.

 

 
|                               | OWENS-ILLINOIS GROUP,  INC. |
|------------------------------------|-----------------------------|
|                               |                        |
|                               | (Registrant)                |
|                               |                        |
|                               | By:                         | /s/ James W. Baehren |
|                               |                        |   |
|                               |                        | James  W. Baehren |
|                               |                        | Attorney-in-fact |
|                               |                        |
|                               |                        |
| Date:  February 10, 2010 |                        |

 

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**Signatures**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of Owens-Illinois Group, Inc.and in the capacities and on the dates indicated.

 
| **Signatures**        | ** ** | **Title**                                                           |
|-----------------------|------------|---------------------------------------------------------------------|
|                  |       |                                                                |
| Albert P.L. Stroucken |       | Chairman and Chief  Executive Officer (Principal Executive Officer) |
|                  |       |                                                                |
| Edward C. White       |       | President (Principal  Financial and Accounting Officer); Director   |
|                  |       |                                                                |
| James W. Baehren      |       | Vice President and  Secretary; Director                             |
|                  |       |                                                                |
| L. Richard Crawford   |       | Director                                                            |

 

 
|                               | By:    | /s/  James W. Baehren |
|------------------------------------|--------|----------------------------|
|                               |   | James W. Baehren           |
|                               |   | Attorney-in-fact           |
|                               |   |
|                               |   |
| Date:  February 10, 2010 |   |

 

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**INDEX TO FINANCIAL STATEMENT SCHEDULE**

 

**Financial Statement Schedule of Owens-IllinoisGroup, Inc. and Subsidiaries:**

 

For the years ended December 31, 2009, 2008, and2007:

 
| ** **                                                  | ** ** | **PAGE** |
|-------------------------------------------------------------|------------|----------|
|                                                        |       |     |
| II —  Valuation and Qualifying Accounts (Consolidated) |       | S-1      |

 

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**OWENS-ILLINOIS GROUP, INC.**

 

**SCHEDULE II — VALUATION ANDQUALIFYING ACCOUNTS (CONSOLIDATED)**

 

**Years ended December 31, 2009, 2008, and 2007**

**(Millions of Dollars)**

 

Reserves deducted from assets in the balance sheets:

 

Allowances for losses and discounts on receivables

 
| ** ** | ** ** | ** **                           | ** ** | **Additions**                       | ** ** | ** ** | ** ** | ** **               | ** ** |
|------------|------------|--------------------------------------|------------|-------------------------------------|------------|------------|------------|--------------------------|------------|
| ** ** | ** ** | **Balance at  beginning  of period** | ** ** | **Charged to  costs and  expenses** | ** ** | **Other**  | ** ** | **Deductions  (Note 1)** | ** ** | **Balance  at end of  period** | ** ** |
|       |       |                                 |       |                                |       |       |       |                     |       |   |   |
| 2009       |       | $                                    | 39.7       |                                | $          | 1.7        |       | $                        | (4.3       | ) | $ | (0.6 | ) | $ | 36.5 |   |
|       |       |                                 |       |                                |       |       |       |                     |       |   |   |
| 2008       |       | $                                    | 36.0       |                                | $          | 8.1        |       | $                        | (0.7       | ) | $ | 3.7 |   | $ | 39.7 |   |
|       |       |                                 |       |                                |       |       |       |                     |       |   |   |
| 2007       |       | $                                    | 28.7       |                                | $          | 4.1        |       | $                        | 8.1        |   | $ | 4.9 |   | $ | 36.0 |   |

 

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(1)       Deductions from allowances for losses anddiscounts on receivables represent uncollectible notes and accounts writtenoff.

 

S-1

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