Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D. C. 20549**

 

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**FORM 10-K**

 

**(MarkOne)**

 

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

 

**For the fiscal year ended December 31, 2008**

 

**or**

 

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

 

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**Commission file number 33-13061**

 

**OWENS-ILLINOIS GROUP, INC.**

(Exact name of registrant as specified in itscharter)

 

| **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 areacode:  **(567)336-5000**

 

Securities registered pursuant to Section 12(b) ofthe Act:  **None**

 

Securities registered pursuant to Section 12(g) ofthe Act:  **None**

 

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 
| Yes o |   | No x |
|-------|--------|------|

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or 15(d) of the Act.

 
| Yes o |   | No x |
|-------|--------|------|

 

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

 
| Yes x |   | No o |
|-------|--------|------|

 

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

 

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of 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, 2009 was 100.

 

**DOCUMENTS INCORPORATED BYREFERENCE**

 

Portions of Owens-Illinois, Inc.Proxy Statement for The Annual Meeting of Share Owners To Be Held Thursday, April 23,2009 (“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, 11, 12 and 13 as permitted under General Instructions I (2)(c) ofForm 10-K.

 

 

 

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**TABLEOF CONTENTS**

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

 

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# **PART I**

# ** **

## **ITEM1.  BUSINESS**

## ** **

**GeneralDevelopment of Business**

 

Owens-Illinois Group, Inc. (the “Company”),through its subsidiaries, is the successor to a business established in1903.  The Company is the largestmanufacturer of glass containers in the world, with leading positions inEurope, North America, Asia Pacific and South America.

 

**Strategic Priorities and Competitive Strengths**

** **

The Company is pursuing the following strategicpriorities aimed at optimizing shareholder return:

 
| · |   | Marketing  Glass — promote its value added benefits and communicate its earth-friendly  attributes                                                          |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                             |
| · |   | Strategic &  Profitable Growth — expand presence in growing markets and enter growing  markets where we do not have a presence                     |
|   |   |                                                                                                                                                             |
| · |   | Innovation &  Technology — focus on product innovation that adds value for customers and  develop technology that provides a sustainable advantage |
|   |   |                                                                                                                                                             |
| · |   | Operational  Excellence — continuous productivity improvement, pricing strategy to improve  margins, and disciplined use of cash                            |

 

Beginning in 2007, the Company commenced a strategicreview of its global profitability and manufacturing footprint.  Since undertaking this review, the Companyhas announced the idling of capacity or closing of facilities involving 11furnaces and approximately 1,800 job eliminations.  The Company expects to conclude the currentglobal review in 2009.  The Companybelieves these actions, combined with its pricing initiatives, will contributeto optimizing shareholder return.

 

The Company has 80 glass manufacturing plants in 22countries.

 

**TechnologyLeader**

 

TheCompany believes it is a technological leader in the worldwide glass containersegment of the rigid packaging market in which it competes.  During the five years ended December 31,2008, on a continuing operations basis, the Company invested more than$1.5 billion in capital expenditures (excluding acquisitions) and morethan $264 million in research, development and engineering to, among otherthings, improve labor and machine productivity, increase capacity in growingmarkets and commercialize technology into new products.

 

**Worldwide Corporate Headquarters**

 

Theprincipal executive office of the Company is located at One Michael Owens Way,Perrysburg, Ohio 43551; the telephone number is (567) 336-5000.  The Company is a wholly owned subsidiary ofOwens-Illinois, Inc. (“OI Inc.”). The Company does not have a web site; however, certain generalinformation about the Company’s operations is available from OI Inc.’s web siteat www.o-i.com.  The Company’s annualreport on Form 10-K, quarterly reports on Form 10-Q, current reportson Form 8-K, and amendments to those reports filed or furnished pursuantto Section 13(a) or 15(d) of the Exchange Act are 

 

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availablefrom the SEC’s web site at www.sec.gov. Copies of the Company’s SEC filings may be obtained free of charge bywriting to the Company, Attention: Investor Relations.

 

**FinancialInformation about Reportable Segments**

 

Informationas to sales, earnings from continuing operations before interest income,interest expense, provision for income taxes and minority share owners’interests in earnings of subsidiaries and excluding amounts related to certain items that management considersnot representative of ongoing operations (“Segment Operating Profit”),and total assets by reportable segment is included in Note 18 to theConsolidated Financial Statements.

 

**NarrativeDescription of Business**

 

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

 

**Products and Services, Customers, Markets andCompetitive Conditions, and Methods of Distribution**

 

TheCompany is the largest manufacturer of glass containers in the world.  The Company is the leading glass containermanufacturer in 17 of the 22 countries where it competes in the glass containersegment of the rigid packaging market, including the U.S., and the solemanufacturer of glass containers in 8 of these countries.

 

**Products and Services**

 

TheCompany produces glass containers for beer, ready-to-drink low alcoholrefreshers, spirits, wine, food, tea, juice and pharmaceuticals.  The Company also produces glass containersfor soft drinks and other non-alcoholic beverages, principally outside theU.S.  The Company manufactures theseproducts in a wide range of sizes, shapes and colors. The Company is active innew product development and glass container innovation.

 

**Customers**

 

Inmost of the countries where the Company competes, it has the leading positionin the glass container segment of the rigid packaging market based on salesrevenue.  The largest customers includemany of the leading manufacturers and marketers of glass packaged products inthe world.  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,  Miller/Coors, Pepsico,and Saxco-Demptos, Inc.  The largestglass container customers outside the U.S. include (in alphabetical order)Anheuser-Busch InBev, Carlsberg, Diageo, Foster’s, Heineken, Lion Nathan,Molson/Coors, and SABMiller.  The Companyis a major glass container supplier to all of these customers.

 

TheCompany sells most of its glass container products directly to customers underannual or multi-year supply agreements. Multi-year contracts typically provide for price adjustments based oncost changes with annual limitations. The Company also sells some of its products through distributors. Glasscontainer production is typically scheduled to maintain reasonable levels ofinventory.

 

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**Markets and Competitive Conditions**

 

Theprincipal markets for glass container products made by the Company are inEurope, North America, Asia Pacific, and South America.  The Company believes it is a low-costproducer in the glass container segment of the rigid packaging market in manyof the countries in which it competes. Much of this cost advantage is due to proprietary equipment and processtechnology used by the Company.  TheCompany’s machine development activities and systematic upgrading of productionequipment begun in the 1990’s and early 2000’s support its low-cost leadershipposition in the glass container segment in many of the countries in which itcompetes, a key strength to competing successfully in the rigid packagingmarket.

 

TheCompany has the leading share of the glass container segment of the U.S. rigidpackaging market based 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 also self-manufacture glass containers.

 

Insupplying glass containers outside of the U.S., the Company competes directlywith Compagnie de Saint-Gobain in Europe and Brazil, Ardagh plc in the U.K.,Germany, and Poland, Vetropak in the Czech Republic and Amcor Limited inAustralia.  In other locations in Europe,the Company competes indirectly with a variety of glass container firmsincluding Compagnie de Saint-Gobain, Vetropak and Ardagh plc.  Except as mentioned above, the Company doesnot compete with any large, multi-national glass container manufacturers inSouth America or the Asia Pacific region.

 

Inaddition to competing with other large, well-established manufacturers in theglass container segment, the Company competes with manufacturers of other formsof rigid packaging, principally aluminum cans and plastic containers, on thebasis of quality, price, service and the marketing attributes of thecontainer.  The principal competitorsproducing metal containers are Amcor, Ball Corporation, Crown Holdings, Inc.,Rexam plc, and Silgan Holdings Inc.  Theprincipal competitors producing plastic containers are Consolidated ContainerHoldings, LLC, Graham Packaging Company, Plastipak Packaging, Inc. andSilgan Holdings Inc.  The Company alsocompetes with manufacturers of non-rigid packaging alternatives, includingflexible pouches and aseptic cartons.

 

TheCompany’s unit shipments of glass containers in countries outside of the U.S.have grown substantially from levels in earlier years.  The Company has added to its internationaloperations by acquiring glass container companies, many of which have leadingpositions in growing or established markets, increasing capacity at selectforeign subsidiaries, and having a global network of glass container companiesthat license its technology.  In manydeveloping countries, the Company’s international glass operations havebenefited in the last ten years from increased consumer spending power, a trendtoward the privatization of industry, a favorable climate for foreigninvestment, lowering of trade barriers and global expansion programs bymulti-national consumer companies.

 

*Europe.*  The Company’s European glass containerbusiness, headquartered in Switzerland, has consolidated manufacturingoperations in 11 countries and is the largest in Europe.  The Company is a leading producer of wine andchampagne bottles in France.  In Italy,the Company is the leading manufacturer of glass containers.  In Germany, the Company’s key customersinclude J***ä***germeister,Unilever, and Nestle Europe.  In TheNetherlands, the Company is one of the leading suppliers of glass containers toHeineken.  The Company is a leadingmanufacturer of glass containers for the U.K. spirits business.  In Spain, the Company serves the market forolives in the Sevilla area and the market for wine bottles in the Barcelona andsouthern France area.  In Poland, theCompany 

 

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is theleading glass container manufacturer and operates two plants.  The Company is the leading glass containermanufacturer in the Czech Republic.  InHungary, the Company is the sole glass container manufacturer and serves theHungarian food industry.  In Finland andthe Baltic country of Estonia, the Company is the only manufacturer of glasscontainers.  The Company coordinatesproduction activities between Finland and Estonia in order to efficiently servethe Finnish, Baltic and Russian markets. In recent years, Western Europeanbrewers have been establishing beer production facilities in Central Europe andthe Russian Republic.  Because these newbeer plants use high-speed filling lines, they require high quality glasscontainers in order to operate properly. The Company believes it is wellpositioned to meet this demand.

 

*North America.*  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.

 

*SouthAmerica.*  The Companyis 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, 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.

 

*AsiaPacific.*TheCompany has glass operations in four countries in the Asia Pacific region:Australia, New Zealand, Indonesia and China. In this region, the Company is theleading manufacturer of glass containers in most of the countries in which itcompetes. In Australia, the Company’s subsidiary operates four glass containerplants including a plant focused on serving the needs of the growing Australianwine industry. In New Zealand, the Company is the sole glass containermanufacturer. In Indonesia, the Company supplies the Indonesian market andexports glass containers to a number of countries. In China, the glasscontainer segments of the packaging market are regional and highly fragmentedwith a number of local competitors. The Company has four glass container plantsin China, manufacturing containers to serve a wide range of customers both domesticallyand 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-nationalconsumer companies due to its leadership in glass technology and its status asa high quality producer in most of the markets it serves.

 

**Manufacturing**

 

TheCompany believes it is a low-cost producer in the North American rigidpackaging market, as well as a low-cost producer in many of the internationalglass segments in which it competes. Much of this cost advantage is due to the Company’s proprietaryequipment and process technology.  TheCompany believes its proprietary high volume glass forming machines, developedand refined by its engineering group, are significantly more efficient andproductive than those used by competitors. The Company’s machine development activities and systematic upgrading ofproduction equipment have given it a low-cost leadership position in the glasscontainer segment in most of the countries in which it competes, a key strengthto competing successfully in the rigid packaging market.

 

TheCompany operates two machine shops that assemble and repair high-productivityglass-forming machines as well as several mold shops that manufacture molds andrelated equipment.

 

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**Methodsof Distribution**

 

Dueto the significance of transportation costs and the importance of timelydelivery, glass container manufacturing facilities are generally located closeto customers.  In the U.S., most of theCompany’s glass container products are shipped by common carrier to customerswithin a 250-mile radius of a given production site.  In addition, the Company’s glass containeroperations outside the U.S. export some products to customers beyond theirnational boundaries, which may include transportation by rail and oceandelivery in combination with common carriers.

 

**Suppliers and Raw Materials**

 

Theprimary raw materials used in the Company’s glass container operations aresand, soda ash, limestone and recycled glass. Each of these materials, as well as the other raw materials used tomanufacture glass containers, has historically been available in adequatesupply from multiple sources.  One of thesources is a soda ash mining operation in Wyoming in which the Company has a25% interest.  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.

 

**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, particularlyfor natural gas and fuel oil in volatile markets such as North America andEurope.  In order to limit the effects offluctuations in market prices for natural gas, the Company uses commodityfutures contracts related to its forecasted requirements in North America.  The objective of these futures contracts isto reduce the potential volatility in cash flows and expense due to changingmarket prices.  The Company continually evaluatesthe energy markets with respect to its forecasted energy requirements in orderto 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.

 

**Glass Recycling**

 

TheCompany is an important contributor to the recycling effort in the U.S. andabroad and continues to melt substantial recycled glass tonnage in its glassfurnaces. The Company 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.

 

#### **ADDITIONAL INFORMATION**

#### ** **

#### **Technical AssistanceLicense Agreements**

#### ** **

TheCompany has agreements to license its proprietary glass container technologyand provide technical assistance to 19 companies in 19 countries.  These agreements cover areas related tomanufacturing and engineering assistance. The worldwide licensee network provides a stream of revenue to supportthe Company’s development activities and gives it the opportunity toparticipate in the rigid packaging market in countries where it does notalready have a direct presence.  Inaddition, the Company’s technical 

 

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agreementsenable it to apply “best practices” developed by its worldwide licenseenetwork.  In the years 2008, 2007 and2006, the Company earned $18.6 million, $19.7 million and $16.5million, respectively, in royalties and net technical assistance revenue on acontinuing operations basis.

 

## **Research and Development**

## ** **

TheCompany believes it is a technological leader in the worldwide glass containersegment of the rigid packaging market. Research, development, and engineering constitute important parts of theCompany’s technical activities.  On acontinuing operations basis, research, development, and engineeringexpenditures were $66.6 million, $65.8 million, and$48.7 million for 2008, 2007, and 2006, respectively.  The Company’s research, development andengineering activities include new products, manufacturing process control,automatic inspection and further automation of manufacturing activities.

 

## **Environmental and Other Governmental Regulation**

## ** **

The Company’s worldwide operations, in common withthose of the industry generally, are subject to extensive laws, ordinances,regulations and other legal requirements relating to environmental protection,including legal requirements governing investigation and clean-up ofcontaminated properties as well as water discharges, air emissions, wastemanagement and workplace health and safety.

 

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 January 1, 2009, there were 11 U.S.states with bottle deposit laws in effect, requiring consumer deposits ofbetween 4 and 15 cents, USD, depending on the size of the container. In Canada,there are 8 provinces with consumer deposits between 5 and 20 cents Canadian,depending on the size of the container. In Europe a number of countries havesome form of consumer deposit law in effect, including Austria, Belgium,Denmark, Finland, Germany, The Netherlands, Norway, Sweden and Switzerland. Thestructure and enforcement of such laws and regulations can impact the sales ofbeverage containers in a given jurisdiction. Such laws and regulations alsoimpact the availability of post-consumer recycled glass for the Company to usein container production.

 

A number of U.S. states and Canadian provinces haverecently considered or are now considering laws and regulations to encouragecurbside, deposit return, and on-premise recycling.   Although there is no clear trend in thedirection of these state and provincial laws and regulations, the Companybelieves that U.S. states and Canadian provinces, as well as municipalitieswithin those jurisdictions, will continue to adopt recycling laws which willaffect 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.

 

The European Union Emissions Trading Scheme (“EUETS”)commenced January 1, 2005.  The EUhas committed to Kyoto Protocol emissions reduction targets and the EUETS isintended to facilitate such reduction. The Company’s manufacturing installations which operate in EU countrieswill need to restrict the volume of their CO2 emissions to the level of theirindividually allocated Emissions Allowances as set by country regulators.   If the actual level of emissions for anyinstallation exceeds its allocated allowance, additional allowances can bebought on the market to cover deficits; conversely, if the actual 

 

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level of emissions for such installation is lessthan its allocation, the excess allowances can be sold on the same market.  No material effect is anticipated as a resultof the EUETS.

 

In Asia Pacific, Australia’s ratification of theKyoto Protocol came into effect in March 2008. In July 2008, theAustralian Federal Government issued the Carbon Pollution Reduction Scheme(CPRS) Green Paper aimed to help reduce the country’s carbon emissions. TheCPRS recommends an emissions trading scheme (ETS) be established in Australiain 2010. In New Zealand, parliament passed ETS legislation in September 2008and a cap-and-trade system is also likely to be in effect by 2010.  Also in Australia, the *National Greenhouse and Energy Reporting Act 2007*commenced on July 1, 2008. The Act establishes a mandatory reportingsystem for corporate greenhouse gas emissions and energy production andconsumption. Key features of the Act include the following: (1) reporting ofgreenhouse gas emissions, energy consumption and production by largecorporations, subject to independent audit; (2) public disclosure ofcorporate level greenhouse gas emissions and energy information; and (3) consistentand comparable data available for government, in particular, the developmentand administration of the Carbon Pollution Reduction Scheme.

 

TheCompany is unable to predict what environmental legal requirements may beadopted in the future.  However, theCompany continuallymonitors its operations in relation to environmental impacts and invests inenvironmentally friendly and emissions reducing projects.  As such, the Company has madesignificant expenditures for environmental improvements at certain of itsfactories over the last several years; however, these expenditures did not havea material adverse affect on the Company’s results of operations or cashflows.  While not expected to bematerial, the compliance costs associated with legal environmental requirementsare expected to continue.

 

## **Intellectual Property Rights**

## ** **

TheCompany has a large number of patents which relate to a wide variety ofproducts and processes, has a substantial number of patent applicationspending, and is licensed under several patents of others.  While in the aggregate the Company’s patentsare of material importance to its businesses, the Company does not considerthat any patent or group of patents relating to a particular product or processis of material importance when judged from the standpoint of any segment or itsbusinesses as a whole.

 

TheCompany has a number of intellectual property rights, comprised of bothpatented and proprietary technology, that the Company believes makes its glassforming machines more efficient and productive than those used by itscompetitors.  In addition, the efficiencyof the Company’s glass forming machines is enhanced by the Company’s overallapproach to cost efficient manufacturing technology, which extends from the rawmaterials batch house to the finished goods warehouse.  This technology is proprietary to the Companythrough a combination of issued patents, pending applications, copyrights,trade secrets and proprietary know-how.

 

Upstreamof the glass forming machines, there is technology to deliver molten glass tothe forming machine at high rates of flow and fully conditioned to behomogeneous in consistency, viscosity and temperature for efficient forminginto glass containers.  The Company hasproprietary know-how in (a) the batch house, where raw materials are stored,measured and mixed, (b) the furnace control system and furnace combustion,and (c) the forehearth and feeding system to deliver such homogeneousglass to the forming machines.

 

Inthe Company’s glass container manufacturing processes, computer controls andelectro-mechanical mechanisms are commonly used for a wide variety ofapplications in the forming machines and auxiliary processes. Various patentsheld by the Company are directed to the electro-mechanical mechanisms andrelated technologies used to control sections of the machines.  Additional U.S. patents held by the

 

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Companyand various pending applications are directed to the technology used by theCompany for the systems that control the operation of the forming machines andmany of the component mechanisms that are embodied in the machine systems.

 

Downstreamof the glass forming machines, there is patented and unpatented technology forware handling, annealing, coating and inspection, which further enhances theoverall efficiency of the manufacturing process.

 

Whilethe above patents and intellectual property rights are representative of thetechnology used in the Company’s glass manufacturing operations, there arenumerous other pending patent applications, trade secrets and other proprietaryknow-how and technology, as supplemented by administrative and operational bestpractices, 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**

## ** **

Salesof particular glass container products such as beer are seasonal.  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.

 

**Employees**

 

TheCompany’s worldwide operations employed approximately 23,000 persons as of December 31,2008.  Approximately 96% of NorthAmerican employees are hourly workers covered by collective bargainingagreements.  The principal collectivebargaining agreement, which at December 31, 2008, covered approximately78% of the Company’s union-affiliated employees in North America, will expireon March 31, 2011. Approximately 56% 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.

 

**Financial Information about Foreign and DomesticOperations**

 

Information as to netsales, Segment Operating Profit, and assets of the Company’s reportablesegments is included in Note 18 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 31,2008, the Company had approximately $3.3 billion of total debt outstanding,reduced from $3.7 billion at December 31, 2007.

 

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While the debt level islower, the Company’s remaining indebtedness could result in the followingconsequences:

 
| · |   | Increased  vulnerability to general adverse economic and industry conditions;                                                                                                                                                                                                             |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | Increased  vulnerability to interest rate increases for the portion of the unhedged and  fixed rate borrowing swapped into variable rates;                                                                                                                                                |
| · |   | Require the  Company to dedicate a substantial portion of cash flow from operations to  payments on indebtedness, thereby reducing the availability of cash flow to  fund working capital, capital expenditures, acquisitions, development efforts  and other general corporate purposes; |
| · |   | Limited  flexibility in reacting to the Company’s competitors that have less debt; and                                                                                                                                                                                               |
| · |   | Limit, along  with the financial and other restrictive covenants in the documents governing  indebtedness, among other things, the Company’s ability to borrow additional  funds.                                                                                                    |

 

**Abilityto Service Debt****—****To service its indebtedness, the Company will require a significantamount of cash. The Company’s ability to generate cash depends on many factorsbeyond its control.**

 

The Company’s ability to make payments on and torefinance its indebtedness and to fund working capital, capital expenditures,acquisitions, development efforts and other general corporate purposes dependson its ability to generate cash in the future. The Company has no assurance that it will generate sufficient cash flowfrom operations, or that future borrowings will be available under the securedcredit agreement, in an amount sufficient to enable the Company to pay itsindebtedness, or to fund other liquidity needs. If short term interest ratesincrease, the Company’s debt service cost will increase because some of itsdebt is subject to short term variable interest rates. At December 31,2008, the Company’s debt subject to variable interest rates, including fixedrate debt swapped to variable rate, represented approximately 58% of totaldebt.

 

The Company may need to refinance all or a portionof its indebtedness on or before maturity. If the Company is unable to generatesufficient cash flow and is unable to refinance or extend outstandingborrowings on commercially reasonable terms or at all, it may have to:

 
| · |   | Reduce or delay capital expenditures planned for replacements,  improvements and expansions; |
|--------|--------|----------------------------------------------------------------------------------------------|
| · |   | Sell assets;                                                                                 |
| · |   | Restructure debt; and/or                                                                     |
| · |   | Obtain additional debt or equity financing.                                                  |

 

The Company can provide no assurance that it couldeffect or implement any of these alternatives on satisfactory terms, if at all.

 

**DebtRestrictions****—****The Company may not be able to finance futureneeds or adapt its business plans to changes because of restrictions containedin the secured credit agreement and the indentures and instruments governingother indebtedness.**

 

The secured credit agreement, the indenturesgoverning unsecured notes and debentures, and certain of the agreementsgoverning other indebtedness contain affirmative and negative covenants thatlimit the ability of the Company to take certain actions. For example, some ofthese indentures restrict, among other things, the ability of the Company andits restricted subsidiaries to borrow money, pay dividends on, or redeem orrepurchase its stock, make investments, create liens, enter into certaintransactions with affiliates and sell certain assets or merge with or intoother companies. These restrictions could adversely affect the Company’sability to operate its businesses and may limit its ability to take advantageof potential business opportunities as they arise.

 

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Failure to comply withthese or other covenants and restrictions contained in the secured creditagreement, the indentures or agreements governing other indebtedness couldresult in a default under those agreements, and the debt under thoseagreements, together with accrued interest, could then be declared immediatelydue and payable. If a default occurs under the secured credit agreement, wecould no longer request borrowings under the agreement, and the lenders couldcause all of the outstanding debt obligations under such secured creditagreement to become due and payable, which would result in a default under anumber of other outstanding debt securities and could lead to an accelerationof obligations related to these debt securities. A default under the securedcredit agreement, indentures or agreements governing other indebtedness couldalso lead to an acceleration of debt under other debt instruments that containcross acceleration or cross-default provisions.

 

**Cash Usedto Satisfy Other Obligations—A portion of the Company’s cash flow will be usedto make payments to OI Inc. to satisfy certain debt and litigation-relatedobligations, including settlement of asbestos-related claims.**

 

Although OI Inc. does not conduct anyoperations, it has substantial obligations to make payments on its outstanding publicdebt securities and to satisfy claims of persons for exposure toasbestos-containing products and related expenses and to pay otherordinary-course obligations. OI Inc. relies primarily on distributionsfrom its subsidiaries, including the Company, to meet these obligations.OI Inc. makes semi-annual interest payments of $19.1 million on itsoutstanding public debt securities. OI Inc.’s asbestos-related paymentswere $210.2 million, $347.1 million and $162.5 million for the yearsended December 31, 2008, 2007 and 2006, respectively. In the fourthquarter of 2008, OI Inc. recorded a charge of $250.0 million (inaddition to previously recorded charges of $3.22 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.

 

As a result of the magnitude of OI Inc.’sobligations for asbestos-related lawsuits and its dependence on the cash flowsof its subsidiaries, the Company expects that a substantial portion of its cashflow will be used to make payments to OI Inc. to enable it to satisfythese obligations. These payments will reduce the cash flow available to theCompany for other purposes. For additional information regarding OI Inc.’sasbestos-related lawsuits, claims and payments, see Note 17 to the ConsolidatedFinancial Statements.

 

**International Operations — The Company is subject torisks associated with operating in foreign countries.**

 

The Company operatesmanufacturing and other facilities throughout the world.  Net sales from international operationstotaled approximately $6.0 billion, representing approximately 76% of theCompany’s net sales for the year ended December 31, 2008.  As a result of its international operations,the Company is subject to risks associated with operating in foreign countries,including:

 
| · |   | Political,  social and economic instability;                                                                                                         |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | War, civil  disturbance or acts of terrorism;                                                                                                        |
| · |   | Taking of  property by nationalization or expropriation without fair compensation;                                                                   |
| · |   | Changes in  government policies and regulations;                                                                                                     |
| · |   | Devaluations and  fluctuations in currency exchange rates;                                                                                           |
| · |   | Imposition of  limitations on conversions of foreign currencies into dollars or remittance  of dividends and other payments by foreign subsidiaries; |
| · |   | Imposition or  increase of withholding and other taxes on remittances and other payments by  foreign subsidiaries;                                   |
| · |   | Hyperinflation  in certain foreign countries; and                                                                                                    |
| · |   | Impositions or  increase of investment and other restrictions or requirements by foreign  governments.                                               |

 

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

 

**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.  TheCompany also competes with manufacturers of non-rigid packaging alternatives,including flexible pouches and aseptic cartons, in serving the packaging needsof 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.

 

**Economic Environment - TheCompany may be adversely affected by the current economic environment.**

 

As a result of severely weak credit market conditions(including uncertainties with respect to financial institutions, and severelydiminished liquidity and credit availability), volatility in energy costs andother macro-economic challenges currently affecting many of the economies inwhich the Company operates, customers or vendors may experience serious cashflow problems and as a result, may modify, delay, or curtail plans to purchasethe Company’s products and vendors may significantly and quickly increase theirprices or reduce their output. Additionally, if customers are not successful in generating sufficientrevenue or are precluded from securing financing, they may not be able to pay,or may delay payment of, accounts receivable that are owed to the Company.  Any inability of current and/or potentialcustomers to pay the Company for its products may adversely affect the Company’searnings and cash flow.  If the economicconditions in the Company’s key markets deteriorate further, the Company mayexperience material adverse 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:

 

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| · |   | The inability to  integrate effectively the operations, products, technologies and personnel of  the acquired companies (some of which are located in diverse geographic  regions) and achieve expected synergies; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | The potential  disruption of existing business and diversion of management’s attention from  day-to-day operations;                                                                                           |
| · |   | The inability to  maintain uniform standards, controls, procedures and policies;                                                                                                                                   |
| · |   | The need or  obligation to divest portions of the acquired companies; and                                                                                                                                          |
| · |   | The potential  impairment of relationships with 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 brewing, iced tea and other beverage industries, inwhich demand is stronger during the summer months, sales of the Company’sproducts have 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 frommultiple sources.  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.  These shortages,as well as material volatility in the cost of any of the principal rawmaterials that the Company uses, may have a material adverse effect onoperations.

 

**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.

 

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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), andcriminal sanctions for violations.  Theselegal requirements may apply to conditions at properties that the Companypresently or formerly owned or operated, as well as at other properties forwhich the Company may be responsible, including those at which wastesattributable to the Company were disposed. A significant order or judgment against the Company, the loss of asignificant permit or license or the imposition of a significant fine may havea 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 31,2008, covered approximately 96% of the Company’s hourly employees in NorthAmerica. Approximately 56% of employees in South America are unionized,although according to the labor legislation on each country, 100% of employeesare covered by collective bargaining agreements.  The agreement covering substantially all ofthe Company’s union-affiliated employees in its U.S. glass container operationsexpires on March 31, 2011. Agreements in South America typically have an average term ofapproximately 2-3 years.  Upon theexpiration of any collective bargaining agreement, if the Company is unable tonegotiate acceptable contracts with labor unions, it could result in strikes bythe affected workers and increased operating costs as a result of higher wagesor benefits paid to union members. In addition, a large number of the Company’semployees are employed in countries in which employment laws provide greaterbargaining or other 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 the Company’s consolidated financialstatements in accordance with U.S. generally accepted accounting principles,several estimates and assumptions are made that affect the accounting for andrecognition of assets, liabilities, revenues and expenses.  These estimates and assumptions must be madebecause certain information that is used in the preparation of the Company’sfinancial statements is dependent on future events, cannot be calculated with ahigh degree of precision from data available or is not capable of being readilycalculated based on generally accepted methodologies.  In some cases, these estimates areparticularly difficult to determine and the Company must exercise significantjudgment.

 

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The Company believes thataccounting for long-lived assets, pension benefit plans, contingencies andlitigation, and income taxes involves the more significant judgments andestimates used in the preparation of its consolidated financial statements.  Actual results for all estimates could differmaterially from the estimates and assumptions that the Company uses, whichcould have a material adverse effect on the Company’s financial condition andresults of operations.

 

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

 

The Company’s implementation of and compliance withchanges in accounting rules and interpretations could adversely affect itsoperating results or cause unanticipated fluctuations in its results in futureperiods.  The accounting rules andregulations that the Company must comply with are complex and continuallychanging.  Recent actions and publiccomments from the SEC have focused on the integrity of financial reportinggenerally.  The Financial AccountingStandards Board, or FASB, has recently introduced several new or proposedaccounting standards, or is developing new proposed standards, which wouldrepresent a significant change from current industry practices.  In addition, many companies’ accountingpolicies are being subjected to heightened scrutiny by regulators and thepublic.  While the Company believes thatits financial statements have been prepared in accordance with U.S. generallyaccepted accounting principles, the Company cannot predict the impact of futurechanges to accounting principles or its accounting policies on its financialstatements 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.**

 

Asrequired by FAS No. 142, “Goodwill and Other Intangibles,” the Companyevaluates goodwill annually (or more frequently if impairment indicators arise)for impairment using the required business valuation methods.  Goodwill at December 31, 2008 totaled$2,207.5 million.  These methods includethe use of a weighted average cost of capital to calculate the present value ofthe expected future cash flows of the Company’s reporting units.  Future changes in the cost of capital,expected cash flows, or other factors may cause the Company’s goodwill to beimpaired, resulting in a non-cash charge against results of operations to writedown goodwill for the amount of the impairment. If a significant write down is required, the charge would have amaterial adverse effect on the Company’s reported results of operations and networth.

 

**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.  Recent deterioration inthe value of such investments, or further reductions driven by a decline insecurities markets or otherwise, could increase the underfunded status of theCompany’s funded pension plans, thereby increasing its obligation to makecontributions to the plans as required by the laws and regulations governingeach plan.  An obligation to makecontributions to pension plans could reduce the cash available for workingcapital and other corporate uses, and may have an adverse impact on the Company’soperations, financial condition and liquidity.

 

## **ITEM 1B.               UNRESOLVEDSTAFF COMMENTS**

## ** **

None.

 

14

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**ITEM 2.  PROPERTIES**

 

The principalmanufacturing facilities and other material important physical properties ofthe Company at December 31, 2008 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                    |   | Toano, VA         |
| Clarion, PA                      |   | 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                         |   |              |
|                             |   |              |
| ***European  Operations***       |   |              |
| Czech Republic                   |   |              |
| Glass Container Plants           |   |              |
| Sokolov                          |   | Teplice           |
|                             |   |              |

 

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| Estonia                          |   |             |
|----------------------------------|--------|------------------|
| Glass Container Plant            |   |             |
| Jarvakandi                       |   |             |
|                             |   |             |
| Finland                          |   |             |
| Glass Container Plant            |   |             |
| Karhula                          |   |             |
|                             |   |             |
| France                           |   |             |
| Glass Container Plants           |   |             |
| Beziers                          |   | Reims (2 plants) |
| 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           |
|                             |   |             |
| ***South  American Operations*** |   |             |
| Brazil                           |   |             |

 

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| 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 Plant           |   |                                        |
| Callao                          |   | Lurin (1)                                   |
|                            |   |                                        |
| Venezuela                       |   |                                        |
| Glass Container Plants          |   |                                        |
| Valencia                        |   | Valera                                      |

 
| ***Other Operations***         | *** *** | *** ***            |
|--------------------------------|--------------|-------------------------|
| Machine Shops                  |         |                    |
| Birmingham, United Kingdom (1) |         | Brockway,  Pennsylvania |
| Cali, Colombia                 |         |                    |
|                           |         |                    |
| ***Corporate Facilities***     |         |                    |
| Perrysburg, OH (1)             |         |                    |

 

----

(1)  This facility is leased in whole or in part.

 

The Company believes that its facilities are wellmaintained and currently adequate for its planned production requirements overthe next three to five years.

 

## **ITEM3.  LEGAL PROCEEDINGS**

## ** **

For further informationon legal proceedings, see Note 17 to the Consolidated Financial Statements andthe section entitled “Environmental and Other Governmental Regulation” in Item1.

 

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# **PART II**

#  

## **ITEM 6.          SELECTEDFINANCIAL DATA**

 

The selected consolidatedfinancial data presented below relates to each of the five years in the periodended December 31, 2008.  Thefinancial data for each of the five years in the period ended December 31,2008 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,**     | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                             | ** ** | **2008**                                        | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                             | ** ** | **(Dollar amounts in millions)** | ** ** |
| Consolidated  operating results (a):                                   |       |                                            |       |   |   |   |   |   |   |   |   |
| Net sales                                                              |       | $                                               | 7,884.7    |   | $ | 7,566.7 |   | $ | 6,650.4 |   | $ | 6,266.9 |   | $ | 5,366.1 |   |
| Manufacturing,  shipping and delivery (b)                              |       | (6,208.1                                        | )          | (5,971.4 | ) | (5,481.1 | ) | (5,084.9 | ) | (4,329.6 | ) |
| Gross profit                                                           |       | 1,676.6                                         |       | 1,595.3 |   | 1,169.3 |   | 1,182.0 |   | 1,036.5 |   |
|                                                                   |       |                                            |       |   |   |   |   |   |   |   |   |
| Research,  engineering, selling, administrative, and other expense (c) |       | (732.7                                          | )          | (737.6 | ) | (633.8 | ) | (1,031.9 | ) | (445.9 | ) |
| Other revenue  (d)                                                     |       | 117.5                                           |       | 112.5 |   | 98.6 |   | 103.2 |   | 134.2 |   |
| Earnings before  interest expense and items below                      |       | 1,061.4                                         |       | 970.2 |   | 634.1 |   | 253.3 |   | 724.8 |   |
| Interest expense  (e)                                                  |       | (253.0                                          | )          | (348.6 | ) | (349.0 | ) | (325.4 | ) | (329.0 | ) |
| Earnings (loss)  from continuing operations before items below         |       | 808.4                                           |       | 621.6 |   | 285.1 |   | (72.1 | ) | 395.8 |   |
| Provision for  income taxes (f)                                        |       | (237.9                                          | )          | (147.8 | ) | (125.3 | ) | (428.9 | ) | (84.9 | ) |
| Minority share  owners’ interests in earnings of subsidiaries     |       | (70.2                                           | )          | (59.5 | ) | (43.6 | ) | (35.9 | ) | (32.9 | ) |
| Earnings (loss)  from continuing operations                            |       | 500.3                                           |       | 414.3 |   | 116.2 |   | (536.9 | ) | 278.0 |   |
| Net earnings  (loss) of discontinued operations (g)                    |       |                                            |       | 2.8 |   | (23.7 | ) | 63.1 |   | (28.0 | ) |
| Gain on sale of  discontinued operations                               |       | 6.8                                             |       | 1,038.5 |   |   |   | 1.2 |   | 70.4 |   |
| Net earnings  (loss)                                                   |       | $                                               | 507.1      |   | $ | 1,455.6 |   | $ | 92.5 |   | $ | (472.6 | ) | $ | 320.4 |   |

 

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| ** **                                                            | ** ** | **Years ended December 31,**     | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                            | ** ** | **2008**                                        | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                            | ** ** | **(Dollar amounts in millions)** | ** ** |
| Other data:                                                           |       |                                            |       |   |   |   |   |   |   |   |   |
| The following are included in net earnings:                           |       |                                            |       |   |   |   |   |   |   |   |   |
| Depreciation                                                          |       | $                                               | 431.0      |   | $ | 423.4 |   | $ | 427.7 |   | $ | 436.1 |   | $ | 406.3 |   |
| Amortization of  intangibles                                          |       | 28.9                                            |       | 28.9 |   | 22.3 |   | 22.5 |   | 18.8 |   |
| Amortization of  deferred finance fees (included in interest expense) |       | 7.9                                             |       | 8.6 |   | 5.7 |   | 6.7 |   | 6.0 |   |
|                                                                  |       |                                            |       |   |   |   |   |   |   |   |   |
| Balance sheet  data (at end of period):                               |       |                                            |       |   |   |   |   |   |   |   |   |
| Working  capital (current assets less current liabilities)            |       | $                                               | 616        |   | $ | 375 |   | $ | 216 |   | $ | 618 |   | $ | 605 |   |
| Total  assets                                                         |       | 7,977                                           |       | 9,325 |   | 9,321 |   | 9,521 |   | 10,550 |   |
| Total  debt                                                           |       | 3,325                                           |       | 3,714 |   | 5,464 |   | 5,300 |   | 5,365 |   |
| Share  owner’s equity                                            |       | 1,536                                           |       | 2,643 |   | 1,044 |   | 1,198 |   | 2,040 |   |

 

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(a)                Amountsrelated to the Company’s plastic packaging business have been reclassified todiscontinued operations for 2004-2007 as a result of the sale of that businessin 2007. Amounts related to the Company’s plastic blow-molded containerbusiness have been reclassified to discontinued operations for 2004 as a resultof the sale of that business in 2004. Amounts for the year ended December 31, 2004, and all subsequentperiods, include the results of BSN from the date of acquisition on June 21,2004.

 

(b)               Amountfor 2006 includes a loss of $8.7 million ($8.4 million after tax) from the markto market effect of natural gas hedge contracts.

 

Amountfor 2005 includes a gain of $3.8 million ($2.3 million after tax) from the markto market effect of natural gas hedge contracts.

 

Amountfor 2004 includes a gain of $4.9 million ($3.2 million after tax) from the markto market effect of natural gas hedge contracts.

 

(c)                Amountfor 2008 includes charges of $133.3 million ($110.1 million after tax andminority share owners’ interests) for restructuring and asset impairments.

 

Amountfor 2007 includes charges of $100.3 million ($84.1 million after tax) forrestructuring and asset impairments.

 

Amountfor 2006 includes a charge of $20.8 million ($20.7 million after tax) for CEOtransition costs and a charge of $29.7 million ($27.7 million after tax) forthe closing of the Godfrey, Illinois machine parts manufacturing operation.

 

Amountfor 2005 includes a charge of $494.0 million (pretax and after tax) to writedown goodwill in the Asia Pacific Glass unit.

 

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Amountfor 2004 includes a charge of $6.4 million ($5.4 million after tax) forrestructuring a life insurance program in order to comply with recent statutoryand tax regulation changes.

 

(d)               Otherrevenue in 2006 includes a gain of $15.9 million ($11.2 million after tax) forthe curtailment of postretirement benefits in The Netherlands.

 

Otherrevenue in 2005 includes $28.1 million (pretax and after tax) from the sale ofthe Company’s glass container facility in Corsico, Italy.

 

Otherrevenue in 2004 includes: (1) a gain of $20.6 million ($14.5 million aftertax) for the sale of certain real property; and (2) a gain of $31.0million ($13.1 million after tax) for a restructuring in the Italian SpecialtyGlass business.

 

(e)                Amountfor 2007 includes charges of $7.9 million ($7.3 million after tax) for noterepurchase premiums.

 

Amountfor 2006 includes charges of $6.2 million (pretax and after tax) for noterepurchase premiums.

 

Amountfor 2004 includes charges of $28.0 million ($18.3 million after tax) for noterepurchase premiums.

 

Includesadditional interest charges for the write-off of unamortized deferred financingfees related to the early extinguishment of debt as follows:  $1.6 million ($1.5 million after tax) for2007; $11.3 million ($10.9 million after tax) for 2006; and $2.8 million ($1.8million after tax) for 2004.

 

(f)                  Amountfor 2008 includes a net tax expense of $33.3 million ($34.8 million afterminority share owners’ interest) related to tax legislation, restructuring, andother.

 

Amountfor 2007 includes a benefit of $13.5 million for the recognition of tax creditsrelated to restructuring of investments in certain European operations.

 

Amountfor 2006 includes a benefit of $5.7 million from the reversal of a non-U.S.deferred tax asset valuation allowance partially offset by charges related tointernational tax restructuring.

 

Amountfor 2005 includes a charge of $300.0 million to record a valuation allowancerelated to accumulated deferred tax assets in the U.S. and a benefit of $5.3million for the reversal of an accrual for potential tax liabilities related toa previous divestiture.  The accrual isno longer required based on the Company’s reassessment of potentialliabilities.

 

Amountfor 2004 includes a benefit of $33.1 million for a tax consolidation in theAustralian glass business.

 

(g)               Amountfor 2005 consists principally of a third quarter benefit from the reversal ofan accrual for potential tax liabilities related to a previousdivestiture.  The accrual is no longerrequired based on the Company’s reassessment of the 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 31,2008, 2007, and 2006.  The Company’smeasure of profit for its reportable segments is Segment Operating Profit, whichconsists of consolidated earnings from continuing operations before interestincome, interest expense, provision for income taxes and minority share owners’interests in earnings of subsidiaries and excludes amounts related to certainitems that management considers not representative of ongoing operations aswell as certain retained corporate costs. The segment data presented below is prepared in accordance with FAS No. 131.  The line titled ‘reportable segment totals’,however, is a non-GAAP measure when presented outside of the financialstatement footnotes.  Management hasincluded ‘reportable segment totals’ below to facilitate the discussion andanalysis of financial condition and results of operations.  The Company’s management uses Segment OperatingProfit, in combination with selected cash flow information, to evaluateperformance and to allocate resources.

 
| **Net Sales:**        | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|
| Europe                     |       | $        | 3,497.8    |     | $          | 3,298.7  |       | $ | 2,846.6 |   |
| North America              |       | 2,209.7  |       | 2,271.3  |       | 2,110.4  |       |
| South America              |       | 1,135.9  |       | 970.7    |       | 796.5    |       |
| Asia Pacific               |       | 964.1    |       | 934.3    |       | 804.9    |       |
|                       |       |     |       |     |       |     |       |
| Reportable  segment totals |       | 7,807.5  |       | 7,475.0  |       | 6,558.4  |       |
| Other                      |       | 77.2     |       | 91.7     |       | 92.0     |       |
| Net Sales                  |       | $        | 7,884.7    |     | $          | 7,566.7  |       | $ | 6,650.4 |   |
|                            |            |          |            |          |            |          |            |  |  |  |  |  |  |

 

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| **Segment Operating Profit:**                                                             | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Europe                                                                                              |       | $        | 477.8      |     | $          | 433.0    |       | $ | 249.6 |   |
| North America                                                                                       |       | 185.2    |       | 265.1    |       | 187.3    |       |
| South America                                                                                       |       | 331.0    |       | 254.9    |       | 195.0    |       |
| Asia Pacific                                                                                        |       | 162.8    |       | 154.0    |       | 102.9    |       |
| Reportable  segment totals                                                                          |       | 1,156.8  |       | 1,107.0  |       | 734.8    |       |
|                                                                                                |       |     |       |     |       |     |       |
| Items excluded  from Segment Operating Profit:                                                      |       |     |       |     |       |     |       |
| Retained  corporate costs and other                                                                 |       | (0.7     | )          | (78.8    | )          | (76.6    | )          |
| Restructuring  and asset impairments                                                                |       | (133.3   | )          | (100.3   | )          | (29.7    | )          |
| CEO and other  transition charges                                                                   |       |     |       |     |       | (20.8    | )          |
| Curtailment of  postretirement benefits in The Netherlands                                          |       |     |       |     |       | 15.9     |       |
| Mark to market  effect of natural gas hedge contracts                                               |       |     |       |     |       | (8.7     | )          |
|                                                                                                |       |     |       |     |       |     |       |
| Interest income                                                                                     |       | 38.6     |       | 42.3     |       | 19.2     |       |
| Interest expense                                                                                    |       | (253.0   | )          | (348.6   | )          | (349.0   | )          |
| Earnings before  income taxes and minority share owners’ interests in earnings of subsidiaries |       | 808.4    |       | 621.6    |       | 285.1    |       |
| Provision for  income taxes                                                                         |       | (237.9   | )          | (147.8   | )          | (125.3   | )          |
| Minority share  owners’ interest in earnings of subsidiaries                                   |       | (70.2    | )          | (59.5    | )          | (43.6    | )          |
| Earnings from  continuing operations                                                                |       | 500.3    |       | 414.3    |       | 116.2    |       |
| Net earnings  (loss) of discontinued operations                                                     |       |     |       | 2.8      |       | (23.7    | )          |
| Gain on sale of  discontinued operations                                                            |       | 6.8      |       | 1,038.5  |       |     |       |
| Net earnings                                                                                        |       | $        | 507.1      |     | $          | 1,455.6  |       | $ | 92.5 |   |

 

***Note: all amounts excluded from reportable segment totals are discussed in thefollowing applicable sections.***

 

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

 

Net sales from continuing operations were $318.0million higher than the prior year principally resulting from improved pricingand favorable product mix across all regions, as well as favorable foreigncurrency exchange rates, principally the Euro. Lower unit shipments partiallyoffset these favorable increases.

 

Segment Operating Profit for reportable segments was$49.8 million higher than the prior year. The benefits of higher selling prices, improved product mix,improvements in glass plant operating efficiencies, and favorable foreigncurrency exchange rates were partially offset by inflationary cost increases inmanufacturing and delivery costs and lower sales volume.

 

Interest expense in 2008 was$253.0 million compared with interest expense from continuing operations of$348.6 million in 2007.  Included in the2007 interest expense was $9.5 million for both note repurchase premiums andthe write-off of unamortized finance fees related to the November 2007repurchase of the $625.0 million 8.75% Senior Secured Notes.  Exclusive of these items, interest expensedecreased approximately $86.1 million. The decrease is principally due to lower variable interest rates underthe Company’s bank credit agreement and on long term debt variable and swappedrates as well as lower overall debt levels, partially offset by an increase inforeign currency exchange rates.  Thedecrease is also due to the non-recurrence of interest on debt that was repaidduring the fourth quarter of 2007 with 

 

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the proceeds from theplastics sale.  This interest waspreviously allocated to discontinued operations until the date of the sale.

 

Interest income for continuingoperations for 2008 was $38.6 million compared to $42.3 million for 2007.

 

Net earnings from continuing operations for 2008 were$500.3 million compared to earnings from continuing operations of $414.3million for 2007.  Earnings in bothperiods included items that management considered not representative of ongoingoperations.  These items decreased netearnings in 2008 by $144.9 million and decreased net earnings in 2007 by $79.4million.

 

Capital spending for property, plant and equipment forcontinuing operations was $361.7 million for 2008 compared to $292.5 millionfor 2007.  The 2008 amount is in a rangeconsistent with long term historical levels. The increase is also due to changes in foreign currency exchange rates.

 

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

*** ***

*Net Sales*

 

The Company’s net sales by segment for 2008 and2007 are presented in the following table. For further information, see Segment Information included in Note 18 tothe Consolidated Financial Statements.

 
| ** **                 | ** ** | **2008**                            | ** ** | **2007** | ** ** |
|----------------------------|------------|-------------------------------------|------------|----------|------------|
| ** **                 | ** ** | **(dollars in millions)** | ** ** |
| Europe                     |       | $                                   | 3,497.8    |     | $          | 3,298.7 |   |
| North America              |       | 2,209.7                             |       | 2,271.3  |       |
| South America              |       | 1,135.9                             |       | 970.7    |       |
| Asia Pacific               |       | 964.1                               |       | 934.3    |       |
| Reportable  segment totals |       | 7,807.5                             |       | 7,475.0  |       |
| Other                      |       | 77.2                                |       | 91.7     |       |
| Net Sales                  |       | $                                   | 7,884.7    |     | $          | 7,566.7 |   |

 

TheCompany’s net sales increased $318.0 million, or 4.2%, over 2007.

 

Thechange in net sales of reportable segments can be summarized as follows(dollars in millions):

 
| 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 |   |
|                                             |        |        |        |        |         |        |  |

 

*SegmentOperating Profit*

 

Operating Profit for the reportable segments in the tablebelow includes an allocation of some corporate expenses based on both apercentage of sales and direct billings based on the costs of specific servicesprovided.  Unallocated corporate expensesand certain other expenses not directly related to the reportable 

 

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segments’ operations are included in RetainedCorporate Costs and Other.  For furtherinformation, see Segment Information included in Note 18 to the ConsolidatedFinancial Statements.

 
| ** **                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
| Europe                              |       | $        | 477.8      |     | $          | 433.0 |   |
| North America                       |       | 185.2    |       | 265.1    |       |
| South America                       |       | 331.0    |       | 254.9    |       |
| Asia Pacific                        |       | 162.8    |       | 154.0    |       |
| Reportable  segment totals          |       | 1,156.8  |       | 1,107.0  |       |
|                                |       |     |       |     |       |
| Retained  corporate costs and other |       | (0.7     | )          | (78.8    | )          |
|                                     |            |          |            |          |            |  |  |

 

SegmentOperating Profit for reportable segments for 2008 increased $49.8 million, or4.5%, to $1,156.8 million, compared with Segment Operating Profit of $1,107.0million for 2007.

 

Thechange in Segment Operating Profit for reportable segments can be summarized asfollows (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  expense                            |   | (28.0  | )      |   |    |
| Other                                         |   | 33.8   |   |   |    |
| Total net effect  on Segment Operating Profit |   |   |   | 49.8   |    |
| Segment  Operating Profit -2008               |   |   |   | $      | 1,156.8 |   |
|                                               |        |        |        |        |         |        |  |

 

*Interest Expense*

 

Interest expense in 2008 was$253.0 million compared with interest expense from continuing operations of$348.6 million in 2007.  Included in the2007 interest expense was $9.5 million for both note repurchase premiums andthe write-off of unamortized finance fees related to the November 2007repurchase of the $625.0 million 8.75% Senior Secured Notes.  Exclusive of these items, interest expensedecreased approximately $86.1 million. The decrease is principally due to lower variable interest rates under theCompany’s bank credit agreement and on long term debt variable and swappedrates as well as lower overall debt levels, partially offset by an increase inforeign currency exchange rates.  Thedecrease is also due to the non-recurrence of interest on debt that was repaidduring the fourth quarter of 2007 with the proceeds from the plasticssale.  This interest was previouslyallocated to discontinued operations until the date of the sale.

 

*Interest Income*

 

Interest income forcontinuing operations for 2008 was $38.6 million compared to $42.3 million for2007.

 

*Provision for 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, 

 

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restructuring,and other.  The provision for 2007includes a benefit of $13.5 million for the recognition of tax credits relatedto restructuring of investments in certain European operations.  Excluding those items and the effects in bothperiods of pretax items for which taxes are separately calculated and recordedin the period, the Company’s effective tax rate from continuing operations for2008 was 24.0% compared to 24.4% for 2007. The Company expects that theeffective tax rate will not change significantly in 2009.

 

*Minority Share Owners’ Interest in Earnings of Subsidiaries*

 

Minorityshare owners’ interest in earnings of subsidiaries for 2008 was $70.2 millioncompared to $59.5 million for 2007.  Theincrease is primarily attributed to higher earnings from the Company’soperations in South America.

 

*Earnings from Continuing Operations*

* *

For 2008, the Company recorded earnings fromcontinuing operations of $500.3 million compared to earnings from continuingoperations of $414.3 million for 2007. The after tax effects of the items excluded from Segment OperatingProfit, the 2008 and 2007 international net tax benefits, and the 2007additional interest charges, increased or decreased earnings in 2008 and 2007as 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 | ) |

 

***Executive Overview — Years ended December 2007 and 2006***

*** ***

Net sales from continuing operations were $916.3million higher than the prior year principally resulting from improved pricing,increased unit shipments, and favorable foreign currency exchange rates.

 

Segment Operating Profit for reportable segments was$372.2 million higher than the prior year. The benefits of higher selling prices, improved productivity, increasedunit shipments, and favorable exchange rates were partially offset byinflationary cost increases.

 

Interest expense fromcontinuing operations for 2007 was $348.6 million compared to $349.0 millionfor 2006.  Included in the 2007 interestexpense was $9.5 million for both note repurchase premiums and the write-off ofunamortized finance fees related to the November 2007 repurchase of the$625.0 million 8.75% Senior Secured Notes. Included in the 2006 interest expense was $17.5 million for both noterepurchase premiums and the write-off of unamortized finance fees related tothe June 2006 refinancing of the Company’s previous credit agreement andthe July 2006 repurchase of approximately $150 million principal amount ofthe 8.875% Senior Secured Notes due 2009. Exclusive of these items, interest expense increased approximately $7.6million.  A significant portion of theincrease is interest on debt that was repaid during the fourth quarter of 2007with the proceeds from the plastics sale. This interest was previously allocated to discontinued operations untilthe date of the sale.

 

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Interest income forcontinuing operations for 2007 was $42.3 million compared to $19.2 million for2006.  The increase of $23.1 million isprimarily due to interest earned as a result of investing a portion of theproceeds from the plastics July 31, 2007 sale until the funds were used torepay senior secured debt in the fourth quarter of 2007.

 

Net earnings from continuing operations for 2007 were$414.3 million compared to $116.2 million for 2006.  Earnings in both periods included items thatmanagement considered not representative of ongoing operations.  These items decreased net earnings in 2007 by$79.4 million and decreased net earnings in 2006 by $57.0 million.

 

Capital spending for property, plant and equipment forcontinuing operations was $292.5 million for 2007 compared to $285.0 millionfor 2006.

 

***Results of Operations - Comparison of 2007 with 2006***

*** ***

*Net Sales*

 

The Company’s net sales by segment for 2007 and2006 are presented in the following table. For further information, see Segment Information included in Note 18 tothe Consolidated Financial Statements.

 
| ** **                 | ** ** | **2007**                            | ** ** | **2006** | ** ** |
|----------------------------|------------|-------------------------------------|------------|----------|------------|
| ** **                 | ** ** | **(dollars in millions)** | ** ** |
| Europe                     |       | $                                   | 3,298.7    |     | $          | 2,846.6 |   |
| North America              |       | 2,271.3                             |       | 2,110.4  |       |
| South America              |       | 970.7                               |       | 796.5    |       |
| Asia Pacific               |       | 934.3                               |       | 804.9    |       |
| Reportable  segment totals |       | 7,475.0                             |       | 6,558.4  |       |
| Other                      |       | 91.7                                |       | 92.0     |       |
| Net Sales                  |       | $                                   | 7,566.7    |     | $          | 6,650.4 |   |

 

TheCompany’s net sales increased $916.3 million, or 13.8%, over 2006.

 

Thechange in net sales can be summarized as follows (dollars in millions):

 
| Net sales - 2006             |   |   |   | $      | 6,650.4 |   |
|---------------------------------------------|--------|--------|--------|--------|---------|--------|
| Net effect of  price and mix                |   | $      | 322.8  |   |    |   |
| Increased sales  volume                     |   | 144.7  |   |   |    |
| Effects of  changing foreign currency rates |   | 448.8  |   |   |    |
| Total effect on  net sales                  |   |   |   | 916.3  |    |
| Net sales - 2007                            |   |   |   | $      | 7,566.7 |   |
|                                             |        |        |        |        |         |        |  |

 

The increase in reported sales from the effects ofchanging foreign currency exchange rates resulted principally from the strongerEuro and Australian dollar.

 

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*SegmentOperating Profit*

 

Operating Profit for the reportable segments in thetable below includes an allocation of some corporate expenses based on both apercentage of sales and direct billings based on the costs of specific servicesprovided.  Unallocated corporate expensesand certain other expenses not directly related to the reportable segments’operations are included in Retained Corporate Costs and Other.  For further information, see SegmentInformation included in Note 18 to the Consolidated Financial Statements.

 
| ** **                          | ** ** | **2007**                            | ** ** | **2006** | ** ** |
|-------------------------------------|------------|-------------------------------------|------------|----------|------------|
| ** **                          | ** ** | **(dollars in millions)** | ** ** |
| Europe                              |       | $                                   | 433.0      |     | $          | 249.6 |   |
| North America                       |       | 265.1                               |       | 187.3    |       |
| South America                       |       | 254.9                               |       | 195.0    |       |
| Asia Pacific                        |       | 154.0                               |       | 102.9    |       |
| Reportable  segment totals          |       | 1,107.0                             |       | 734.8    |       |
|                                |       |                                |       |     |       |
| Retained  corporate costs and other |       | (78.8                               | )          | (76.6    | )          |
|                                     |            |                                     |            |          |            |  |  |

 

SegmentOperating Profit for reportable segments for 2007 increased $372.2 million, or50.7%, to $1,107.0 million, compared with Segment Operating Profit of $734.8million for 2006.

 

Thechange in Segment Operating Profit for reportable segments can be summarized asfollows (dollars in millions):

 
| Segment  Operating Profit - 2006              |   |   |   | $      | 734.8   |   |
|-----------------------------------------------|--------|--------|--------|--------|---------|--------|
| Net effect of  price and mix                  |   | $      | 323.0  |   |    |   |
| Productivity and  production volume           |   | 80.0   |   |   |    |
| Effects of  changing foreign currency rates   |   | 52.0   |   |   |    |
| Increased sales  volume                       |   | 34.4   |   |   |    |
| Warehouse,  delivery and other costs          |   | 25.9   |   |   |    |
| Operating  expense                            |   | 25.3   |   |   |    |
| Manufacturing  inflation, net of cost savings |   | (152.0 | )      |   |    |
| Other                                         |   | (16.4  | )      |   |    |
| Total net effect  on Segment Operating Profit |   |   |   | 372.2  |    |
| Segment  Operating Profit -2007               |   |   |   | $      | 1,107.0 |   |
|                                               |        |        |        |        |         |        |  |

 

*Interest Expense*

 

Interest expense fromcontinuing operations for 2007 was $348.6 million compared to $349.0 millionfor 2006.  Included in the 2007 interestexpense was $9.5 million for both note repurchase premiums and the write-off ofunamortized finance fees related to the November 2007 repurchase of the$625.0 million 8.75% Senior Secured Notes. Included in the 2006 interest expense was $17.5 million for both noterepurchase premiums and the write-off of unamortized finance fees related to theJune 2006 refinancing of the Company’s previous credit agreement and the July 2006repurchase of approximately $150 million principal amount of the 8.875% SeniorSecured Notes due 2009.  Exclusive ofthese items, interest expense increased approximately $7.6 million.  A significant portion of the increase isinterest 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.

 

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*Interest Income*

 

Interest income forcontinuing operations for 2007 was $42.3 million compared to $19.2 million for2006.  The increase of $23.1 million isprimarily due to interest earned as a result of investing a portion of theproceeds from the July 31, 2007 plastics sale until the funds were used torepay senior secured debt in the fourth quarter of 2007.

 

*Provision for Income Taxes*

 

TheCompany’s effective tax rate from continuing operations for 2007 was 23.8%,compared with 43.9% for 2006. Excluding the effects of separately taxed itemsin both periods, the Company’s effective tax rate from continuing operationsfor 2007 was 24.4% compared with 40.3% for 2006. The reduction is principallydue to:  (1) a change in mix ofearnings to jurisdictions where the Company is subject to lower effectiverates, and (2) the effect of higher earnings and lower interest costs inthe U.S., where the Company has recognized a valuation allowance on netdeferred tax assets.

 

*Minority Share Owners’ Interest in Earnings of Subsidiaries*

 

Minority share owners’interest in earnings of subsidiaries for 2007 was $59.5 million compared to$43.6 million for 2006.  The increase isprimarily attributed to higher earnings from the Company’s operations in SouthAmerica.

 

*Earnings from Continuing Operations*

* *

For 2007, the Company recorded earnings fromcontinuing operations of $414.3 million compared to $116.2 million for2006.  The after tax effects of the itemsexcluded from Segment Operating Profit, the 2007 and 2006 international net taxbenefits, and the additional interest charges, increased or decreased earningsin 2007 and 2006 as set forth in the following table (dollars in millions).

 
| ** **                                                                                                                           | ** ** | **Net Earnings  Increase (Decrease)** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **Description**                                                                                                                      | ** ** | **2007**                                        | ** ** | **2006** | ** ** |
| Gain recognition  from foreign tax credits                                                                                           |       | $                                               | 13.5       |   | $ | — |   |
|                                                                                                                                 |       |                                            |       |   |   |
| Curtailment of  postretirement benefits in The Netherlands                                                                           |       |                                            |       | 11.2 |   |
| Reversal of  non-U.S. deferred tax asset valuation allowance partially offset by charges  related to international tax restructuring |       |                                            |       | 5.7 |   |
| Restructuring  and asset impairments                                                                                                 |       | (84.1                                           | )          | (27.7 | ) |
| CEO transition  charge and other                                                                                                     |       |                                            |       | (20.7 | ) |
| Note repurchase  premiums and write-off of finance fees                                                                              |       | (8.8                                            | )          | (17.1 | ) |
| Loss from the  mark to market effect of natural gas hedge contracts                                                                  |       |                                            |       | (8.4 | ) |
|                                                                                                                                 |       |                                            |       |   |   |
| Total                                                                                                                                |       | $                                               | (79.4      | ) | $ | (57.0 | ) |

 

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

 

RetainedCorporate Costs and Other

 

Retainedcorporate costs and other for 2008 was $0.7 million compared with $78.8 millionfor 2007. Beginning in 2008, the Company revised its method ofallocating corporate expenses.  TheCompany decreased slightly the percentage allocation based on sales andsignificantly expanded the number of functions included in the allocation basedon cost of services.  It is notpracticable to quantify the net effect of these changes on periods prior to2008.  However, the effect for 2008 wasto reduce the amount of retained corporate costs by approximately $38.0million.  Also contributing to the decreasewere lower accruals for self insured risks and increased pension income in2008.

 

Retainedcorporate costs and other for 2007 was $78.8 million compared with $76.6million for 2006.

 

Restructuringand Asset Impairments

 

During2008, the Company recorded charges totaling $133.3 million ($110.1 millionafter tax and minority share owners’ interests), for additional restructuringand asset impairment principally in North America and Europe, with additionalcharges across all segments as well as in Retained Corporate Costs andOther.  The charges reflect theadditional decisions reached in the Company’s ongoing strategic review of itsglobal manufacturing footprint.  See Note15 for additional information.

 

During the third andfourth quarters of 2007, the Company recorded charges totaling $100.3 million($84.1 million after tax), for restructuring and asset impairment in SouthAmerica, Europe, and North America.  Thecharges reflect the initial decisions of the Company’s global profitabilityreview. See Note 15 foradditional information.

 

InSeptember 2006, the Company announced the permanent closing of itsGodfrey, Illinois machine parts manufacturing operation. The facility wasclosed by the end of the year. This closing is part of a broad initiative toreduce working capital and improve system costs. The Company also closed a smallrecycling facility in Ohio. As a result, the Company recorded a charge of $29.7million ($27.7 million after tax) in the third quarter of 2006.  The closing of these facilities resulted inthe elimination of approximately 260 jobs and a corresponding reduction in theCompany’s workforce.  The Companyanticipates that it will pay out approximately $11.5 million in cash related toinsurance, benefits, plant clean up, and other plant closing costs. The Companyexpects that the majority of these costs will be paid out by the end of 2009.

 

CEO and OtherTransition Charges

 

TheCompany recorded a 2006 charge of $20.8 million ($20.7 million after tax)associated with the separation agreement with its former CEO and with severalmembers of the European management team. The charge also included costs relatedto the employment agreement with the Company’s new CEO.

 

Curtailment of Postretirement Benefits inThe Netherlands

 

TheCompany recorded a 2006 gain of $15.9 million ($11.2 million after tax) relatedto curtailment of certain postretirement benefits in The Netherlands as aresult of certain improvements in retiree medical benefits offered by thegovernment.

 

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Mark to MarketEffect of Natural Gas Hedge Contracts

 

During the fourth quarterof 2004, the Company determined that the commodity futures contracts related toforecasted natural gas requirements did not meet all of the documentationrequirements to qualify for special hedge accounting treatment and began torecognize all changes in fair value of these contracts in current earnings. TheCompany completed the documentation and re-designation of its natural gas hedgecontracts and began to apply special hedge accounting as of April 1, 2005.The total unrealized pretax loss recorded in 2006 was $8.7 million.

 

**Tax Benefits and Charges**

** **

**In 2008 the Company recorded a net tax charge of $33.3 million ($34.8million after minority share owners’ interest) related to tax legislation,restructuring, and other.**

** **

**In 2007 the Company recorded a tax benefit of $13.5 million forrecognition of tax credits related to restructuring of investments in certainEuropean operations.**

** **

**In 2006 the Company recorded a net tax benefit of $5.7 million from thereversal of a valuation allowance against certain non-U.S. deferred tax assetsdue to improving operations, partially offset by charges related tointernational tax restructuring.**

** **

***Discontinued Operations***

** **

OnJuly 31, 2007, the Company completed the sale of its plastics packagingbusiness to Rexam PLC for approximately $1.825 billion in cash.  As required by FAS No. 144,”Accountingfor the Impairment or Disposal of Long-Lived Assets,” the Company has presentedthe results of operations for the plastics packaging business in theConsolidated Results of Operations for the years ended December 31, 2007and 2006 as discontinued operations. Interest expense was allocated to the discontinued operations based ondebt that was required by an amendment to the Secured Credit Agreement to berepaid from the net proceeds.  Amountsfor the prior periods have been reclassified to conform to this presentation.

 

### **The followingsummarizes the revenues and expenses of the discontinued operations as reportedin the consolidated results of operations for the periods indicated:**

### ** **

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| ** **                                                         | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                         | ** ** | **2007**                                    | ** ** | **2006** | ** ** |
| Net sales                                                          |       | $                                           | 455.0      |   | $ | 771.6 |   |
| Manufacturing,  shipping and delivery                              |       | (343.5                                      | )          | (602.9 | ) |
| Gross profit                                                       |       | 111.5                                       |       | 168.7 |   |
|                                                               |       |                                        |       |   |   |
| Selling and  administrative                                        |       | (20.7                                       | )          | (34.4 | ) |
| Research,  development and engineering                             |       | (8.3                                        | )          | (15.1 | ) |
| Interest expense                                                   |       | (80.6                                       | )          | (139.2 | ) |
| Other income                                                       |       | (0.1                                        | )          | 2.9 |   |
| Other expense                                                      |       | (1.2                                        | )          | (5.4 | ) |
|                                                               |       |                                        |       |   |   |
| Earnings (loss)  before items below                                |       | 0.6                                         |       | (22.5 | ) |
|                                                               |       |                                        |       |   |   |
| (Provision)  credit for income taxes                               |       | 2.4                                         |       | (1.2 | ) |
| Minority share  owners’ interests in earnings of subsidiaries |       | (0.2                                        | )          |   |   |
| Gain on sale of  discontinued operations                           |       | 1,038.5                                     |       |   |   |
| Net earnings  (loss) from discontinued operations                  |       | $                                           | 1,041.3    |   | $ | (23.7 | ) |

 

 

### **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 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.

 

***CapitalResources and Liquidity***

 

*Current and Long-Term Debt*

 

The Company’s total debt at December 31, 2008 was$3.33 billion, compared to $3.71 billion at December 31, 2007.

 

On June 14, 2006, the Company’s subsidiaryborrowers entered into the Secured Credit Agreement (the “Agreement”).  At December 31, 2008, the Agreementincluded a $900.0 million revolving credit facility, a 225.0 million Australiandollar term loan, and a 110.8 million Canadian dollar term loan, each of whichhas a final maturity date of June 15, 2012.  It also included a $191.5 million term loanand a €191.5 million term loan, each of which has a final maturity date of June 14,2013.

 

As a result of the bankruptcy of Lehman BrothersHoldings Inc. and several of its subsidiaries, the Company believes that themaximum amount available under the revolving credit facility was reduced by$32.3 million.  After further deductingamounts attributable to letters of credit and overdraft facilities that 

 

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are supported by the revolving credit facility, at December 31,2008 the Company’s subsidiary borrowers had unused credit of $768.4 millionavailable under the Agreement.

 

The Agreement contains various covenants thatrestrict, among other things and subject to certain exceptions, the ability ofthe Company to incur certain liens, make certain investments and acquisitions,become liable under contingent obligations in certain defined instances only,make restricted junior payments, make certain asset sales within guidelines andlimits, make capital expenditures beyond a certain threshold, engage inmaterial transactions with shareholders and affiliates, participate in sale andleaseback financing arrangements, alter its fundamental business, amend certainoutstanding debt obligations, and prepay certain outstanding debt obligations.

 

The Agreement also contains one financial maintenancecovenant, a Leverage Ratio, that requires the Company not to exceed a ratiocalculated by dividing consolidated total debt, less cash and cash equivalents,by Consolidated Adjusted EBITDA, as defined in the Agreement.  The Leverage Ratio could restrict the abilityof the Company to undertake additional financing to the extent that such financingwould cause the Leverage Ratio to exceed the specified maximum.

 

Failure to comply with these covenants andrestrictions could result in an event of default under the Agreement.  In such an event, the Company could notrequest borrowings under the revolving facility, and all amounts outstandingunder the Agreement, together with accrued interest, could then be declaredimmediately due and payable.  If an eventof default occurs under the Agreement and the lenders cause all of theoutstanding debt obligations under the Agreement to become due and payable,this 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 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 Ratio also determines pricing under theAgreement.  The interest rate onborrowings under the Agreement is, at the Company’s option, the Base Rate orthe Eurocurrency Rate, as defined in the Agreement.  These rates include a margin linked to theLeverage 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 annum linkedto the Leverage Ratio.  The weightedaverage interest rate on borrowings outstanding under the Agreement at December 31,2008 was 4.07%.  As of December 31,2008, 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.

 

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 March 2007, asubsidiary of the Company issued Senior Notes totaling €300.0 million.  The notes bear interest at 6.875% and are dueMarch 31, 2017.  The notes areguaranteed by substantially all of the Company’s domestic subsidiaries.  The proceeds were used to retire the $300million principal amount of 8.10% Senior Notes which matured in May 2007,and to reduce borrowings under the revolving credit facility.

 

On July 31, 2007,the Company completed the sale of its plastics packaging business to Rexam PLCfor approximately $1.825 billion in cash. In accordance with an amendment of the Agreement that became effectiveupon completion of the sale of the plastics business, the Company was requiredto use the net proceeds (as defined in the Agreement) to repay senior secureddebt.  In addition, the amendment 

 

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provided for modificationof certain covenants, including the elimination of the financial covenantrequiring the Company to maintain a specified interest coverage ratio.  The Company used a portion of the net proceeds in the third quarter of2007 to redeem all $450.0 million of the 7.75% Senior Secured Notes andrepurchase $283.1 million of the 8.875% Senior Secured Notes.  The remaining $566.9 million of the 8.875%Senior Secured Notes were repurchased or discharged in accordance with theindenture in October 2007. The remaining net proceeds, along with fundsfrom operations and/or additional borrowings under the revolving creditfacility, were used to redeem all $625.0 million of the 8.75% Senior SecuredNotes on November 15, 2007.  TheCompany recorded $9.5 million of additional interest charges for noterepurchase premiums and the related write-off of unamortized finance fees.

 

During October 2006, the Company enteredinto a €300million European accounts receivable securitization program.  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 100 million Australian dollars and 25 million New Zealanddollars that extends through July 2009 and October 2009,respectively.

 

 Information related to the Company’s accountsreceivable securitization program is as follows:

 
| ** **                              | ** ** | **Dec. 31,  2008** | ** ** | **Dec. 31,  2007** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|-------------------------|------------|
|                                    |       |                    |       |                    |       |
| Balance  (included in short-term loans) |       | $                       | 293.7      |                    | $          | 361.8 |   |
|                                    |       |                    |       |                    |       |
| Weighted average  interest rate         |       | 5.31                    | %          | 5.48                    | %          |
|                                         |            |                         |            |                         |            |  |  |

 

*Cash Flows*

 

For2008, cash provided by continuing operating activities was $916.6 millioncompared with $972.2 million for 2007.  Theincrease is mainly attributable to improved profit margins and lower interest,partially offset by higher working capital balances.

 

Capital spending for property, plant and equipment(continuing operations) was $361.7 million compared with $292.5 million in theprior year.  The Company capitalized$25.6 million and $27.0 million in 2008 and 2007, respectively, under capitallease obligations with the related financing recorded as long-term debt.  The 2008 amount is in a range consistent withlong term historical levels.  Theincrease is also due to changes in foreign currency exchange rates.

 

OI Inc. has substantialobligations related to semiannual interest payments on $500.0 million ofoutstanding public debt securities.  OIInc. also makes, and expects in the future to make, substantial indemnitypayments and payments for legal fees and expenses in connection withasbestos-related lawsuits and claims.  OIInc.’s asbestos-related payments were $210.2 million and $347.1 million for2008 and 2007, respectively.  OI Inc.relies primarily on distributions from the Company to meet theseobligations.  Based on OI Inc.’sexpectations regarding future payments for lawsuits and claims, and also basedon the Company’s expected operating cash flow, the Company believes that thepayments to OI Inc. for any deferred amounts of previously settled or otherwisedetermined lawsuits and claims, and the resolution of presently pending andanticipated future lawsuits and claims associated with asbestos, will not havea material adverse effect upon the Company’s liquidity on a short-term(twelve-months) or long-term basis.

 

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During the currentdownturn in global financial markets, some companies may experiencedifficulties accessing their cash equivalents, drawing on revolvers, issuingdebt, and raising capital generally, which could have a material adverse impacton their liquidity. Notwithstanding these adverse market conditions, theCompany anticipates that cash flow 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 and long-term basis including payments to OI Inc., described above.

 

*Contractual Obligations and Off-Balance SheetArrangements*

 

The following information summarizes the Company’ssignificant contractual cash obligations at December 31, 2008 (dollars inmillions).

 
| ** **                              | ** ** | **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                          |       | $                                         | 2,874.3    |   | $ | 8.9 |   | $ | 412.1 |   | $ | 1,064.0 |   | $ | 1,389.3 |   |
| Capital lease  obligations              |       | 75.3                                      |       | 9.3 |   | 27.5 |   | 21.6 |   | 16.9 |   |
| Operating leases                        |       | 141.0                                     |       | 50.3 |   | 61.2 |   | 22.1 |   | 7.4 |   |
| Interest (1)                            |       | 1,216.9                                   |       | 207.7 |   | 361.2 |   | 316.6 |   | 331.4 |   |
| Purchase  obligations (2)               |       | 820.0                                     |       | 512.0 |   | 268.0 |   | 35.0 |   | 5.0 |   |
| Pension benefit  plan contributions     |       | 75.0                                      |       | 75.0 |   |   |   |   |   |   |   |
| Postretirement  benefit plan            |       | —                                    |       |   |   |   |   |   |   |   |   |
| benefit payments  (1)                   |       | 260.3                                     |       | 22.3 |   | 43.8 |   | 42.7 |   | 151.5 |   |
| Total  contractual cash obligations     |       | $                                         | 5,462.8    |   | $ | 885.5 |   | $ | 1,173.8 |   | $ | 1,502.0 |   | $ | 1,901.5 |   |

 
| ** **                     | ** ** | **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     |       | $                                              | 81.3       |   | $ | 81.3 |   |   |   |   |   |   |   |
| Total commercial  commitments  |       | $                                              | 81.3       |   | $ | 81.3 |   |   |   |   |   |   |   |

 

----

(1) Amounts based onrates and assumptions at December 31, 2008.

 

(2) The Company’spurchase obligations included contracted amounts for energy and molds.  The Company did not include ordinary courseof business purchase orders in this amount as the majority of such purchaseorders may be canceled.  In cases wherevariable prices are involved, current market prices have been used.  The Company does not believe such purchaseorders will adversely affect our liquidity position.

 

The Company is unable tomake a reasonably reliable estimate as to when cash settlement with taxingauthorities may occur for our unrecognized tax benefits.  Therefore, our 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.

 

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***Critical Accounting Estimates***

 

The Company’s analysis anddiscussion of its financial condition and results of operations are based uponits consolidated financial statements that have been prepared in accordancewith accounting principles generally accepted in the United States (“U.S. GAAP”).  The preparation of financial statements inconformity with U.S. GAAP requires management to make estimates and assumptionsthat affect the reported amounts of assets, liabilities, revenues and expenses,and the disclosure of contingent assets and liabilities.  The Company evaluates these estimates andassumptions on an ongoing basis. Estimates and assumptions are based on historical and other factors believedto be reasonable under the circumstances at the time the financial statementsare issued.  The results of theseestimates may form the basis of the carrying value of certain assets andliabilities and may not be readily apparent from other sources.  Actual results, under conditions andcircumstances different from those assumed, may differ from estimates.

 

The impact of, and anyassociated risks related to, estimates and assumptions are discussed withinManagement’s Discussion and Analysis of Financial Condition and Results ofOperations, as well as in the Notes to the Consolidated Financial Statements,if applicable, where estimates and assumptions affect the Company’s reportedand expected financial results.

 

The Company believes thataccounting for property, plant and equipment, impairment of long-lived assets,pension benefit plans, and income taxes involves the more significant judgmentsand estimates used in the preparation of its consolidated financial statements.

 

*Property, Plant andEquipment*

 

The net carrying amount ofproperty, plant, and equipment (“PP&E”) at December 31, 2008 totaled$2,645.6 million, representing 33% of total assets.  Depreciation expense from continuingoperations during 2008 totaled $431.0 million, representing approximately 5% oftotal costs and expenses. Given the significance of PP&E and associateddepreciation to the Company’s consolidated financial statements, thedeterminations of an asset’s cost basis and its economic useful life areconsidered to be critical accounting estimates.

 

**Cost Basis** - PP&E is recorded at cost, which isgenerally objectively quantifiable when assets are purchased singly.   However, when assets are purchased ingroups, or as part of a business, costs assigned to PP&E are based on anestimate of fair value of each asset at the date of acquisition.  These estimates are based on assumptionsabout asset condition, remaining useful life and market conditions, amongothers.  The Company frequently employsexpert appraisers to aid in allocating cost among assets purchased as a group.

 

Included in the cost basisof PP&E are those costs which substantially increase the usefullives or capacity of existing PP&E. Significant judgment is needed to determine which costs should becapitalized under these criteria and which costs should be expensed as a repairor maintenance expenditure.  For example,the Company frequently incurs various costs related to its existing glassmelting furnaces and forming machines and must make a determination of whichcosts, if any, to capitalize.  TheCompany relies on the experience and expertise of its operations andengineering staff to make reasonable and consistent judgments regardingincreases in useful lives or capacity of PP&E.

 

**Estimated Useful Life** — PP&E is generally depreciated usingthe straight-line method, which deducts equal amounts of the cost of each assetfrom earnings each period over its estimated economic useful life.  Economic useful life is the duration of timean asset is expected to be productively employed by the Company, which may beless than its physical life. Management’s assumptions regarding the following 

 

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factors, among others,affect the determination of estimated economic useful life: wear and tear,product and process obsolescence, technical standards, and changes in marketdemand.

 

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 in2008, 2007 or 2006.

 

*Impairment of Long-Lived Assets*

 

**Property, Plant, and Equipment** —As required by FAS No. 144, theCompany tests for impairment of PP&E whenever events or changes incircumstances indicate that the carrying amount of the assets may not berecoverable.  PP&E held for use inthe Company’s business is grouped for impairment testing at the lowest levelfor which cash flows can reasonably be identified, typically a geographicregion.  The Company evaluates therecoverability of property, plant, and equipment based on undiscountedprojected cash flows, excluding interest and taxes. If an asset group is considered impaired, the impairment loss to berecognized is measured as the amount by which the asset group’s carrying amountexceeds its fair value.  PP&E heldfor sale is reported at the lower of carrying amount or fair value less cost tosell.

 

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.  The review is ongoing into 2009.  As an initial result of this review, during2007 and 2008, the Company recorded charges that included impairments ofproperty, plant, and equipment across all segments including certain RetainedCorporate Costs and Other activities.  Itis possible that the Company may conclude in the future that it will close ortemporarily idle additional selected facilities or production lines and reduceheadcount to increase operating performance and cash flows.  As of December 31, 2008, no otherdecisions had been made and no events had occurred that would require anadditional evaluation of possible impairment in accordance with FAS No. 144.  For additional information on chargesrecorded in 2008, 2007 and 2006, see Note 15 to the Consolidated FinancialStatements.

 

**Goodwill** — Goodwill at December 31, 2008 totaled $2,207.5 million,representing 27% of total assets.  Asrequired by FAS No. 142, the Company evaluates goodwill annually (or morefrequently 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 eachreporting unit which is calculated as of a measurement date by determining thepresent value of debt-free, after-tax projected future cash flows, discountedat the weighted average cost of capital of a hypothetical third partybuyer.  This BEV is then compared to thebook value of each reporting unit as of the measurement date to assess whetheran impairment of goodwill may exist.

 

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During the fourth quarter of2008, the Company completed its annual testing and determined that noimpairment of goodwill existed.

 

The testing performed as of October 1,2008, indicated a significant 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, 2008, 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 each reportingunit by a significant margin.

 

The Company will monitorconditions throughout 2009 that might significantly affect the projections andvariables used in the impairment test to determine if a review prior to October 1may be appropriate.  If the results ofimpairment testing confirm that a write down of goodwill is necessary, then theCompany will record a charge in the fourth quarter of 2009, or earlier ifappropriate.  In the event the Companywould be required to record a significant write down of goodwill, the chargewould have a material adverse effect on reported results of operations and networth.

 

**OtherLong-Lived Assets** —Other long-lived assets include, among others, equity investments and repairparts inventories.  The Company’s equityinvestments are non-publicly traded ventures with other companies in businessesrelated to those of the Company.  Equityinvestments are reviewed for impairment whenever events or changes incircumstances indicate 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 asignificant amount of repair parts inventories in order to provide a dependablesupply of quality parts for servicing the Company’s PP&E, particularly itsglass melting furnaces and forming machines. The Company evaluates the recoverability of repair partsinventories based on undiscounted projected cash flows, excluding interest andtaxes, when factors indicate that impairment may exist.  If impairment exists, the repair parts arewritten down to fair value.  The Company continually monitors the carryingvalue of repair parts for recoverability, especially in light of changingbusiness circumstances.  For example,technological advances related to, and changes in, the estimated future demandfor products produced on the equipment to which the repair parts relate maymake the repair parts obsolete.  In thesecircumstances, the Company writes down the repair parts to fair value.  For additional information on a chargerecorded in 2006, see Note 14 to the Consolidated Financial Statements.

 

*Pension Benefit Plans*

 

Significant Estimates - The determination of pension obligations and the related pensionexpense or credits to operations involves significant estimates.  The most significant estimates are thediscount rate used to calculate the actuarial present value of benefitobligations and the expected long-term rate of return on plan assets.  The Company uses discount rates based onyields of high quality fixed rate debt securities at the end of the year.  At December 31, 2008, the weightedaverage discount rate for all plans was 6.29%. The Company uses an expected long-term rate of return on assets that isbased on both past performance of the various plans’ assets and estimatedfuture performance of the assets.  Due tothe

 

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natureof the plans’ assets and the volatility of debt and equity markets, actualreturns may vary significantly from year to year.  The Company refers to average historicalreturns over longer periods (up to 10 years) in determining its expected ratesof return because short-term fluctuations in market values do not reflect therates of return the Company expects to achieve based upon its long-terminvesting strategy.  For purposes ofdetermining pension charges and credits in 2009, the Company’s estimatedweighted average expected long-term rate of return on plan assets is 7.7%compared to 8.1% in 2008.  The Companyrecorded pension expense (income) from continuing operations of $36.2 million,$3.4 million, and $(24.3) million in 2006, 2007, and 2008, respectively, fromits principal defined benefit pension plans. The improvement in 2008 is principally a result of higher asset valuesin the U.S. plans at the beginning of 2008. Depending on currency translation rates, the Company expects to recordapproximately $20 million of pension expense for the full year of 2009.

 

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 2009.  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.

 

Recognition of Funded Status —FAS No. 158, “Employers’ Accounting for Defined Benefit Pensionand Other Postretirement Plans”, requires employers to adjust the assets andliabilities related to defined benefit plans so that the amounts reflected onthe balance sheet represent the overfunded or underfunded status of theplans.  These funded status amounts aremeasured as the difference between the fair value of plan assets andactuarially calculated benefit obligations as of the balance sheet date.  At December 31, 2008, the AccumulatedOther Comprehensive Loss component of share owners’ equity was increased by$1,080.1 million ($1,025.0 million after tax) to reflect a net decrease in thefunded status of the Company’s plans at that date.

 

Funding - Basedon exchange rates at the end of 2008, the Company expects to contributeapproximately $70 million to $75 million to its non-U.S. defined benefitpension plans in 2009, compared with $61.2 million in 2008. Depending on anumber of factors, the Company may elect to contribute amounts in excess ofminimum required amounts in order to improve the funded status of certainplans.  The Company presently estimatesit will not be required to make cash contributions to the U.S. plans during2009.

 

*Income Taxes*

 

The Company accounts for income taxes as required by theprovisions of FAS No. 109, “Accounting for Income Taxes,” under whichdeferred tax assets and liabilities are recognized for the tax effects oftemporary differences between the financial reporting and tax bases of assetsand liabilities measured using enacted tax rates.

 

Management judgment is required in determining incometax expense and the related balance sheet amounts.  In addition, under FASB Interpretation 48, “Accountingfor Uncertainty in Income Taxes” (“FIN 48”) 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. Taxassessments may arise several years after tax returns have been filed. During2008, the Company’s estimated unrecognized tax benefits increased by $44.0million related 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, FAS No. 109 requires that avaluation allowance be recorded when it is more likely than not that someportion or 

 

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all of the deferred tax assets will not berealized.  This assessment is dependentupon projected profitability including the effects of tax planning.  Deferred tax assets and liabilities aredetermined separately for each tax jurisdiction in which the Company conductsits operations or otherwise incurs taxable income or losses.  In the U.S., the Company has recordedsignificant deferred tax assets, the largest of which relate to foreign andother tax credits which amounted to $303.9 million at December 31, 2008and the pension liability which amounted to $122.6 million at December 31,2008.   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. During the third quarter of 2007 the Company sold its discontinuedplastics operations.  For tax purposes,the gain on the sale was substantially offset by capital and net operating losscarryforwards. The credit for the corresponding reduction in the valuationallowance of $406.8 million was classified as a component of the gain on saleof discontinued operations.  In 2007 theCompany implemented a plan to restructure the ownership and intercompanyobligations of certain foreign subsidiaries. These actions resulted in taxation of a significant portion ofpreviously unremitted foreign earnings and will transfer a portion of theCompany’s debt service obligations to operations outside the U.S. in order tobetter balance operating cash flows with financing costs on a globalbasis.  The foreign earnings reported astaxable in the U.S. were fully offset by net operating loss carryforwards andforeign tax credits.  Foreign tax creditcarryforwards arising from the restructuring were fully offset by an increasein the valuation allowance.

 

## **ITEM7A.               QUALITATIVE ANDQUANTITATIVE DISCLOSURES ABOUT MARKET RISK**

## ** **

Market risks relating tothe Company’s operations result primarily from fluctuations in foreign currencyexchange rates, changes in interest rates, and changes in commodity prices,principally energy and soda ash.  TheCompany uses certain derivative instruments to mitigate a portion of the riskassociated with changing foreign currency exchange rates and fluctuating energyprices.  In addition, the Company usesinterest rate swap agreements to manage a portion of fixed rate debt and interestexpense.  These instruments carry varyingdegrees of counterparty credit risk.  Tomitigate this risk, the Company has established limits on the exposure withindividual counterparties and the Company regularly monitors theseexposures.  Substantially all of theseexposures are with counterparties that are rated single-A or above.

 

***ForeignCurrency Exchange Rate Risk***

 

*Earningsof operations outside the United States*

 

A substantial portion ofthe Company’s operations are conducted by subsidiaries outside the U.S.  The primary international markets served bythe Company’s subsidiaries are in Canada, Australia, South America (principallyColombia, Brazil and Venezuela), and Europe (principally Italy, France, TheNetherlands, Germany, the United Kingdom, and Poland).  In general, revenues earned and costsincurred by the Company’s major international operations are denominated intheir respective local currencies. Consequently, the Company’s reported financial results could be affectedby factors such as changes in foreign currency exchange rates or highlyinflationary economic conditions in the international markets in which theCompany’s subsidiaries operate.  When theU.S. dollar strengthens against foreign currencies, the reported dollar valueof local currency earnings generally decreases; when the U.S. dollar weakensagainst foreign currencies, the reported U.S. dollar value of local currencyearnings generally increases.  TheCompany does not have any significant foreign subsidiaries whose functional currencyis the U.S. dollar, however, if economic conditions in Venezuela were todecline, the Company may be required to adopt the U.S. dollar as the functionalcurrency for its subsidiaries in that country. The Company does 

 

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not hedge the foreigncurrency exchange rate risk related to earnings of operations outside theUnited States.

 

*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 currencyis the 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.

 

Available excess funds ofa subsidiary may be redeployed through intercompany loans to other subsidiaries for debt repayment,capital investment, or other cash requirements. Generally, each intercompany loan is denominated in the lender’s localcurrency giving rise to foreign currency exchange rate risk for theborrower.  To mitigate this risk, theborrower generally enters into a forward exchange contract which effectivelyswaps the intercompany 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 31,2008 and 2007.

 

***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 has enteredinto a series of interest rate swap agreements with a total notional amount of$700 million that mature in 2010 and 2013.  The swaps were executed in order to: (i) converta portion of the senior notes and senior debentures fixed-rate debt intofloating-rate debt; (ii) maintain a capital structure containingappropriate amounts of fixed and floating-rate debt; and (iii) reduce netinterest payments and expense in the near-term.

 

TheCompany’s fixed-to-variable interest rate swaps are accounted for as fair valuehedges.  Because the relevant terms ofthe swap agreements match the corresponding terms of the notes, there is nohedge ineffectiveness. Accordingly, the Company recorded the net of the fairmarket values of the swaps as a long-term asset along with a corresponding netincrease in the carrying value of the hedged debt.

 

Underthe swaps, the Company receives fixed rate interest amounts (equal to intereston the corresponding hedged note) and pays interest at a six-month U.S. LIBORrate (set in arrears) plus a margin spread. The interest rate differential on each swap is recognized as anadjustment of interest expense during each six-month period over the term ofthe agreement.

 

The following tableprovides information about the Company’s interest rate sensitivity related toits significant debt obligations and interest rate swaps at December 31,2008.  For debt obligations, the tablepresents principal cash flows and related weighted-average interest rates byexpected maturity date.  For interestrate swaps, the table presents notional amounts and weighted-average interestrates by contract 

 

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maturity date.  Notional amounts are used to calculate thecontractual cash flows to be exchanged under the swap contracts.

 
| ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Fair**          | ** ** |
|----------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|-------------------|------------|
| ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **There-** | ** ** | ** ** | ** ** | **Value at** | ** ** |
| **(dollars in millions)**                | ** ** | **2009**   | ** ** | **2010**   | ** ** | **2011**   | ** ** | **2012**   | ** ** | **2013**   | ** ** | **after**  | ** ** | **Total**  | ** ** | **12/31/2008**    | ** ** |
|                                               |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |              |       |
| Long-term debt  at variable rate:                  |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |              |       |
| Principal by  expected maturity                    |       | $          | 18.2       |       | $          | 20.1       |       | $          | 160.1      |       | $          | 153.6      |       | $          | 462.0      |              | $          | 25.9 |   | $ | 839.9 |   | $ | 839.9 |   |
| Avg. principal  outstanding                        |       | 830.8      |       | 811.7      |       | 721.6      |       | 564.7      |       | 256.9      |       | 12.9       |       |       |       |              |       |
| Avg. interest  rate                                |       | 4.07       | %          | 4.07       | %          | 4.07       | %          | 4.07       | %          | 4.07       | %          | 4.07       | %          |       |       |              |       |
|                                               |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |              |       |
| Long-term debt  at fixed rate:                     |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |              |       |
| Principal by  expected maturity                    |       |       |       | $          | 250.0      |       |       |       |       |       | $          | 450.0      |       | $          | 1,389.2    |              | $          | 2,089.2 |   | $ | 1,824.5 |   |
| Avg. principal  outstanding                        |       | $          | 2,089.2    |       | $          | 1,933.0    |       | $          | 1,839.2    |       | $          | 1,839.2    |       | $          | 1,558.0    |              | $          | 1,389.2 |   |   |   |   |   |
| Avg. interest  rate                                |       | 7.31       | %          | 7.30       | %          | 7.29       | %          | 7.29       | %          | 7.11       | %          | 6.98       | %          |       |       |              |       |
|                                               |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |              |       |
| Interest rate  swaps (pay variable/receive fixed): |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |              |       |
| Notional by  expected maturity                     |       |       |       | $          | 250.0      |       |       |       |       |       | $          | 450.0      |       |       |       | $                 | 700.0      |   | $ | (29.4 | ) |
| Avg. notional  outstanding                         |       | $          | 700.0      |       | $          | 543.8      |       | $          | 450.0      |       | $          | 450.0      |       | $          | 450.0      |              |       |   |   |   |   |   |
| Avg. pay rate  margin over U.S. LIBOR              |       | 3.52       | %          | 3.61       | %          | 3.70       | %          | 3.70       | %          | 3.70       | %          |       |       |       |       |              |       |
| Avg. fixed  receive rate                           |       | 7.98       | %          | 8.12       | %          | 8.25       | %          | 8.25       | %          | 8.25       | %          |       |       |       |       |              |       |

 

The Company believes thenear term exposure to interest rate risk of its debt obligations and interestrate swaps has not changed materially since December 31, 2007.

 

***CommodityPrice Risk***

 

TheCompany has exposure to commodity price risk, principally related toenergy.  The Company believes it canmitigate a portion of this risk by passing commodity cost changes through tocustomers.  In addition, the Companyenters into commodity futures contracts related to forecasted natural gasrequirements, the objectives of which are to limit the effects of fluctuationsin the future market price paid for natural gas and the related volatility incash flows.  The Company continuallyevaluates the natural gas market with respect to its forecasted usagerequirements over the next twelve to twenty-four months and periodically entersinto commodity futures contracts in order to hedge a portion of its usagerequirements over that period. Significant transactions related to commodity price risk are as follows:

 

·                  At December 31, 2008, the Company had entered into commodityfutures contracts for approximately 50% (approximately 10,200,000 MM BTUs) ofits estimated North American usage requirements for the full year of 2009 andapproximately 1% (approximately 240,000 MM BTUs) for the full year of 2010.

 

TheCompany believes the near term exposure to commodity price risk of itscommodity futures contracts was not material at December 31, 2008.

 

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***ForwardLooking Statements***

 

This document contains “forward looking” statementswithin the meaning of Section 21E of the Securities Exchange Act of 1934and Section 27A of the Securities Act of 1933. Forward-looking statementsreflect the Company’s current expectations and projections about future eventsat the time, and thus involve uncertainty and risk. It is possible the Company’sfuture financial performance may differ from expectations due to a variety offactors including, but not limited to the following: (1) foreign currencyfluctuations relative to the U.S. dollar, (2) changes in capitalavailability 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.

 

## **ITEM 8.          FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

## ** **

| ** **                                                      | ** ** | ** ** |
|-----------------------------------------------------------------|------------|------------|
|                                                            |       |       |
| Report of Independent Registered Public Accounting  Firm        |       |       |
|                                                            |       |       |
| Consolidated Balance Sheets at December 31, 2008  and 2007 |       |       |
|                                                            |       |       |
| For the years ended December 31, 2008, 2007, and 2006:     |       |       |
|                                                            |       |       |
| Consolidated Results of Operations                              |       |       |
| Consolidated Share Owner’s Equity                          |       |       |
| Consolidated Cash Flows                                         |       |       |
|                                                            |       |       |
| Notes to Consolidated Financial Statements                      |       |       |
|                                                            |       |       |
| Selected Quarterly Financial Data                               |       |       |

 

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

TheBoard of Directors and Share Owner of

Owens-IllinoisGroup, Inc.

 

We have audited theaccompanying consolidated balance sheets of Owens-Illinois Group, Inc. andsubsidiaries as of December 31, 2008 and 2007, and the relatedconsolidated statements of results of operations, share owners’ equity, andcash flows for each of the three years in the period ended December 31,2008.  Our audits also included thefinancial statement schedule listed in the Index at Item 15(a).  These financial statements and schedule arethe responsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements and schedule based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Owens-Illinois Group, Inc.and subsidiaries at December 31, 2008 and 2007, and the consolidatedresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2008, in conformity with U.S. generallyaccepted accounting principles.  Also, inour opinion, the related financial statement schedule, when considered inrelation to the basic financial statements taken as a whole, presents fairly inall material respects the information set forth therein.

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), Owens-Illinois Group, Inc.’s internal control overfinancial reporting as of December 31, 2008, based on criteria establishedin Internal Control**—**IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission and our report dated February 17, 2009 expressed an unqualifiedopinion thereon.

 

As discussed in Note 12to the consolidated financial statements, the Company changed its method ofaccounting for defined benefit pension plans and other postretirement plans in2006.

 

 
|                    | /s/ Ernst &  Young LLP |
|-------------------------|---------------------------------|
|                    |                            |
|                    |                            |
| Toledo, Ohio            |                            |
| February 17,  2009 |                            |

 

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**CONSOLIDATEDRESULTS OF OPERATIONS**  Owens-IllinoisGroup, Inc.

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

 
| **Years ended December 31,**                        | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net sales                                                          |       | $        | 7,884.7    |     | $          | 7,566.7  |       | $ | 6,650.4 |   |
| Manufacturing,  shipping, and delivery                             |       | (6,208.1 | )          | (5,971.4 | )          | (5,481.1 | )          |
| Gross profit                                                       |       | 1,676.6  |       | 1,595.3  |       | 1,169.3  |       |
|                                                               |       |     |       |     |       |     |       |
| Selling and  administrative expense                                |       | (511.9   | )          | (520.6   | )          | (530.4   | )          |
| Research,  development, and engineering expense                    |       | (66.6    | )          | (65.8    | )          | (48.7    | )          |
| Interest expense                                                   |       | (253.0   | )          | (348.6   | )          | (349.0   | )          |
| Interest income                                                    |       | 38.6     |       | 42.3     |       | 19.2     |       |
| Equity earnings                                                    |       | 50.8     |       | 34.1     |       | 23.4     |       |
| Royalties and  net technical assistance                            |       | 18.6     |       | 19.7     |       | 16.5     |       |
| Other income                                                       |       | 9.5      |       | 16.4     |       | 39.5     |       |
| Other expense                                                      |       | (154.2   | )          | (151.2   | )          | (54.7    | )          |
|                                                               |       |     |       |     |       |     |       |
| Earnings from  continuing operations before items below            |       | 808.4    |       | 621.6    |       | 285.1    |       |
|                                                               |       |     |       |     |       |     |       |
| Provision for  income taxes                                        |       | (237.9   | )          | (147.8   | )          | (125.3   | )          |
| Minority share  owners’ interests in earnings of subsidiaries |       | (70.2    | )          | (59.5    | )          | (43.6    | )          |
|                                                               |       |     |       |     |       |     |       |
| Earnings from  continuing operations                               |       | 500.3    |       | 414.3    |       | 116.2    |       |
| Net earnings  (loss) of discontinued operations                    |       |     |       | 2.8      |       | (23.7    | )          |
| Gain on sale of  discontinued operations                           |       | 6.8      |       | 1,038.5  |       |     |       |
|                                                               |       |     |       |     |       |     |       |
| Net earnings                                                       |       | $        | 507.1      |     | $          | 1,455.6  |       | $ | 92.5 |   |

 

See accompanying Notes to the Consolidated FinancialStatements.

 

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

**Dollars in millions**

 
| **December 31,**                                                           | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Assets**                                                                      |       |     |       |     |       |
| **Current  assets:**                                                            |       |     |       |     |       |
| Cash, including  time deposits of $307.5 ($190.8 in 2007)                       |       | $        | 379.5      |     | $          | 387.7 |   |
| Short-term  investments                                                         |       | 25.0     |       | 59.8     |       |
| Receivables,  less allowances of $39.7 ($36.0 in 2007) for losses and discounts |       | 988.8    |       | 1,185.6  |       |
| Inventories                                                                     |       | 999.5    |       | 1,020.8  |       |
| Prepaid expenses                                                                |       | 51.9     |       | 40.7     |       |
| Total current  assets                                                           |       | 2,444.7  |       | 2,694.6  |       |
|                                                                            |       |     |       |     |       |
| **Other  assets:**                                                              |       |     |       |     |       |
| Equity  investments                                                             |       | 101.7    |       | 81.0     |       |
| Repair parts  inventories                                                       |       | 132.5    |       | 155.8    |       |
| Prepaid pension                                                                 |       |     |       | 566.4    |       |
| Deposits,  receivables, and other assets                                        |       | 444.5    |       | 448.7    |       |
| Goodwill                                                                        |       | 2,207.5  |       | 2,428.1  |       |
| Total other  assets                                                             |       | 2,886.2  |       | 3,680.0  |       |
|                                                                            |       |     |       |     |       |
| **Property,  plant, and equipment:**                                            |       |     |       |     |       |
| Land, at cost                                                                   |       | 248.1    |       | 266.4    |       |
| Buildings and  equipment, at cost:                                              |       |     |       |     |       |
| Buildings and  building equipment                                               |       | 1,078.4  |       | 1,126.6  |       |
| Factory  machinery and equipment                                                |       | 4,345.3  |       | 4,748.1  |       |
| Transportation,  office, and miscellaneous equipment                            |       | 114.6    |       | 132.4    |       |
| Construction in  progress                                                       |       | 196.7    |       | 149.6    |       |
|                                                                            |       | 5,983.1  |       | 6,423.1  |       |
| Less accumulated  depreciation                                                  |       | 3,337.5  |       | 3,473.1  |       |
| Net property,  plant, and equipment                                             |       | 2,645.6  |       | 2,950.0  |       |
|                                                                            |       |     |       |     |       |
| Total assets                                                                    |       | $        | 7,976.5    |     | $          | 9,324.6 |   |

 

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

**Millions of dollars**

** **
| **December 31,**                                                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Liabilities  and Share Owner’s Equity**                                                       |       |     |       |     |       |
| **Current  liabilities:**                                                                            |       |     |       |     |       |
| Short-term loans                                                                                     |       | $        | 375.6      |     | $          | 435.6 |   |
| Accounts payable                                                                                     |       | 838.2    |       | 957.5    |       |
| Salaries and  wages                                                                                  |       | 141.6    |       | 193.1    |       |
| U.S. and foreign  income taxes                                                                       |       | 78.7     |       | 42.9     |       |
| Other accrued  liabilities                                                                           |       | 376.0    |       | 425.1    |       |
| Long-term debt  due within one year                                                                  |       | 18.2     |       | 265.3    |       |
| Total current  liabilities                                                                           |       | 1,828.3  |       | 2,319.5  |       |
|                                                                                                 |       |     |       |     |       |
| **Long-term  debt**                                                                                  |       | 2,931.4  |       | 3,013.2  |       |
|                                                                                                 |       |     |       |     |       |
| **Deferred  taxes**                                                                                  |       | 77.6     |       | 109.4    |       |
|                                                                                                 |       |     |       |     |       |
| **Pension  benefits**                                                                                |       | 741.8    |       | 313.7    |       |
|                                                                                                 |       |     |       |     |       |
| **Nonpension  postretirement benefits**                                                              |       | 239.7    |       | 287.0    |       |
|                                                                                                 |       |     |       |     |       |
| **Other  liabilities**                                                                               |       | 369.0    |       | 387.2    |       |
|                                                                                                 |       |     |       |     |       |
| **Minority  share owners’ interests**                                                           |       | 252.8    |       | 251.7    |       |
|                                                                                                 |       |     |       |     |       |
| **Share  owner’s equity:**                                                                      |       |     |       |     |       |
| Common stock,  par value $.01 per share, 1,000 shares authorized, 100 shares issued and  outstanding |       | —   |       | —   |       |
| Other  contributed capital                                                                           |       | 940.0    |       | 1,110.4  |       |
| Retained  earnings                                                                                   |       | 2,216.5  |       | 1,709.4  |       |
| Accumulated  other comprehensive loss                                                                |       | (1,620.6 | )          | (176.9   | )          |
|                                                                                                 |       |     |       |     |       |
| Total share  owner’s equity                                                                     |       | 1,535.9  |       | 2,642.9  |       |
|                                                                                                 |       |     |       |     |       |
| Total  liabilities and share owner’s equity                                                     |       | $        | 7,976.5    |     | $          | 9,324.6 |   |

 

See accompanying Notes to the Consolidated Financial Statements.

 

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**CONSOLIDATEDSHARE OWNER’S EQUITY**  Owens-Illinois Group, Inc.

**Millions of dollars**

 
| **Years ended December 31,**                         | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Other  contributed capital**                                      |       |     |       |     |       |     |       |
| Balance at  beginning of year                                       |       | $        | 1,110.4    |     | $          | 1,384.7  |       | $ | 1,272.3 |   |
| Net distribution  to Parent                                         |       | (170.4   | )          | (274.3   | )          | 112.4    |       |
| Balance at end  of year                                             |       | $        | 940.0      |     | $          | 1,110.4  |       | $ | 1,384.7 |   |
| **Retained  earnings**                                              |       |     |       |     |       |     |       |
| Balance at  beginning of year                                       |       | $        | 1,709.4    |     | $          | 253.8    |       | $ | 161.3 |   |
| Net earnings                                                        |       | 507.1    |       | 1,455.6  |       | 92.5     |       |
|                                                                |       |     |       |     |       |     |       |
| Balance at end  of year                                             |       | $        | 2,216.5    |     | $          | 1,709.4  |       | $ | 253.8 |   |
|                                                                |       |     |       |     |       |     |       |
| **Accumulated  other comprehensive income (loss)**                  |       |     |       |     |       |     |       |
| Balance at  beginning of year                                       |       | $        | (176.9     | )        | $          | (594.2   | )          | $ | (235.9 | ) |
| Foreign currency  translation adjustments                           |       | (431.9   | )          | 325.3    |       | 268.0    |       |
| Change in  minimum pension liability, net of tax                    |       |     |       |     |       | 40.2     |       |
| Employee benefit  plans, net of tax                                 |       | (978.9   | )          | 63.8     |       | (617.2   | )          |
| Change in fair  value of certain derivative instruments, net of tax |       | (32.9    | )          | 28.2     |       | (49.3    | )          |
|                                                                |       |     |       |     |       |     |       |
| Balance at end  of year                                             |       | $        | (1,620.6   | )        | $          | (176.9   | )          | $ | (594.2 | ) |
|                                                                |       |     |       |     |       |     |       |
| Total share  owner’s equity                                    |       | $        | 1,535.9    |     | $          | 2,642.9  |       | $ | 1,044.3 |   |
|                                                                |       |     |       |     |       |     |       |
| **Total  comprehensive income**                                     |       |     |       |     |       |     |       |
| Net earnings                                                        |       | $        | 507.1      |     | $          | 1,455.6  |       | $ | 92.5 |   |
| Foreign currency  translation adjustments                           |       | (431.9   | )          | 325.3    |       | 268.0    |       |
| Change in  minimum pension liability, net of tax                    |       |     |       |     |       | 40.2     |       |
| Employee benefit  plans, net of tax                                 |       | (978.9   | )          | 63.8     |       |     |       |
| Change in fair  value of certain derivative instruments, net of tax |       | (32.9    | )          | 28.2     |       | (49.3    | )          |
|                                                                |       |     |       |     |       |     |       |
| Total                                                               |       | $        | (936.6     | )        | $          | 1,872.9  |       | $ | 351.4 |   |

 

See accompanying Notes to the Consolidated FinancialStatements.

 

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** **

**CONSOLIDATED CASH FLOWS**  Owens-IllinoisGroup, Inc.

**Dollars in millions**

 
| **Years ended December 31,**                                                  | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Operating  activities:**                                                                   |       |     |       |     |       |     |       |
| Net earnings  (loss)                                                                         |       | $        | 507.1      |     | $          | 1,455.6  |       | $ | 92.5 |   |
| Net (earnings)  loss of discontinued operations                                              |       |     |       | (2.8     | )          | 23.7     |       |
| Gain on sale of  discontinued operations                                                     |       | (6.8     | )          | (1,038.5 | )          |     |       |
| Non-cash charges  (credits):                                                                 |       |     |       |     |       |     |       |
| Depreciation                                                                                 |       | 431.0    |       | 423.4    |       | 427.7    |       |
| Amortization of  deferred costs                                                              |       | 28.9     |       | 28.9     |       | 22.3     |       |
| Amortization of  deferred finance fees                                                       |       | 7.9      |       | 8.6      |       | 5.7      |       |
| Deferred tax  provision                                                                      |       | 21.0     |       | 3.2      |       | 4.6      |       |
| Restructuring  and asset impairment                                                          |       | 133.3    |       | 100.3    |       | 29.7     |       |
| CEO and other  transition charges                                                            |       |     |       |     |       | 20.8     |       |
| Curtailment of  postretirement benefits in The Netherlands                                   |       |     |       |     |       | (15.9    | )          |
| Reverse non-U.S.  deferred tax valuation allowance net of tax restructuring charges          |       |     |       |     |       | (5.7     | )          |
| Mark to market  effect of natural gas hedge contracts                                        |       |     |       |     |       | 8.7      |       |
| Other                                                                                        |       | 90.4     |       | 50.1     |       | 7.9      |       |
| Change in  non-current operating assets                                                      |       | 1.4      |       | (7.4     | )          | (34.5    | )          |
| Reduction of  non-current liabilities                                                        |       | (96.2    | )          | (85.4    | )          | (58.1    | )          |
| Change in  components of working capital                                                     |       | (201.4   | )          | 36.2     |       | (257.1   | )          |
| Cash provided by  continuing operating activities                                            |       | 916.6    |       | 972.2    |       | 272.3    |       |
| Cash provided by  discontinued operating activities                                          |       |     |       | 11.3     |       | 39.3     |       |
| Total cash  provided by operating activities                                                 |       | 916.6    |       | 983.5    |       | 311.6    |       |
| **Investing  activities:**                                                                   |       |     |       |     |       |     |       |
| Additions to  property, plant, and equipment - continuing                                    |       | (361.7   | )          | (292.5   | )          | (285.0   | )          |
| Additions to  property, plant, and equipment - discontinued                                  |       |     |       | (23.3    | )          | (35.3    | )          |
| Acquisitions,  net of cash acquired                                                          |       |     |       | (9.8     | )          |     |       |
| Advances to  affiliate                                                                       |       | (1.6     | )          |     |       |     |       |
| Collections on  receivables arising from consolidation of receivables securitization program |       |     |       |     |       | 127.3    |       |
| Net cash  proceeds from divestitures and other                                               |       | (13.9    | )          | 1,770.0  |       | 15.1     |       |
| Cash provided by  (utilized in) investing activities                                         |       | (377.2   | )          | 1,444.4  |       | (177.9   | )          |
| **Financing  activities:**                                                                   |       |     |       |     |       |     |       |
| Additions to  long-term debt                                                                 |       | 686.4    |       | 406.4    |       | 1,206.5  |       |
| Repayments of  long-term debt                                                                |       | (695.4   | )          | (2,093.2 | )          | (1,341.8 | )          |
| Net change in  payable to parent                                                             |       | (250.0   | )          | (300.0   | )          |     |       |
| Distribution to  parent                                                                      |       | (199.9   | )          | (305.8   | )          | (174.8   | )          |
| Increase  (decrease) in short-term loans                                                     |       | (20.6    | )          | (21.5    | )          | 158.9    |       |
| Net receipts  (payments) for hedging activity                                                |       | (45.2    | )          | 5.7      |       | (6.8     | )          |
| Payment of  finance fees and debt retirement costs                                           |       |     |       | (6.3     | )          | (12.3    | )          |
| Cash utilized in  financing activities                                                       |       | (524.7   | )          | (2,314.7 | )          | (170.3   | )          |
| Effect of  exchange rate fluctuations on cash                                                |       | (22.9    | )          | 51.8     |       | 12.7     |       |
| Increase  (decrease) in cash                                                                 |       | (8.2     | )          | 165.0    |       | (23.9    | )          |
| Cash at  beginning of year                                                                   |       | 387.7    |       | 222.7    |       | 246.6    |       |
| Cash at end of  year                                                                         |       | $        | 379.5      |     | $          | 387.7    |       | $ | 222.7 |   |

 

See accompanying Notes to theConsolidated Financial Statements.

 

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**Owens-Illinois Group, Inc.**

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**Tabular data dollars in millions**

 

**1. Significant Accounting Policies**

 

**Basis of Consolidated Statements**  The consolidated financial statements ofOwens-Illinois Group, Inc. (“Company”) include the accounts of itssubsidiaries.  Newly acquiredsubsidiaries have been included in the consolidated financial statements fromdates of acquisition. Results of operations for the plastics packagingbusiness sold during 2007 have been presented as a discontinued operation. The format of theCompany’s 2007 and 2006 consolidated income statements has been reclassified toconform to the presentation used in the current period.  The individual captions within the financialstatements did not change.

 

TheCompany uses the equity method of accounting for investments in which it has asignificant ownership interest, generally 20% to 50%.  Other investments are accounted for atcost.  The Company monitors other thantemporary declines in fair value and records reductions in carrying values whenappropriate.

 

**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.

 

Forfederal and certain state income tax purposes, the taxable income of theCompany is included in the consolidated tax returns of OI Inc. and income taxesare allocated to the Company on a basis consistent with separate returns.  Current income taxes are recorded by theCompany on a basis consistent with separate returns.

 

**Nature of Operations**  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 22 countries. The principal markets and operations for the Company’s products are inNorth America, Europe, South America, and Australia.

 

**Use of Estimates**  Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management of the Company tomake estimates and assumptions that affect certain amounts reported in thefinancial statements and accompanying notes.  Actual results may differ from thoseestimates, at which time the Company would revise its estimatesaccordingly.  For further information oncertain of the Company’s significant estimates relative to contingentliabilities, see Note 17.

 

**Cash**  The Companydefines “cash” as cash and time deposits with maturities of three months orless when purchased.  Outstanding checksin excess of funds on deposit are included in accounts payable.

 

**Fair Values of Financial Instruments**  The carrying amounts reported for cash,short-term investments and short-term loans approximate fair value.  In addition, carrying amounts approximatefair value for certain long-term debt obligations subject to frequentlyredetermined interest rates.  Fair valuesfor the Company’s significant fixed rate debt obligations are generally basedon published market quotations.

 

**Derivative Instruments**  TheCompany uses currency swaps, interest rate swaps, options, and commodityfutures contracts to manage risks generally associated with foreign exchangerate, interest rate and commodity market volatility.  Derivative financial instruments are included on thebalance sheet at fair value.  Wheneverpossible, derivative instruments are designated as and are effective ashedges, in 

 

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**Owens-Illinois Group, Inc.**

** **

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

** **

accordance with accounting principles generallyaccepted in the United States.  If theunderlying hedged transaction ceases to exist, all changes in fair value of therelated derivatives that have not been settled are recognized in currentearnings.  The Company does not enterinto derivative financial instruments for trading purposes and is not a partyto leveraged derivatives. In accordance with FAS No. 104, cash flows fromfair value hedges of debt and short-term forward exchange contracts areclassified as a financing activity.  Cashflows of currency swaps, interest rate swaps, and commodity futures contractsare classified as operating activities. See Note 8 for additional informationrelated to derivative instruments.

 

**Inventory Valuation**  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**  Goodwillrepresents the excess of cost over fair value of assets of businesses acquired.  Goodwill is evaluated annually, as of October 1,for impairment or more frequently if an impairment indicator exists.

 

**Intangible Assets and Other Long-Lived Assets** Intangible assets are amortized over the expected useful life of theasset.  Amortization expense directlyattributed to the manufacturing of the Company’s 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 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 formingmachines) depreciated over 7-15 years. Buildings and building equipment are depreciated over periods rangingfrom 10 to 50 years. Depreciation expense directly attributed to themanufacturing of the Company’s products is included in manufacturing, shipping,and delivery.  Depreciation expenserelated to non-manufacturing activities is included in selling andadministrative. Maintenance and repairs are expensed as incurred.  Costs assigned to PP&E of acquired businessesare 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.

 

**Revenue Recognition**  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.

 

**Shipping and Handling Costs** Shipping and handling costs are included with manufacturing, shipping,and delivery costs in the Consolidated Statements of Operations.

 

**Income Taxes 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.

 

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**Owens-Illinois Group, Inc.**

** **

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

 

**Foreign Currency 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.

 

**Accounts Receivable  **Receivables are stated at amounts estimated bymanagement to be the net realizable value. The Company charges off accounts receivable when it becomes apparentbased upon age or customer circumstances that amounts will not be collected.

 

**Allowance for Doubtful Accounts  **The allowance for doubtful accounts is establishedthrough charges to the provision for bad debts. The Company evaluates the adequacy of the allowance for doubtfulaccounts on a periodic basis.  Theevaluation includes historical trends in collections and write-offs, management’sjudgment of the probability of collecting accounts and management’s evaluationof business risk.

 

**NewAccounting Standards  **In December 2007,the FASB issued Statement of Financial Accounting Standards No. 141R, “BusinessCombinations” (“FAS No. 141R”).  FASNo. 141R establishes principles and requirements for how an acquirerrecognizes and measures in its financial statements the identifiable assetsacquired, the liabilities assumed, and any noncontrolling interest in theacquiree and recognizes and measures the goodwill acquired in the businesscombination or a gain from a bargain purchase. FAS No. 141R also sets forth the disclosures required to be made inthe financial statements to evaluate the nature and financial effects of thebusiness combination.  SFAS No. 141Rapplies prospectively to business combinations for which the acquisition dateis on or after the beginning of the first annual reporting period beginning onor after December 15, 2008. Accordingly, FAS No. 141R will be applied by the Company tobusiness combinations occurring on or after January 1, 2009.

 

InDecember 2007, the FASB issued Statement of Financial Accounting StandardsNo. 160, “Noncontrolling Interests in Consolidated Financial Statements,an amendment of ARB No. 51” (“FAS No. 160”).  FAS No. 160 establishes accounting andreporting standards for the non-controlling interest in a subsidiary and thedeconsolidation of a subsidiary.  FAS No. 160is effective for years beginning on or after December 15, 2008.  Adoption of FAS No. 160 is not presentlyexpected to have a material impact on the Company’s results of operations,financial position or cash flows.

 

InMarch 2008, the FASB issued Statement of Financial Accounting Standards No. 161,“Disclosures about Derivative Instruments and Hedging Activities, an amendmentof FASB Statement No. 133”**(“FASNo. 161”).  FAS No. 161 isintended to improve financial reporting about derivative instruments andhedging activities by requiring enhanced disclosures to enable investors tobetter understand their effects on an entity’s financial condition, financialperformance, and cash flows. FAS No. 161 is effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008.  Adoption of FAS No. 161 isnot presently expected to have a material impact on the Company’s results ofoperations, financial position or cash flows.

 

In December 2008,the FASB issued a FASB Staff Position on Statement of Financial AccountingStandards No. 132(R), “Employers’ Disclosures about Postretirement BenefitPlan Assets” (“FSP FAS No. 132(R)-1”). FSP FAS No. 132(R)-1 requires additional disclosures about the fairvalue of postretirement benefit plan assets to provide users of financialstatements with useful, transparent and timely information about the assetportfolios.  FSP FAS No. 132(R)-1 iseffective for years ending after December 15, 2009.  Adoption of FSP FAS No. 132(R)-1 willhave no impact on the Company’s results of operations, financial position orcash flows.

 

In February 2008, theFinancial Accounting Standards Board (FASB) issued FASB Staff Position FSP157-2, “Effective Date of FASBStatement No. 157” (FSP 157-2). FSP 157-2 delays the effective date of 

 

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**Owens-Illinois Group, Inc.**

** **

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

 

FAS No. 157 for allnon-financial assets and non-financial liabilities, except for items that arerecognized or disclosed at fair value in the financial statements on arecurring basis (at least annually), until the beginning of the first quarterof fiscal 2009. The adoption of FAS No. 157 is not expected to have asignificant impact on the Company’s consolidated financial statements when itis applied to non-financial assets and non-financial liabilities that are notmeasured at fair value on a recurring basis, beginning in the first quarter of2009.

 

**StockOptions****and Other Stock-Based Compensation**   The Company participates in OI Inc.’s fivenon-qualified plans, which are described more fully in Note 11.  In December 2004,the Financial Accounting Standards Board issued FAS No. 123R, “Share-BasedPayment” (“FAS No. 123R”), which requires that the cost resulting from allshare-based payment transactions be recognized in the financialstatements.  The statement requires apublic entity to measure the cost of employee services received in exchange foran award of equity instruments based on the grant-date fair value of theaward.  That cost is recognized over therequired service period (usually the vesting period).  No compensation cost is recognized for equityinstruments for which employees do not render the required service.

 

The Company adopted the provisions of FAS No. 123Reffective January 1, 2006 using the modified-prospective method ofadoption, which requires recognition of compensation cost in the financialstatements beginning on the date of adoption.

 

Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes option pricing model with the following assumptions:

 
| ** **                                          | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                |       |       |       |       |       |       |       |
| Range of  expected lives of options (years)         |       | 4.75       |       | 4.75       |       | 3.50-4.75  |       |
| Range of  expected stock price volatilities         |       | 29.0%-39.8 | %          | 37.1%-40.0 | %          | 32.7%-50.5 | %          |
| Weighted average  expected stock price volatilities |       | 31.4       | %          | 39.9       | %          | 44.9       | %          |
| Range of  risk-free interest rates                  |       | 1.5%-3.7   | %          | 4.1%-4.6   | %          | 4.1%-5.1   | %          |
| Expected  dividend yield                            |       | 0.0        | %          | 0.0        | %          | 0.0        | %          |

 

Theexpected life of options is based on the assumption that, on average, optionswill be exercised at the mid-point between the vesting date and the expirationdate.  The expected stock pricevolatility is determined by reference to historical prices over a period equalto the expected life.

 

Thefair value of other equity awards, consisting of restricted shares andperformance vested restricted share units, is equal to the quoted market valueat the time of grant.

 

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

 

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** **

**Owens-Illinois Group, Inc.**

** **

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

 
| ** **                                   | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                         |       |     |       |     |       |     |       |
| Decrease  (increase) in current assets:      |       |     |       |     |       |     |       |
| Short-term  investments                      |       | $        | 36.8       |     | $          | (27.0    | )          | $ | 22.5 |   |
| Receivables                                  |       | 57.8     |       | (16.5    | )          | (162.8   | )          |
| Inventories                                  |       | (74.1    | )          | 63.0     |       | (31.2    | )          |
| Prepaid expenses                             |       | (1.6     | )          | 5.6      |       | (2.6     | )          |
| Increase  (decrease) in current liabilities: |       |     |       |     |       |     |       |
| Accounts payable                             |       | (56.7    | )          | (2.9     | )          | 51.9     |       |
| Accrued  liabilities                         |       | (95.7    | )          | (63.2    | )          | (82.1    | )          |
| Salaries and  wages                          |       | (37.2    | )          | 38.3     |       | (24.4    | )          |
| U.S. and foreign  income taxes               |       | (30.7    | )          | 24.5     |       | (24.1    | )          |
|                                         |       | $        | (201.4     | )        | $          | 21.8     |       | $ | (252.8 | ) |
| Continuing  operations                       |       | $        | (201.4     | )        | $          | 36.2     |       | $ | (257.1 | ) |
| Discontinued  operations                     |       |     |       | (14.4    | )          | 4.3      |       |
|                                         |       |     |       |     |       |     |       |
|                                         |       | $        | (201.4     | )        | $          | 21.8     |       | $ | (252.8 | ) |

 

Interest paid in cash, including note repurchasepremiums in 2007 and 2006, aggregated $251.9 million for 2008, $452.4 millionfor 2007, and $461.0 million for 2006.

 

Incometaxes paid (received) in cash were as follows:

 
| ** ** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
|       |       |     |       |     |       |     |       |
| Domestic   |       | $        | (1.2       | )        | $          | 31.8     |       | $ | (1.2 | ) |
| Foreign    |       | 162.5    |       | 151.1    |       | 126.8    |       |
|       |       |     |       |     |       |     |       |
|       |       | $        | 161.3      |     | $          | 182.9    |       | $ | 125.6 |   |

** **

**3. Inventories**  Major classes of inventory are as follows:

 
| ** **          | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
|                |       |     |       |     |       |
| Finished goods      |       | $        | 831.7      |     | $          | 861.1 |   |
| Work in process     |       | 0.8      |       | 1.4      |       |
| Raw materials       |       | 109.8    |       | 90.5     |       |
| Operating  supplies |       | 57.2     |       | 67.8     |       |
|                |       |     |       |     |       |
|                |       | $        | 999.5      |     | $          | 1,020.8 |   |

 

Ifthe inventories which are valued on the LIFO method had been valued at standardcosts, which approximate current costs, consolidated inventories would behigher than reported by $32.5 million and $29.1 million at December 31,2008 and 2007, respectively.

 

Inventorieswhich are valued at the lower of standard costs (which approximate averagecosts) or market at December 31, 2008 and 2007 were approximately $861.7million and $874.6 million, respectively.

 

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

 

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**Owens-Illinois Group, Inc.**

** **

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

 
| ** **                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |
| At end of year:                    |       |     |       |     |       |
| Equity in  undistributed earnings: |       |     |       |     |       |
| Foreign                            |       | $        | 36.4       |     | $          | 23.4 |   |
| Domestic                           |       | 15.2     |       | 18.7     |       |
| Total                              |       | $        | 51.6       |     | $          | 42.1 |   |

 
| ** **           | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------|------------|----------|------------|----------|------------|----------|------------|
|                 |       |     |       |     |       |     |       |
| For the year:        |       |     |       |     |       |     |       |
| Equity in  earnings: |       |     |       |     |       |     |       |
| Foreign              |       | $        | 14.1       |     | $          | 5.3      |       | $ | 2.0 |   |
| Domestic             |       | 36.7     |       | 28.8     |       | 21.4     |       |
| Total                |       | $        | 50.8       |     | $          | 34.1     |       | $ | 23.4 |   |
|                 |       |     |       |     |       |     |       |
| Dividends  received  |       | $        | 24.5       |     | $          | 21.7     |       | $ | 43.5 |   |

 

Summarized combinedfinancial information for equity associates is as follows:

 
| ** **                            | ** ** | **2008** | ** ** | **2007 (a)** | ** ** |
|---------------------------------------|------------|----------|------------|-------------------|------------|
|                                  |       |     |       |              |       |
| At end of year:                       |       |     |       |              |       |
| Current assets                        |       | $        | 208.3      |              | $          | 191.3 |   |
| Non-current  assets                   |       | 325.9    |       | 302.4             |       |
| Total assets                          |       | 534.2    |       | 493.7             |       |
|                                  |       |     |       |              |       |
| Current  liabilities                  |       | 167.5    |       | 117.0             |       |
| Other  liabilities and deferred items |       | 182.5    |       | 265.5             |       |
| Total liabilities  and deferred items |       | 350.0    |       | 382.5             |       |
|                                  |       |     |       |              |       |
| Net assets                            |       | $        | 184.2      |              | $          | 111.2 |   |
|                                       |            |          |            |                   |            |  |  |  |  |

 
| ** **    | ** ** | **2008** | ** ** | **2007 (a)** | ** ** | **2006** | ** ** |
|---------------|------------|----------|------------|-------------------|------------|----------|------------|
|          |       |     |       |              |       |     |       |
| For the year: |       |     |       |              |       |     |       |
| Net sales     |       | $        | 635.8      |              | $          | 535.9    |       | $ | 564.0 |   |
| Gross profit  |       | $        | 227.5      |              | $          | 176.5    |       | $ | 132.2 |   |
| Net earnings  |       | $        | 153.9      |              | $          | 112.4    |       | $ | 69.4 |   |

 

----

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

 

The Company’s significant equity method investmentsinclude:  (1) 43.5% of the commonshares of Vetri Speciali SpA, a specialty glass manufacturer; (2) a 25%partnership interest in General Chemical Soda 

 

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**Owens-Illinois Group, Inc.**

** **

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

 

Ash (Partners), a soda ash supplier; and (3) a50% partnership interest in Rocky Mountain Bottle Company, a glass containermanufacturer.

 

**5.  Debt**  The following table summarizes the long-termdebt of the Company at December 31, 2008 and 2007:

 
| ** **                                               | ** ** | **Dec. 31,  2008** | ** ** | **Dec. 31,  2007** | ** ** |
|----------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| Secured Credit  Agreement:                               |       |                    |       |                    |       |
| Revolving Credit  Facility:                              |       |                    |       |                    |       |
| Revolving Loans                                          |       | $                       | 18.7       |                    | $          | — |   |
| Term Loans:                                              |       |                    |       |                    |       |
| Term Loan A  (225.5 million AUD at Dec. 31, 2008)   |       | 155.7                   |       | 198.1                   |       |
| Term Loan B                                              |       | 191.5                   |       | 191.5                   |       |
| Term Loan C  (110.8 million CAD at Dec. 31, 2008)   |       | 90.9                    |       | 113.2                   |       |
| Term Loan D  (€191.5 million at Dec. 31, 2008) |       | 269.6                   |       | 281.8                   |       |
| Senior Notes:                                            |       |                    |       |                    |       |
| 8.25%, due 2013                                          |       | 461.1                   |       | 450.3                   |       |
| 6.75%, due 2014                                          |       | 400.0                   |       | 400.0                   |       |
| 6.75%, due 2014  (€225 million)                     |       | 316.8                   |       | 331.1                   |       |
| 6.875%, due 2017  (€300 million)                    |       | 422.4                   |       | 441.5                   |       |
| Payable to OI  Inc.                                      |       | 509.5                   |       | 752.8                   |       |
| Other                                                    |       | 113.4                   |       | 118.2                   |       |
| Total long-term  debt                                    |       | 2,949.6                 |       | 3,278.5                 |       |
| Less amounts due  within one year                        |       | 18.2                    |       | 265.3                   |       |
| Long-term debt                                           |       | $                       | 2,931.4    |                    | $          | 3,013.2 |   |

 

On June 14,2006, the Company’s subsidiary borrowers entered into the Secured CreditAgreement (the “Agreement”).  At December 31,2008, the Agreement included a $900.0 million revolving credit facility, a225.0 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 $191.5 million term loanand a €191.5 million term loan, each of which has a final maturity date of June 14,2013.

 

As a result of the bankruptcy of Lehman BrothersHoldings Inc. and several of its subsidiaries, the Company believes that themaximum amount available under the revolving credit facility was reduced by$32.3 million.  After further deductingamounts attributable to letters of credit and overdraft facilities that aresupported by the revolving credit facility, at December 31, 2008 theCompany’s subsidiary borrowers had unused credit of $768.4 million availableunder the Agreement.

 

The Agreement contains various covenants thatrestrict, among other things and subject to certain exceptions, the ability ofthe Company to incur certain liens, make certain investments and acquisitions,become liable under contingent obligations in certain defined instances only,make restricted junior payments, make certain asset sales within guidelines andlimits, make capital expenditures beyond a certain threshold, engage inmaterial transactions with shareholders and affiliates, participate in sale andleaseback financing arrangements, alter its fundamental business, amend certainoutstanding debt obligations, and prepay certain outstanding debt obligations.

 

The Agreement also contains one financial maintenancecovenant, a Leverage Ratio, that requires the Company not to exceed a ratiocalculated by dividing consolidated total debt, less cash and cash equivalents,by Consolidated Adjusted EBITDA, as defined in the Agreement.  The Leverage Ratio could 

 

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** **

**Owens-Illinois Group, Inc.**

** **

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

 

restrict the ability of the Company to undertakeadditional financing to the extent that such financing would cause the LeverageRatio to exceed the specified maximum.

 

Failure to comply with these covenants andrestrictions could result in an event of default under the Agreement.  In such an event, the Company could notrequest borrowings under the revolving facility, and all amounts outstanding underthe Agreement, together with accrued interest, could then be declaredimmediately due and payable.  If an eventof default occurs under the Agreement and the lenders cause all of theoutstanding debt obligations under the Agreement to become due and payable,this 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 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 Ratio also determines pricing under theAgreement.  The interest rate onborrowings under the Agreement is, at the Company’s option, the Base Rate orthe Eurocurrency Rate, as defined in the Agreement.  These rates include a margin linked to theLeverage 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, 2008 was 4.07%.  As of December 31,2008, 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 under the Agreement are secured bysubstantially all of the assets of the Company’s domestic subsidiaries andcertain foreign subsidiaries, which have a book value of approximately $2.1billion.  Borrowings are also secured bya pledge of intercompany debt and equity in most of the Company’s domesticsubsidiaries and stock of certain foreign subsidiaries.  All borrowings under the agreement are guaranteedby substantially all domestic subsidiaries of the Company for the term of theAgreement.

 

During the second quarterof 2008, the Company used cash from operations and borrowings under theAgreement to retire the $250 million principal amount of OI Inc.’s 7.35% SeniorNotes which matured in May 2008.

 

DuringMarch 2007, a subsidiary of the Company issued Senior Notes totaling€300.0 million.  The notes bear interestat 6.875% and are due March 31, 2017. The notes are guaranteed by substantially all of the Company’s domesticsubsidiaries.  The proceeds were used toretire the $300 million principal amount of 8.10% Senior Notes which matured inMay 2007, and to reduce borrowings under the revolving credit facility.

 

OnJuly 31, 2007, the Company completed the sale of its plastics packagingbusiness to Rexam PLC for approximately $1.825 billion in cash.  In accordance with an amendment of theAgreement that became effective upon completion of the sale of the plasticsbusiness, the Company was required to use the net proceeds (as defined in theAgreement) to repay senior secured debt. In addition, the amendment provides for modification of certaincovenants, including the elimination of the financial covenant requiring theCompany to maintain a specified interest coverage ratio.  The Company used a portion of the netproceeds in the third quarter of 2007 to redeem all $450.0 million of the 7.75%Senior Secured Notes and repurchase $283.1 million of the 8.875% Senior SecuredNotes.  The remaining $566.9 million ofthe 8.875% Senior Secured Notes were repurchased or discharged in accordancewith the indenture in October 2007. The remaining net proceeds, along withfunds from operations and/or additional borrowings under the revolving creditfacility, were used to redeem all $625.0 million of the 8.75% 

 

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**Owens-Illinois Group, Inc.**

** **

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

 

SeniorSecured Notes on November 15, 2007. The Company recorded $9.5 million of additional interest charges fornote repurchase premiums and the related write-off of unamortized financefees.  See Note 20 for additional chargesfor note repurchase premiums and the related write-off of unamortized financefees included in the gain on sale of the Company’s plastics business.

 

During October 2006, the Company enteredinto a €300 million Europeanaccounts receivable securitization program. The program extends through October 2011, subject to annual renewalof backup credit lines.  In addition, theCompany participates in a receivables financing program in the Asia Pacific regionwith a revolving funding commitment of 100 million Australian dollars and 25million New Zealand dollars that extends through July 2009 and October 2009,respectively.  Informationrelated to the Company’s accounts receivable securitization program is asfollows:

 
| ** **                              | ** ** | **Dec. 31,  2008** | ** ** | **Dec. 31,  2007** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|-------------------------|------------|
|                                    |       |                    |       |                    |       |
| Balance  (included in short-term loans) |       | $                       | 293.7      |                    | $          | 361.8 |   |
|                                    |       |                    |       |                    |       |
| Weighted average  interest rate         |       | 5.31                    | %          | 5.48                    | %          |
|                                         |            |                         |            |                         |            |  |  |

 

The Company capitalized $25.6 million and $27.0million in 2008 and 2007, respectively, under capital lease obligations withthe related financing recorded as long term debt.  These amounts are included in other in thelong-term debt table above.

 

Annual maturities for all of the Company’s long-termdebt through 2013 are as follows:  2009,$18.2 million; 2010, $279.5 million; 2011, $160.1 million; 2012, $153.6million; and 2013, $923.1 million.

 

Fair values at December 31, 2008, of the Company’ssignificant fixed rate debt obligations were as follows:

 
| ** **                            | ** ** | **Principal Amount  (millions of  dollars)** | ** ** | **Indicated  Market  Price** | ** ** | **Fair Value  (millions of  dollars)** | ** ** | **Hedge Value  (millions of  dollars)** | ** ** |
|---------------------------------------|------------|--------------------------------------------------------|------------|------------------------------|------------|--------------------------------------------------|------------|---------------------------------------------------|------------|
| Senior Notes:                         |       |                                                   |       |                         |       |                                             |       |                                              |       |
| 8.25%, due 2013                       |       | 450.0                                                  |       | 96.00                        |       | 432.0                                            |       | 461.1                                             |       |
| 6.75%, due 2014                       |       | 400.0                                                  |       | 92.75                        |       | 371.0                                            |       |                                              |       |
| 6.75%, due 2014  (€225 million)  |       | 316.8                                                  |       | 77.63                        |       | 245.9                                            |       |                                              |       |
| 6.875%, due 2017  (€300 million) |       | 422.4                                                  |       | 74.13                        |       | 313.1                                            |       |                                              |       |

** **

**6.  Operating Leases**  Rent expense attributable to all warehouse,office buildings and equipment operating leases was $98.9 million in 2008,$92.8 million in 2007, and $82.1 million in 2006.  Minimum future rentals under operating leasesare as follows:  2009, $50.3 million;2010, $37.9 million; 2011, $23.3 million; 2012, $14.7 million; 2013, $7.4million; and 2014 and thereafter, $7.4 million.

 

**7.  ForeignCurrency Transactions**  Aggregate foreign currencyexchange gains (losses) included in other costs and expenses were $0.6 millionin 2008, $(8.1) million in 2007, and $(1.7) million in 2006.

 

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**Owens-Illinois Group, Inc.**

** **

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

 

**8.  Derivative Instruments  **At December 31, 2008, the Company had the followingderivative instruments related to its various hedging programs:

 

*InterestRate Swaps Designated as Fair Value Hedges*

 

In the fourth quarter of2003 and the first quarter of 2004, the Company entered into a series ofinterest rate swap agreements with a current total notional amount of$500 million that mature in 2010 and 2013.  The swaps were executed in order to: (i) converta portion of the senior notes and senior debentures fixed-rate debt intofloating-rate debt; (ii) maintain a capital structure containingappropriate amounts of fixed and floating-rate debt; and (iii) reduce netinterest payments and expense in the near-term.

 

The Company’sfixed-to-variable interest rate swaps are accounted for as fair valuehedges.  Because the relevant terms of theswap agreements match the corresponding terms of the notes, there is no hedgeineffectiveness. Accordingly, the Company recorded the net of the fair marketvalues of the swaps as a long-term asset (liability) along with a correspondingnet increase (decrease) in the carrying value of the hedged debt.

 

Under the swaps, theCompany receives fixed rate interest amounts (equal to interest on thecorresponding hedged note) and pays interest at a six-month U.S. LIBOR rate(set in arrears) plus a margin spread (see table below).  The interest rate differential on each swapis recognized as an adjustment of interest expense during each six-month periodover the term of the agreement.

 

The following selectedinformation relates to fair value swaps at December 31, 2008:

 
| ** **                                                               | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | **Asset**       | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|-----------------|------------|
| ** **                                                               | ** ** | **Amount** | ** ** | **Receive** | ** ** | **Average** | ** ** | **(Liability)** | ** ** |
| ** **                                                               | ** ** | **Hedged** | ** ** | **Rate**    | ** ** | **Spread**  | ** ** | **Recorded**    | ** ** |
|                                                                     |       |       |       |        |       |        |       |            |       |
| OI Inc. public  notes swapped by the Company through intercompany loans: |       |       |       |        |       |        |       |            |       |
| Senior  Debentures due 2010                                              |       | 250.0      |       | 7.50        | %          | 3.2         | %          | 9.4             |       |
| Notes issued by  a subsidiary of the Company:                            |       |       |       |        |       |        |       |            |       |
| Senior Notes due  2013                                                   |       | 250.0      |       | 8.25        | %          | 3.7         | %          | 11.1            |       |
| Total                                                                    |       | $          | 500.0      |        |       |        |       |            | $          | 20.5 |   |
|                                                                          |            |            |            |             |            |             |            |                 |            |  |  |

* *

*Commodity Hedges*

 

The Company enters into commodity futures contractsrelated to forecasted natural gas requirements, the objectives of which are tolimit the effects of fluctuations in the future market price paid for naturalgas and the related volatility in cash flows. The Company continually evaluates the natural gas market with respect toits forecasted usage requirements over the next twelve to twenty-four monthsand periodically enters into commodity futures contracts in order to hedge aportion of its usage requirements over that period.  At December 31, 2008, the Company hadentered into commodity futures contracts for approximately 50% (approximately10,200,000 MM BTUs) of its estimated North American usage requirements for thefull year of 2009 and approximately 1% (approximately 240,000 MM BTUs) for thefull year of 2010.

 

The Company accounts for the above futurescontracts on the balance sheet at fair value. The effective portion of changes in the fair value of a derivative thatis designated as, and meets the required criteria for, a cash flow hedge isrecorded in the Accumulated Other Comprehensive Income component of share 

 

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**Owens-Illinois Group, Inc.**

** **

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

 

owners’ equity (“OCI”) and reclassified intoearnings in the same period or periods during which the underlying hedged itemaffects earnings.  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 above futures contracts are accounted for ascash flow hedges at December 31, 2008.

 

At December 31, 2008, an unrecognized loss of$31.8 million (pretax and after tax), related to the domestic commodity futurescontracts, was included in OCI, which will be reclassified into earnings overthe next twelve months.  Theineffectiveness related to these natural gas hedges for the year ended December 31,2008 was not material.

 

*Other Hedges*

 

TheCompany’s subsidiaries may enter into short-term forward exchange or optionagreements to purchase foreign currencies at set rates in the future.  These agreements are used to limit exposureto fluctuations in foreign currency exchange rates for significant plannedpurchases of fixed assets or commodities that are denominated in currenciesother than the subsidiaries’ functional currency.   Subsidiaries may also use forward exchangeagreements to offset the foreign currency risk for receivables and payables notdenominated in, or indexed to, their functional currencies.  The Company records these short-term forwardexchange agreements on the balance sheet at fair value and changes in the fairvalue are recognized in current earnings.

 

*Balance Sheet Classification*

 

The Company records the fairvalues of derivative financial instruments on the balance sheet as follows: (1) receivablesif the instrument has a positive fair value and maturity within one year, (2) deposits,receivables, and other assets if the instrument has a positive fair value andmaturity after one year, (3) accounts payable and other currentliabilities if the instrument has a negative fair value and maturity within oneyear, and (4) other liabilities if the instrument has a negative fair valueand maturity after one year.

 

**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 thebeginning and end of the year.

 

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**Owens-Illinois Group, Inc.**

** **

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

 

Thefollowing table lists the beginning balance, yearly activity and ending balanceof each component of accumulated other comprehensive income (loss):

 
| ** **                       | ** ** | **Net Effect of  Exchange Rate  Fluctuations** | ** ** | **Deferred Tax  Effect for  Translation** | ** ** | **Change in  Minimum  Pension  Liability** | ** ** | **Change in  Certain  Derivative  Instruments** | ** ** | **Employee  Benefit Plans** | ** ** | **Total  Accumulated  Comprehensive  Income (Loss)** | ** ** |
|----------------------------------|------------|---------------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------|------------|-----------------------------------------------------------|------------|
|                             |       |                                                          |       |                                                |       |                                            |       |                                                 |       |                             |       |                                                      |       |
| Balance on  January 1, 2006 |       | $                                                             | (117.5     | )                                                   | $          | 12.7                                            |       | $                                                    | (145.5     | )                                | $          | 14.4                                                      |       | $ | — |   | $ | (235.9 | ) |
|                             |       |                                                          |       |                                                |       |                                            |       |                                                 |       |                             |       |                                                      |       |
| 2006 Change                      |       | 285.5                                                         |       |                                                |       | 55.0                                            |       | (49.3                                                | )          | (639.9                           | )          | (348.7                                                    | )          |
| Translation  effect              |       |                                                          |       |                                                |       | (17.6                                           | )          |                                                 |       |                             |       | (17.6                                                     | )     |
| Tax effect                       |       |                                                          |       |                                                |       | (14.8                                           | )          |                                                 |       | 22.8                             |       | 8.0                                                       |       |
|                             |       |                                                          |       |                                                |       |                                            |       |                                                 |       |                             |       |                                                      |       |
| Balance on  Dec. 31, 2006   |       | 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 | ) |

 

For2008 and 2007, respectively, foreign currency translation adjustments include aloss of approximately $19.9 million and $35.1 million related to a hedge of theCompany’s net investment in a non-U.S. subsidiary.

 

**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.

 

Significant components of the Company’s deferred taxassets and liabilities at December 31, 2008 and 2007 are as follows:

 

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**Owens-Illinois Group, Inc.**

** **

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

 
| ** **                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
|                             |       |     |       |     |       |
| Deferred tax  assets:            |       |     |       |     |       |
| Accrued  postretirement benefits |       | $        | 84.0       |     | $          | 95.8 |   |
| Foreign tax  credit              |       | 295.5    |       | 417.0    |       |
| Tax loss and  credit carryovers  |       | 342.9    |       | 264.8    |       |
| Capital loss  carryovers         |       | 23.7     |       | 32.7     |       |
| Alternative  minimum tax credits |       | 20.5     |       | 21.4     |       |
| Accrued  liabilities             |       | 159.3    |       | 178.5    |       |
| Pension  liability               |       | 181.0    |       |     |       |
| Other                            |       | 26.5     |       | 38.2     |       |
| Total deferred  tax assets       |       | 1,133.4  |       | 1,048.4  |       |
|                             |       |     |       |     |       |
| Deferred tax  liabilities:       |       |     |       |     |       |
| Property, plant,  and equipment  |       | 151.1    |       | 229.3    |       |
| Prepaid pension  costs           |       |     |       | 147.0    |       |
| Inventory                        |       | 13.4     |       | 20.0     |       |
| Other                            |       | 49.3     |       | 59.1     |       |
| Total deferred  tax liabilities  |       | 213.8    |       | 455.4    |       |
| Valuation  allowance             |       | (874.1   | )          | (568.5   | )          |
|                             |       |     |       |     |       |
| Net deferred  taxes              |       | $        | 45.5       |     | $          | 24.5 |   |

 

Deferred taxes are included in the ConsolidatedBalance Sheets at December 31, 2008 and 2007 as follows:

 
| ** **                               | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
| Prepaid expenses                         |       | $        | 24.1       |     | $          | 9.2 |   |
| Deposits,  receivables, and other assets |       | 99.0     |       | 124.7    |       |
| Deferred taxes                           |       | (77.6    | )          | (109.4   | )          |
|                                     |       |     |       |     |       |
| Net deferred  taxes                      |       | $        | 45.5       |     | $          | 24.5 |   |

 

The Company reviews the likelihood that it willrealize the benefit of its deferred tax assets and therefore the need forvaluation allowances on a quarterly basis, or whenever events indicate that areview is required. In determining the requirement for a valuation allowance,the historical and projected financial results of the legal entity orconsolidated group recording the net deferred tax asset is considered, alongwith other positive and negative evidence.

 

Thefollowing details the Valuation Allowance activity:

 
| **Year** | ** ** | **Beginning  Year Balance** | ** ** | **Foreign Currency  Translation** | ** ** | **Other Changes** | ** ** | **Goodwill** | ** ** | **Other  Comprehensive  Income** | ** ** | **Ending Year  Balance** | ** ** |
|----------|------------|----------------------------------|------------|----------------------------------------|------------|------------------------|------------|--------------|------------|----------------------------------|------------|-------------------------------|------------|
| 2006     |       | $                                | (769.6     | )                                      | $          | (16.4                  | )          | $            | (58.6      | )                                | $          | 44.2                          |       | $ | (221.2 | ) | $ | (1,021.6 | ) |
| 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                        | )          |
|          |            |                                  |            |                                        |            |                        |            |              |            |                                  |            |                               |            |  |  |  |  |  |  |

 

In 2007, the Company reduced the valuation allowancerecorded against its deferred tax assets in the United States by $506.3 millionthrough the utilization of net operating and capital loss carryforwards.

 

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**Owens-Illinois Group, Inc.**

** **

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

 

Otherinternational valuation allowances approximating $66 million were establishedprincipally in prior years in allocation of the costs of acquisitions. BeginningJanuary 1, 2009, under FAS No.141R, “Business Combinations,” any futurereductions of these components will result in an increase to income versus thereduction to goodwill required in previous years.

 

The provision (benefit) for income taxes consists ofthe following:

 
| ** **                         | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |     |       |
| Current:                           |       |     |       |     |       |     |       |
| U.S. Federal                       |       | $        | (2.7       | )        | $          | —   |       | $ | — |   |
| State                              |       | 0.6      |       | 31.1     |       | 2.0      |       |
| Foreign                            |       | 213.0    |       | 145.2    |       | 113.7    |       |
|                               |       |     |       |     |       |     |       |
|                               |       | 210.9    |       | 176.3    |       | 115.7    |       |
|                               |       |     |       |     |       |     |       |
| Deferred:                          |       |     |       |     |       |     |       |
| U.S. Federal                       |       | 14.6     |       | 8.0      |       | 9.2      |       |
| State                              |       | (0.8     | )          | 1.0      |       | (14.6    | )          |
| Foreign                            |       | 8.4      |       | (1.7     | )          | 16.2     |       |
|                               |       |     |       |     |       |     |       |
|                               |       | 22.2     |       | 7.3      |       | 10.8     |       |
|                               |       |     |       |     |       |     |       |
| Total:                             |       |     |       |     |       |     |       |
| U.S. Federal                       |       | 11.9     |       | 8.0      |       | 9.2      |       |
| State                              |       | (0.2     | )          | 32.1     |       | (12.6    | )          |
| Foreign                            |       | 221.4    |       | 143.5    |       | 129.9    |       |
|                               |       |     |       |     |       |     |       |
|                               |       | $        | 233.1      |     | $          | 183.6    |       | $ | 126.5 |   |
|                               |       |     |       |     |       |     |       |
| Total for  continuing operations   |       | $        | 237.9      |     | $          | 147.8    |       | $ | 125.3 |   |
| Total for  discontinued operations |       | (4.8     | )          | 35.8     |       | 1.2      |       |
|                               |       | $        | 233.1      |     | $          | 183.6    |       | $ | 126.5 |   |

 

The provision (benefit) for income taxes wascalculated based on the following components of earnings (loss) before incometaxes:

 
| **Continuing operations** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Domestic                       |       | $        | 109.4      |     | $          | (65.7    | )          | $ | (174.1 | ) |
| Foreign                        |       | 699.0    |       | 687.3    |       | 459.2    |       |
|                           |       |     |       |     |       |     |       |
|                           |       | $        | 808.4      |     | $          | 621.6    |       | $ | 285.1 |   |

 
| **Discontinued  operations** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Domestic                     |       | $        | 2.0        |     | $          | (1.1     | )          | $ | (19.7 | ) |
| Foreign                      |       | —   |       | 1.7      |       | (2.8     | )          |
|                         |       |     |       |     |       |     |       |
|                         |       | $        | 2.0        |     | $          | 0.6      |       | $ | (22.5 | ) |

 

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**Owens-Illinois Group, Inc.**

** **

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

 

A reconciliation of the provision (benefit) forincome taxes based on the statutory U.S. Federal tax rate of 35% to theprovision for income taxes is as follows:

 
| ** **                                                                                                        | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                              |       |     |       |     |       |     |       |
| Tax provision  (benefit) on pretax earnings (loss) from continuing  operations at statutory U.S. Federal tax rate |       | $        | 282.9      |     | $          | 217.6    |       | $ | 99.8 |   |
| Increase  (decrease) in provision for income taxes due to:                                                        |       |     |       |     |       |     |       |
|                                                                                                              |       |     |       |     |       |     |       |
| Valuation  allowance - U.S.                                                                                       |       | (16.9    | )          | (506.3   | )          | 62.6     |       |
| Foreign  subsidiary ownership restructuring and incentives                                                        |       | 35.1     |       | 535.9    |       | 30.8     |       |
| Foreign source  income taxable in the U.S.                                                                        |       | 11.3     |       | 29.3     |       | 1.8      |       |
| Reversal of  non-U.S. tax valuation allowance                                                                     |       | —   |       | (13.4    | )          | (34.7    | )          |
| Foreign tax  credit utilization                                                                                   |       | —   |       | (40.4    | )          |     |       |
| State taxes, net  of federal benefit                                                                              |       | 5.0      |       | (2.9     | )          | (13.5    | )          |
| Rate differences  on non-U.S. earnings                                                                            |       | (55.3    | )          | (65.7    | )          | (23.8    | )          |
| Adjustment for  non-U.S. tax law changes                                                                          |       | (20.1    | )          | (9.9     | )          | (1.6     | )          |
| Other items                                                                                                       |       | (4.1     | )          | 3.6      |       | 3.9      |       |
|                                                                                                              |       |     |       |     |       |     |       |
| Provision for  income taxes                                                                                       |       | $        | 237.9      |     | $          | 147.8    |       | $ | 125.3 |   |
|                                                                                                                   |            |          |            |          |            |          |            |  |  |  |  |  |  |

 

In 2007 the Company implemented a plan torestructure the ownership and intercompany obligations of certain foreignsubsidiaries. These actions resulted in the taxation of a significant portionof previously unremitted foreign earnings. The Company also realigned its debt service obligations to operationsoutside the U.S. in order to better balance its future operating cash flowswith its global financing costs. The foreign earnings reported as taxable inthe U.S. were offset by net operating loss carryforwards and foreign taxcredits. Foreign tax credit carryforwards arising from the restructuring werefully offset by an increase in the valuation allowance.

 

The Company has recognized tax benefits as a resultof incentives in certain non-U.S. jurisdictions which expire between 2012 to2015.

 

At December 31, 2008, before valuationallowance, the Company has unused research tax credits of $8.4 million expiringfrom 2009 to 2029 and foreign tax credits of $295.5 million expiring in 2017.The Company also has unused alternative minimum tax credits of $20.5 millionwhich do not expire and which will be available to offset future U.S. Federalincome tax. Approximately $72.3 million of the deferred tax assets relate tonet operating and capital loss carryforwards that can be carried overindefinitely with the remaining $286.0 million expiring between 2009 and2028.  As a result of U.S. taxlegislation enacted in 2008, the Company realized $2.3 million of benefits fromits research and alternative minimum tax credit carryforwards.  The related valuation on these credits wasreduced accordingly.

 

At December 31, 2008, the Company’s equity inthe undistributed earnings of foreign subsidiaries for which income taxes hadnot been provided approximated $1,583.2 million. The Company intends toreinvest these earnings indefinitely in the non-U.S. operations. It is notpracticable to estimate the U.S. and foreign tax which would be payable shouldthese earnings be distributed.

 

TheCompany adopted FASB Interpretation 48, “Accounting for Uncertainty in IncomeTaxes,” (“FIN 48”) as of January 1, 2007. This interpretation was issuedto clarify the accounting for uncertainty in 

 

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**Owens-Illinois Group, Inc.**

** **

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

 

incometaxes recognized in an enterprise’s financial statements in accordance with FASNo. 109, “Accounting for Income Taxes.” FIN 48 defines criteria that a taxposition must meet for any part of the benefit of that position to berecognized in an enterprise’s financial statements and also includesrequirements for measuring the amount of the benefit to be recognized in thefinancial statements.

 

Asa result of the adoption of FIN 48, the Company recognized no adjustment toretained earnings for unrecognized income tax benefits. The Companyreclassified $28.5 million of deferred tax assets related to general businesscredits and net operating losses that were previously offset by a fullvaluation allowance to the liability for unrecognized income tax benefits. Thisbalance sheet reclassification had no effect on share owners’ equity. Inconnection with the adoption of FIN 48, the Company is maintaining itshistorical method of accruing interest and penalties associated withunrecognized income tax benefits as a component of its income tax expense.

 

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

 
| ** **                                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Balance at  January 1                                            |       | $        | 53.0       |     | $          | 45.8 |   |
| Additions for  tax positions of prior years                           |       | 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         |       | 6.1      |       | 11.0     |       |
| Reductions due  to the lapse of the applicable statute of limitations |       | (3.1     | )          | (1.4     | )          |
| Reductions due  to settlements                                        |       | (2.0     | )          | —   |       |
| Balance at  December 31                                          |       | $        | 103.1      |     | $          | 53.0 |   |

 

AtDecember 31, 2008 and December 31, 2007, accrued interest andpenalties related to unrecognized tax benefits were $14.5 million and$3.9 million, respectively. Tax expense for the year ended December 31,2008 includes interest and penalties of $5.4 million on unrecognized taxbenefits for prior years.

 

The unrecognized tax benefit liability, includinginterest and penalties, as of December 31, 2008 and December 31, 2007was $117.6 million and $56.9 million respectively. Approximately $72.7 millionand $41.1 million as of December 31, 2008 and December 31, 2007,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. Taxyears through 1999 have been settled with the U.S. Internal Revenue Service andthere is no current IRS examination in progress. 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 the earliest open year for the Company’s othermajor tax jurisdictions.

 

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

 

**11.  StockOptions and Other Stock Based Compensation**   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 

 

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**Owens-Illinois Group, Inc.**

** **

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

 

Owens-Illinois, Inc.; (4) the 2004 EquityIncentive Plan for Directors of Owens-Illinois, Inc.; and (5) the2005 Equity Incentive Plan of Owens-Illinois, Inc. At December 31,2008, there were 2,174,949 shares authorized and available for grants underthese plans.  Total compensation cost forall grants of shares and units under all of these plans was $21.4 million($19.1 million after tax) for the year ended December 31, 2008.  Total compensation cost for grants of sharesand units was $23.6 million ($21.9 million after tax) in 2007 and $21.7 million($20.4 million after tax) in 2006.  Thecost in 2006 included $3.1 million for accelerated vesting of options, sharesand units held by the former CEO at the time of his separation in November 2006and $1.9 million for fully vested options granted to the new CEO in December 2006.

 

*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 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.

 

Stockoption information at December 31, 2008 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 Dec. 31, 2007                |       | 3,462              |       | $                    | 20.54      |            |       |          |       |   |
| Granted                                                   |       | 428                |       | 52.33                |       |            |       |          |       |
| Exercised                                                 |       | (604               | )          | 23.98                |       |            |       |          |       |
| Forfeited or  expired                                     |       | (73                | )          | 46.00                |       |            |       |          |       |
| Options  outstanding at Dec. 31, 2008                |       | 3,213              |       | 23.56                |       | 4.7             |       | $             | 22.9       |   |
| Options vested  or expected to vest at Dec. 31, 2008 |       | 3,171              |       | $                    | 23.56      |            | 4.7        |          | $          | 22.6 |   |
| Options  exercisable at Dec. 31, 2008                |       | 1,870              |       | $                    | 18.03      |            | 4.3        |          | $          | 17.4 |   |

 

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**Owens-Illinois Group, Inc.**

** **

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

 

Certain additional information related to stock options is as followsfor the periods indicated:

 
| ** **                                                             | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Weighted average  grant-date fair value of options granted (per share) |       | $        | 16.21      |     | $          | 9.87     |       | $ | 7.91 |   |
| Aggregate  intrinsic value of options exercised                        |       | $        | 17.3       |     | $          | 44.5     |       | $ | 3.7 |   |
| Aggregate cash  received from options exercised                        |       | $        | 14.5       |     | $          | 62.8     |       | $ | 7.6 |   |

 

*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.

 

Restrictedshare activity is as follows:

 
|                                    | ** ** | ** **         | ** ** | **Weighted**         | ** ** |   |   |
|------------------------------------|------------|--------------------|------------|----------------------|------------|--------|--------|
| ** **                         | ** ** | **Number of** | ** ** | **Average**          | ** ** |   |   |
| ** **                         | ** ** | **Restricted**     | ** ** | **Grant-Date**       | ** ** |   |   |
| ** **                         | ** ** | **Shares**         | ** ** | **Fair Value**  | ** ** |   |   |
| ** **                         | ** ** | **(thousands)**    | ** ** | **(per share)** | ** ** |   |   |
|                               |       |               |       |                 |       |   |   |
| Nonvested at  January 1, 2008 |       | 501                |       | $                    | 18.61      |   |   |   |
| Granted                            |       | 64                 |       | 52.02                |       |   |   |
| Vested                             |       | (72                | )          | 20.80                |       |   |   |
| Forfeited                          |       | (1                 | )          | 22.14                |       |   |   |
| Nonvested at  Dec. 31, 2008   |       | 492                |       | 22.63                |       |   |   |
| Awards granted  during 2007        |       |               |       | $                    | 26.07      |   |   |   |
| Awards granted  during 2006        |       |               |       | $                    | 18.74      |   |   |   |

 
| ** **                         | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Total fair value  of shares vested |       | $        | 2.9        |     | $          | 10.9     |       | $ | 7.7 |   |
|                                    |            |          |            |          |            |          |            |  |  |  |

 

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** **

**Owens-Illinois Group, Inc.**

** **

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

 

*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 OIInc.’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.

 

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, 2008 |       | 963                   |       | $                   | 21.47      |   |   |   |
| Granted                            |       | 166                   |       | 52.23               |       |   |   |
| Vested                             |       | (222                  | )          | 24.22               |       |   |   |
| Forfeited                          |       | (21                   | )          | 22.86               |       |   |   |
| Nonvested at  Dec. 31, 2008   |       | 886                   |       | 26.51               |       |   |   |
| Awards granted  during 2007        |       |                  |       | $                   | 24.18      |   |   |   |
| Awards granted  during 2006        |       |                  |       | $                   | 18.24      |   |   |   |

** **
| ** **                                                      | ** ** | **2008** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|
| Number of shares  issued to holders of vested units (thousands) |       | 316      |       |
| Fair value of  shares at issuance date                          |       | $        | 16.9       |   |
|                                                                 |            |          |            |  |

 

Asof December 31, 2008, there was $18.0 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.

 

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**Owens-Illinois Group, Inc.**

 

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

 

**12.  PensionBenefit Plans and Other Postretirement Benefits**

 

*PensionBenefit Plans*

 

Netexpense to results of operations for all of the Company’s pension plans andcertain deferred compensation arrangements amounted to $(3.5) million in 2008,$24.9 million in 2007, and $41.9 million in 2006.

 

TheCompany has defined benefit pension plans covering substantially all employeeslocated in the United States, the United Kingdom, The Netherlands, Canada andAustralia, as well as many employees in Germany and France.  Benefits generally are based on compensationfor salaried employees and on length of service for hourly employees.  The Company’s policy is to fund pension planssuch that sufficient assets will be available to meet future benefitrequirements.  The Company’s definedbenefit pension plans use a December 31 measurement date.  The following tables relate to the Company’sprincipal defined benefit pension plans.

 

Thechanges in the pension benefit obligations for the year were as follows:

 
| ** **                                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|----------|------------|
| Obligations at  beginning of year                            |       | $        | 3,817.7    |     | $          | 3,879.2 |   |
|                                                         |       |     |       |     |       |
| Change in  benefit obligations:                              |       |     |       |     |       |
| Service cost                                                 |       | 46.3     |       | 54.0     |       |
| Interest cost                                                |       | 215.2    |       | 212.0    |       |
| Actuarial gain,  including effect of changing discount rates |       | (108.5   | )          | (73.6    | )          |
| Curtailments                                                 |       | (9.5     | )          | (21.9    | )          |
| Special  termination benefits                                |       | 4.4      |       |     |       |
| Settlements                                                  |       |     |       | (55.8    | )          |
| Participant  contributions                                   |       | 8.8      |       | 10.0     |       |
| Benefit payments                                             |       | (257.8   | )          | (325.1   | )          |
| Plan amendments                                              |       | 3.0      |       | (3.5     | )          |
| Foreign currency  translation                                |       | (284.2   | )          | 136.4    |       |
| Other                                                        |       |     |       | 6.0      |       |
| Net change in  benefit obligations                           |       | (382.3   | )          | (61.5    | )          |
| Obligations at end  of year                                  |       | $        | 3,435.4    |     | $          | 3,817.7 |   |

 

Thechanges in the fair value of the pension plans’ assets for the year were asfollows:

 

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**Owens-Illinois Group, Inc.**

 

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

 
| ** **                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
| Fair value at  beginning of year    |       | $        | 4,084.9    |     | $          | 4,043.5 |   |
|                                |       |     |       |     |       |
| Change in fair  value:              |       |     |       |     |       |
| Actual gain  (loss) on plan assets  |       | (973.2   | )          | 177.6    |       |
| Benefit payments                    |       | (257.8   | )          | (325.1   | )          |
| Employer  contributions             |       | 61.2     |       | 63.9     |       |
| Participant  contributions          |       | 8.8      |       | 10.0     |       |
| Foreign currency  translation       |       | (213.7   | )          | 115.0    |       |
| Other                               |       | (3.3     | )          |     |       |
| Net change in  fair value of assets |       | (1,378.0 | )          | 41.4     |       |
| Fair value at  end of year          |       | $        | 2,706.9    |     | $          | 4,084.9 |   |

 

Thefunded status of the pension plans at year end was as follows:

 
| ** **                                                     | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|
| Plan assets at  fair value                                     |       | $        | 2,706.9    |     | $          | 4,084.9 |   |
| Projected  benefit obligations                                 |       | 3,435.4  |       | 3,817.7  |       |
| Plan assets  greater (less) than projected benefit obligations |       | (728.5   | )          | 267.2    |       |
|                                                           |       |     |       |     |       |
| Items not yet  recognized in pension expense:                  |       |     |       |     |       |
| Actuarial loss                                                 |       | 1,748.1  |       | 700.4    |       |
| Prior service  credit                                          |       | (15.6    | )          | (18.7    | )          |
|                                                           |       | 1,732.5  |       | 681.7    |       |
| Net amount  recognized                                         |       | $        | 1,004.0    |     | $          | 948.9 |   |

 

Thenet amount recognized is included in the Consolidated Balance Sheets at December 31,2008 and 2007 as follows:

 
| ** **                                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Prepaid pension                                                     |       | $        | —     |     | $          | 566.4 |   |
| Current pension  liability, included with Other accrued liabilities |       | (8.0     | )          | (9.2     | )          |
| Noncurrent  pension liability, included with Pension benefits       |       | (720.5   | )          | (290.0   | )          |
| Accumulated  other comprehensive income                             |       | 1,732.5  |       | 681.7    |       |
| Net amount  recognized                                              |       | $        | 1,004.0    |     | $          | 948.9 |   |

 

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**Owens-Illinois Group, Inc.**

 

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

 

Thefollowing changes in plan assets and benefit obligations were recognized inaccumulated other comprehensive income at December 31, 2008 as follows:

 
| ** **                            | ** ** | ** ** | ** ** | **Tax**    | ** ** | ** **         | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|--------------------|------------|
| ** **                            | ** ** | **Pretax** | ** ** | **Effect** | ** ** | **After—tax** | ** ** |
|                                  |       |       |       |       |       |               |       |
| Current year  actuarial loss          |       | $          | 1,148.8    |       | $          | (62.2              | )          | $ | 1,086.6 |   |
| Amortization of  actuarial loss       |       | (30.3      | )          | 1.1        |       | (29.2              | )          |
| Current year  prior service cost      |       | 3.0        |       |       |       | 3.0                |       |
| Amortization of  prior service credit |       | 1.1        |       | (0.1       | )          | 1.0                |       |
| Curtailment                           |       | (8.5       | )          | 2.4        |       | (6.1               | )          |
|                                  |       | 1,114.1    |       | (58.8      | )          | 1,055.3            |       |
| Translation                           |       |       |       |       |       | (44.9              | )          |
|                                  |       | $          | 1,114.1    |       | $          | (58.8              | )          | $ | 1,010.4 |   |

 

Theaccumulated benefit obligation for all defined benefit pension plans was$3,157.0 million and $3,566.0 million at December 31, 2008 and 2007,respectively.

 

Thecomponents of the net pension expense (income) for the year were as follows:

 
| ** **                         | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |     |       |   |   |   |
| Service cost                       |       | $        | 46.3       |     | $          | 54.0     |       | $ | 60.8 |   |
| Interest cost                      |       | 215.2    |       | 212.0    |       | 204.3    |       |
| Expected asset  return             |       | (318.3   | )          | (317.6   | )          | (298.4   | )          |
| Settlement cost                    |       |     |       | 18.6     |       |     |       |
| Special  termination benefits      |       | 4.4      |       |     |       |     |       |
| Curtailment  (gain) loss           |       | 0.1      |       | (1.5     | )          |     |       |
| Other                              |       | (1.2     | )          | 5.1      |       | 9.2      |       |
|                               |       |     |       |     |       |     |       |
| Amortization:                      |       |     |       |     |       |     |       |
| Prior service  credit              |       | (1.1     | )          | (0.8     | )          | (0.6     | )          |
| Loss                               |       | 30.3     |       | 38.2     |       | 61.5     |       |
| Net amortization                   |       | 29.2     |       | 37.4     |       | 60.9     |       |
| Net expense  (income)              |       | $        | (24.3      | )        | $          | 8.0      |       | $ | 36.8 |   |
|                               |       |     |       |     |       |     |       |
| Total for  continuing operations   |       | $        | (24.3      | )        | $          | 3.4      |       | $ | 36.2 |   |
| Total for  discontinued operations |       |     |       | 4.6      |       | 0.6      |       |
|                               |       | $        | (24.3      | )        | $          | 8.0      |       | $ | 36.8 |   |

 

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**Owens-Illinois Group, Inc.**

 

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

 

Amountsthat will be amortized from accumulated other comprehensive income into netpension expense during 2009:

 
| Amortization:       |   |   |   |
|---------------------|--------|--------|--------|
| Loss                |   | $      | 43.6   |   |
| Prior service  cost |   | (1.0   | )      |
| Net amortization    |   | $      | 42.6   |   |

 

Thefollowing information is for plans with projected and accumulated benefitobligations in excess of the fair value of plan assets at year end:

 
| ** **                       | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|----------------------------------|------------|------------|------------|------------|------------|
| ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Projected  benefit obligations   |       | $          | 3,435.4    |       | $          | 1,125.1 |   |
| Fair value of plan  assets       |       | 2,706.9    |       | 816.1      |       |
| Accumulated  benefit obligations |       | 3,157.0    |       | 1,015.4    |       |
|                                  |            |            |            |            |            |  |  |

 

Theweighted average assumptions used to determine benefit obligations were asfollows:

 
| ** **                     | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
|                           |       |     |       |     |       |
| Discount rate                  |       | 6.29     | %          | 5.87     | %          |
| Rate of  compensation increase |       | 4.34     | %          | 4.32     | %          |

 

Theweighted average assumptions used to determine net periodic pension costs wereas follows:

 
| ** **                                   | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                         |       |     |       |     |       |     |       |
| Discount rate                                |       | 5.87     | %          | 5.49     | %          | 5.30     | %          |
| Rate of  compensation increase               |       | 4.32     | %          | 4.34     | %          | 4.54     | %          |
| Expected long-term  rate of return on assets |       | 8.09     | %          | 8.08     | %          | 8.08     | %          |

 

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

 

For2008, the Company’s weighted average expected long-term rate of return onassets was 8.09%.  In developing thisassumption, the Company evaluated input from its third party pension plan assetmanagers, including their review of asset class return expectations and long-terminflation assumptions.  The Company alsoconsidered its historical 10-year average return (through December 31,2007), which was in line with the expected long-term rate of return assumptionfor 2008.

 

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**Owens-Illinois Group, Inc.**

 

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

 

Theweighted average actual asset allocations and weighted average targetallocation ranges by asset category for the Company’s pension plan assets wereas follows:

 
| ** **              | ** ** | ** **                 | ** ** | ** **     | ** ** | **Target** | ** ** |
|-------------------------|------------|----------------------------|------------|----------------|------------|------------|------------|
| ** **              | ** ** | **Actual Allocation** | ** ** | **Allocation** | ** ** |
| **Asset Category** | ** ** | **2008**                   | ** ** | **2007**       | ** ** | **Ranges** | ** ** |
|                    |       |                       |       |           |       |       |       |
| Equity securites        |       | 48                         | %          | 63             | %          | 48-58%     |       |
| Debt securities         |       | 43                         | %          | 28             | %          | 30-40%     |       |
| Real estate             |       | 6                          | %          | 5              | %          | 3-13%      |       |
| Other                   |       | 3                          | %          | 4              | %          | 0-9%       |       |
| Total                   |       | 100                        | %          | 100            | %          |       |       |

 

It isthe Company’s policy to invest pension plan assets in a diversified portfolioconsisting of an array of asset classes within the above target assetallocation ranges.  The investment riskof the assets is limited by appropriate diversification both within and betweenasset classes.  The assets for both theU.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.

 

Basedon exchange rates at the end of 2008, the Company expects to contributeapproximately $70 million to $75 million to its non—U.S. defined benefitpension plans in 2009.

 

Thefollowing estimated future benefit payments, which reflect expected futureservice, as appropriate, are expected to be paid in the years indicated:

 
| **Year(s)** | ** ** | ** ** | **Amount** | ** ** |
|-------------|------------|------------|------------|------------|
|        |       |       |       |       |
| 2009        |       |       | 262.4      |       |
| 2010        |       |       | 234.1      |       |
| 2011        |       |       | 234.7      |       |
| 2012        |       |       | 238.7      |       |
| 2013        |       |       | 241.8      |       |
| 2014 - 2018 |       |       | 1,241.1    |       |

 

TheCompany also sponsors several defined contribution plans for all salaried andhourly U.S. employees.   Participation isvoluntary and participants’ contributions are based on their compensation.  The Company matches contributions ofparticipants, up to various limits, in substantially all plans.  Company contributions to these plans amountedto $7.1 million in 2008, $6.7 million in 2007, and $6.4 million in 2006.

 

*PostretirementBenefits Other Than Pensions*

 

 The Company provides certain retiree healthcare and life insurance benefits covering substantially all U.S. salaried andcertain hourly employees, substantially all employees in Canada and in TheNetherlands.  Employees are generallyeligible for benefits upon retirement and completion of a specified number ofyears of creditable service.  The Companyuses a December 31 measurement date to measure its Postretirement BenefitObligations.

 

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**Owens-Illinois Group, Inc.**

 

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

 

The changes in thepostretirement benefit obligations for the year were as follows:

 
| ** **                                                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Obligations at  beginning of year                                |       | $        | 309.5      |     | $          | 317.6 |   |
|                                                             |       |     |       |     |       |
| Change in  benefit obligations:                                  |       |     |       |     |       |
| Service cost                                                     |       | 2.2      |       | 3.0      |       |
| Interest cost                                                    |       | 17.2     |       | 17.5     |       |
| Actuarial gain,  including the effect of changing discount rates |       | (30.0    | )          | (9.5     | )          |
| Curtailments                                                     |       | (2.9     | )          | (9.1     | )          |
| Special  termination benefits                                    |       | 0.9      |       |     |       |
| Benefit payments                                                 |       | (19.9    | )          | (24.4    | )          |
| Foreign currency  translation                                    |       | (16.7    | )          | 14.4     |       |
| Other                                                            |       |     |       |     |       |
| Net change in  benefit obligations                               |       | (49.2    | )          | (8.1     | )          |
| Obligations at  end of year                                      |       | $        | 260.3      |     | $          | 309.5 |   |

 

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

 
| ** **                                                    | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|
| Postretirement  benefit obligations                           |       | $        | 260.3      |     | $          | 309.5 |   |
|                                                          |       |     |       |     |       |
| Items not yet  recognized in net postretirement benefit cost: |       |     |       |     |       |
| Prior service  credit                                         |       | 20.7     |       | 23.8     |       |
| Actuarial loss                                                |       | (39.7    | )          | (78.2    | )          |
|                                                          |       | (19.0    | )          | (54.4    | )          |
|                                                          |       |     |       |     |       |
| Net amount  recognized                                        |       | $        | 241.3      |     | $          | 255.1 |   |

 

Thenet amount recognized is included in the Consolidated Balance Sheets at December 31,2008 and 2007 as follows:

 
| ** **                                                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                |       |     |       |     |       |
| Current  nonpension postretirement benefit, included with Other accrued liabilities |       | $        | (22.3      | )        | $          | (24.3 | ) |
| Nonpension  postretirement benefits                                                 |       | (238.0   | )          | (285.2   | )          |
| Accumulated  other comprehensive income                                             |       | 19.0     |       | 54.4     |       |
|                                                                                |       |     |       |     |       |
| Net amount  recognized                                                              |       | $        | (241.3     | )        | $          | (255.1 | ) |

 

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**Owens-Illinois Group, Inc.**

 

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

 

Thefollowing changes in benefit obligations were recognized in accumulated othercomprehensive income at December 31, 2008 as follows:

 
| ** **                            | ** ** | ** ** | ** ** | **Tax**    | ** ** | ** **    | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|---------------|------------|
| ** **                            | ** ** | **Pretax** | ** ** | **Effect** | ** ** | **After-tax** | ** ** |
|                                  |       |       |       |       |       |          |       |
| Current year  actuarial gain          |       | $          | (28.4      | )          | $          | 3.0           |       | $ | (25.4 | ) |
| Amortization of  actuarial loss       |       | (6.2       | )          |       |       | (6.2          | )          |
| Amortization of  prior service credit |       | 3.1        |       |       |       | 3.1           |       |
| Curtailment                           |       | (2.5       | )          | 0.7        |       | (1.8          | )          |
|                                  |       | (34.0      | )          | 3.7        |       | (30.3         | )          |
| Translation                           |       |       |       |       |       | (1.2          | )          |
|                                  |       | $          | (34.0      | )          | $          | 3.7           |       | $ | (31.5 | ) |

 

Thecomponents of the net postretirement benefit cost for the year were as follows:

 
| ** **                         | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |     |       |
| Service cost                       |       | $        | 2.2        |     | $          | 3.0      |       | $ | 4.3 |   |
| Interest cost                      |       | 17.2     |       | 17.4     |       | 16.8     |       |
| Curtailment gain                   |       |     |       | (14.9    | )          | (15.9    | )          |
| Special  termination benefit       |       | 0.9      |       |     |       |     |       |
| Other                              |       |     |       |     |       | 0.9      |       |
| Amortization:                      |       |     |       |     |       |     |       |
| Prior service  credit              |       | (3.1     | )          | (3.8     | )          | (4.3     | )          |
| Loss                               |       | 6.2      |       | 5.8      |       | 3.9      |       |
| Net amortization                   |       | 3.1      |       | 2.0      |       | (0.4     | )          |
| Net  postretirement benefit cost   |       | $        | 23.4       |     | $          | 7.5      |       | $ | 5.7 |   |
| Total for  continuing operations   |       | 23.4     |       | 20.7     |       | 3.2      |       |
| Total for  discontinued operations |       |     |       | (13.2    | )          | 2.5      |       |
|                               |       | $        | 23.4       |     | $          | 7.5      |       | $ | 5.7 |   |

 

Amountsthat will be amortized from accumulated other comprehensive income into netpostretirement benefit cost during 2009:

 
| Amortization:         |   |   |   |
|-----------------------|--------|--------|--------|
| Loss                  |   | $      | 3.9    |   |
| Prior service  credit |   | (3.1   | )      |
| Net amortization      |   | $      | 0.8    |   |

 

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**Owens-Illinois Group, Inc.**

 

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

 

Theweighted average discount rate used to determine the accumulated postretirementbenefit obligation was 6.40% and 5.86% at December 31, 2008 and 2007,respectively.

 

Theweighted average discount rate used to determine net postretirement benefitcost was 5.86%, 5.56%, and 5.45% at December 31, 2008, 2007, and 2006,respectively.

 

Theweighted average assumed health care cost trend rates at December 31 wereas follows:

 
| ** **                                                                     | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Health care cost  trend rate assumed for next year                             |       | 7.38     | %          | 8.51     | %          |
| Rate to which  the cost trend rate is assumed to decline (ultimate trend rate) |       | 5.67     | %          | 5.64     | %          |
| Year that the  rate reaches the ultimate trend rate                            |       | 2010     |       | 2010     |       |

 

Assumedhealth care cost trend rates affect the amounts reported for the postretirementbenefit plans.  A one-percentage-pointchange in assumed health care cost trend rates would have the followingeffects:

 
| ** **                                                | ** ** | **1-Percentage-**       | ** ** | **1-Percentage-**       | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                | ** ** | **Point Increase** | ** ** | **Point Decrease** | ** ** |
|                                                      |       |                    |       |                    |       |
| Effect on total  of service and interest cost             |       | $                       | 8.9        |                    | $          | (7.6 | ) |
| Effect on  accumulated postretirement benefit obligations |       | 15.9                    |       | (13.4                   | )          |
|                                                           |            |                         |            |                         |            |  |  |

 

Amortizationincluded in net postretirement benefit cost is based on the average remainingservice of employees.

 

Thefollowing estimated future benefit payments, which reflect expected futureservice, as appropriate, are expected to be paid in the years indicated:

 
| **Year(s)** | ** ** | **Amount** | ** ** |
|-------------|------------|------------|------------|
|        |       |       |       |   |
| 2009        |       |       | 22.3       |   |
| 2010        |       |       | 22.0       |   |
| 2011        |       |       | 21.8       |   |
| 2012        |       |       | 21.5       |   |
| 2013        |       |       | 21.2       |   |
| 2014 - 2018 |       |       | 102.6      |   |

 

Benefitsprovided by the Company for certain hourly retirees are determined bycollective bargaining.  Most other domestichourly retirees receive health and life insurance benefits from amulti-employer trust established by collective bargaining.  Payments to the trust as required by thebargaining agreements are based upon specified amounts per hour worked and were$8.9 million in 2008, $7.4 million in 2007, and $7.4 million in 2006.  Postretirement health and life benefits forretirees of foreign subsidiaries are 

 

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**Owens-Illinois Group, Inc.**

 

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

 

generallyprovided through the national health care programs of the countries in whichthe subsidiaries are located.

 

**13.  Other Income** Other income in 2006 includes a gain of $15.9million ($11.2 million after tax) related to curtailment of certainpostretirement benefits in The Netherlands.

 

**14. Other Expense **Other expense for the year ended December 31,2008****included the following:

 

·                  TheCompany recorded charges totaling $132.4 million ($110.1 million after tax andminority shareowners’ interests), for restructuring and asset impairment.  The charges reflect the additional decisionsreached in the Company’s ongoing strategic review of its global manufacturingfootprint.  See Note 15 for additionalinformation.

 

Othercosts and expenses for the year ended December 31, 2007 included thefollowing:

 

·                  Inthe South American Segment’s 50%-owned Caribbean affiliate, decliningproductivity and cash flows resulted in impairment of the Company’s equityinvestment, establishment of valuation allowances against advances to theaffiliate, and accrual of certain contingent obligations for total charges of$45.0 million ($43.9 million after tax) recorded in 2007 with an additional$0.9 million (before and after tax) recorded in the first quarter of 2008.

 

·                  TheCompany recorded charges totaling $55.3 million ($40.2 million after tax), forrestructuring and asset impairment.  Thecharges reflect the additional decisions reached in the Company’s ongoingstrategic review of its global manufacturing footprint.  SeeNote 15 for additional information.

 

Othercosts and expenses for the year ended December 31, 2006 included thefollowing:

 

·                  During the third quarter of 2006, the Companyrecorded a charge of $29.7 million ($27.7 million after tax), principally relatedto the closing of its Godfrey, Illinois machine parts manufacturing operation.

 

**15.  Restructuring Accruals **Beginning in 2007, theCompany commenced a strategic review of its global profitability andmanufacturing footprint.  The combined 2007 and 2008 charges, amountingto $187.7 million ($150.3 million after tax and minority shareowners’interests) and approximately 1,800 jobs and corresponding reduction in theCompany’s workforce, reflect the decisions reached through December 31,2008 in the Company’s ongoing strategic review of its global manufacturingfootprint commenced in mid-2007.  Amountsrecorded by the Company do not include any gains that may be realized upon theultimate sale or disposition of closed facilities.

 

2007

Duringthe third and fourth quarters of 2007, the Company recorded restructuringcharges totaling $55.3 million ($40.2 million after tax), for restructuring andasset impairment in Europe and North America.

 

Asa result of its strategic review, the Company decided to curtail selectedproduction capacity.  Because the futureundiscounted cash flows of the related asset groups were not sufficient torecover their carrying amounts, certain assets were considered impaired.  As a result, those assets were written downto the extent their carrying amounts exceeded fair value.  The curtailment of plant capacity resulted inelimination of approximately 560 jobs and a corresponding reduction in theCompany’s workforce.  The Company accruedcertain employee separation costs, plant clean up, and other exit costs.

 

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**Owens-Illinois Group, Inc.**

 

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

 

2008

During2008, the Company recorded restructuring charges totaling $132.4 million($110.1 million after tax and minority share owners’ interests).  The 2008 charges consisted primarily of $85.5million for the closure of two Canadian plants with additional charges acrossall segments as well as in Retained Corporate Costs and Other.

 

Asa continuation of the Company’s strategic review in 2008, the Company decidedto curtail and realign selected production capacity and other activities acrossall segments as well as in Retained Corporate Costs and Other.  Because the future undiscounted cash flows ofthe related asset groups were not sufficient to recover their carrying amounts,certain assets were considered impaired. As a result, those assets were written down to the extent their carryingamounts exceeded fair value.  Thecurtailment of plant capacity and realignment of selected operations willresult in elimination of approximately 1,240 jobs and a corresponding reductionin the Company’s workforce.  The Companyaccrued certain employee separation costs, plant clean up, and other exitcosts.

 

Probablecash expenditures for the 2007 and 2008 charges are expected to totalapproximately $110 million.  The Companyexpects that the majority of these costs will be paid out by the end of 2009.

 

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     | )          |
| Remaining  restructuring accrual as of December 31, 2008 |       | $                   | 47.6       |                  | $          | —    |       | $         | 16.3       |   | $ | 63.9 |   |

* *

*BSN Acquisition*

 

Duringthe second quarter of 2005, the Company concluded its evaluation of acquiredcapacity in connection with the acquisition of BSN Glasspack S.A. and announcedthe permanent closing of its Düsseldorf, Germany glass container factory, andthe shutdown of a furnace at its Reims, France glass container facility, bothin 2005.  These actions were part of theEuropean integration strategy to optimally align the manufacturing capacitieswith the market and improve operational efficiencies.  As a result, the Company recorded an accrualof €47.1 million through an adjustment to goodwill.

 

Theseactions resulted in the elimination of approximately 400 jobs and acorresponding reduction in the Company’s workforce.  The Company anticipates that it will pay atotal of approximately €110.9 million in cash related to severance, benefits,plant clean-up, and other plant closing costs related to restructuringaccruals.

 

TheEuropean restructuring accrual recorded in the second quarter of 2005 was inaddition to the initial estimated accrual of €63.8 million recorded in 2004.

 

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**Owens-Illinois Group, Inc.**

 

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

 

Selectedinformation related to the restructuring accrual is as follows, with 2008activity translated from Euros into dollars at the December 31, 2008exchange rate:

 
| Remaining  European restructuring accrual as of January 1, 2006   |   | $     | 80.9   |   |
|------------------------------------------------------------------------|--------|-------|--------|--------|
| Net cash paid,  principally severance and related benefits             |   | (33.7 | )      |
| Partial reversal  of accrual (goodwill adjustment)                     |   | (7.6  | )      |
| Other,  principally foreign exchange translation                       |   | (1.5  | )      |
| Remaining  European restructuring accrual as of December 31, 2006 |   | 38.1  |   |
| Net cash paid,  principally severance and related benefits             |   | (17.8 | )      |
| Other,  principally foreign exchange translation                       |   | 7.4   |   |
| Remaining  European restructuring accrual as of December 31, 2007 |   | 27.7  |   |
| Net cash paid,  principally severance and related benefits             |   | (6.1  | )      |
| Other,  principally foreign exchange translation                       |   | (4.8  | )      |
| Remaining  European restructuring accrual as of December 31, 2008 |   | $     | 16.8   |   |

 

**16. Additional Interest Charges from Early Extinguishment of Debt**    During 2007, the Company recordedadditional interest charges of $9.5 million ($8.8 million after tax) for noterepurchase premiums and the write-off of unamortized finance fees related todebt that was repaid prior to its maturity. During 2006, the Company recorded additional interest charges of $17.5million ($17.1 million after tax) for note repurchase premiums and thewrite-off of unamortized finance fees related to debt that was repaid prior toits maturity.

 

**17.  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 from 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):

 
| ** **                    | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                          |       |     |       |     |       |     |       |
| Pending at  beginning of year |       | 14,000   |       | 18,000   |       | 32,000   |       |
| Disposed                      |       | 8,000    |       | 13,000   |       | 21,000   |       |
| Filed                         |       | 5,000    |       | 9,000    |       | 7,000    |       |
|                          |       |     |       |     |       |     |       |
| Pending at end  of year       |       | 11,000   |       | 14,000   |       | 18,000   |       |

 

Based on an analysis of the lawsuits pending as of December 31, 2008, approximately 84% of plaintiffs either do not specify the monetary damages sought, or in the case of court filings, claim an amount 

 

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sufficient to invoke the jurisdictional minimum of the trial court.  Approximately 15% of plaintiffs specifically plead damages of $15 million or less, and 0.4% 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, 2008 there are approximately 1,000 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, 2008, has disposed of the asbestos claims of approximately 367,000 plaintiffs and claimants at an average indemnity payment per claim of approximately $7,300.  Certain of these dispositions have included deferred amounts payable over a number of years.  Deferred amounts payable totaled approximately $34.0 million at December 31, 2008 ($34.0 million at December 31, 2007) 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 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 be estimated with certainty. Beginning with the initial liability of $975 million established in 1993, OI Inc. has accrued a total of approximately $3.47 billion through 2008, before insurance recoveries, for its asbestos-related liability.  OI Inc.’s ability reasonably to 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 

 

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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 which 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 estimated by OI Inc. in connection with its annual comprehensive review and consist of the following: (i) the reasonably probable contingent liability for asbestos claims already asserted against OI Inc.; (ii) the contingent liability for preexisting but unasserted asbestos claims for prior periods arising under its administrative claims-handling agreements with various plaintiffs’ counsel; (iii) the contingent liability for asbestos claims not yet asserted against OI Inc., but which OI Inc. believes it is reasonably probable will be asserted in the next several years, to the degree that an estimation as to future claims is possible, 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 to which OI Inc.’s accelerated settlements in 2007 and 2008 impact the number and type of future claims and lawsuits;

 

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

 

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

 

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

 

g)   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;

 

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

 

i)  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.

 

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 an estimation of the reasonably probable amount of the contingent liability for claims not yet asserted against OI Inc. is not possible beyond a period of several years.  

 

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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 OIInc. with respect to the lawsuits and proceedings referred to above, inaddition to other pending litigation, cannot be estimated with certainty.  OI Inc.’s reported results of operations for2008 were materially affected by the $250.0 million fourth quarter charge forasbestos-related costs andasbestos-related payments continue to be substantial.  Any future additional charge would likewisematerially affect OI Inc.’s results of operations for the period in which it isrecorded. Also, the continued use of significant amounts of cash forasbestos-related costs has affected and will continue to affect the Company’sand OI Inc.’s cost of borrowing and the ability to pursue global or domesticacquisitions. However, the Company believes that its operating cash flows andother sources of liquidity will be sufficient to fund OI Inc.’sasbestos-related payments and to fund the Company’s working capital and capitalexpenditure requirements on a short-term and long-term basis.

 

Other 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.  In accordance with FAS No. 5,the Company records a liability for such matters when it is both probable thatthe liability has been incurred and the amount of the liability can bereasonably estimated.  Recorded amountsare reviewed and adjusted to reflect changes in the factors upon which theestimates are based including additional information, negotiations,settlements, and other events. The ultimate legal and financial liability ofthe Company with respect to the lawsuits and proceedings referred to above, inaddition to other pending litigation, cannot be estimated with certainty.  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, cash flows or financial condition.

 

**18.  SegmentInformation**   The Company’s former Plastics Packagingsegment has been reclassified to discontinued operations as a result of the July 31,2007 sale of that business.  Followingthe sale, the Company redefined its reportable segments and divided the formerGlass Containers segment into four geographic segments:  (1) North America; (2) Europe; (3) AsiaPacific; (4) South America.  Thesefour segments are aligned with the Company’s internal approach to managing,reporting, and evaluating performance of its global glass operations.  In connection with this change, 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.  Amounts for 2006 in the following tables are presentedon the redefined basis.

 

The Company’s measure of profit for its reportablesegments is Segment Operating Profit, which consists of consolidated earningsfrom continuing operations before interest income, interest expense, provisionfor income taxes and minority share owners’ interests in earnings ofsubsidiaries and excludes amounts related to certain items that managementconsiders not representative of ongoing operations as well as certain retainedcorporate costs.  The Company’smanagement uses Segment Operating Profit, in combination with selected cashflow information, to evaluate performance and to allocate resources.

 

Segment Operating Profit for reportable segmentsincludes an allocation of some corporate expenses based on both a percentage ofsales and direct billings based on the costs of specific servicesprovided.  Beginning in 2008, the Companyrevised 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 notpracticable to quantify the net

 

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** **

effect of thesechanges on periods prior to 2008. However, the effect for 2008 was to reducethe amount of retained corporate costs by approximately $38.0 million. The information below is presented on acontinuing operations basis, and therefore, the 2007 and 2006 amounts excludeamounts related to the discontinued operations. See Note 20 for more information.

 

Financialinformation regarding the Company’s reportable segments is as follows:

 
| **Net Sales:**        | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|
| Europe                     |       | $        | 3,497.8    |     | $          | 3,298.7  |       | $ | 2,846.6 |   |
| North America              |       | 2,209.7  |       | 2,271.3  |       | 2,110.4  |       |
| South America              |       | 1,135.9  |       | 970.7    |       | 796.5    |       |
| Asia Pacific               |       | 964.1    |       | 934.3    |       | 804.9    |       |
|                       |       |     |       |     |       |     |       |
| Reportable  segment totals |       | 7,807.5  |       | 7,475.0  |       | 6,558.4  |       |
| Other                      |       | 77.2     |       | 91.7     |       | 92.0     |       |
| Net sales                  |       | $        | 7,884.7    |     | $          | 7,566.7  |       | $ | 6,650.4 |   |

 
| **Segment  Operating Profit:**                                                                      | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Europe                                                                                              |       | $        | 477.8      |     | $          | 433.0    |       | $ | 249.6 |   |
| North America                                                                                       |       | 185.2    |       | 265.1    |       | 187.3    |       |
| South America                                                                                       |       | 331.0    |       | 254.9    |       | 195.0    |       |
| Asia Pacific                                                                                        |       | 162.8    |       | 154.0    |       | 102.9    |       |
| Reportable  segment totals                                                                          |       | 1,156.8  |       | 1,107.0  |       | 734.8    |       |
|                                                                                                |       |     |       |     |       |     |       |
| Items excluded  from Segment Operating Profit:                                                      |       |     |       |     |       |     |       |
| Retained  corporate costs and other                                                                 |       | (0.7     | )          | (78.8    | )          | (76.6    | )          |
| Restructuring  and asset impairments                                                                |       | (133.3   | )          | (100.3   | )          | (29.7    | )          |
| CEO and other  transition charges                                                                   |       |     |       |     |       | (20.8    | )          |
| Curtailment of  postretirement benefits in The Netherlands                                          |       |     |       |     |       | 15.9     |       |
| Mark to market  effect of natural gas hedge contracts                                               |       |     |       |     |       | (8.7     | )          |
|                                                                                                |       |     |       |     |       |     |       |
| Interest income                                                                                     |       | 38.6     |       | 42.3     |       | 19.2     |       |
| Interest expense                                                                                    |       | (253.0   | )          | (348.6   | )          | (349.0   | )          |
| Earnings before  income taxes and minority share owners’ interests in earnings of subsidiaries |       | $        | 808.4      |     | $          | 621.6    |       | $ | 285.1 |   |

 

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

 
| ** **                              | ** ** | **North  America** | ** ** | **Europe** | ** ** | **Asia  Pacific** | ** ** | **South  America** | ** ** | **Reportable  Segment  Totals** | ** ** | **Retained  Corp Costs  and Other** | ** ** | **Consolidated  Totals** | ** ** |
|-----------------------------------------|------------|--------------------|------------|------------|------------|-------------------|------------|--------------------|------------|---------------------------------|------------|------------------------------------------|------------|--------------------------|------------|
|                                    |       |               |       |       |       |              |       |               |       |                            |       |                                     |       |                     |       |
| Total assets:                           |       |               |       |       |       |              |       |               |       |                            |       |                                     |       |                     |       |
| 2008                                    |       | $                  | 1,802.9    |       | $          | 3,758.4           |       | $                  | 1,239.6    |                            | $          | 976.2                                    |       | $                        | 7,777.1    |   | $ | 199.4 |   | $ | 7,976.5 |   |
| 2007                                    |       | 1,946.9            |       | 4,124.1    |       | 1,558.1           |       | 965.7              |       | 8,594.8                         |       | 729.8                                    |       | 9,324.6                  |       |
| 2006                                    |       | 1,777.0            |       | 3,838.0    |       | 1,454.4           |       | 765.7              |       | 7,835.1                         |       | 1,485.6                                  |       | 9,320.7                  |       |
|                                    |       |               |       |       |       |              |       |               |       |                            |       |                                     |       |                     |       |
| Equity earnings:                        |       |               |       |       |       |              |       |               |       |                            |       |                                     |       |                     |       |
| 2008                                    |       | $                  | 12.6       |       | $          | 14.1              |       | $                  | —     |                            | $          | —                                   |       | $                        | 26.7       |   | $ | 24.1 |   | $ | 50.8 |   |
| 2007                                    |       | 10.4               |       | 8.0        |       |              |       | (2.7               | )          | 15.7                            |       | 18.4                                     |       | 34.1                     |       |
| 2006                                    |       | 10.5               |       | 6.9        |       |              |       | (4.8               | )          | 12.6                            |       | 10.8                                     |       | 23.4                     |       |
|                                    |       |               |       |       |       |              |       |               |       |                            |       |                                     |       |                     |       |
| Capital  expenditures (1):              |       |               |       |       |       |              |       |               |       |                            |       |                                     |       |                     |       |
| 2008                                    |       |               |       |       |       |              |       |               |       |                            |       |                                     |       |                     |       |   |   |   |   |   |   |
| Continuing                              |       | $                  | 90.5       |       | $          | 151.9             |       | $                  | 57.6       |                            | $          | 57.3                                     |       | $                        | 357.3      |   | $ | 4.4 |   | $ | 361.7 |   |
| 2007                                    |       |               |       |       |       |              |       |               |       |                            |       |                                     |       |                     |       |
| Continuing                              |       | 65.9               |       | 129.2      |       | 42.0              |       | 51.1               |       | 288.2                           |       | 4.3                                      |       | 292.5                    |       |
| Discontinued                            |       |               |       |       |       |              |       |               |       |                            |       | 23.3                                     |       | 23.3                     |       |
| 2006                                    |       |               |       |       |       |              |       |               |       |                            |       |                                     |       |                     |       |
| Continuing                              |       | 57.8               |       | 105.4      |       | 47.8              |       | 59.2               |       | 270.2                           |       | 14.8                                     |       | 285.0                    |       |
| Discontinued                            |       |               |       |       |       |              |       |               |       |                            |       | 35.3                                     |       | 35.3                     |       |
|                                    |       |               |       |       |       |              |       |               |       |                            |       |                                     |       |                     |       |
| Depreciation and  amortization expense: |       |               |       |       |       |              |       |               |       |                            |       |                                     |       |                     |       |
| 2008                                    |       |               |       |       |       |              |       |               |       |                            |       |                                     |       |                     |       |
| Continuing                              |       | $                  | 98.7       |       | $          | 222.0             |       | $                  | 80.4       |                            | $          | 56.5                                     |       | $                        | 457.6      |   | $ | 10.2 |   | $ | 467.8 |   |
| Discontinued                            |       |               |       |       |       |              |       |               |       |                            |       |                                     |       |                     |       |
| 2007                                    |       |               |       |       |       |              |       |               |       |                            |       |                                     |       |                     |       |
| Continuing                              |       | 107.3              |       | 210.3      |       | 81.7              |       | 54.3               |       | 453.6                           |       | 7.3                                      |       | 460.9                    |       |
| Discontinued                            |       |               |       |       |       |              |       |               |       |                            |       | 23.3                                     |       | 23.3                     |       |
| 2006                                    |       |               |       |       |       |              |       |               |       |                            |       |                                     |       |                     |       |
| Continuing                              |       | 110.2              |       | 203.3      |       | 81.4              |       | 56.3               |       | 451.2                           |       | 4.5                                      |       | 455.7                    |       |
| Discontinued                            |       |               |       |       |       |              |       |               |       |                            |       | 53.5                                     |       | 53.5                     |       |

 

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(1) Retained Corporate Costs and Other includes assets of discontinued operations.

(2) Excludes property, plant and equipment acquired through acquisitions.

 

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TheCompany’s net property, plant, and equipment by geographic segment are asfollows:

 
| ** ** | ** ** | **United  States** | ** ** | **Foreign** | ** ** | **Total** | ** ** |
|------------|------------|--------------------|------------|-------------|------------|-----------|------------|
|       |       |               |       |        |       |      |       |
| 2008       |       | $                  | 679.5      |        | $          | 1,966.1   |       | $ | 2,645.6 |   |
| 2007       |       | 678.9              |       | 2,271.1     |       | 2,950.0   |       |
| 2006       |       | 712.5              |       | 2,162.0     |       | 2,874.5   |       |
|            |            |                    |            |             |            |           |            |  |  |  |

 

The Company’s netsales by geographic segment are as follows:

 
| ** ** | ** ** | **United  States** | ** ** | **Foreign** | ** ** | **Total** | ** ** |
|------------|------------|--------------------|------------|-------------|------------|-----------|------------|
|       |       |               |       |        |       |      |       |
| 2008       |       | $                  | 1,894.8    |        | $          | 5,989.9   |       | $ | 7,884.7 |   |
| 2007       |       | 1,920.6            |       | 5,646.1     |       | 7,566.7   |       |
| 2006       |       | 1,793.7            |       | 4,856.7     |       | 6,650.4   |       |
|            |            |                    |            |             |            |           |            |  |  |  |

 

Operations inindividual countries outside the United States that accounted for more than 10%of consolidated net sales from continuing operations were in Italy (2008 - 10.7%,2007 - 10.1%) and France (2008 - 14.7%, 2007 - 19.3%, 2006 - 19.3%).

 

**19.**  **Goodwill**  The changes in the carrying amount ofgoodwill for the years ended December 31, 2006, 2007 and 2008 are asfollows:

 
| ** **                                                                                   | ** ** | **North  America** | ** ** | **Europe** | ** ** | **Asia  Pacific** | ** ** | **South  America** | ** ** | **Other** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------|------------|------------|------------|-------------------|------------|--------------------|------------|-----------|------------|-----------|------------|
| Balance as of  January 1, 2006                                                          |       | $                  | 747.5      |       | $          | 926.7             |       | $                  | 470.8      |      | $          | —    |       | $ | 14.7 |   | $ | 2,159.7 |   |
| Translation  effects                                                                         |       | 2.8                |       | 99.5       |       | 31.3              |       |               |       |      |       | 133.6     |       |
| Other changes,  principally adjustments to reverse foreign deferred tax valuation allowances |       | (28.7              | )          | (9.2       | )          |              |       |               |       | (0.2      | )          | (38.1     | )          |
| Balance as of  December 31, 2006                                                        |       | 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 |   |

 

Duringthe fourth quarters of 2008, 2007 and 2006, the Company completed its annualimpairment testing and determined that no impairment existed.

 

**20. 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.  As required by FAS No. 144, the Companyhas presented the results of operations for the plastics packaging business inthe Consolidated Results of Operations for the years ended December 31,2007 and 2006 as discontinued operations. Interest expense was allocated to the discontinued operations based ondebt that was required 

 

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byan amendment to the Secured Credit Agreement to be repaid from the netproceeds.  Amounts for the prior periodshave been reclassified to conform to this presentation.

 

### **The followingsummarizes the revenues and expenses of the discontinued operations as reportedin the consolidated results of operations for the periods indicated:**

### ** **

| ** **                                                         | ** ** | **Years ended  December 31,** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                         | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| Net sales                                                          |       | $                                       | 455.0      |   | $ | 771.6 |   |
| Manufacturing,  shipping and delivery                              |       | (343.5                                  | )          | (602.9 | ) |
| Gross profit                                                       |       | 111.5                                   |       | 168.7 |   |
|                                                               |       |                                    |       |   |   |
| Selling and  administrative                                        |       | (20.7                                   | )          | (34.4 | ) |
| Research,  development and engineering                             |       | (8.3                                    | )          | (15.1 | ) |
| Interest expense                                                   |       | (80.6                                   | )          | (139.2 | ) |
| Other income                                                       |       | (0.1                                    | )          | 2.9 |   |
| Other expense                                                      |       | (1.2                                    | )          | (5.4 | ) |
|                                                               |       |                                    |       |   |   |
| Earnings (loss)  before items below                                |       | 0.6                                     |       | (22.5 | ) |
|                                                               |       |                                    |       |   |   |
| (Provision)  credit for income taxes                               |       | 2.4                                     |       | (1.2 | ) |
| Minority share  owners’ interests in earnings of subsidiaries |       | (0.2                                    | )          |   |   |
| Gain on sale of  discontinued operations                           |       | 1,038.5                                 |       |   |   |
|                                                               |       |                                    |       |   |   |
| Net earnings  (loss) from discontinued operations                  |       | $                                       | 1,041.3    |   | $ | (23.7 | ) |

** **

### **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 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.

 

**21. ****Fair Value Measurements**** **In September 2006, theFASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (FAS No. 157),**which defines fair value,establishes a framework for measuring fair value and enhances disclosure aboutfair value measurements.  On February 2,2008, the FASB issued FASB Staff Position No. 157-2 (FSP 157-2) whichdelays the effective date of FAS No. 157 for nonfinancial assets andnonfinancial liabilities, except for items that are recognized or disclosed atfair value in the financial statements on at least an annual basis.  Where the measurement objective specificallyrequires the use of “fair value” the Company has adopted the 

 

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**Owens-Illinois Group, Inc.**

** **

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

 

provisions of FAS No. 157 related to financialassets and financial liabilities as of January 1, 2008. The adoption ofFAS No. 157 had no impact on the Company.

 

FAS No. 157 clarifies that fair value is anexit price, representing the amount that would be received to sell an asset orpaid to transfer a liability (exit price) in the principal or most advantageousmarket for the asset or liability in an orderly transaction between market participants.  FAS No. 157 establishes a three-tierfair value hierarchy, which prioritizes the inputs used in measuring fair valueas follows:

 

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

*Level 2:* Inputs, other than quotedprices in active markets, that are observable either directly or indirectly;and

*Level 3:* Unobservable inputs forwhich there is little or no market data, which requires the Company to developassumptions.

 

The Company’s derivative assets and liabilitiesconsist of interest rate swaps, natural gas forwards, and foreign exchangeoption and forward contracts.  TheCompany uses an income approach to valuing these contracts.  Interest rate yield curves, natural gasforward rates, and foreign exchange rates are the significant inputs into thevaluation models.  These inputs areobservable in active markets over the terms of the instruments the Companyholds, and accordingly, the Company classifies the $0.4 million net derivativeliability as Level 2 in the hierarchy. The Company also evaluates counterparty risk in determining fair values.

 

The Company adopted Statement of FinancialAccounting Standards No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities-Including an Amendment of FASB Statement No. 115”(“FAS No. 159”), effective January 1, 2008.  This standard permits entities to choose tomeasure many financial instruments and certain other items at fair value.  While FAS No. 159 became effective January 1,2008, the Company did not elect the fair value measurement option for any ofits financial assets or liabilities.

 

**22.**  **Financial Information forSubsidiary Guarantors and Non-Guarantors **The following presents condensed consolidating financialinformation for the Company, 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 GuarantorSubsidiaries are 100% owned direct and indirect subsidiaries of the Parent andtheir guarantees are full, unconditional and joint and several.  The Parent is also a guarantor, and itsguarantee is full, unconditional and joint and several.

 

Subsidiaries of the Parent and of the Issuer arepresented on the equity basis of accounting. Certain reclassifications have been made to conform all of the financialinformation to the financial presentation on a consolidated basis.  The principal eliminations relate toinvestments in subsidiaries and inter-company balances and transactions.

 

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**Owens-Illinois Group, Inc.**

** **

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

 
| ** **                                               | ** ** | **December 31, 2008** | ** ** |
|----------------------------------------------------------|------------|---------------------------------|------------|
| **Balance Sheet**                                        | ** ** | **Parent**                      | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  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 and minority interests    |       |                            |       | 58.9 |   | 565.5 |   | 997.5 |   | 59.0 |   | 1,680.9 |   |
| Investments by  and advances from parent                 |       |                            |       | 2,589.3 |   | (553.3 | ) | 2,753.9 |   | (4,789.9 | ) | — |   |
| Share owner’s  equity                               |       | 1,535.9                         |       |   |   |   |   |   |   |   |   | 1,535.9 |   |
|                                                     |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Total  liabilities and share owner’s 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 FINANCIALSTATEMENTS – (Continued)**

 
| ** **                                               | ** ** | **December 31, 2007** | ** ** |
|----------------------------------------------------------|------------|---------------------------------|------------|
| **Balance Sheet**                                        | ** ** | **Parent**                      | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                     |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Current assets:                                          |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Accounts  receivable                                     |       | $                               | —     |   | $ | 71.1 |   | $ | (7.4 | ) | $ | 1,121.9 |   | $ | — |   | $ | 1,185.6 |   |
| Inventories                                              |       |                            |       | 163.3 |   | 0.4 |   | 857.1 |   |   |   | 1,020.8 |   |
| Other current  assets                                    |       |                            |       | 8.3 |   | 50.6 |   | 428.7 |   | 0.6 |   | 488.2 |   |
|                                                     |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Total current  assets                                    |       | —                          |       | 242.7 |   | 43.6 |   | 2,407.7 |   | 0.6 |   | 2,694.6 |   |
|                                                     |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Investments in  and advances to subsidiaries             |       | 3,392.9                         |       | 3,296.9 |   | 8.2 |   |   |   | (6,698.0 | ) | — |   |
| Goodwill                                                 |       |                            |       | 560.9 |   | 9.4 |   | 1,857.8 |   |   |   | 2,428.1 |   |
| Other  non-current assets                                |       |                            |       | 165.8 |   | 562.1 |   | 536.3 |   | (12.3 | ) | 1,251.9 |   |
|                                                     |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Total other  assets                                      |       | 3,392.9                         |       | 4,023.6 |   | 579.7 |   | 2,394.1 |   | (6,710.3 | ) | 3,680.0 |   |
| Property, plant  and equipment, net                      |       |                            |       | 620.3 |   | 47.0 |   | 2,282.7 |   |   |   | 2,950.0 |   |
|                                                     |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Total assets                                             |       | $                               | 3,392.9    |   | $ | 4,886.6 |   | $ | 670.3 |   | $ | 7,084.5 |   | $ | (6,709.7 | ) | $ | 9,324.6 |   |
| Current  liabilities :                                   |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable  and accrued liabilities                |       | $                               | —     |   | $ | 340.4 |   | $ | 109.2 |   | $ | 1,169.6 |   | $ | (0.6 | ) | $ | 1,618.6 |   |
| Short-term loans  and long-term debt due within one year |       | 250.0                           |       | (0.2 | ) |   |   | 451.1 |   |   |   | 700.9 |   |
| Total current  liabilities                               |       | 250.0                           |       | 340.2 |   | 109.2 |   | 1,620.7 |   | (0.6 | ) | 2,319.5 |   |
| Long-term debt                                           |       | 500.0                           |       | 1,375.8 |   | 19.1 |   | 1,118.3 |   |   |   | 3,013.2 |   |
| Other  non-current liabilities and minority interests    |       |                            |       | 46.3 |   | 273.4 |   | 1,026.1 |   | 3.2 |   | 1,349.0 |   |
| Investments by  and advances from parent                 |       |                            |       | 3,124.3 |   | 268.6 |   | 3,319.4 |   | (6,712.3 | ) | — |   |
| Share owner’s  equity                               |       | 2,642.9                         |       |   |   |   |   |   |   |   |   | 2,642.9 |   |
|                                                     |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Total  liabilities and share owner’s equity         |       | $                               | 3,392.9    |   | $ | 4,886.6 |   | $ | 670.3 |   | $ | 7,084.5 |   | $ | (6,709.7 | ) | $ | 9,324.6 |   |

 

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** **

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

 
| ** **                                                         | ** ** | **Year ended December 31, 2008** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **Results of Operations**                                          | ** ** | **Parent**                                           | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  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 items below     |       | 500.3                                                |       | 596.7 |   | (73.4 | ) | 700.5 |   | (915.7 | ) | 808.4 |   |
| Provision for  income taxes                                        |       |                                                 |       | (0.5 | ) | (18.6 | ) | (218.8 | ) |   |   | (237.9 | ) |
| Minority share  owners’ interests in earnings of subsidiaries |       |                                                 |       |   |   | 13.2 |   | (66.5 | ) | (16.9 | ) | (70.2 | ) |
|                                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Earnings (loss)  from continuing operations                        |       | 500.3                                                |       | 596.2 |   | (78.8 | ) | 415.2 |   | (932.6 | ) | 500.3 |   |
| Net earnings of  discontinued operations                           |       | 6.8                                                  |       |   |   | 6.8 |   |   |   | (6.8 | ) | 6.8 |   |
|                                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net earnings  (loss)                                               |       | $                                                    | 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** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **Results of Operations**                                          | ** ** | **Parent**                                           | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  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 items below            |       | 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 | ) |
| Minority share  owners’ interests in earnings of subsidiaries |       |                                                 |       |   |   | (1.5 | ) | (51.9 | ) | (6.1 | ) | (59.5 | ) |
|                                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Earnings from  continuing operations                               |       | 414.3                                                |       | 526.1 |   | 1,336.8 |   | 499.7 |   | (2,362.6 | ) | 414.3 |   |
| Net earnings of  discontinued operations                           |       | 1,041.3                                              |       |   |   | 1,040.6 |   | 0.7 |   | (1,041.3 | ) | 1,041.3 |   |
|                                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net earnings                                                       |       | $                                                    | 1,455.6    |   | $ | 526.1 |   | $ | 2,377.4 |   | $ | 500.4 |   | $ | (3,403.9 | ) | $ | 1,455.6 |   |

 

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** **

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

** **
| ** **                                                         | ** ** | **Year ended December 31, 2006** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **Results of Operations**                                          | ** ** | **Parent**                                           | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net sales                                                          |       | $                                                    | —     |   | $ | 1,849.3 |   | $ | (3.5 | ) | $ | 4,905.6 |   | $ | (101.0 | ) | $ | 6,650.4 |   |
| Manufacturing,  shipping, and delivery                             |       |                                                 |       | (1,632.4 | ) | 12.2 |   | (4,005.6 | ) | 144.7 |   | (5,481.1 | ) |
|                                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Gross profit                                                       |       | —                                               |       | 216.9 |   | 8.7 |   | 900.0 |   | 43.7 |   | 1,169.3 |   |
| Research,  engineering, selling, administrative, and other         |       |                                                 |       | (133.2 | ) | (130.6 | ) | (370.0 | ) |   |   | (633.8 | ) |
| Net intercompany  interest                                         |       | 82.4                                                 |       | 32.4 |   | (84.3 | ) | (30.5 | ) |   |   | — |   |
| Other interest  expense                                            |       | (82.4                                                | )          | (314.3 | ) | 137.8 |   | (90.1 | ) |   |   | (349.0 | ) |
| Interest income                                                    |       |                                                 |       | — |   | 1.0 |   | 18.2 |   |   |   | 19.2 |   |
| Equity earnings  from subsidiaries                                 |       | 116.2                                                |       | 265.7 |   | 27.0 |   |   |   | (408.9 | ) | — |   |
| Other equity  earnings                                             |       |                                                 |       | 10.5 |   | 6.1 |   | 6.8 |   |   |   | 23.4 |   |
| Other revenue                                                      |       |                                                 |       | 81.9 |   | 15.0 |   | 31.1 |   | (72.0 | ) | 56.0 |   |
|                                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Earnings (loss)  from continuing operations before items below     |       | 116.2                                                |       | 159.9 |   | (19.3 | ) | 465.5 |   | (437.2 | ) | 285.1 |   |
| Provision for  income taxes                                        |       |                                                 |       | (8.9 | ) | 12.5 |   | (128.9 | ) |   |   | (125.3 | ) |
| Minority share  owners’ interests in earnings of subsidiaries |       |                                                 |       |   |   |   |   | (42.0 | ) | (1.6 | ) | (43.6 | ) |
|                                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Earnings (loss)  from continuing operations                        |       | 116.2                                                |       | 151.0 |   | (6.8 | ) | 294.6 |   | (438.8 | ) | 116.2 |   |
| Net earnings  (loss) of discontinued operations                    |       | (23.7                                                | )          |   |   | (21.8 | ) | (1.9 | ) | 23.7 |   | (23.7 | ) |
|                                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net earnings  (loss)                                               |       | $                                                    | 92.5       |   | $ | 151.0 |   | $ | (28.6 | ) | $ | 292.7 |   | $ | (415.1 | ) | $ | 92.5 |   |

 

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** **

**Owens-Illinois Group, Inc.**

** **

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

 
| ** **                                               | ** ** | **Year ended December 31, 2008** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------|------------|
| **Cash Flows**                                           | ** ** | **Parent**                                           | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                     |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Cash provided by  (used in) operating activities         |       | $                                                    | —     |   | $ | 108.3 |   | $ | (34.1 | ) | $ | 880.5 |   | $ | (38.1 | ) | $ | 916.6 |   |
| 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 | ) |
| Cash provided by  (used in) financing activities         |       | —                                               |       | (26.1 | ) | 13.9 |   | (551.1 | ) | 38.6 |   | (524.7 | ) |
| Effect of  exchange rate change on cash                  |       |                                                 |       |   |   |   |   | (22.9 | ) |   |   | (22.9 | ) |
| Net change in  cash                                      |       | —                                               |       | — |   | (39.4 | ) | 30.7 |   | 0.5 |   | (8.2 | ) |
| Cash at  beginning of period                             |       | —                                               |       | — |   | 43.8 |   | 343.2 |   | 0.7 |   | 387.7 |   |
|                                                     |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Cash at end of  period                                   |       | $                                                    | —     |   | $ | — |   | $ | 4.4 |   | $ | 373.9 |   | 1.2 |   | $ | 379.5 |   |
|                                                          |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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** **

**Owens-IllinoisGroup, Inc.**

** **

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

 
| ** **                                                 | ** ** | **Year ended December 31, 2007** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **Cash Flows**                                             | ** ** | **Parent**                                           | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                       |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Cash provided by  (used in) operating activities           |       | $                                                    | —     |   | $ | 161.8 |   | $ | 1,303.4 |   | $ | 952.7 |   | $ | (1,434.4 | ) | $ | 983.5 |   |
| 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 | ) |
| Cash provided by  (used in) financing activities           |       | —                                               |       | (119.6 | ) | (2,917.8 | ) | (712.4 | ) | 1,435.1 |   | (2,314.7 | ) |
| Effect of  exchange rate change on cash                    |       |                                                 |       |   |   |   |   | 51.8 |   |   |   | 51.8 |   |
| Net change in  cash                                        |       | —                                               |       | — |   | 33.9 |   | 130.4 |   | 0.7 |   | 165.0 |   |
| Cash at  beginning of period                               |       | —                                               |       | — |   | 9.8 |   | 212.9 |   | — |   | 222.7 |   |
|                                                       |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Cash at end of  period                                     |       | $                                                    | —     |   | $ | — |   | $ | 43.7 |   | $ | 343.3 |   | 0.7 |   | $ | 387.7 |   |
|                                                            |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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** **

**Owens-Illinois Group, Inc.**

** **

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

 
| ** **                                                                                   | ** ** | **Year ended December 31, 2006** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **Cash Flows**                                                                               | ** ** | **Parent**                                           | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                                                         |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Cash provided by  (used in) operating activities                                             |       | $                                                    | —     |   | $ | 26.3 |   | $ | 18.3 |   | $ | 365.2 |   | $ | (98.2) |   | $ | 311.6 |   |
| Investing  Activities:                                                                       |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Additions to  property, plant, and equipment - continuing                                    |       |                                                 |       | (52.3 | ) | (14.3 | ) | (218.4 | ) |   |   | (285.0 | ) |
| Additions to  property, plant, and equipment - discontinued                                  |       |                                                 |       |   |   | (33.8 | ) | (1.5 | ) |   |   | (35.3 | ) |
| Collections on  receivables arising from consolidation of receivables securitization program |       |                                                 |       |   |   |   |   | 127.3 |   |   |   | 127.3 |   |
| Proceeds from  sales                                                                         |       |                                                 |       | 1.3 |   | 1.5 |   | 12.3 |   |   |   | 15.1 |   |
| Cash used in  investing activities                                                           |       | —                                               |       | (51.0 | ) | (46.6 | ) | (80.3 | ) | — |   | (177.9 | ) |
| Financing  Activities:                                                                       |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net distribution  to OI Inc.                                                                 |       | (174.8                                               | )          |   |   |   |   |   |   |   |   | (174.8 | ) |
| Change in  intercompany transactions                                                         |       | 174.8                                                |       | 160.4 |   | 7.7 |   | (441.1 | ) | 98.2 |   | — |   |
| Change in short  term debt                                                                   |       |                                                 |       |   |   |   |   | 158.9 |   |   |   | 158.9 |   |
| Payments of long  term debt                                                                  |       |                                                 |       | (454.4 | ) | (0.2 | ) | (887.2 | ) |   |   | (1,341.8 | ) |
| Borrowings of  long term debt                                                                |       |                                                 |       | 323.1 |   |   |   | 883.4 |   |   |   | 1,206.5 |   |
| Net payments for  debt-related hedging activity                                              |       |                                                 |       |   |   |   |   | (6.8 | ) |   |   | (6.8 | ) |
| Payment of  finance fees                                                                     |       |                                                 |       | (4.4 | ) |   |   | (7.9 | ) |   |   | (12.3 | ) |
| Cash provided by  (used in) financing activities                                             |       | —                                               |       | 24.7 |   | 7.5 |   | (300.7 | ) | 98.2 |   | (170.3 | ) |
| Effect of  exchange rate change on cash                                                      |       |                                                 |       |   |   |   |   | 12.7 |   |   |   | 12.7 |   |
| Net change in  cash                                                                          |       | —                                               |       | — |   | (20.8 | ) | (3.1 | ) | — |   | (23.9 | ) |
| Cash at  beginning of period                                                                 |       | —                                               |       | — |   | 30.6 |   | 216.0 |   | — |   | 246.6 |   |
|                                                                                         |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Cash at end of  period                                                                       |       | $                                                    | —     |   | $ | — |   | $ | 9.8 |   | $ | 212.9 |   | — |   | $ | 222.7 |   |
|                                                                                              |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Selected Quarterly Financial Data (unaudited)**  The following tables present selectedfinancial data by quarter for the years ended December 31, 2008 and 2007:

 
| ** **                                      | ** ** | **2008**           | ** ** |
|-------------------------------------------------|------------|--------------------|------------|
| ** **                                      | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** | **Year  to  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 |   |
|                                            |       |               |       |   |   |   |   |   |   |   |   |
| 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)                                  Amountfor the first quarter includes charges of $12.9 million ($9.7 million aftertax) for restructuring and asset impairment.

 

Amountfor the second quarter includes charges of $8.2 million ($4.2 million after taxand minority share owners’ interests) for restructuring and asset impairment.

 

Amountfor the third quarter includes charges of $90.6 million ($79.7 million aftertax) for restructuring and asset impairment. The effect of these charges is areduction in earnings per share of $0.47. Amount for the third quarter also includes a net benefit of $6.2 million($4.6 million after minority share owners’ interests) related to taxlegislation and restructuring in Europe.

 

Amountfor the fourth quarter includes a charge of $21.6 million ($16.5 million aftertax) for restructuring and asset impairment.

 

Amountfor the fourth quarter includes expense of $39.5 million related to taxrestructuring and other.

 

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| ** **                                      | ** ** | **2007 (b)**  | ** ** |
|-------------------------------------------------|------------|--------------------|------------|
| ** **                                      | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** | **Year  to Date** | ** ** |
| Net sales -  continuing operations              |       | $                  | 1,684.0    |   | $ | 1,997.0 |   | $ | 1,928.4 |   | $ | 1,957.3 |   | $ | 7,566.7 |   |
| Net sales -  discontinued operations            |       | 188.3              |       | 200.9 |   | 65.8 |   |   |   | 455.0 |   |
| Gross profit -  continuing operations           |       | $                  | 327.8      |   | $ | 429.4 |   | $ | 417.2 |   | $ | 420.9 |   | $ | 1,595.3 |   |
| Gross profit -  discontinued operations         |       | 44.0               |       | 47.7 |   | 19.8 |   |   |   | 111.5 |   |
| Earnings from  continuing operations (c)        |       | 55.3               |       | 153.8 |   | 75.6 |   | 129.6 |   | 414.3 |   |
| Net earnings  (loss) of discontinued operations |       | (2.1               | )          | (4.1 | ) | 9.0 |   |   |   | 2.8 |   |
| Gain (loss) on  sale of discontinued operations |       |               |       |   |   | 1,071.9 |   | (33.4 | ) | 1,038.5 |   |
|                                            |       |               |       |   |   |   |   |   |   |   |   |
| Net earnings                                    |       | $                  | 53.2       |   | $ | 149.7 |   | $ | 1,156.5 |   | $ | 96.2 |   | $ | 1,455.6 |   |

 

----

(b)                                 Amountsrelated to the Company’s plastics packaging business have been reclassified todiscontinued operations following as a result of the July 2007 sale ofthat business.

 

(c)                                  Amountfor the second quarter includes a benefit of $13.5 million for the recognitionof tax credits related to restructuring of investments in certain Europeanoperations.

 

Amountfor the third quarter includes charges of $61.9 million ($55.1 million aftertax) for restructuring and asset impairment.

 

Amountfor the fourth quarter includes charges totaling $47.9 million ($37.8 millionafter tax) for the following: (1) $38.4 million ($29.0 million after tax)for restructuring and asset impairment; and (2) $9.5 million ($8.8 millionafter tax) for note repurchase premiums and the write-off of finance feesrelated to debt that was repaid prior to its maturity.

 
| **ITEM 9.**   | ** ** | **CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON  ACCOUNTING AND FINANCIAL DISCLOSURE** |   |
|---------------|------------|-------------------------------------------------------------------------------------------|--------|
| None.         | ** ** | ** **                                                                                |   |
| ** **    | ** ** | ** **                                                                                |   |
| **ITEM  9A.** | ** ** | **CONTROLS  AND 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 Company has investments in certainunconsolidated entities.  As the Companydoes not control or manage these entities, its disclosure controls andprocedures with respect to such entities are necessarily substantially morelimited than those maintained with respect to its consolidated subsidiaries.

 

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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 this report.  Based on the foregoing, the Company’s ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures were effective at the reasonable assurancelevel as of December 31, 2008.

 

Managementconcluded that the Company’s system of internal control over financialreporting was effective as of December 31, 2008.  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 is maintainingand monitoring appropriate internal controls during the implementation period. The Company believes that the internal control environment will beenhanced 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 internal controlsystems, 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, 2008. 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 theCompany’s system of internal control over financial reporting was effective asof December 31, 2008.

 

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 REGISTEREDPUBLIC ACCOUNTING FIRM**

 

**The Board of Directors and Share Owner of**

**Owens-Illinois Group, Inc.**

** **

We have auditedOwens-Illinois Group, Inc.’s internal control over financial reporting asof December 31, 2008 based on criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). Owens-IllinoisGroup, Inc.’s management is responsible for maintaining effective internalcontrol over financial reporting, and for its assessment of the effectivenessof internal control over financial reporting included in the accompanyingManagement’s Report on Internal Control over Financial Reporting. Ourresponsibility is to express an opinion on the company’s internal control overfinancial reporting based on our audit.

 

We conducted our audit 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 effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,assessing the risk that a material weakness exists, testing and evaluating thedesign and operating effectiveness of internal control based on the assessedrisk, and performing such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

 

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance 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 permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

 

In our opinion,Owens-Illinois Group, Inc. maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2008, basedon the COSO criteria.

 

We also have audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theconsolidated balance sheets of Owens-Illinois Group, Inc. and subsidiariesas of December 31, 2008 and 2007, and the related consolidated statementsof results of operations, share owners’ equity, and cash flows for each of thethree years in the period ended December 31, 2008 and our report dated February 17,2009 expressed an unqualified opinion thereon.

 

 
|                    | /s/ Ernst &  Young LLP |
|-------------------------|---------------------------------|
|                    |                            |
|                    |                            |
| Toledo, Ohio            |                            |
| February 17,  2009 |                            |

 

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## **ITEM 9B.**                                            OTHER INFORMATION

## ** **

None.

 

# **PART III**

# ** **

**ITEM 14.****                                              PRINCIPALACCOUNTANT FEES AND SERVICES**

 

Informationwith respect to principal accountant fees and services is included in OI Inc.’s2009 Proxy Statement in the section entitled “Independent Registered PublicAccounting Firm” and such information is incorporated herein by reference.

 

**PART IV**

 

## **ITEM15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

## ** **

**FINANCIALSTATEMENTS AND FINANCIAL STATEMENT SCHEDULES**

 

Indexof Financial Statements and Financial Statement Schedules Covered by Report ofIndependent Auditors.

 
|                                                            | ** ** |
|-----------------------------------------------------------------|------------|
|                                                            |       |
| (i) Registrant                                             |       |
|                                                            |       |
| Report of Independent Registered Public Accounting Firm         |       |
|                                                            |       |
| Consolidated Balance Sheets at December 31, 2008  and 2007 |       |
|                                                            |       |
| For the years ended December 31, 2008, 2007, and 2006      |       |
|                                                            |       |
| Consolidated  Results of Operations                             |       |
| Consolidated Share Owner’s  Equity                         |       |
| Consolidated Cash Flows                                         |       |
|                                                            |       |
| Notes  to the Consolidated Financial Statements                 |       |
|                                                            |       |
| Exhibit Index                                              |       |

 
| **Financial Statement Schedule**                                                                                                                                  | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
|                                                                                                                                                              |       |       |
| For the years ended December 31, 2008, 2007, and 2006:                                                                                                       |       |       |
|                                                                                                                                                              |       |       |
| II - Valuation and  Qualifying Accounts (Consolidated)                                                                                                            |       |       |
|                                                                                                                                                              |       |       |
| 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                                                                 |       |       |

 

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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 15, 1997, 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 16, 1997, 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 January 24, 2002, among Owens-Brockway Glass Container, Inc.,  the Guarantors (as defined therein) and U.S. Bank National Association, as  Trustee (filed as Exhibit 4.1 to Owens-Illinois Group, Inc.’s  Form S-4 dated April 5, 2002, File No. 333-85690, and  incorporated herein by reference). |
| 4.7                  | —     |         | First  Supplemental Indenture, dated as of January 24, 2002, among  Owens-Brockway Glass Container, Inc., the Guarantors (as defined  therein) and U.S. Bank National Association, as Trustee (filed as  Exhibit 4.2 to Owens-Illinois Group, Inc.’s Form S-4 dated  April 5, 2002, File No. 333-85690, and incorporated herein by  reference). |

 

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| 4.8   | — |   | Second Supplemental Indenture, dated as of August 5, 2002, among  Owens-Brockway Glass Container, Inc., the Guarantors (as defined  therein) and U.S. Bank National Association, as Trustee (filed as  Exhibit 4.1 to Owens-Illinois Group Inc.’s Form 10-Q for the  quarter ended September 30, 2002, File No. 33-13061, and  incorporated herein by reference).                                                                                        |
|-------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.9   | — |   | Third Supplemental Indenture, dated as of November 13, 2002,  among Owens-Brockway Glass Container Inc., the Guarantors (as defined  therein) and U.S. Bank National Association, as Trustee (filed as  Exhibit 4.4 to Owens-Illinois Group, Inc.’s Form S-4  dated February 14, 2003, File No. 333-103263, and incorporated  herein by reference).                                                                                                      |
| 4.10  | — |   | Fourth Supplemental Indenture, dated as of May 6, 2003, among  Owens-Brockway Glass Container Inc., the Guarantors (as defined therein) and  U.S. Bank National Association, as Trustee (filed as Exhibit 4.2 to Owens-Illinois  Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended  March 31, 2003, File No. 33-13061, and incorporated herein by  reference).                                                                           |
| 4.11  | — |   | 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). |
| 4.12  | — |   | Second Amendment to Credit Agreement and Consent, dated June 11,  2007 (filed as Exhibit 4.1 to Owens-Illinois, Inc.’s and  Owens-Illinois Group, Inc.’s Form 8-K dated June 11, 2007, File  Nos. 1-9576 and 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).                                                                                                                                                                                                  |
| 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).                                                                                                                                                                                |

 

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| **S-K Item 601 No.** | ** ** | **Document** |
|----------------------|------------|--------------|
|                 |       |         |   |
| 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). |
| 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). |

 

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| **S-K Item 601 No.** | ** ** | **Document** |
|----------------------|------------|--------------|
|                 |       |         |   |
| 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*               | —     |         | Owens-Illinois, Inc.  2005 Incentive Award Plan (filed as Exhibit 10.28 to Owens-Illinois, Inc.’s  Form 10-K for the year ended December 31, 2005, File  No. 1-9576, and incorporated herein by reference). |
| 10.25*               | —     |         | First Amendment  to 2005 Incentive Award Plan of Owens-Illinois, Inc. dated as of  December 4, 2006 (filed  as Exhibit 10.29 to Owens-Illinois, Inc.’s Form 10-K for the  year ended December 31, 2006, File No. 1-9576, and incorporated  herein by reference). |
| 10.26*               | —     |         | 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). |
| 10.27*               | —     |         | 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). |
| 10.28*               | —     |         | 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). |
| 10.29*               | —     |         | 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). |
| 10.30*               | —     |         | 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). |
| 10.31*               | —     |         | 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). |
| 32.2                 | —     |         | Certification of  Principal Financial Officer pursuant to 18 U.S.C Section 1350 (filed  herewith). |

 

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*                 Indicatesa management contract or compensatory plan or arrangement required to be filedas an exhibit to this form pursuant to Item 15(c).

 

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

** **

1)              Financialstatements of Owens-Brockway Packaging, Inc. and subsidiaries includingconsolidated balance sheets as of December 31, 2008 and 2007, and therelated statements of operations, net parent investment, and cash flows for theyears ended December 31, 2008, 2007 and 2006.

 

2)              Financialstatements of Owens-Brockway Glass Container Inc. and subsidiaries includingconsolidated balance sheets as of December 31, 2008 and 2007, and therelated statements of operations, net parent investment, and cash flows for theyears ended December 31, 2008, 2007 and 2006.

 

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

** **

TheBoard of Directors and Share Owner of

Owens-BrockwayPackaging, Inc.

 

We have audited theaccompanying consolidated balance sheets of Owens-Brockway Packaging, Inc.and subsidiaries as of December 31, 2008 and 2007, and the relatedconsolidated statements of results of operations, net Parent investment, andcash flows for each of the three years in the period ended December 31,2008.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  We were not engaged to perform an audit ofthe Company’s internal control over financial reporting.  Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting.  Accordingly, we express nosuch opinion.  An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Owens-Brockway Packaging, Inc.and subsidiaries at December 31, 2008 and 2007, and the consolidatedresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2008, in conformity with U.S. generallyaccepted accounting principles.

 

As discussed in Note 13to the consolidated financial statements, the Company changed its method of accountingfor defined benefit pension plans and other postretirement plans in 2006.

 

 
|                    | /s/ Ernst & Young LLP |
|-------------------------|--------------------------------|
|                    |                           |
|                    |                           |
| Toledo, Ohio            |                           |
| February 17,  2009 |                           |

 

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**CONSOLIDATED RESULTS OF OPERATIONS** Owens-Brockway Packaging, Inc.

**Dollars in millions**

 
| **Years ended December 31,**                        | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                               |       |     |       |     |       |     |       |
| Net sales                                                          |       | $        | 7,884.7    |     | $          | 7,566.7  |       | $ | 6,692.4 |   |
| Manufacturing,  shipping, and delivery                             |       | (6,212.3 | )          | (5,968.6 | )          | (5,529.6 | )          |
| Gross profit                                                       |       | 1,672.4  |       | 1,598.1  |       | 1,162.8  |       |
|                                                               |       |     |       |     |       |     |       |
| Selling and  administrative                                        |       | (440.7   | )          | (401.5   | )          | (410.2   | )          |
| Research,  development, and engineering                            |       | (66.7    | )          | (65.8    | )          | (49.0    | )          |
| Net intercompany  interest                                         |       | (32.3    | )          | 4.0      |       | 3.0      |       |
| Other interest  expense                                            |       | (205.3   | )          | (360.2   | )          | (404.6   | )          |
| Other expense                                                      |       | (149.2   | )          | (142.3   | )          | (55.0    | )          |
| Other income                                                       |       | 111.9    |       | 92.4     |       | 86.5     |       |
|                                                               |       |     |       |     |       |     |       |
| Earnings before  items below                                       |       | 890.1    |       | 724.7    |       | 333.5    |       |
| Provision for  income taxes                                        |       | (223.8   | )          | (139.1   | )          | (138.8   | )          |
| Minority share  owners’ interests in earnings of subsidiaries |       | (70.2    | )          | (59.5    | )          | (43.7    | )          |
|                                                               |       |     |       |     |       |     |       |
| Net earnings                                                       |       | $        | 596.1      |     | $          | 526.1    |       | $ | 151.0 |   |

 

See accompanying Notes to the Consolidated Financial Statements.

 

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**CONSOLIDATEDBALANCE SHEETS** Owens-Brockway Packaging, Inc.

**Dollars in millions**

 
| **December 31,**                                                                                                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                                                                    |       |     |       |     |       |
| **Assets**                                                                                                                                    |       |     |       |     |       |
| **Current  assets:**                                                                                                                          |       |     |       |     |       |
| Cash, including  time deposits of $307.5 ($154.4 in 2007)                                                                                     |       | $        | 397.9      |     | $          | 401.9 |   |
| Receivables  including amount from related parties of $3.8 ($3.8 in 2007), less allowances  of $38.1 ($35.1 in 2007) for losses and discounts |       | 988.2    |       | 1,201.1  |       |
| Inventories                                                                                                                                   |       | 999.1    |       | 1,020.3  |       |
| Prepaid expenses                                                                                                                              |       | 46.8     |       | 35.1     |       |
|                                                                                                                                          |       |     |       |     |       |
| Total current  assets                                                                                                                         |       | 2,432.0  |       | 2,658.4  |       |
| **Other  assets:**                                                                                                                            |       |     |       |     |       |
| Equity  investments                                                                                                                           |       | 101.7    |       | 79.9     |       |
| Repair parts  inventories                                                                                                                     |       | 132.5    |       | 155.8    |       |
| Prepaid pension                                                                                                                               |       |     |       | 58.1     |       |
| Deposits,  receivables, and other assets                                                                                                      |       | 418.3    |       | 418.0    |       |
| Goodwill                                                                                                                                      |       | 2,207.5  |       | 2,428.1  |       |
|                                                                                                                                          |       |     |       |     |       |
| Total other  assets                                                                                                                           |       | 2,860.0  |       | 3,139.9  |       |
| **Property,  plant, and equipment:**                                                                                                          |       |     |       |     |       |
| Land, at cost                                                                                                                                 |       | 243.3    |       | 261.7    |       |
| Buildings and  equipment, at cost:                                                                                                            |       |     |       |     |       |
| Buildings and  building equipment                                                                                                             |       | 1,021.9  |       | 1,070.7  |       |
| Factory  machinery and equipment                                                                                                              |       | 4,339.0  |       | 4,742.1  |       |
| Transportation,  office, and miscellaneous equipment                                                                                          |       | 96.9     |       | 114.9    |       |
| Construction in  progress                                                                                                                     |       | 194.2    |       | 146.7    |       |
|                                                                                                                                          |       | 5,895.3  |       | 6,336.1  |       |
| Less accumulated  depreciation                                                                                                                |       | 3,292.9  |       | 3,431.9  |       |
| Net property,  plant, and equipment                                                                                                           |       | 2,602.4  |       | 2,904.2  |       |
| Total assets                                                                                                                                  |       | $        | 7,894.4    |     | $          | 8,702.5 |   |

 

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

**Dollars in millions**

 
| **December 31,**                                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                   |       |     |       |     |       |
| **Liabilities  and Net Parent Investment**                                   |       |     |       |     |       |
| **Current  liabilities:**                                                    |       |     |       |     |       |
| Short-term loans                                                             |       | $        | 375.6      |     | $          | 435.6 |   |
| Accounts payable  including amount to related parties of $7.1 ($9.3 in 2007) |       | 811.8    |       | 926.5    |       |
| Salaries and  wages                                                          |       | 138.2    |       | 176.3    |       |
| U.S. and foreign  income taxes                                               |       | 152.4    |       | 118.7    |       |
| Other accrued  liabilities                                                   |       | 295.2    |       | 311.4    |       |
| Long-term debt  due within one year                                          |       | 18.2     |       | 15.2     |       |
|                                                                         |       |     |       |     |       |
| Total current  liabilities                                                   |       | 1,791.4  |       | 1,983.7  |       |
| ** **                                                                   |       |     |       |     |       |
| **External  long-term debt**                                                 |       | 2,413.1  |       | 2,494.1  |       |
| ** **                                                                   |       |     |       |     |       |
| **Deferred  taxes**                                                          |       | 117.5    |       | 147.2    |       |
| ** **                                                                   |       |     |       |     |       |
| **Other  liabilities**                                                       |       | 729.8    |       | 701.0    |       |
| ** **                                                                   |       |     |       |     |       |
| **Minority  share owners’ interests**                                   |       | 253.2    |       | 252.2    |       |
| ** **                                                                   |       |     |       |     |       |
| **Net  Parent investment:**                                                  |       |     |       |     |       |
| Investment by  and advances from Parent                                      |       | 2,798.6  |       | 2,769.1  |       |
| Accumulated  other comprehensive loss                                        |       | (209.2   | )          | 355.2    |       |
|                                                                         |       |     |       |     |       |
| Total net Parent  investment                                                 |       | 2,589.4  |       | 3,124.3  |       |
|                                                                         |       |     |       |     |       |
| Total  liabilities and net Parent investment                                 |       | $        | 7,894.4    |     | $          | 8,702.5 |   |

 

See accompanying Notes to the Consolidated FinancialStatements.

 

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**CONSOLIDATED NET PARENT INVESTMENT**Owens-BrockwayPackaging, Inc.

**Dollars in millions**

 
| **Years ended December 31,**                         | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                |       |     |       |     |       |     |       |
| **Investment  by and advances to Parent**                           |       |     |       |     |       |     |       |
| Balance at  beginning of year                                       |       | $        | 2,769.1    |     | $          | 1,287.2  |       | $ | 1,313.9 |   |
| Net intercompany  transactions                                      |       | (566.6   | )          | 955.8    |       | (177.7   | )          |
| Net earnings                                                        |       | 596.1    |       | 526.1    |       | 151.0    |       |
|                                                                |       |     |       |     |       |     |       |
| Balance at end  of year                                             |       | $        | 2,798.6    |     | $          | 2,769.1  |       | $ | 1,287.2 |   |
| ** **                                                          |       |     |       |     |       |     |       |
| **Accumulated  other comprehensive loss**                           |       |     |       |     |       |     |       |
| Balance at  beginning of year                                       |       | $        | 355.2      |     | $          | (4.5     | )          | $ | (215.3 | ) |
| Foreign currency  translation adjustments                           |       | (431.9   | )          | 305.3    |       | 284.9    |       |
| Change in  minimum pension liability, net of tax                    |       |     |       |     |       | 22.6     |       |
| Employee benefit  plans, net of tax                                 |       | (99.6    | )          | 26.2     |       | (47.4    | )          |
| Change in fair  value of certain derivative instruments, net of tax |       | (32.9    | )          | 28.2     |       | (49.3    | )          |
|                                                                |       |     |       |     |       |     |       |
| Balance at end  of year                                             |       | $        | (209.2     | )        | $          | 355.2    |       | $ | (4.5 | ) |
|                                                                |       |     |       |     |       |     |       |   |   |   |
| Total net Parent  investment                                        |       | $        | 2,589.4    |     | $          | 3,124.3  |       | $ | 1,282.7 |   |
| ** **                                                          |       |     |       |     |       |     |       |
| **Total  comprehensive income**                                     |       |     |       |     |       |     |       |
| Net earnings                                                        |       | $        | 596.1      |     | $          | 526.1    |       | $ | 151.0 |   |
| Foreign currency  translation adjustments                           |       | (431.9   | )          | 305.3    |       | 284.9    |       |
| Change in  minimum pension liability, net of tax                    |       | —   |       | —   |       | 22.6     |       |
| Employee benefit  plans, net of tax                                 |       | (99.6    | )          | 26.2     |       |     |       |
| Change in fair  value of certain derivative instruments, net of tax |       | (32.9    | )          | 28.2     |       | (49.3    | )          |
|                                                                |       |     |       |     |       |     |       |
| Total  comprehensive income                                         |       | $        | 31.7       |     | $          | 885.8    |       | $ | 409.2 |   |

 

See accompanying Notes to theConsolidated Financial Statements

 

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**CONSOLIDATED CASH FLOWS ** Owens-Brockway Glass Container Inc.

**Dollars in millions**

 
| **Years ended December 31,**                                                           | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Operating activities:**                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net earnings                                                                                          |       | $          | 596.1      |       | $          | 526.1      |       | $ | 151.0 |   |
| Non-cash charges  (credits):                                                                          |       |       |       |       |       |       |       |
| Depreciation                                                                                          |       | 427.5      |       | 419.7      |       | 426.5      |       |
| Amortization of  deferred costs                                                                       |       | 32.7       |       | 36.1       |       | 32.6       |       |
| Deferred tax  provision (credit)                                                                      |       | 10.6       |       | (5.6       | )          | 25.4       |       |
| Restructuring  and asset impairment                                                                   |       | 133.3      |       | 100.3      |       | 27.5       |       |
| Reverse non-U.S.  deferred tax valuation allowance net of restructuring charges                       |       |       |       |       |       | (5.7       | )          |
| Goodwill  impairment                                                                                  |       |       |       |       |       |       |       |
| Curtailment of  postretirement benefits in The Netherlands                                            |       |       |       |       |       | (15.9      | )          |
| Other                                                                                                 |       | 53.4       |       | (20.7      | )          | 20.7       |       |
| Change in  non-current operating assets                                                               |       | 8.7        |       | 6.4        |       | (10.1      | )          |
| Change in  non-current liabilities                                                                    |       | (88.1      | )          | (23.8      | )          | (52.1      | )          |
| Change in  components of working capital                                                              |       | (190.1     | )          | 26.2       |       | (221.7     | )          |
| Cash provided by  operating activities                                                                |       | 984.1      |       | 1,064.7    |       | 378.2      |       |
| **Investing  activities:**                                                                            |       |       |       |       |       |       |       |
| Additions to  property, plant, and equipment                                                          |       | (360.9     | )          | (290.4     | )          | (271.5     | )          |
| Advances to  equity affiliate - net                                                                   |       | (1.6       | )          |       |       |       |       |
| Collections on  accounts receivable arising from consolidation of receivables securitization  program |       |       |       |       |       | 127.3      |       |
| Net cash  proceeds from divestitures and other                                                        |       | 3.0        |       | 14.1       |       | 13.6       |       |
| Cash utilized in  investing activities                                                                |       | (359.5     | )          | (276.3     | )          | (130.6     | )          |
| **Financing  activities:**                                                                            |       |       |       |       |       |       |       |
| Additions to  long-term debt                                                                          |       | 686.4      |       | 406.4      |       | 1,206.5    |       |
| Repayments of long-term  debt                                                                         |       | (695.4     | )          | (2,092.2   | )          | (1,341.7   | )          |
| Increase  (decrease) in short-term loans                                                              |       | (20.6      | )          | (21.5      | )          | 158.9      |       |
| Net change in  intercompany debt                                                                      |       | (530.9     | )          | 1,032.8    |       | (266.9     | )          |
| Net receipts  (payments) for hedging activity                                                         |       | (45.2      | )          | 0.7        |       | (6.8       | )          |
| Payment of finance  fees                                                                              |       |       |       | (6.3       | )          | (12.3      | )          |
| Cash utilized in  financing activities                                                                |       | (605.7     | )          | (680.1     | )          | (262.3     | )          |
| Effect of  exchange rate fluctuations on cash                                                         |       | (22.9      | )          | 51.8       |       | 12.6       |       |
| Increase  (decrease) in cash                                                                          |       | (4.0       | )          | 160.1      |       | (2.1       | )          |
| Cash at  beginning of year                                                                            |       | 401.9      |       | 241.8      |       | 243.9      |       |
| Cash at end of  year                                                                                  |       | $          | 397.9      |       | $          | 401.9      |       | $ | 241.8 |   |

 

See Accompanying Notes toConsolidated Financial Statements.

 

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**Owens-Brockway Glass ContainerInc.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**1.Significant Accounting Policies**

 

**Basis of Consolidated Statements**   The consolidated financial statements ofOwens-Brockway Packaging, Inc. (“Company”) include the accounts of itssubsidiaries.  Newly acquiredsubsidiaries have been included in the consolidated financial statements fromdates of acquisition.

 

TheCompany uses the equity method of accounting for investments in which it has asignificant ownership interest, generally 20% to 50%.  Other investments are accounted for at cost.The Company monitors investments for other than temporary declines in fairvalue and records reductions in carrying values when appropriate.

 

**Relationship with 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 indebtedness,dividends for preferred stock and asbestos-related payments. OI Inc.relies primarily on distributions from its direct and indirect subsidiaries tomeet these obligations.

 

For federal andcertain state income tax purposes, the taxable income of the Company isincluded in the consolidated tax returns of OI Inc. and income taxes areallocated to the Company on a basis consistent with separate returns.

 

**Nature of Operations**   The Company is a leading manufacturer ofglass container products. The Company’s principal product lines in the GlassContainers product segment are glass containers for the food and beverageindustries.  The Company has glasscontainer operations located in 22 countries. The principal markets andoperations for the Company’s glass products are in North America, Europe, SouthAmerica, and Australia.

 

**Use of Estimates**   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 estimatesaccordingly.

 

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

 

**Fair Values of Financial Instruments**   The carrying amounts reported for cash,short-term investments and short-term loans approximate fair value.  In addition, carrying amounts approximatefair value for certain long-term debt obligations subject to frequentlyredetermined interest rates.  Fair valuesfor the Company’s significant fixed rate debt obligations are generally basedon published market quotations.

 

**Derivative Instruments**  The Company uses currency swaps,interest rate swaps, options, and commodity futures contracts to manage risksgenerally associated with foreign exchange rate, interest rate and commoditymarket volatility.  Derivativefinancial instruments are included on the balance sheet at fair value.  Whenever possible, derivative instruments are designated as and are effectiveas hedges, in accordance with accounting principles generally accepted in theUnited States.  If the underlying hedgedtransaction ceases to exist, all changes in fair value of the relatedderivatives that have not been settled are recognized in current earnings.  The Company does not enter into derivativefinancial instruments for trading purposes and is not a party to leveragedderivatives. In accordance with FAS No. 104, cash flows from fair valuehedges of debt and short-term forward exchange contracts are classified as afinancing 

 

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activity. Cash flows of currency swaps, interest rate swaps, and commodity futurescontracts are classified as operating activities. See Note 9 for additionalinformation related to derivative instruments.

 

**Inventory Valuation**   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.

 

**Intangible Assets and Other Long-Lived Assets**  Intangible assets are amortized over theexpected useful life of the asset. Amortization expense directly attributed to the manufacturing of theCompany’s products is included in manufacturing, shipping, and delivery.  Amortization expense related tonon-manufacturing activities is included in selling and administrative andother. The Company evaluates the recoverability of intangible assets and otherlong-lived assets based on undiscounted projected cash flows, excludinginterest and taxes, when factors indicate that impairment may exist.  If impairment exists, the asset is writtendown to fair value.

 

**Property, Plant, and Equipment  **Property, plant, andequipment (“PP&E”) is carried at cost and includes expenditures for newfacilities and equipment and those costs which substantially increase theuseful lives or capacity of existing PP&E. In general, depreciation is computed using the straight-line method andrecorded over the estimated useful life of the asset.  Factory machinery and equipment isdepreciated over periods ranging from 5 to 25 years with the majority of suchassets (principally glass-melting furnaces and forming machines) depreciatedover 7-15 years.  Buildings and buildingequipment are depreciated 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 may exist.  If impairment exists, the asset is writtendown to fair value.

 

**Revenue Recognition**  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.

 

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

 

**Income Taxes on Undistributed Earnings   **Ingeneral, the Company plans to continue to reinvest the undistributed earningsof foreign subsidiaries and foreign corporate joint ventures accounted for bythe equity method.  Accordingly, taxesare provided only on that amount of undistributed earnings in excess of plannedreinvestments.

 

**Foreign Currency Translation**   The assets and liabilities of substantiallyall subsidiaries and associates are translated at current exchange rates andany related translation adjustments are recorded directly in net Parentinvestment.

 

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**Accounts Receivable  **Receivables are stated atamounts estimated 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.

 

**Allowance for Doubtful Accounts  **The allowance for doubtfulaccounts is established 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 December 2007, the FASB issuedStatement of Financial Accounting Standards No. 141R, “BusinessCombinations” (“FAS No. 141R”).  FASNo. 141R establishes principles and requirements for how an acquirerrecognizes and measures in its financial statements the identifiable assetsacquired, the liabilities assumed, and any noncontrolling interest in theacquiree and recognizes and measures the goodwill acquired in the businesscombination or a gain from a bargain purchase. FAS No. 141R also sets forth the disclosures required to be made inthe financial statements to evaluate the nature and financial effects of thebusiness combination.  SFAS No. 141Rapplies prospectively to business combinations for which the acquisition dateis on or after the beginning of the first annual reporting period beginning onor after December 15, 2008. Accordingly, FAS No. 141R will be applied by the Company tobusiness combinations occurring on or after January 1, 2009.

 

InDecember 2007, the FASB issued Statement of Financial Accounting StandardsNo. 160, “Noncontrolling Interests in Consolidated Financial Statements,an amendment of ARB No. 51” (“FAS No. 160”).  FAS No. 160 establishes accounting andreporting standards for the non-controlling interest in a subsidiary and thedeconsolidation of a subsidiary.  FAS No. 160is effective for years beginning on or after December 15, 2008.  Adoption of FAS No. 160 is not presentlyexpected to have a material impact on the Company’s results of operations,financial position or cash flows.

 

InMarch 2008, the FASB issued Statement of Financial Accounting Standards No. 161,“Disclosures about Derivative Instruments and Hedging Activities, an amendmentof FASB Statement No. 133”**(“FASNo. 161”).  FAS No. 161 isintended to improve financial reporting about derivative instruments andhedging activities by requiring enhanced disclosures to enable investors tobetter understand their effects on an entity’s financial condition, financialperformance, and cash flows. FAS No. 161 is effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008.  Adoption of FAS No. 161 isnot presently expected to have a material impact on the Company’s results ofoperations, financial position or cash flows.

 

In December 2008,the FASB issued a FASB Staff Position on Statement of Financial AccountingStandards No. 132(R), “Employers’ Disclosures about Postretirement BenefitPlan Assets” (“FSP FAS No. 132(R)-1”). FSP FAS No. 132(R)-1 requires additional disclosures about the fairvalue of postretirement benefit plan assets to provide users of financialstatements with useful, transparent and timely information about the assetportfolios.  FSP FAS No. 132(R)-1 iseffective for years ending after December 15, 2009.  Adoption of FSP FAS No. 132(R)-1 willhave no impact on the Company’s results of operations, financial position orcash flows.

 

In February 2008, theFinancial Accounting Standards Board (FASB) issued FASB Staff Position FSP157-2, “Effective Date of FASBStatement No. 157” (FSP 157-2). FSP 157-2 delays the effective date of FAS No. 157 for allnon-financial assets and non-financial liabilities, except for items that arerecognized or disclosed at fair value in the financial statements on arecurring basis (at least annually), until the beginning of the first quarterof fiscal 2009. The adoption of FAS No. 157 is not expected to have asignificant impact on the Company’s consolidated financial statements when itis applied to non-financial 

 

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assets and non-financial liabilitiesthat are not measured at fair value on a recurring basis, beginning in thefirst quarter of 2009.

 

**Participation in OI Inc. Stock OptionPlans and Other Stock Based Compensation**  The Company participates in the equitycompensation plans of OI Inc. under which employees of the Company may begranted options to purchase common shares of OI Inc., restricted common sharesof 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 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 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, unless certainretirement 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 

 

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theestimated number of shares into which the restricted share unit will beconverted change, an adjustment will be recorded to recognize the accumulateddifference in amortization between the revised and previous estimates.

 

*Accounting*

 

OI Inc. adopted theprovisions of FAS No. 123R “Share-Based Payment” (FAS No. 123R) effective January 1, 2006 using themodified-prospective method of adoption, which requires recognition ofcompensation cost in the financial statements beginning on the date ofadoption.

 

Asdiscussed in Note 11, 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 thecomponents of working capital related to operations (net of the effects relatedto acquisitions and divestitures) were as follows:

 
| ** **                                   | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                         |       |     |       |     |       |     |       |
| Decrease  (increase) in current assets:      |       |     |       |     |       |     |       |
| Receivables                                  |       | $        | 73.8       |     | $          | (30.1    | )          | $ | (173.9 | ) |
| Inventories                                  |       | (77.8    | )          | 70.5     |       | (36.8    | )          |
| Prepaid expenses                             |       | (7.0     | )          | 6.8      |       | 2.4      |       |
| Increase  (decrease) in current liabilities: |       |     |       |     |       |     |       |
| Accounts payable  and accrued liabilities    |       | (166.7   | )          | (13.5    | )          | (28.1    | )          |
| Salaries and  wages                          |       | (18.8    | )          | 24.9     |       | (13.8    | )          |
| U.S. and foreign  income taxes               |       | 6.4      |       | (32.4    | )          | 28.5     |       |
|                                         |       |     |       |     |       |     |       |
|                                         |       | $        | (190.1     | )        | $          | 26.2     |       | $ | (221.7 | ) |

 

Interest paid in cash, including note repurchasepremiums in 2007 and 2006, aggregated $209.3 million for 2008, $390.3 millionfor 2007, and $380.0 million for 2006.

 

Incometaxes paid (received) in cash were as follows:

 
| ** ** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
|       |       |     |       |     |       |     |       |   |   |   |
| Domestic   |       | $        | (0.3       | )        | $          | 0.2      |       | $ | (0.4 | ) |
| Foreign    |       | 158.4    |       | 149.2    |       | 126.8    |       |
|       |       |     |       |     |       |     |       |
|       |       | $        | 158.1      |     | $          | 149.4    |       | $ | 126.4 |   |

** **

**3. Inventories**  Major classes of inventory are as follows:

 
| ** **          | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
|                |       |     |       |     |       |   |   |
| Finished goods      |       | $        | 831.7      |     | $          | 861.1 |   |
| Work in process     |       | 0.8      |       | 1.4      |       |
| Raw materials       |       | 109.8    |       | 90.5     |       |
| Operating  supplies |       | 56.8     |       | 67.3     |       |
|                |       |     |       |     |       |
|                |       | $        | 999.1      |     | $          | 1,020.3 |   |

 

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Ifthe inventories which are valued on the LIFO method had been valued at standardcosts, which approximate current costs, consolidated inventories would behigher than reported by $32.5 million and $29.1 million, at December 31,2008 and 2007, respectively.

 

Inventorieswhich are valued at the lower of standard costs (which approximate averagecosts), or market at December 31, 2008 and 2007 were approximately $861.4million and $872.8 million, respectively.

 

**4.  EquityInvestments **Summarizedinformation pertaining to the Company’s equity associates follows:

 
|                               |       | **2008** | ** ** | **2007** | ** ** |     |       |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |     |       |
| At end of year:                    |       |     |       |     |       |     |       |
| Equity in  undistributed earnings: |       |     |       |     |       |     |       |
| Foreign                            |       | $        | 35.4       |     | $          | 22.4     |       |   |   |
| Domestic                           |       | 15.2     |       | 18.7     |       |     |       |
| Total                              |       | $        | 50.6       |     | $          | 41.1     |       |   |   |
|                               |       |     |       |     |       |     |       |
| ** **                         | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|                               |       |     |       |     |       |     |       |
| For the year:                      |       |     |       |     |       |     |       |
| Equity in  earnings:               |       |     |       |     |       |     |       |
| Foreign                            |       | $        | 14.1       |     | $          | 5.3      |       | $ | 2.0 |   |
| Domestic                           |       | 36.7     |       | 28.8     |       | 21.4     |       |
|                               |       |     |       |     |       |     |       |   |   |   |
| Total                              |       | $        | 50.8       |     | $          | 34.1     |       | $ | 23.4 |   |
| Dividends  received                |       | $        | 24.5       |     | $          | 21.7     |       | $ | 43.5 |   |
|                                    |            |          |            |          |            |          |            |  |  |  |  |

 

Summarized combinedfinancial information for equity associates is as follows:

 
| ** **                            | ** ** | **2008** | ** ** | **2007 (a)** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|----------|------------|-------------------|------------|------------|------------|
|                                  |       |     |       |              |       |       |       |
| At end of year:                       |       |     |       |              |       |       |       |
| Current assets                        |       | $        | 208.3      |              | $          | 191.3      |       |   |   |
| Non-current assets                    |       | 325.9    |       | 302.4             |       |       |       |
| Total assets                          |       | 534.2    |       | 493.7             |       |       |       |
|                                  |       |     |       |              |       |       |       |
| Current  liabilities                  |       | 167.5    |       | 117.0             |       |       |       |
| Other  liabilities and deferred items |       | 182.5    |       | 265.5             |       |       |       |
| Total  liabilities and deferred items |       | 350.0    |       | 382.5             |       |       |       |
|                                  |       |     |       |              |       |       |       |
| Net assets                            |       | $        | 184.2      |              | $          | 111.2      |       |   |   |

 
| ** **    | ** ** | **2008** | ** ** | **2007 (a)** | ** ** | **2006** | ** ** |
|---------------|------------|----------|------------|-------------------|------------|----------|------------|
|          |       |     |       |              |       |     |       |
| For the year: |       |     |       |              |       |     |       |
| Net sales     |       | $        | 635.8      |              | $          | 535.9    |       | $ | 564.0 |   |
|          |       |     |       |              |       |     |       |
| Gross profit  |       | $        | 227.5      |              | $          | 176.5    |       | $ | 132.2 |   |
|          |       |     |       |              |       |     |       |
| Net earnings  |       | $        | 153.9      |              | $          | 112.4    |       | $ | 69.4 |   |

 

----

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

 

The Company’s significant equity method investmentsinclude:  (1) 43.5% of the commonshares of Vetri Speciali SpA, a specialty glass manufacturer; (2) a 25%partnership interest in General Chemical Soda 

 

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Ash (Partners), a soda ash supplier; and (3) a50% partnership interest in Rocky Mountain Bottle Company, a glass containermanufacturer.

 

**5.  ExternalDebt**   The followingtable summarizes the external long-term debt of the Company at December 31,2008 and 2007:

 
| ** **                                               | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                     |       |     |       |     |       |
| Secured Credit  Agreement:                               |       |     |       |     |       |
| Revolving Credit  Facility:                              |       |     |       |     |       |
| Revolving Loans                                          |       | $        | 18.7       |     | $          | — |   |
| Term Loans:                                              |       |     |       |     |       |
| Term Loan A  (225.0 million AUD at Dec. 31, 2008)   |       | 155.7    |       | 198.1    |       |
| Term Loan B                                              |       | 191.5    |       | 191.5    |       |
| Term Loan C  (110.8 million CAD at Dec. 31, 2008)   |       | 90.9     |       | 113.2    |       |
| Term Loan D  (€191.5 million at Dec. 31, 2008) |       | 269.6    |       | 281.8    |       |
| Senior Secured  Notes:                                   |       |     |       |     |       |
| 8.875%, due 2009                                         |       |     |       |     |       |
| 7.75%, due 2011                                          |       |     |       |     |       |
| 8.75%, due 2012                                          |       |     |       |     |       |
| Senior Notes:                                            |       |     |       |     |       |
| 8.25%, due 2013                                          |       | 461.1    |       | 450.3    |       |
| 6.75%, due 2014                                          |       | 400.0    |       | 400.0    |       |
| 6.75%, due 2014  (€225 million)                     |       | 316.8    |       | 331.1    |       |
| 6.875%, due 2017  (€300 million)                    |       | 422.4    |       | 441.5    |       |
| Other                                                    |       | 104.6    |       | 101.8    |       |
|                                                     |       |     |       |     |       |
|                                                     |       | 2,431.3  |       | 2,509.3  |       |
| Less amounts due  within one year                        |       | 18.2     |       | 15.2     |       |
|                                                     |       |     |       |     |       |
| External  long-term debt                                 |       | $        | 2,413.1    |     | $          | 2,494.1 |   |

 

On June 14, 2006, theCompany’s subsidiary borrowers entered into the Secured Credit Agreement (the “Agreement”).  At December 31, 2008, the Agreementincluded a $900.0 million revolving credit facility, a 225.0 million Australiandollar term loan, and a 110.8 million Canadian dollar term loan, each of whichhas a final maturity date of June 15, 2012.  It also included a $191.5 million term loanand a €191.5 million term loan, each of which has a final maturity date of June 14,2013.

 

As a result of the bankruptcy of Lehman BrothersHoldings Inc. and several of its subsidiaries, the Company believes that themaximum amount available under the revolving credit facility was reduced by$32.3 million.  After further deductingamounts attributable to letters of credit and overdraft facilities that aresupported by the revolving credit facility, at December 31, 2008 theCompany’s subsidiary borrowers had unused credit of $768.4 million availableunder the Agreement.

 

The Agreement contains various covenants thatrestrict, among other things and subject to certain exceptions, the ability ofthe Company to incur certain liens, make certain investments and acquisitions,become liable under contingent obligations in certain defined instances only,make restricted junior payments, make certain asset sales within guidelines andlimits, make capital expenditures beyond a certain threshold, engage in materialtransactions with shareholders and affiliates, participate in sale andleaseback financing arrangements, alter its fundamental business, amend certainoutstanding debt obligations, and prepay certain outstanding debt obligations.

 

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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 Ratio could restrict the ability of theCompany to undertake additional financing to the extent that such financingwould cause the Leverage Ratio to exceed the specified maximum.

 

Failure to comply withthese covenants and restrictions could result in an event of default under theAgreement. In such an event, the Company could not request borrowings under therevolving facility, and all amounts outstanding under the Agreement, togetherwith accrued interest, could then be declared immediately due and payable. Ifan event of default occurs under the Agreement and the lenders cause all of theoutstanding debt obligations under the Agreement to become due and payable,this 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 or event of default under the Agreement, indenturesor agreements governing other indebtedness could also lead to an accelerationof debt under other debt instruments that contain cross acceleration orcross-default provisions.

 

The Leverage Ratio alsodetermines pricing under the Agreement. The interest rate on borrowings underthe Agreement is, at the Company’s option, the Base Rate or the EurocurrencyRate, as defined in the Agreement. These rates include a margin linked to theLeverage Ratio and the borrowers’ senior secured debt rating. The margins rangefrom 0.875% to 1.75% for Eurocurrency Rate loans and from -0.125% to 0.75% forBase Rate loans. In addition, a facility fee is payable on the revolving creditfacility commitments ranging from 0.20% to 0.50% per annum linked to theLeverage Ratio. The weighted average interest rate on borrowings outstandingunder the Agreement at December 31, 2008 was 4.07%.

 

As of December 31,2008, the Company was in compliance with all covenants and restrictions in theAgreement. In addition, the Company believes that it will remain in complianceand that its ability to borrow funds under the Agreement will not be adverselyaffected 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 $2.0 billion. Borrowings are also secured by a pledge ofintercompany debt and equity in most of the Company’s domestic subsidiaries andstock of certain foreign subsidiaries. All borrowings under the agreement areguaranteed by substantially all domestic subsidiaries of the Company for theterm of the Agreement.

 

DuringMarch 2007, a subsidiary of the Company issued Senior Notes totaling €300.0million. The notes bear interest at 6.875% and are due March 31, 2017. Thenotes are guaranteed by substantially all of the Company’s domesticsubsidiaries. The proceeds were used to retire the $300 million principalamount of OI Inc.’s 8.10% Senior Notes which matured in May 2007, and toreduce borrowings under the revolving credit facility.

 

OnJuly 31, 2007, the OI Inc. completed the sale of its plastics packagingbusiness to Rexam PLC for approximately $1.825 billion in cash. In accordancewith an amendment of the Agreement that became effective upon completion of thesale of the plastics business, the Company was required to use the net proceeds(as defined in the Agreement) to repay senior secured debt. In addition, theamendment provides for modification of certain covenants, including theelimination of the financial covenant requiring the Company to maintain aspecified interest coverage ratio. OI Inc. used a portion of the net proceedsin the third quarter of 2007 to redeem all $450.0 million of the 7.75% SeniorSecured Notes and repurchase $283.1 million of the 8.875% Senior Secured Notes.The remaining $566.9 million of the 8.875% Senior Secured Notes wererepurchased or discharged in accordance with the indenture in 

October 2007.The remaining net proceeds, along with funds from operations and/or additionalborrowings under the revolving credit facility, were used to redeem all $625.0million of the 8.75%

 

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SeniorSecured Notes on November 15, 2007. The Company recorded $9.5 million ofadditional interest charges for note repurchase premiums and the relatedwrite-off of unamortized finance fees.

 

During October 2006, the Company enteredinto a €300million European accounts receivable securitization program. The programextends through October 2011, subject to annual renewal of backup creditlines. In addition, the Company participates in a receivables financing programin the Asia Pacific region with a revolving funding commitment of 100 millionAustralian dollars and 25 million New Zealand dollars that extends through July 2009and October 2009, respectively. Information related to the Company’s accounts receivable securitizationprogram is as follows:

 
| ** **                              | ** ** | **Dec. 31,** | ** ** | **Dec. 31,** | ** ** |
|-----------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                              | ** ** | **2008**          | ** ** | **2007**          | ** ** |
|                                    |       |              |       |              |       |
| Balance  (included in short-term loans) |       | $                 | 293.7      |              | $          | 361.8 |   |
|                                    |       |              |       |              |       |
| Weighted average  interest rate         |       | 5.31              | %          | 5.48              | %          |
|                                         |            |                   |            |                   |            |  |  |

 

The Company capitalized$25.6 million and $27.0 million in 2008 and 2007, respectively, under capitallease obligations with the related financing recorded as long term debt. Theseamounts are included in other in the long-term debt table above.

 

Annual maturities for allof the Company’s long-term debt through 2013 are as follows:  2009, $18.2 million; 2010, $19.0 million;2011, $159.0 million; 2012, $152.4 million; and 2013, $930.7 million.

 

Fair values at December 31,2008, of the Company’s significant fixed rate debt obligations were as follows:

 
| ** **                            | ** ** | **Principal Amount** | ** ** | **Indicated** | ** ** | **Fair Value**   | ** ** | **Hedge Value**  | ** ** |
|---------------------------------------|------------|---------------------------|------------|---------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **(millions of**     | ** ** | **Market**    | ** ** | **(millions of** | ** ** | **(millions of** | ** ** |
| ** **                            | ** ** | **dollars)**              | ** ** | **Price**     | ** ** | **dollars)**          | ** ** | **dollars)**          | ** ** |
|                                  |       |                      |       |          |       |                  |       |                  |       |
| Senior Notes:                         |       |                      |       |          |       |                  |       |                  |       |
| 8.25%, due 2013                       |       | $                         | 450.0      |          | 96.00      |                  | $          | 432.0                 |       | $ | 461.1 |   |
| 6.75%, due 2014                       |       | 400.0                     |       | 92.75         |       | 371.0                 |       |                  |       |
| 6.75%, due 2014  (€225 million)  |       | 316.8                     |       | 77.63         |       | 245.9                 |       |                  |       |
| 6.875%, due 2017  (€300 million) |       | 422.4                     |       | 74.13         |       | 313.1                 |       |                  |       |
|                                       |            |                           |            |               |            |                       |            |                       |            |  |  |  |

 

**6.Guarantees of Debt **OI Group and the Company guarantee OI Inc.’ssenior notes and debentures on a subordinated basis. The fair value of the OIInc. debt being guaranteed was $462.6 at December 31, 2008.

 

**7. OperatingLeases**   Rent expenseattributable to all warehouse, office buildings, and equipment operating leaseswas $95.4 million in 2008, $87.4 million in 2007, and $75.7 million in 2006. Minimumfuture rentals under operating leases are as follows:  2009, $45.5 million; 2010, $34.4 million;2011, $22.6 million; 2012, $14.6 million; 2013, $7.4 million; and 2014 andthereafter, $7.4 million.

 

**8. ForeignCurrency Transactions**  Aggregate foreign currency exchange gains (losses) included in othercosts and expenses were $0.6 million in 2008, $(8.1) million in 2007, and$(1.0) million in 2006.

 

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**9. DerivativeInstruments **At December 31,2008, the Company had the following derivative instruments related to itsvarious hedging programs:

 

*InterestRate Swaps Designated as Fair Value Hedges*

 

In the fourth quarter of2003 and the first quarter of 2004, the Company entered into a series ofinterest rate swap agreements with a current total notional amount of$500 million that mature in 2010 and 2013. The swaps were executed inorder to: (i) convert a portion of the senior notes and senior debenturesfixed-rate debt into floating-rate debt; (ii) maintain a capital structurecontaining appropriate amounts of fixed and floating-rate debt; and (iii) reducenet interest payments and expense in the near-term.

 

The Company’s fixed-to-variableinterest rate swaps are accounted for as fair value hedges. Because therelevant terms of the swap agreements match the corresponding terms of thenotes, there is no hedge ineffectiveness. Accordingly, the Company recorded thenet 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.

 

Under the swaps, theCompany receives fixed rate interest amounts (equal to interest on the correspondinghedged note) and pays interest at a six-month U.S. LIBOR rate (set in arrears)plus a margin spread (see table below). The interest rate differential on eachswap is recognized as an adjustment of interest expense during each six-monthperiod over the term of the agreement.

 

The following selectedinformation relates to fair value swaps at December 31, 2008:

 
| ** **                                                               | ** ** | ** ** | ** ** | **Average** | ** ** | ** **  | ** ** | **Asset**       | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|-----------------|------------|
| ** **                                                               | ** ** | **Amount** | ** ** | **Receive** | ** ** | **Average** | ** ** | **(Liability)** | ** ** |
| ** **                                                               | ** ** | **Hedged** | ** ** | **Rate**    | ** ** | **Spread**  | ** ** | **Recorded**    | ** ** |
|                                                                     |       |       |       |        |       |        |       |            |       |
| OI Inc. public  notes swapped by the company through intercompany loans: |       |       |       |        |       |        |       |            |       |
|                                                                     |       |       |       |        |       |        |       |            |       |
| Senior  Debentures due 2010                                              |       | 250.0      |       | 7.50        | %          | 3.2         | %          | 9.4             |       |
|                                                                     |       |       |       |        |       |        |       |            |       |
| Notes issued by  OBGC:                                                   |       |       |       |        |       |        |       |            |       |
|                                                                     |       |       |       |        |       |        |       |            |       |
| Senior Notes due  2013                                                   |       | 250.0      |       | 8.25        | %          | 3.7         | %          | 11.1            |       |
|                                                                     |       |       |       |        |       |        |       |            |       |
| Total                                                                    |       | $          | 500.0      |        |       |        |       |            | $          | 20.5 |   |
|                                                                          |            |            |            |             |            |             |            |                 |            |  |  |

 

*Commodity Hedges*

 

The Company enters into commodity futures contractsrelated to forecasted natural gas requirements, the objectives of which are tolimit the effects of fluctuations in the future market price paid for naturalgas and the related volatility in cash flows. 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, 2008, the Company had entered into commodityfutures contracts for approximately 50% (approximately 10,200,000 MM BTUs) ofits estimated North American usage requirements for the full year of 2009 andapproximately 1% (approximately 240,000 MM BTUs) for the full year of 2010.

 

The Company accounts for the above futurescontracts on the balance sheet at fair value. The effective portion of changesin the fair value of a derivative that is designated as, and meets the requiredcriteria

 

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for, a cash flow hedge is recorded in the AccumulatedOther Comprehensive Income component of share owners’ equity (“OCI”) andreclassified into earnings in the same period or periods during which theunderlying hedged item affects earnings. Any material portion of the change inthe fair value of a derivative designated as a cash flow hedge that is deemedto be ineffective is recognized in current earnings.

 

The above futures contracts are accounted for ascash flow hedges at December 31, 2008.

 

At December 31, 2008, an unrecognized loss of$31.8 million (pretax and after tax), related to the domestic commodity futurescontracts, was included in OCI, which will be reclassified into earnings overthe next twelve months. The ineffectiveness related to these natural gas hedgesfor the year ended December 31, 2008 was not material.

 

*Other Hedges*

 

TheCompany’s subsidiaries may enter into short-term forward exchange or optionagreements to purchase foreign currencies at set rates in the future. Theseagreements are used to limit exposure to fluctuations in foreign currencyexchange rates for significant planned purchases of fixed assets or commoditiesthat are denominated in currencies other than the subsidiaries’ functionalcurrency. Subsidiaries may also use forward exchange agreements to offset theforeign currency risk for receivables and payables not denominated in, orindexed to, their functional currencies. The Company records these short-termforward exchange agreements on the balance sheet at fair value and changes inthe fair value are recognized in current earnings.

 

*Balance Sheet Classification*

 

The Company records the fairvalues of derivative financial instruments on the balance sheet as follows: (1) receivablesif the instrument has a positive fair value and maturity within one year, (2) deposits,receivables, and other assets if the instrument has a positive fair value andmaturity after one year, (3) accounts payable and other currentliabilities if the instrument has a negative fair value and maturity within oneyear, and (4) other liabilities if the instrument has a negative fairvalue and maturity after one year.

 

**10. AccumulatedOther 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 effect of exchange rate fluctuations generallyreflects changes in the relative strength of the U.S. dollar against majorforeign currencies between the beginning and end of the year.

 

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

 

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| ** **                | ** ** | ** **                  | ** ** | ** **            | ** ** | **Change in** | ** ** | **Change in** | ** ** | ** **   | ** ** | **Total**              | ** ** |
|---------------------------|------------|-----------------------------|------------|-----------------------|------------|--------------------|------------|--------------------|------------|--------------|------------|------------------------|------------|
| ** **                | ** ** | **Net Effect of** | ** ** | **Deferred Tax** | ** ** | **Minimum**        | ** ** | **Certain**        | ** ** | **Employee** | ** ** | **Accumulated**        | ** ** |
| ** **                | ** ** | **Exchange Rate**      | ** ** | **Effect for**   | ** ** | **Pension**        | ** ** | **Derivative**     | ** ** | **Benefit**  | ** ** | **Comprehensive**      | ** ** |
| ** **                | ** ** | **Fluctuations**            | ** ** | **Translation**       | ** ** | **Liability**      | ** ** | **Instruments**    | ** ** | **Plans**    | ** ** | **Income (Loss)** | ** ** |
| Balance on Jan.  1, 2006  |       | $                           | (97.0      | )                     | $          | 12.8               |       | $                  | (145.5     | )            | $          | 14.4                   |       | $ | — |   | $ | (215.3 | ) |
| 2006 Change               |       | 284.9                       |       |                  |       | 55.0               |       | (49.3              | )          | (71.0        | )          | 219.6                  |       |
| Translation  effect       |       |                        |       |                  |       | (17.6              | )          |               |       |         |       | (17.6                  | )          |
| Tax effect                |       |                        |       |                  |       | (14.8              | )          |               |       | 23.6         |       | 8.8                    |       |
| Balance on Dec.  31, 2006 |       | 187.9                       |       | 12.8                  |       | (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 |       | 493.2                       |       | 12.8                  |       | —             |       | (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 |       | $                           | 61.3       |                  | $          | 12.8               |       | $                  | —     |         | $          | (37.4)                 |       | $ | (245.9 | ) | $ | (209.2 | ) |

 

For 2008 and 2007,respectively, foreign currency translation adjustments include a loss ofapproximately $19.9 million and $35.1 million related to a hedge of the Company’snet investment in a non-U.S. subsidiary.

 

**11. IncomeTaxes**  Deferred incometaxes reflect:  (1) the net taxeffects of temporary differences between the carrying amounts of assets andliabilities for financial reporting purposes and the amounts used for income taxpurposes and (2) carryovers and credits for income tax purposes.Significant components of the Company’s deferred tax assets and liabilities at December 31,2008 and 2007 are as follows:

 
| ** **                              | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
|                                    |       |     |       |     |       |
| Deferred tax  assets:                   |       |     |       |     |       |
| Tax loss carryovers                     |       | $        | 233.5      |     | $          | 242.1 |   |
| Capital loss  carryovers                |       | 23.7     |       | 32.7     |       |
| Accrued  postretirement benefits        |       | 20.2     |       | 24.4     |       |
| Other,  principally accrued liabilities |       | 190.0    |       | 195.5    |       |
| Total deferred  tax assets              |       | 467.4    |       | 494.7    |       |
|                                    |       |     |       |     |       |
| Deferred tax  liabilities:              |       |     |       |     |       |
| Property, plant  and equipment          |       | 143.9    |       | 221.8    |       |
| Inventory                               |       | 13.4     |       | 20.0     |       |
| Other                                   |       | 46.1     |       | 49.7     |       |
| Total deferred  tax liabilities         |       | 203.4    |       | 291.5    |       |
| Valuation  allowance                    |       | (255.4   | )          | (213.9   | )          |
| Net deferred tax  liabilities           |       | $        | 8.6        |     | $          | (10.7 | ) |

 

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Deferred taxes areincluded in the Consolidated Balance Sheets at December 31, 2008 and 2007as follows:

 
| ** **                               | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
|                                     |       |     |       |     |       |   |   |
| Prepaid expenses                         |       | $        | 24.8       |     | $          | 11.8 |   |
| Deposits,  receivables, and other assets |       | 101.3    |       | 124.7    |       |
| Deferred taxes                           |       | (117.5   | )          | (147.2   | )          |
|                                     |       |     |       |     |       |
| Net deferred tax  liabilities            |       | $        | 8.6        |     | $          | (10.7 | ) |
|                                          |            |          |            |          |            |  |  |  |  |

 

The provision for incometaxes consists of the following:

 
| ** **   | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------|------------|----------|------------|----------|------------|----------|------------|
|         |       |     |       |     |       |     |       |
| Current:     |       |     |       |     |       |     |       |
| U.S. Federal |       | $        | (0.4       | )        | $          | —   |       | $ | — |   |
| State        |       | 0.6      |       | 0.4      |       | 0.3      |       |
| Foreign      |       | 213.0    |       | 144.3    |       | 113.1    |       |
|         |       | 213.2    |       | 144.7    |       | 113.4    |       |
|         |       |     |       |     |       |     |       |
| Deferred:    |       |     |       |     |       |     |       |
| U.S. Federal |       | 4.0      |       | 0.3      |       | 12.9     |       |
| State        |       | (3.2     | )          | (4.0     | )          | (3.6     | )          |
| Foreign      |       | 9.8      |       | (1.9     | )          | 16.1     |       |
|         |       | 10.6     |       | (5.6     | )          | 25.4     |       |
|         |       |     |       |     |       |     |       |
| Total:       |       |     |       |     |       |     |       |
| U.S. Federal |       | 3.6      |       | 0.3      |       | 12.9     |       |
| State        |       | (2.6     | )          | (3.6     | )          | (3.3     | )          |
| Foreign      |       | 222.8    |       | 142.4    |       | 129.2    |       |
|         |       |     |       |     |       |     |       |
|         |       | $        | 223.8      |     | $          | 139.1    |       | $ | 138.8 |   |

 

The provision for incometaxes was calculated based on the following components of earnings (loss)before income taxes:

 
| ** ** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
|       |       |     |       |     |       |     |       |   |   |   |
| Domestic   |       | $        | 191.2      |     | $          | 37.4     |       | $ | (119.1 | ) |
| Foreign    |       | 698.9    |       | 687.3    |       | 452.6    |       |
|       |       |     |       |     |       |     |       |
|       |       | $        | 890.1      |     | $          | 724.7    |       | $ | 333.5 |   |

 

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** **

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:

 
| ** **                                                                                                        | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                              |       |     |       |     |       |     |       |
| Tax provision  (benefit) on pretax earnings (loss) from continuing operations at statutory  U.S. Federal tax rate |       | $        | 311.5      |     | $          | 253.7    |       | $ | 116.7 |   |
| Increase  (decrease) in provision for income taxes due to:                                                        |       |     |       |     |       |     |       |
|                                                                                                              |       |     |       |     |       |     |       |
| Valuation  allowance - U.S.                                                                                       |       | (53.7    | )          | (538.3   | )          | 46.5     |       |
| Foreign  subsidiary ownership restructuring and incentives                                                        |       | 35.1     |       | 535.9    |       | 30.8     |       |
| Foreign source  income taxable in the U.S.                                                                        |       | 11.3     |       | 29.3     |       | 1.8      |       |
| Reversal of  non-U.S. tax valuation allowance                                                                     |       | —   |       | (13.4    | )          | (34.7    | )          |
| Foreign tax  credit utilization                                                                                   |       | —   |       | (47.9    | )          |     |       |
| State taxes, net  of federal benefit                                                                              |       | (1.3     | )          | (4.8     | )          | (0.3     | )          |
| Rate differences  on non-U.S. earnings                                                                            |       | (55.3    | )          | (65.8    | )          | (22.1    | )          |
| Adjustment for  non-U.S. tax law changes                                                                          |       | (20.1    | )          | (9.9     | )          | (1.6     | )          |
| Other items                                                                                                       |       | (3.7     | )          | 0.3      |       | 1.7      |       |
|                                                                                                              |       |     |       |     |       |     |       |
| Provision for  income taxes                                                                                       |       | $        | 223.8      |     | $          | 139.1    |       | $ | 138.8 |   |

 

In2007 the Company implemented a plan to restructure the ownership andintercompany obligations of certain foreign subsidiaries. These actionsresulted in taxation of a significant portion of previously unremitted foreignearnings and will transfer a portion of the Company’s debt service obligationsto operations outside the U.S. in order to better balance operating cash flowswith financing costs on a global basis. The foreign earnings reported astaxable in the U.S. were offset by net operating loss carryforwards and foreigntax credits. Foreign tax credit carryforwards arising from the restructuringwere fully offset by an increase 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 minimum tax credits, and research and developmentcredits available to offset future U.S. Federal income tax.

 

At December 31,2008, the Company’s equity in the undistributed earnings of foreignsubsidiaries for which income taxes had not been provided approximated $1,583.2million. The Company intends to reinvest these earnings indefinitely in thenon-U.S. operations. It is not practicable to estimate the U.S. and foreign taxwhich would be payable should these earnings be distributed.

 

TheCompany adopted FASB Interpretation 48, “Accounting for Uncertainty in IncomeTaxes,” (“FIN 48”) as of January 1, 2007. This interpretation was issuedto clarify the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with FAS No. 109, “Accountingfor Income Taxes.” FIN 48 defines criteria that a tax position must meet forany part of the benefit of that position to be recognized in an enterprise’sfinancial statements and also includes requirements for measuring the amount ofthe benefit to be recognized in the financial statements.

 

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Asa result of the adoption of FIN 48, the Company recognized no adjustment toretained earnings for unrecognized income tax benefits. The Companyreclassified $28.5 million of deferred tax assets related to general businesscredits and net operating losses that were previously offset by a full valuationallowance to the liability for unrecognized income tax benefits. This balancesheet reclassification had no effect on share owners’ equity. In connectionwith the adoption of FIN 48, the Company is maintaining its historical methodof accruing interest and penalties associated with unrecognized income taxbenefits as a component of its income tax expense.

 

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

 
| ** **                                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Balance at  January 1                                            |       | $        | 53.0       |     | $          | 45.8 |   |
| Additions for  tax positions of prior years                           |       | 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         |       | 6.1      |       | 11.0     |       |
| Reductions due  to the lapse of the applicable statute of limitations |       | (3.1     | )          | (1.4     | )          |
| Reductions due  to settlements                                        |       | (2.0     | )          | —   |       |
| Balance at  December 31                                          |       | $        | 103.1      |     | $          | 53.0 |   |

 

AtDecember 31, 2008 and December 31, 2007, accrued interest andpenalties related to unrecognized tax benefits were $14.5 million and$3.9 million, respectively. Tax expense for the year ended December 31,2008 includes interest and penalties of $5.4 million on unrecognized taxbenefits for prior years.

 

Theunrecognized tax benefit liability, including interest and penalties, as of December 31,2008 and December 31, 2007 was $117.6 million and $56.9 millionrespectively. Approximately $72.7 million and $41.1 million as of December 31,2008 and December 31, 2007, respectively, relate to unrecognized tax benefits,which if recognized, would impact the Company’s effective income tax rate. Thisamount differs from the gross unrecognized tax benefits presented in the tableabove because of the unrecognized tax benefits that would result in theutilization of certain tax attribute carryforwards that are currently subjectto a full valuation allowance due to uncertainties about their future periodutilization.

 

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 tax attribute carryforwards (which arecurrently offset by full valuation allowances) in the U.S., the Company treatscertain post-1999 tax positions as unsettled because of 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.

 

**12. RelatedParty Transactions       **Chargesfor administrative services are allocated to the Company by OI Inc. based on anannual utilization level. Such services include compensation and benefitsadministration, payroll processing, use of certain general accounting systems,auditing, income tax planning and compliance, and treasury services. Beginning in 2008, the Company revised itsmethod of allocating corporate expenses. The Company decreased slightly thepercentage allocation based on sales and significantly expanded the number offunctions included in the allocation based on cost of services.

 

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Allocated costs also include charges associated withOI Inc.’s equity compensation plans. A substantial number of the options,restricted shares and restricted share units granted under these plans havebeen granted to key employees of another subsidiary of OI Inc., some of whosecompensation costs, including stock-based compensation, are included in anallocation of costs to all operating subsidiaries of OI Inc., including theCompany.

 

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,** | ** ** |
|--------------------------------|------------|---------------------------------------------|------------|
| ** **                     | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues:                      |       |                                        |       |   |   |   |   |
| Sales to  affiliated companies |       | $                                           | —     |   | $ | 0.3 |   | $ | 0.5 |   |
|                           |       |                                        |       |   |   |   |   |
| Expenses:                      |       |                                        |       |   |   |   |   |
| Administrative  services       |       | 15.0                                        |       | 19.5 |   | 25.5 |   |
| Corporate  management fee      |       | 60.9                                        |       | 29.1 |   | 27.1 |   |
| Trademark  royalties           |       | 19.9                                        |       |   |   |   |   |
| Total expenses                 |       | $                                           | 95.8       |   | $ | 48.6 |   | $ | 52.6 |   |

 

The above expenses are recorded in thestatement of operations as follows:

 
| ** **                                    | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                    | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Cost of sales                                 |       | $                                           | 0.9        |   | $ | 16.9 |   | $ | 22.6 |   |
| Selling,  general, and adminstrative expenses |       | 94.9                                        |       | 31.7 |   | 30.0 |   |
| Total expenses                                |       | $                                           | 95.8       |   | $ | 48.6 |   | $ | 52.6 |   |

 

Intercompanyinterest is charged to the Company from OI Inc. based on intercompany debtbalances. An interest rate is calculated monthly based on OI Inc.’s totalconsolidated monthly external debt balance and the related interest expense,including finance fee amortization and commitment fees. The calculated rate(6.3% at December 31, 2008) is applied monthly to the intercompany debtbalance to determine intercompany interest expense.

 

**13. PensionBenefit Plans and Other Postretirement Benefits**

 

*PensionBenefit Plans*

 

The Company participatesin OI Inc.’s defined benefit pension plans for substantially all employeeslocated in the United States. Benefits generally are based on compensation forsalaried employees and on length of service for hourly employees. OI Inc.’s policyis to fund pension plans such that sufficient assets will be available to meetfuture benefit requirements. Independent actuaries determine pension costs foreach subsidiary of OI Inc. included in the plans; however, accumulated benefitobligation information and plan assets pertaining to each subsidiary have notbeen separately determined. As such, the accumulated benefit obligation and theplan assets related to the pension plans for domestic employees have beenretained by another subsidiary of OI Inc. Net credits to results of operationsfor the

 

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Company’s allocatedportion of the domestic pension costs amounted to $39.9 million in 2008, $23.0million in 2007, and $7.7 million in 2006.

 

OI Inc. also sponsorsseveral defined contribution plans for all salaried and hourly U.S. employeesof the Company. Participation is voluntary and participants’ contributions arebased on their compensation. OI Inc. matches contributions of participants, upto various limits, in substantially all plans. OI Inc. charges the Company forits share of the match. The Company’s share of the contributions to these plansamounted to $6.0 million in 2008, $5.7 million in 2007, and $5.5 million in2006.

 

The Company’ssubsidiaries in the United Kingdom, the Netherlands, Canada, Australia, andmany employees of Germany and France also have pension plans coveringsubstantially all employees. The following tables relate to the Company’sprincipal defined benefit pension plans in the United Kingdom, the Netherlands,Canada, Australia, Germany and France (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:

 
| ** **                                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                              |       |     |       |     |       |   |   |
| Obligations at  beginning of year                                 |       | $        | 1,617.1    |     | $          | 1,544.4 |   |
|                                                              |       |     |       |     |       |
| Change in  benefit obligations:                                   |       |     |       |     |       |
| Service cost                                                      |       | 22.0     |       | 25.0     |       |
| Interest cost                                                     |       | 82.9     |       | 78.8     |       |
| Actuarial gain,  including the effect of change in discount rates |       | (52.7    | )          | (92.1    | )          |
| Participant  contributions                                        |       | 8.8      |       | 10.0     |       |
| Benefit payments                                                  |       | (89.4    | )          | (85.5    | )          |
| Plan amendments                                                   |       |     |       | (3.5     | )          |
| Curtailments                                                      |       | (9.5     | )          | (2.6     | )          |
| Special  termination benefits                                     |       | 4.4      |       |     |       |
| Foreign currency  translation                                     |       | (284.2   | )          | 136.4    |       |
| Other                                                             |       |     |       | 6.2      |       |
|                                                              |       |     |       |     |       |
| Net change in  benefit obligations                                |       | (317.7   | )          | 72.7     |       |
|                                                              |       |     |       |     |       |
| Obligations at  end of year                                       |       | $        | 1,299.4    |     | $          | 1,617.1 |   |

 

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The changes in the fairvalue of the International Pension Plans’ assets for the year were as follows:

 
| ** **                          | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-------------------------------------|------------|------------|------------|------------|------------|
| ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fair value at  beginning of year    |       | $          | 1,376.8    |       | $          | 1,253.3 |   |
|                                |       |       |       |       |       |
| Change in fair  value:              |       |       |       |       |       |
| Actual gain  (loss) on plan assets  |       | (220.6     | )          | 24.4       |       |
| Benefit payments                    |       | (89.4      | )          | (85.5      | )          |
| Employer  contributions             |       | 60.1       |       | 59.6       |       |
| Participant  contributions          |       | 8.8        |       | 10.0       |       |
| Foreign currency  translation       |       | (213.7     | )          | 115.0      |       |
|                                |       |       |       |       |       |
| Net change in  fair value of assets |       | (454.8     | )          | 123.5      |       |
|                                |       |       |       |       |       |
| Fair value at  end of year          |       | $          | 922.0      |       | $          | 1,376.8 |   |

 

The funded status of theInternational Pension Plans at year end was as follows:

 
| ** **                                           | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                 |       |     |       |     |       |
| Plan assets at  fair value                           |       | $        | 922.0      |     | $          | 1,376.8 |   |
| Projected  benefit obligations                       |       | 1,299.4  |       | 1,617.1  |       |
|                                                 |       |     |       |     |       |
| Plan assets less  than projected benefit obligations |       | (377.4   | )          | (240.3   | )          |
| Items not yet  recognized in pension expense:        |       |     |       |     |       |
| Actuarial loss                                       |       | 362.9    |       | 212.0    |       |
| Prior service  credit                                |       | (15.1    | )          | (14.7    | )          |
|                                                 |       |     |       |     |       |
|                                                 |       | 347.8    |       | 197.3    |       |
|                                                 |       |     |       |     |       |
| Net amount  recognized                               |       | $        | (29.6      | )        | $          | (43.0 | ) |

 

The net amount recognizedis included in the Consolidated Balance Sheets at December 31, 2008 and 2007as follows:

 
| ** **                                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                |       |     |       |     |       |
| Prepaid pension                                                     |       | $        | —     |     | $          | 58.1 |   |
| Current pension  liability, included with Other accrued liabilities |       | (7.2     | )          | (8.5     | )          |
| Noncurrent  pension liability, included with Pension benefits       |       | (370.2   | )          | (289.9   | )          |
| Accumulated  other comprehensive income                             |       | 347.8    |       | 197.3    |       |
|                                                                |       |     |       |     |       |
| Net amount  recognized                                              |       | $        | (29.6      | )        | $          | (43.0 | ) |

 

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The following changes inplan assets and benefit obligations were recognized in accumulated othercomprehensive income at December 31, 2008 as follows:

 
| ** **                            | ** ** | ** ** | ** ** | **Tax**    | ** ** | ** **    | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|---------------|------------|
| ** **                            | ** ** | **Pretax** | ** ** | **Effect** | ** ** | **After-tax** | ** ** |
|                                  |       |       |       |       |       |          |       |
| Current year  actuarial (gain) loss   |       | $          | 226.7      |       | $          | (62.2         | )          | $ | 164.5 |   |
| Amortization of  actuarial loss       |       | (5.2       | )          | 1.1        |       | (4.1          | )          |
| Amortization of  prior service credit |       | 0.6        |       | (0.1       | )          | 0.5           |       |
| Curtailment                           |       | (8.5       | )          | 2.4        |       | (6.1          | )          |
|                                  |       |       |       |       |       |          |       |
|                                  |       | 213.6      |       | (58.8      | )          | 154.8         |       |
| Translation                           |       |       |       |       |       | (44.9         | )          |
|                                  |       |       |       |       |       |          |       |
|                                  |       | $          | 213.6      |       | $          | (58.8         | )          | $ | 109.9 |   |

 

The accumulated benefitobligation for all defined benefit pension plans was $1,463.8 million and$1,129.5 million at December 31, 2007 and 2008, respectively.

 

The components of theInternational Pension Plans’ net pension expense were as follows:

 
| ** **                   | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                         |       |     |       |     |       |     |       |
| Service cost                 |       | $        | 21.9       |     | $          | 25.0     |       | $ | 28.1 |   |
| Interest cost                |       | 82.9     |       | 78.8     |       | 69.1     |       |
| Expected asset  return       |       | (96.5    | )          | (94.5    | )          | (81.5    | )          |
| Curtailment loss             |       | 0.1      |       | 0.1      |       |     |       |
| Special  termination benefit |       | 4.4      |       |     |       |     |       |
| Other                        |       | (1.1     | )          | 5.2      |       |     |       |
|                         |       |     |       |     |       |     |       |
| Amortization:                |       |     |       |     |       |     |       |
| Prior service  cost (credit) |       | (0.6     | )          | (0.1     | )          | 0.2      |       |
| Loss                         |       | 5.2      |       | 11.4     |       | 15.8     |       |
|                         |       |     |       |     |       |     |       |
| Net amortization             |       | 4.6      |       | 11.3     |       | 16.0     |       |
|                         |       |     |       |     |       |     |       |
| Net expense                  |       | $        | 16.3       |     | $          | 25.9     |       | $ | 31.7 |   |

 

Amounts that will beamortized from accumulated other comprehensive income into net pension expenseduring 2009:

 
| Amortization:         |   |   |   |
|-----------------------|--------|--------|--------|
| Loss                  |   | $      | 5.2    |   |
| Prior service  credit |   | (0.8   | )      |
|                  |   |   |   |
| Net amortization      |   | $      | 4.4    |   |

 

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The following informationis for plans with projected benefit obligations in excess of the fair value ofplan assets at year end:

 
| ** **                     | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
|                           |       |     |       |     |       |   |   |
| Projected  benefit obligations |       | $        | 1,299.4    |     | $          | 1,114.6 |   |
| Fair value of  plan assets     |       | 922.0    |       | 816.1    |       |

 

The following informationis for plans with accumulated benefit obligations in excess of the fair valueof plan assets at year end:

 
| ** **                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
|                             |       |     |       |     |       |   |   |
| Accumulated  benefit obligations |       | $        | 1,129.5    |     | $          | 1,008.3 |   |
| Fair value of  plan assets       |       | 922.0    |       | 816.1    |       |

 

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

 
| ** **                     | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
|                           |       |     |       |     |       |
| Discount rate                  |       | 5.88     | %          | 5.46     | %          |
| Rate of  compensation increase |       | 2.65     | %          | 3.39     | %          |

 

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

 
| ** **                                   | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                         |       |     |       |     |       |     |       |
| Discount rate                                |       | 5.46     | %          | 4.92     | %          | 4.57     | %          |
| Rate of  compensation increase               |       | 3.39     | %          | 3.34     | %          | 3.78     | %          |
| Expected  long-term rate of return on assets |       | 6.96     | %          | 7.16     | %          | 7.15     | %          |

 

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 2008, the Company’sweighted average expected long-term rate of return on assets was 6.96%. 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, 2007), whichwas in line with the expected long-term rate of return assumption for 2008.

 

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The weighted averageactual asset allocations and weighted average target allocation ranges by assetcategory for the Company’s pension plan assets were as follows:

 
| ** **              | ** ** | **Actual Allocation** | ** ** | **Target  Allocation** | ** ** |
|-------------------------|------------|----------------------------|------------|------------------------|------------|
| **Asset Category** | ** ** | **2008**                   | ** ** | **2007**               | ** ** | **Ranges** | ** ** |
|                    |       |                       |       |                   |       |   |   |
| Equity securites        |       | 31                         | %          | 63                     | %          | 28-38% |   |
| Debt securities         |       | 56                         | %          | 28                     | %          | 44-54% |   |
| Real estate             |       | 5                          | %          | 5                      | %          | 0-10% |   |
| Other                   |       | 8                          | %          | 4                      | %          | 8-18% |   |
| Total                   |       | 100                        | %          | 100                    | %          |   |   |

 

It is the Company’spolicy to invest pension plan assets in a diversified portfolio consisting ofan array of asset classes within the above target asset allocation ranges. Theinvestment risk of the assets is limited by appropriate diversification bothwithin and between asset classes. The assets are primarily invested in a broadmix of domestic and international equities, domestic and international bonds,and real estate, subject to the target asset allocation ranges. The assets aremanaged with a view to ensuring that sufficient liquidity will be available tomeet expected cash flow requirements.

 

Based on exchange ratesat the end of 2008, the Company expects to contribute approximately $70 millionto $75 million to its defined benefit pension plans in 2009.

 

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

 
| **Year(s)** | ** ** | **Amount** | ** ** |
|-------------|------------|------------|------------|
| 2009        |       |       | 97.0       |   |
| 2010        |       |       | 70.0       |   |
| 2011        |       |       | 70.0       |   |
| 2012        |       |       | 74.0       |   |
| 2013        |       |       | 76.9       |   |
| 2014 - 2018 |       |       | 400.2      |   |

 

*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 $5.8 million, $8.1 million, and $14.7 million, at December 31,2008, 2007, and 2006, respectively.

 

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The Company’s subsidiaries in Canada and theNetherlands also have postretirement benefit plans covering substantially allemployees.  The following tables relateto the Company’s postretirement benefit plan in Canada and the Netherlands (theInternational Postretirement Benefit Plans).

 

The changes in the International PostretirementBenefit Plans obligations were as follows: 

 
| ** **                                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                    |       |     |       |     |       |
| Obligations at beginning of year                                        |       | $        | 95.0       |     | $          | 76.9 |   |
|                                                                    |       |     |       |     |       |
| Change in benefit obligations:                                          |       |     |       |     |       |
| Service cost                                                            |       | 1.2      |       | 1.3      |       |
| Interest cost                                                           |       | 4.5      |       | 4.0      |       |
| Actuarial (gain) loss, including the effect  of changing discount rates |       | (11.9    | )          | 2.5      |       |
| Curtailments                                                            |       | (2.9     | )          | (0.8     | )          |
| Special termination benefits                                            |       | 0.9      |       |     |       |
| Benefit payments                                                        |       | (3.1     | )          | (3.3     | )          |
| Foreign currency translation                                            |       | (16.7    | )          | 14.4     |       |
| Net change in benefit obligations                                       |       | (28.0    | )          | 18.1     |       |
| Obligations at end of year                                              |       | $        | 67.0       |     | $          | 95.0 |   |

 

The funded status of the InternationalPostretirement Benefit Plans at year end was as follows:

 
| ** **                                                    | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                          |       |     |       |     |       |
| Postretirement benefit obligations                            |       | $        | 67.0       |     | $          | 95.0 |   |
|                                                          |       |     |       |     |       |
| Items not yet recognized in net  postretirement benefit cost: |       |     |       |     |       |
| Actuarial gain                                                |       | 6.8      |       | (7.3     | )          |
| Net amount recognized                                         |       | $        | 73.8       |     | $          | 87.7 |   |

 

The net amount recognized is included in theConsolidated Balance Sheets at December 31, 2008 and 2007 as follows:

 
| ** **                                                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                |       |     |       |     |       |
| Current nonpension postretirement benefit,  included with Other accrued liabilities |       | $        | (3.1       | )        | $          | (3.7 | ) |
| Nonpension postretirement benefits                                                  |       | (63.9    | )          | (91.3    | )          |
| Accumulated other comprehensive income                                              |       | (6.8     | )          | 7.3      |       |
| Net liability recognized                                                            |       | $        | (73.8      | )        | $          | (87.7 | ) |

 

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The following changes in benefit obligationswere recognized in accumulated other comprehensive income at December 31,2008 as follows:

 
| ** **                     | ** ** | **Pretax** | ** ** | **Tax  Effect** | ** ** | **After-tax** | ** ** |
|--------------------------------|------------|------------|------------|-----------------|------------|---------------|------------|
| ** **                     | ** ** | ** ** | ** ** | ** **      | ** ** | ** **    | ** ** |
| Current year actuarial loss    |       | $          | (10.4      | )               | $          | 3.0           |       | $ | (7.4 | ) |
| Amortization of actuarial loss |       | 0.1        |       |            |       | 0.1           |       |
| Curtailment                    |       | (2.5       | )          | 0.7             |       | (1.8          | )          |
|                           |       | (12.8)     |       | 3.7             |       | (9.1          | )          |
| Translation                    |       |       |       |            |       | (1.2          | )          |
|                           |       | $          | (12.8)     |            | $          | 3.7           |       | $ | (10.3 | ) |

 

The Company’s nonpension postretirementbenefit obligations are included with other long term liabilities on thebalance sheet.

 

The components of InternationalPostretirement Benefit Plans net postretirement benefit cost were as follows:

 
| ** **                      | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                            |       |     |       |     |       |     |       |
| Service cost                    |       | $        | 1.2        |     | $          | 1.3      |       | $ | 1.9 |   |
| Interest cost                   |       | 4.5      |       | 4.0      |       | 4.2      |       |
| Curtailment                     |       |     |       |     |       | (15.9    | )          |
| Special termination benefit     |       | 0.9      |       |     |       |     |       |
| Other                           |       | 0.1      |       |     |       | 0.6      |       |
|                            |       |     |       |     |       |     |       |
| Amortization:                   |       |     |       |     |       |     |       |
| Gain                            |       | (0.1     | )          | (0.3     | )          | (1.0     | )          |
|                            |       |     |       |     |       |     |       |
| Net postretirement benefit cost |       | $        | 6.6        |     | $          | 5.0      |       | $ | (10.2 | ) |

 

The weighted average discount rate used todetermine the accumulated postretirement benefit obligation was 6.4% and 4.8%at December 31, 2008 and 2007, respectively.

 

The weighted average discount rate used todetermine net postretirement benefit cost was 4.8% at December 31, 2008,5.2% at December 31, 2007, and 4.8% at December 31, 2006.

 

The weighted average assumed health care costtrend rates at December 31 were as follows:

 
| ** **                                                                     | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Health care cost trend rate assumed for  next year                             |       | 9.00     | %          | 9.65     | %          |
| Rate to which the cost trend rate is  assumed to decline (ultimate trend rate) |       | 5.00     | %          | 4.82     | %          |
| Year that the rate reaches the ultimate  trend rate                            |       | 2010     |       | 2010     |       |

 

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Assumed health care cost trend rates affectthe amounts reported for the postretirement benefit plans.  A one-percentage-point change in assumedhealth 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             |       | $                       | 0.9        |                    | $          | 0.7 |   |
| Effect on accumulated  postretirement benefit obligations |       | 9.3                     |       | 7.7                     |       |
|                                                           |            |                         |            |                         |            |  |  |

 

Amortization included in net postretirementbenefit cost is based on the average remaining service of employees.

 

The following estimated future benefitpayments, which reflect expected future service, as appropriate, are expectedto be paid in the years indicated:

 
| **Year(s)** | ** ** | **Amount** | ** ** |
|-------------|------------|------------|------------|
| ** **  | ** ** | ** ** | ** ** |
| 2009        |       |       | $          | 3.1 |   |
| 2010        |       |       | 3.4        |   |
| 2011        |       |       | 3.7        |   |
| 2012        |       |       | 4.1        |   |
| 2013        |       |       | 4.4        |   |
| 2014 - 2018 |       |       | 25.9       |   |
|             |            |            |            |  |  |

 

Benefits provided by OI Inc. for certainhourly retirees of the Company are determined by collective bargaining.  Most other domestic hourly retirees receivehealth and life insurance benefits from a multi-employer trust established bycollective bargaining.  Payments to thetrust as required by the bargaining agreements are based upon specified amountsper hour worked and were $8.9 million in 2008, $7.4 million in 2007, and $6.6million in 2006.  Postretirement healthand life benefits for retirees of foreign subsidiaries are generally providedthrough the national health care programs of the countries in which thesubsidiaries are located.

 

**14.  Other Income  **Otherincome in 2006 includes a gain of $15.9 million ($11.2 million after tax)related to curtailment of certain postretirement benefits in The Netherlands.

 

**15.  Other Expense**Otherexpense for the year ended December 31, 2008****includedthe following:

 

·                  The Companyrecorded charges totaling $132.4 million ($110.1 million after tax and minorityshareowners’ interests), for restructuring and asset impairment.  The charges reflect the additional decisionsreached in the Company’s ongoing strategic review of its global manufacturingfootprint.  See Note 16 for additionalinformation.

 

Other costs and expenses for 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 

 

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valuationallowances against advances to the affiliate, and accrual of certain contingentobligations for total charges of $45.0 million ($43.9 million after tax)recorded in 2007 with an additional $0.9 million (before and after tax)recorded in the first quarter of 2008.

 

·                  The Companyrecorded charges totaling $55.3 million ($40.2 million after tax), forrestructuring and asset impairment.  Thecharges reflect the additional decisions reached in the Company’s ongoingstrategic review of its global manufacturing footprint.  SeeNote 16 for additional information.

 

Other costs and expenses for the year ended December 31,2006 included the following:

 

·                  During the third quarter of 2006, the Companyrecorded a charge of $27.5 million ($25.6 million after tax), principally relatedto the closing of its Godfrey, Illinois machine parts manufacturing operation.

 

**16. Restructuring Accruals  **Beginningin 2007, the Company commenced a strategic review of its global profitabilityand manufacturing footprint.  The combined 2007 and 2008 charges, amountingto $187.7 million ($150.3 million after tax and minority shareowners’interests) and approximately 1,800 jobs and corresponding reduction in theCompany’s workforce, reflect the decisions reached through December 31,2008 in the Company’s ongoing strategic review of its global manufacturingfootprint commenced in mid-2007.  Amountsrecorded by the Company do not include any gains that may be realized upon theultimate sale or disposition of closed facilities.

 

2007

Duringthe third and fourth quarters of 2007, the Company recorded restructuringcharges totaling $55.3 million ($40.2 million after tax), for restructuring andasset impairment in Europe and North America.

 

Asa result of its strategic review, the Company decided to curtail selectedproduction capacity.  Because the futureundiscounted cash flows of the related asset groups were not sufficient torecover their carrying amounts, certain assets were considered impaired.  As a result, those assets were written downto the extent their carrying amounts exceeded fair value.  The curtailment of plant capacity resulted inelimination of approximately 560 jobs and a corresponding reduction in theCompany’s workforce.  The Company accruedcertain employee separation costs, plant clean up, and other exit costs.

 

2008

During2008, the Company recorded restructuring charges totaling $132.4 million($110.1 million after tax and minority share owners’ interests).  The 2008 charges consisted primarily of $85.5million for the closure of two Canadian plants with additional charges acrossall segments as well as in Retained Corporate Costs and Other.

 

Asa continuation of the Company’s strategic review in 2008, the Company decidedto curtail and realign selected production capacity and other activities acrossall segments as well as in Retained Corporate Costs and Other.  Because the future undiscounted cash flows ofthe related asset groups were not sufficient to recover their carrying amounts,certain assets were considered impaired. As a result, those assets were written down to the extent their carryingamounts exceeded fair value.  Thecurtailment of plant capacity and realignment of selected operations willresult in elimination of approximately 1,240 jobs and a corresponding reductionin the Company’s workforce.  The Companyaccrued certain employee separation costs, plant clean up, and other exitcosts.

 

Probablecash expenditures for the 2007 and 2008 charges are expected to totalapproximately $110 million.  The Companyexpects that the majority of these costs will be paid out by the end of 2009.

 

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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     | )          |
| Remaining restructuring accrual as of  December 31, 2008 |       | $                   | 47.6       |                  | $          | —    |       | $         | 16.3       |   | $ | 63.9 |   |

* *

*BSN Acquisition*

* *

Duringthe second quarter of 2005, the Company concluded its evaluation of acquiredcapacity in connection with the acquisition of BSN Glasspack S.A. and announcedthe permanent closing of its Düsseldorf, Germany glass container factory, andthe shutdown of a furnace at its Reims, France glass container facility, bothin 2005.  These actions were part of theEuropean integration strategy to optimally align the manufacturing capacitieswith the market and improve operational efficiencies.  As a result, the Company recorded an accrualof €47.1 million through an adjustment to goodwill.

 

Theseactions resulted in the elimination of approximately 400 jobs and acorresponding reduction in the Company’s workforce.  The Company anticipates that it will pay atotal of approximately €110.9 million in cash related to severance, benefits,plant clean-up, and other plant closing costs related to restructuringaccruals.

 

TheEuropean restructuring accrual recorded in the second quarter of 2005 was inaddition to the initial estimated accrual of €63.8 million recorded in 2004.Selected information related to the restructuring accrual is as follows, with2008 activity translated from Euros into dollars at the December 31, 2008exchange rate:

 
| Remaining European restructuring accrual as  of January 1, 2006   |   | $     | 80.9   |   |
|-------------------------------------------------------------------|--------|-------|--------|--------|
| Net cash paid, principally severance and  related benefits        |   | (33.7 | )      |
| Partial reversal of accrual (goodwill  adjustment)                |   | (7.6  | )      |
| Other, principally foreign exchange  translation                  |   | (1.5  | )      |
| Remaining European restructuring accrual as  of December 31, 2006 |   | 38.1  |   |
| Net cash paid, principally severance and  related benefits        |   | (17.8 | )      |
| Other, principally foreign exchange  translation                  |   | 7.4   |   |
| Remaining European restructuring accrual as  of December 31, 2007 |   | 27.7  |   |
| Net cash paid, principally severance and  related benefits        |   | (6.1  | )      |
| Other, principally foreign exchange  translation                  |   | (4.8  | )      |
| Remaining European restructuring accrual as  of December 31, 2008 |   | $     | 16.8   |   |

 

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**17. Contingencies  **Certain litigationis pending against the Company, in many cases involving ordinary and routineclaims incidental to the business of the Company and in others presentingallegations that are nonroutine and involve compensatory, punitive or trebledamage claims as well as other types of relief. In accordance with FAS No. 5,“Accounting for Contingencies,” the Company records a liability for suchmatters when it is both probable that the liability has been incurred and theamount 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. The ultimatelegal and financial liability of the Company in respect to this pendinglitigation cannot be estimated with certainty. However, the Company believes, based on its examination and review ofsuch matters and experience to date, that such ultimate liability will not havea material adverse effect on its results of operations or financial condition.

 

**18.  Segment Information **The Company has four reportable segments based on its four geographiclocations:  (1) North America; (2) Europe;(3) Asia Pacific; (4) South America. These four segments are aligned with the Company’s internal approach tomanaging, reporting, and evaluating performance of its global glassoperations.  Certain assets andactivities not directly related to one of the regions or to glass manufacturingare reported with Other.  These includelicensing, equipment manufacturing, global engineering, and non-glass equityinvestments.

 

The Company’s measure of profit for its reportablesegments is Segment Operating Profit, which consists of consolidated earningsbefore interest income, interest expense, provision for income taxes andminority share owners’ interests in earnings of subsidiaries and excludesamounts related to certain items that management considers not representativeof ongoing operations.  The Company’smanagement uses Segment Operating Profit, in combination with selected cashflow information, to evaluate performance and to allocate resources.

 

Segment Operating Profit for reportable segmentsincludes an allocation of some corporate expenses based on both a percentage ofsales and direct billings based on the costs of specific services provided.Beginning in 2008, the OI Inc. revised its method of allocating corporateexpenses.  OI Inc. decreased slightly thepercentage allocation based on sales and significantly expanded the number offunctions included in the allocation based on cost of services. It is notpracticable to quantify the net effect of these changes on periods prior to2008.

 

Financial information regarding the Company’sreportable segments is as follows:

 
| ** **                | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net Sales:           |       |     |       |     |       |     |       |
| Europe                    |       | $        | 3,497.8    |     | $          | 3,298.7  |       | $ | 2,846.6 |   |
| North America             |       | 2,209.7  |       | 2,271.3  |       | 2,110.4  |       |
| South America             |       | 1,135.9  |       | 970.7    |       | 796.5    |       |
| Asia Pacific              |       | 964.1    |       | 934.3    |       | 804.9    |       |
| Reportable segment totals |       | 7,807.5  |       | 7,475.0  |       | 6,558.4  |       |
| Other                     |       | 77.2     |       | 91.7     |       | 134.0    |       |
| Net sales                 |       | $        | 7,884.7    |     | $          | 7,566.7  |       | $ | 6,692.4 |   |

 

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| ** **                                                                                          | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Segment  Operating Profit:                                                                          |       |     |       |     |       |     |       |
| Europe                                                                                              |       | $        | 477.8      |     | $          | 433.0    |       | $ | 249.6 |   |
| North America                                                                                       |       | 185.2    |       | 265.1    |       | 187.3    |       |
| South America                                                                                       |       | 331.0    |       | 254.9    |       | 195.0    |       |
| Asia Pacific                                                                                        |       | 162.8    |       | 154.0    |       | 102.9    |       |
| Reportable  segment totals                                                                          |       | 1,156.8  |       | 1,107.0  |       | 734.8    |       |
|                                                                                                |       |     |       |     |       |     |       |
| Items excluded  from Segment Operating Profit:                                                      |       |     |       |     |       |     |       |
| Other                                                                                               |       | 68.1     |       | 47.3     |       | 10.0     |       |
| Restructuring  and asset impairments                                                                |       | (133.3   | )          | (100.3   | )          | (27.5    | )          |
| CEO and other  transition charges                                                                   |       |     |       |     |       | (6.0     | )          |
| Curtailment of  postretirement benefits in The Netherlands                                          |       |     |       |     |       | 15.9     |       |
| Mark to market  effect of natural gas hedge contracts                                               |       |     |       |     |       | (8.7     | )          |
|                                                                                                |       |     |       |     |       |     |       |
| Interest income                                                                                     |       | 36.1     |       | 26.9     |       | 16.6     |       |
| Interest expense                                                                                    |       | (237.6   | )          | (356.2   | )          | (401.6   | )          |
| Earnings before  income taxes and minority share owners’ interests in earnings of subsidiaries |       | $        | 890.1      |     | $          | 724.7    |       | $ | 333.5 |   |
|                                                                                                     |            |          |            |          |            |          |            |  |  |  |  |  |  |

 
| ** **                              | ** ** | ** **  | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | **Total**      | ** ** | ** ** | ** ** | ** **       | ** ** |
|-----------------------------------------|------------|-------------|------------|------------|------------|-------------|------------|-------------|------------|----------------|------------|------------|------------|------------------|------------|
| ** **                              | ** ** | **North**   | ** ** | ** ** | ** ** | **Asia**    | ** ** | **South**   | ** ** | **Reportable** | ** ** | ** ** | ** ** | **Consolidated** | ** ** |
| ** **                              | ** ** | **America** | ** ** | **Europe** | ** ** | **Pacific** | ** ** | **America** | ** ** | **Segments**   | ** ** | **Other**  | ** ** | **Totals**       | ** ** |
| Total assets:                           |       |        |       |       |       |        |       |        |       |           |       |       |       |
| 2008                                    |       | $           | 1,792.3    |       | $          | 3,758.4     |       | $           | 1,239.6    |           | $          | 976.2      |       | $                | 7,766.5    |   | $ | 127.9 |   | $ | 7,894.4 |   |
| 2007                                    |       | 1,936.0     |       | 4,124.1    |       | 1,558.1     |       | 965.7       |       | 8,583.9        |       | 94.6       |       | 8,678.5          |       |
| 2006                                    |       | 1,765.7     |       | 3,838.0    |       | 1,454.4     |       | 765.7       |       | 7,823.8        |       | 307.8      |       | 8,131.6          |       |
| Equity earnings:                        |       |        |       |       |       |        |       |        |       |           |       |       |       |
| 2008                                    |       | $           | 12.6       |       | $          | 14.1        |       | $           | —     |           | $          | —     |       | $                | 26.7       |   | $ | 24.1 |   | $ | 50.8 |   |
| 2007                                    |       | 10.4        |       | 8.0        |       |        |       | (2.7        | )          | 15.7           |       | 18.4       |       | 34.1             |       |
| 2006                                    |       | 10.5        |       | 6.9        |       |        |       | (4.8        | )          | 12.6           |       | 10.8       |       | 23.4             |       |
| Capital  expenditures (1):              |       |        |       |       |       |        |       |        |       |           |       |       |       |
| 2008                                    |       | $           | 90.5       |       | $          | 151.9       |       | $           | 57.6       |           | $          | 57.3       |       | $                | 357.3      |   | 3.6 |   | $ | 360.9 |   |
| 2007                                    |       | 65.9        |       | 129.2      |       | 42.0        |       | 51.1        |       | 288.2          |       | 2.2        |       | 290.4            |       |
| 2006                                    |       | 57.8        |       | 105.4      |       | 47.8        |       | 59.2        |       | 270.2          |       | 1.3        |       | 271.5            |       |
| Depreciation and  amortization expense: |       |        |       |       |       |        |       |        |       |           |       |       |
| 2008                                    |       | $           | 98.7       |       | $          | 222.0       |       | $           | 80.4       |           | $          | 56.5       |       | $                | 457.6      |   | $ | 2.6 |   | $ | 460.2 |   |
| 2007                                    |       | 107.3       |       | 210.3      |       | 81.7        |       | 54.3        |       | 453.6          |       | 2.2        |       | 455.8            |       |
| 2006                                    |       | 110.2       |       | 203.3      |       | 81.4        |       | 56.3        |       | 451.2          |       | 7.9        |       | 459.1            |       |

 

----

(1) Excludes property, plant and equipment acquired through acquisitions.

 

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TheCompany’s net property, plant, and equipment by geographic segment are asfollows:

 
| ** ** | ** ** | **United** | ** ** | ** **  | ** ** | ** ** | ** ** |
|------------|------------|------------|------------|-------------|------------|------------|------------|
| ** ** | ** ** | **States** | ** ** | **Foreign** | ** ** | **Total**  | ** ** |
|       |       |       |       |        |       |       |       |
| 2008       |       | $          | 636.3      |        | $          | 1,966.1    |       | $ | 2,602.4 |   |
| 2007       |       | 633.1      |       | 2,271.1     |       | 2,904.2    |       |
| 2006       |       | 668.4      |       | 2,172.8     |       | 2,841.2    |       |
|            |            |            |            |             |            |            |            |  |  |  |

 

The Company’s net sales by geographic segmentare as follows:

 
| ** ** | ** ** | **United** | ** ** | ** **  | ** ** | ** ** | ** ** |
|------------|------------|------------|------------|-------------|------------|------------|------------|
| ** ** | ** ** | **States** | ** ** | **Foreign** | ** ** | **Total**  | ** ** |
|       |       |       |       |        |       |       |       |
| 2008       |       | $          | 1,894.8    |        | $          | 5,989.9    |       | $ | 7,884.7 |   |
| 2007       |       | 1,920.6    |       | 5,646.1     |       | 7,566.7    |       |
| 2006       |       | 1,787.6    |       | 4,904.8     |       | 6,692.4    |       |
|            |            |            |            |             |            |            |            |  |  |  |

 

Operations in individual countries outsidethe United States that accounted for more than 10% of consolidated net saleswere in Italy (2008 - 10.7%, 2007 - 10.1%) and France (2008 - 14.7%, 2007 -19.3%,  2006 - 19.3%).

 

**19.  Additional Interest Charges from EarlyExtinguishment of Debt**  During 2007, the Company recorded additional interest charges of $9.5million ($8.8 million after tax) for note repurchase premiums and the write-offof unamortized finance fees related to debt that was repaid prior to itsmaturity.  During 2006, the Companyrecorded additional interest charges of $17.5 million ($17.1 million after tax)for note repurchase premiums and the write-off of unamortized finance feesrelated to debt that was repaid prior to its maturity.

 

**20.**  **Goodwill**   The changes in the carrying amount ofgoodwill for the years ended December 31, 2006, 2007 and 2008 are asfollows:

 
| ** **                                                                                   | ** ** | **North**   | ** ** | ** ** | ** ** | **Asia**    | ** ** | **South**   | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------|------------|------------|------------|-------------|------------|-------------|------------|------------|------------|------------|------------|
| ** **                                                                                   | ** ** | **America** | ** ** | **Europe** | ** ** | **Pacific** | ** ** | **America** | ** ** | **Other**  | ** ** | **Total**  | ** ** |
| Balance as of  January 1, 2006                                                          |       | $           | 747.5      |       | $          | 926.7       |       | $           | 470.8      |       | $          | —     |       | $ | 14.7 |   | $ | 2,159.7 |   |
| Translation  effects                                                                         |       | 2.8         |       | 99.5       |       | 31.3        |       |        |       |       |       | 133.6      |       |
| Other changes,  principally adjustments to reverse foreign deferred tax valuation allowances |       | (28.7       | )          | (9.2       | )          |        |       |        |       | (0.2       | )          | (38.1      | )          |
| Balance as of  December 31, 2006                                                        |       | 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 |   |

 

Duringthe fourth quarters of 2008, 2007 and 2006, the Company completed its annualimpairment testing and determined that no impairment existed.

 

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**21.  Fair Value Measurements **In September 2006, theFASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (FAS No. 157),**which defines fair value,establishes a framework for measuring fair value and enhances disclosure aboutfair value measurements.  On February 2,2008, the FASB issued FASB Staff Position No. 157-2 (FSP 157-2) whichdelays the effective date of FAS No. 157 for nonfinancial assets andnonfinancial liabilities, except for items that are recognized or disclosed atfair value in the financial statements on at least an annual basis.  Where the measurement objective specificallyrequires the use of “fair value” the Company has adopted the provisions of FAS No. 157related to financial assets and financial liabilities as of January 1,2008. The adoption of FAS No. 157 had no impact on the Company.

 

FAS No. 157clarifies that fair value is an exit price, representing the amount that wouldbe received to sell an asset or paid to transfer a liability (exit price) inthe principal or most advantageous market for the asset or liability in anorderly transaction between market participants.  FAS No. 157 establishes a three-tierfair value hierarchy, which prioritizes the inputs used in measuring fair valueas follows:

 

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

*Level 2:* Inputs, other than quotedprices in active markets, that are observable either directly or indirectly;and

*Level 3:* Unobservable inputs forwhich there is little or no market data, which requires the Company to developassumptions.

 

TheCompany’s derivative assets 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 the $0.4net derivative liability as Level 2 in the hierarchy.  The Company also evaluates counterparty riskin determining fair values.

 

TheCompany adopted Statement of Financial Accounting Standards No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities-Including anAmendment of FASB Statement No. 115” (“FAS No. 159”), effective January 1,2008.  This standard permits entities tochoose to measure many financial instruments and certain other items at fairvalue.  While FAS No. 159 becameeffective January 1, 2008, the Company did not elect the fair valuemeasurement option for any of its financial assets or liabilities.

 

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

TheBoard of Directors and Share Owner of

Owens-BrockwayGlass Container Inc.

 

We have audited theaccompanying consolidated balance sheets of Owens-Brockway Glass Container Inc.and subsidiaries as of December 31, 2008 and 2007, and the relatedconsolidated statements of results of operations, net Parent investment, andcash flows for each of the three years in the period ended December 31,2008.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  We were not engaged to perform an audit ofthe Company’s internal control over financial reporting.  Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting.  Accordingly, we express nosuch opinion.  An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Owens-Brockway Glass ContainerInc. and subsidiaries at December 31, 2008 and 2007, and the consolidatedresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2008, in conformity with U.S. generallyaccepted accounting principles.

 

As discussed in Note 12to the consolidated financial statements, the Company changed its method ofaccounting for defined benefit pension plans and other postretirement plans in2006.

 

 

| /s/ Ernst & Young LLP |
|--------------------------------|

 

 

Toledo,Ohio

February 17,2009

 

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**CONSOLIDATED RESULTS OF OPERATIONS**  Owens-Brockway Glass Container Inc.

**Dollars in millions**

 
| **Years ended December 31,**                        | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                               |       |     |       |     |       |     |       |
| Net sales                                                          |       | $        | 7,884.7    |     | $          | 7,566.7  |       | $ | 6,692.4 |   |
| Manufacturing,  shipping, and delivery                             |       | (6,212.3 | )          | (5,968.6 | )          | (5,529.6 | )          |
| Gross profit                                                       |       | 1,672.4  |       | 1,598.1  |       | 1,162.8  |       |
|                                                               |       |     |       |     |       |     |       |
| Selling and  administrative                                        |       | (440.7   | )          | (401.5   | )          | (410.2   | )          |
| Research,  development, and engineering                            |       | (66.7    | )          | (65.8    | )          | (49.0    | )          |
| Net intercompany  interest                                         |       | (32.3    | )          | 4.0      |       | 3.0      |       |
| Other interest  expense                                            |       | (205.3   | )          | (360.2   | )          | (404.6   | )          |
| Other expense                                                      |       | (149.2   | )          | (142.3   | )          | (55.0    | )          |
| Other income                                                       |       | 111.9    |       | 92.4     |       | 86.5     |       |
|                                                               |       |     |       |     |       |     |       |
| Earnings before  items below                                       |       | 890.1    |       | 724.7    |       | 333.5    |       |
|                                                               |       |     |       |     |       |     |       |
| Provision for  income taxes                                        |       | (223.8   | )          | (139.1   | )          | (138.8   | )          |
|                                                               |       |     |       |     |       |     |       |
| Minority share  owners’ interests in earnings of subsidiaries |       | (70.2    | )          | (59.5    | )          | (43.7    | )          |
| Net earnings                                                       |       | $        | 596.1      |     | $          | 526.1    |       | $ | 151.0 |   |

 

See accompanying Notes to the Consolidated Financial Statements.

 

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**CONSOLIDATED BALANCE SHEETS**  Owens-Brockway Glass Container Inc.

**Dollars in millions**

 
| **December 31,**                                                                                                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Assets**                                                                                                                                   |       |     |       |     |       |
| **Current  assets:**                                                                                                                         |       |     |       |     |       |
| Cash, including  time deposits of $307.5 ($154.4 in 2007)                                                                                    |       | $        | 397.9      |     | $          | 401.9 |   |
| Receivables  including amount from related parties of $3.8 ($3.8 in 2007), less allowances  of $38.1($35.1 in 2007) for losses and discounts |       | 988.2    |       | 1,201.1  |       |
| Inventories                                                                                                                                  |       | 999.1    |       | 1,020.3  |       |
| Prepaid expenses                                                                                                                             |       | 46.8     |       | 35.1     |       |
| Total current  assets                                                                                                                        |       | 2,432.0  |       | 2,658.4  |       |
| **Other  assets:**                                                                                                                           |       |     |       |     |       |
| Equity  investments                                                                                                                          |       | 101.7    |       | 79.9     |       |
| Repair parts  inventories                                                                                                                    |       | 132.5    |       | 155.8    |       |
| Prepaid pension                                                                                                                              |       |     |       | 58.1     |       |
| Deposits,  receivables, and other assets                                                                                                     |       | 418.3    |       | 418.0    |       |
| Goodwill                                                                                                                                     |       | 2,207.5  |       | 2,428.1  |       |
| Total other assets                                                                                                                           |       | 2,860.0  |       | 3,139.9  |       |
| **Property,  plant, and equipment:**                                                                                                         |       |     |       |     |       |
| Land, at cost                                                                                                                                |       | 243.3    |       | 261.7    |       |
| Buildings and  equipment, at cost:                                                                                                           |       |     |       |     |       |
| Buildings and  building equipment                                                                                                            |       | 1,021.9  |       | 1,070.7  |       |
| Factory  machinery and equipment                                                                                                             |       | 4,339.0  |       | 4,742.1  |       |
| Transportation,  office, and miscellaneous equipment                                                                                         |       | 96.9     |       | 114.9    |       |
| Construction in  progress                                                                                                                    |       | 194.2    |       | 146.7    |       |
|                                                                                                                                         |       | 5,895.3  |       | 6,336.1  |       |
| Less accumulated  depreciation                                                                                                               |       | 3,292.9  |       | 3,431.9  |       |
| Net property,  plant, and equipment                                                                                                          |       | 2,602.4  |       | 2,904.2  |       |
| Total assets                                                                                                                                 |       | $        | 7,894.4    |     | $          | 8,702.5 |   |

 

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** **

**CONSOLIDATED BALANCE SHEETS** Owens-Brockway Glass Container Inc. (continued)

**Dollars in millions**

** **
| **December 31,**                                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Liabilities  and Net Parent Investment**                                   |       |     |       |     |       |
| **Current  liabilities:**                                                    |       |     |       |     |       |
| Short-term loans                                                             |       | $        | 375.6      |     | $          | 435.6 |   |
| Accounts payable  including amount to related parties of $7.1 ($9.3 in 2007) |       | 811.8    |       | 926.5    |       |
| Salaries and wages                                                           |       | 138.2    |       | 176.3    |       |
| U.S. and foreign  income taxes                                               |       | 152.4    |       | 118.7    |       |
| Other accrued  liabilities                                                   |       | 295.2    |       | 311.4    |       |
| Long-term debt  due within one year                                          |       | 18.2     |       | 15.2     |       |
| Total current  liabilities                                                   |       | 1,791.4  |       | 1,983.7  |       |
| **External  long-term debt**                                                 |       | 2,413.1  |       | 2,494.1  |       |
| **Deferred  taxes**                                                          |       | 117.5    |       | 147.2    |       |
| **Other  liabilities**                                                       |       | 729.8    |       | 701.0    |       |
| **Minority  share owners’ interests**                                   |       | 253.2    |       | 252.2    |       |
| **Net  Parent investment:**                                                  |       |     |       |     |       |
| Investment by  and advances from Parent                                      |       | 2,798.6  |       | 2,769.1  |       |
| Accumulated  other comprehensive loss                                        |       | (209.2   | )          | 355.2    |       |
| Total net Parent  investment                                                 |       | 2,589.4  |       | 3,124.3  |       |
| Total  liabilities and net Parent investment                                 |       | $        | 7,894.4    |     | $          | 8,702.5 |   |

 

See accompanying Notes to the Consolidated FinancialStatements.

 

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**CONSOLIDATED NET PARENTINVESTMENT  **Owens-BrockwayGlass Container Inc.

**Dollars in millions**

 
| **Years ended December 31,**                         | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                |       |     |       |     |       |     |       |
| **Investment  by and advances to Parent**                           |       |     |       |     |       |     |       |
| Balance at  beginning of year                                       |       | $        | 2,769.1    |     | $          | 1,287.2  |       | $ | 1,313.9 |   |
| Net intercompany  transactions                                      |       | (566.6   | )          | 955.8    |       | (177.7   | )          |
| Net earnings                                                        |       | 596.1    |       | 526.1    |       | 151.0    |       |
| Balance at end  of year                                             |       | $        | 2,798.6    |     | $          | 2,769.1  |       | $ | 1,287.2 |   |
|                                                                |       |     |       |     |       |     |       |
| **Accumulated  other comprehensive loss**                           |       |     |       |     |       |     |       |
| Balance at  beginning of year                                       |       | $        | 355.2      |     | $          | (4.5     | )          | $ | (215.3 | ) |
| Foreign currency  translation adjustments                           |       | (431.9   | )          | 305.3    |       | 284.9    |       |
| Change in  minimum pension liability, net of tax                    |       |     |       |     |       | 22.6     |       |
| Employee benefit  plans, net of tax                                 |       | (99.6    | )          | 26.2     |       | (47.4    | )          |
| Change in fair  value of certain derivative instruments, net of tax |       | (32.9    | )          | 28.2     |       | (49.3    | )          |
| Balance at end  of year                                             |       | $        | (209.2     | )        | $          | 355.2    |       | $ | (4.5 | ) |
| Total net Parent  investment                                        |       | $        | 2,589.4    |     | $          | 3,124.3  |       | $ | 1,282.7 |   |
|                                                                |       |     |       |     |       |     |       |
| **Total  comprehensive income**                                     |       |     |       |     |       |     |       |
| Net earnings                                                        |       | $        | 596.1      |     | $          | 526.1    |       | $ | 151.0 |   |
| Foreign currency  translation adjustments                           |       | (431.9   | )          | 305.3    |       | 284.9    |       |
| Change in  minimum pension liability, net of tax                    |       | —   |       | —   |       | 22.6     |       |
| Employee benefit  plans, net of tax                                 |       | (99.6    | )          | 26.2     |       |     |       |
| Change in fair  value of certain derivative instruments, net of tax |       | (32.9    | )          | 28.2     |       | (49.3    | )          |
| Total  comprehensive income                                         |       | $        | 31.7       |     | $          | 885.8    |       | $ | 409.2 |   |

 

See accompanying Notes to the Consolidated FinancialStatements.

 

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**CONSOLIDATED CASH FLOWS ** Owens-Brockway Glass Container Inc.

**Dollars in millions**

 
| **Years ended December 31,**                                                           | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Operating  activities:**                                                                            |       |     |       |     |       |     |       |
| Net earnings                                                                                          |       | $        | 596.1      |     | $          | 526.1    |       | $ | 151.0 |   |
| Non-cash charges  (credits):                                                                          |       |     |       |     |       |     |       |
| Depreciation                                                                                          |       | 427.5    |       | 419.7    |       | 426.5    |       |
| Amortization of  deferred costs                                                                       |       | 32.7     |       | 36.1     |       | 32.6     |       |
| Deferred tax  provision (credit)                                                                      |       | 10.6     |       | (5.6     | )          | 25.4     |       |
| Restructuring  and asset impairment                                                                   |       | 133.3    |       | 100.3    |       | 27.5     |       |
| Reverse non-U.S.  deferred tax valuation allowance net of restructuring charges                       |       |     |       |     |       | (5.7     | )          |
| Goodwill  impairment                                                                                  |       |     |       |     |       |     |       |
| Curtailment of  postretirement benefits in The Netherlands                                            |       |     |       |     |       | (15.9    | )          |
| Other                                                                                                 |       | 53.4     |       | (20.7    | )          | 20.7     |       |
| Change in  non-current operating assets                                                               |       | 8.7      |       | 6.4      |       | (10.1    | )          |
| Change in  non-current liabilities                                                                    |       | (88.1    | )          | (23.8    | )          | (52.1    | )          |
| Change in  components of working capital                                                              |       | (190.1   | )          | 26.2     |       | (221.7   | )          |
| Cash provided by  operating activities                                                                |       | 984.1    |       | 1,064.7  |       | 378.2    |       |
| **Investing  activities:**                                                                            |       |     |       |     |       |     |       |
| Additions to  property, plant, and equipment                                                          |       | (360.9   | )          | (290.4   | )          | (271.5   | )          |
| Advances to  equity affiliate - net                                                                   |       | (1.6     | )          |     |       |     |       |
| Collections on  accounts receivable arising from consolidation of receivables securitization  program |       |     |       |     |       | 127.3    |       |
| Net cash  proceeds from divestitures and other                                                        |       | 3.0      |       | 14.1     |       | 13.6     |       |
| Cash utilized in  investing activities                                                                |       | (359.5   | )          | (276.3   | )          | (130.6   | )          |
| **Financing  activities:**                                                                            |       |     |       |     |       |     |       |
| Additions to  long-term debt                                                                          |       | 686.4    |       | 406.4    |       | 1,206.5  |       |
| Repayments of long-term  debt                                                                         |       | (695.4   | )          | (2,092.2 | )          | (1,341.7 | )          |
| Increase  (decrease) in short-term loans                                                              |       | (20.6    | )          | (21.5    | )          | 158.9    |       |
| Net change in  intercompany debt                                                                      |       | (530.9   | )          | 1,032.8  |       | (266.9   | )          |
| Net receipts  (payments) for hedging activity                                                         |       | (45.2    | )          | 0.7      |       | (6.8     | )          |
| Payment of finance  fees                                                                              |       |     |       | (6.3     | )          | (12.3    | )          |
| Cash utilized in  financing activities                                                                |       | (605.7   | )          | (680.1   | )          | (262.3   | )          |
| Effect of  exchange rate fluctuations on cash                                                         |       | (22.9    | )          | 51.8     |       | 12.6     |       |
| Increase  (decrease) in cash                                                                          |       | (4.0     | )          | 160.1    |       | (2.1     | )          |
|                                                                                                  |       |     |       |     |       |     |       |
| Cash at  beginning of year                                                                            |       | 401.9    |       | 241.8    |       | 243.9    |       |
| Cash at end of  year                                                                                  |       | $        | 397.9      |     | $          | 401.9    |       | $ | 241.8 |   |

 

See accompanying Notes to the Consolidated FinancialStatements.

 

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**Owens-BrockwayGlass Container Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS **

 

**1.Significant Accounting Policies**

 

**Basis of Consolidated Statements**   The consolidated financial statements ofOwens-Brockway Glass Container Inc. (“Company”) include the accounts of itssubsidiaries.  Newly acquiredsubsidiaries have been included in the consolidated financial statements fromdates of acquisition.

 

TheCompany uses the equity method of accounting for investments in which it has asignificant ownership interest, generally 20% to 50%.  Other investments are accounted for at cost.The Company monitors investments for other than temporary declines in fairvalue and records reductions in carrying values when appropriate.

 

**Relationship with Owens-Brockway Packaging, Inc.,Owens-Illinois Group, Inc.****andOwens-Illinois, Inc.  **TheCompany is a wholly-owned subsidiary of Owens-Brockway Packaging, Inc. (“OBPackaging”), and an indirect subsidiary of Owens-Illinois Group, Inc. (“OI Group”)and Owens-Illinois, Inc. (“OI Inc.”). Although OI Inc. does not conduct any operations, it hassubstantial obligations related to outstanding indebtedness, dividends forpreferred stock and asbestos-related payments. OI Inc. relies primarily ondistributions from its direct and indirect subsidiaries to meet theseobligations.

 

For federal andcertain state income tax purposes, the taxable income of the Company isincluded in the consolidated tax returns of OI Inc. and income taxes areallocated to the Company on a basis consistent with separate returns.

 

**Nature of Operations**   The Company is a leading manufacturer ofglass container products. The Company’s principal product lines in the GlassContainers product segment are glass containers for the food and beverageindustries.  The Company has glasscontainer operations located in 22 countries. The principal markets andoperations for the Company’s glass products are in North America, Europe, SouthAmerica, and Australia.

 

**Use of Estimates**   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 estimatesaccordingly.

 

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

 

**Fair Values of Financial Instruments**   The carrying amounts reported for cash,short-term investments and short-term loans approximate fair value.  In addition, carrying amounts approximatefair value for certain long-term debt obligations subject to frequentlyredetermined interest rates.  Fair valuesfor the Company’s significant fixed rate debt obligations are generally basedon published market quotations.

 

**Derivative Instruments**  The Company uses currency swaps,interest rate swaps, options, and commodity futures contracts to manage risksgenerally associated with foreign exchange rate, interest rate and commoditymarket volatility.  Derivativefinancial instruments are included on the balance sheet at fair value.  Whenever possible, derivative instruments are designated as and areeffective as hedges, in accordance with accounting principles generallyaccepted in the United States.  If theunderlying hedged transaction ceases to exist, all changes in fair value of therelated derivatives that have not been settled are recognized in currentearnings.  The Company does not enterinto derivative financial instruments for trading purposes and is not a partyto leveraged derivatives. In accordance with FAS No. 104, cash flows fromfair value hedges of debt and short-term forward exchange contracts areclassified as a financing 

 

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activity. Cash flows of currency swaps, interest rate swaps, and commodity futurescontracts are classified as operating activities. See Note 9 for additionalinformation related to derivative instruments.

 

**Inventory Valuation**   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.

 

**Intangible Assets and Other Long-Lived Assets**  Intangible assets are amortized over theexpected useful life of the asset. Amortization expense directly attributed to the manufacturing of theCompany’s products is included in manufacturing, shipping, and delivery.  Amortization expense related tonon-manufacturing activities is included in selling and administrative andother. The Company evaluates the recoverability of intangible assets and otherlong-lived assets based on undiscounted projected cash flows, excludinginterest and taxes, when factors indicate that impairment may exist.  If impairment exists, the asset is writtendown to fair value.

 

**Property, Plant, and Equipment  **Property, plant, andequipment (“PP&E”) is carried at cost and includes expenditures for newfacilities and equipment and those costs which substantially increase theuseful lives or capacity of existing PP&E. In general, depreciation is computed using the straight-line method andrecorded over the estimated useful life of the asset.  Factory machinery and equipment isdepreciated over periods ranging from 5 to 25 years with the majority of suchassets (principally glass-melting furnaces and forming machines) depreciatedover 7-15 years.  Buildings and buildingequipment are depreciated 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.

 

**Revenue Recognition**  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.

 

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

 

**Income Taxes on Undistributed Earnings  **In general, the Companyplans to continue to reinvest the undistributed earnings of foreignsubsidiaries and foreign corporate joint ventures accounted for by the equitymethod.  Accordingly, taxes are providedonly on that amount of undistributed earnings in excess of plannedreinvestments.

 

**Foreign Currency Translation**   The assets and liabilities of substantiallyall subsidiaries and associates are translated at current exchange rates andany related translation adjustments are recorded directly in net Parentinvestment.

 

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**Accounts Receivable  **Receivables are stated atamounts estimated 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.

 

**Allowance for Doubtful Accounts  **The allowance for doubtfulaccounts is established 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 December 2007, the FASB issuedStatement of Financial Accounting Standards No. 141R, “BusinessCombinations” (“FAS No. 141R”).  FASNo. 141R establishes principles and requirements for how an acquirerrecognizes and measures in its financial statements the identifiable assetsacquired, the liabilities assumed, and any noncontrolling interest in theacquiree and recognizes and measures the goodwill acquired in the businesscombination or a gain from a bargain purchase. FAS No. 141R also sets forth the disclosures required to be made inthe financial statements to evaluate the nature and financial effects of thebusiness combination.  SFAS No. 141Rapplies prospectively to business combinations for which the acquisition dateis on or after the beginning of the first annual reporting period beginning onor after December 15, 2008. Accordingly, FAS No. 141R will be applied by the Company tobusiness combinations occurring on or after January 1, 2009.

 

InDecember 2007, the FASB issued Statement of Financial Accounting StandardsNo. 160, “Noncontrolling Interests in Consolidated Financial Statements,an amendment of ARB No. 51” (“FAS No. 160”).  FAS No. 160 establishes accounting andreporting standards for the non-controlling interest in a subsidiary and thedeconsolidation of a subsidiary.  FAS No. 160is effective for years beginning on or after December 15, 2008.  Adoption of FAS No. 160 is not presentlyexpected to have a material impact on the Company’s results of operations,financial position or cash flows.

 

InMarch 2008, the FASB issued Statement of Financial Accounting Standards No. 161,“Disclosures about Derivative Instruments and Hedging Activities, an amendmentof FASB Statement No. 133”**(“FASNo. 161”).  FAS No. 161 isintended to improve financial reporting about derivative instruments andhedging activities by requiring enhanced disclosures to enable investors tobetter understand their effects on an entity’s financial condition, financialperformance, and cash flows. FAS No. 161 is effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008.  Adoption of FAS No. 161 isnot presently expected to have a material impact on the Company’s results ofoperations, financial position or cash flows.

 

In December 2008,the FASB issued a FASB Staff Position on Statement of Financial AccountingStandards No. 132(R), “Employers’ Disclosures about Postretirement BenefitPlan Assets” (“FSP FAS No. 132(R)-1”). FSP FAS No. 132(R)-1 requires additional disclosures about the fairvalue of postretirement benefit plan assets to provide users of financialstatements with useful, transparent and timely information about the assetportfolios.  FSP FAS No. 132(R)-1 iseffective for years ending after December 15, 2009.  Adoption of FSP FAS No. 132(R)-1 willhave no impact on the Company’s results of operations, financial position orcash flows.

 

In February 2008, theFinancial Accounting Standards Board (FASB) issued FASB Staff Position FSP157-2, “Effective Date of FASBStatement No. 157” (FSP 157-2). FSP 157-2 delays the effective date of FAS No. 157 for allnon-financial assets and non-financial liabilities, except for items that arerecognized or disclosed at fair value in the financial statements on arecurring basis (at least annually), until the beginning of the first quarterof fiscal 2009. The adoption of FAS No. 157 is not expected to have asignificant impact on the Company’s consolidated financial statements when itis applied to non-financial 

 

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assets and non-financialliabilities that are not measured at fair value on a recurring basis, beginningin the first quarter of 2009.

 

**Participation in OI Inc. Stock OptionPlans and Other Stock Based Compensation**  The Company participates in the equitycompensation plans of OI Inc. under which employees of the Company may begranted options to purchase common shares of OI Inc., restricted common sharesof 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 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 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.

 

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 

 

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theestimated number of shares into which the restricted share unit will beconverted change, an adjustment will be recorded to recognize the accumulateddifference in amortization between the revised and previous estimates.

 

*Accounting*

 

OI Inc. adopted theprovisions of FAS No. 123R “Share-Based Payment” (FAS No. 123R) effective January 1, 2006 using themodified-prospective method of adoption, which requires recognition ofcompensation cost in the financial statements beginning on the date ofadoption.

 

Asdiscussed in Note 11, 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 thecomponents of working capital related to operations (net of the effects relatedto acquisitions and divestitures) were as follows:

 
| ** **                                   | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                         |       |     |       |     |       |     |       |
| Decrease  (increase) in current assets:      |       |     |       |     |       |     |       |
| Receivables                                  |       | $        | 73.8       |     | $          | (30.1    | )          | $ | (173.9 | ) |
| Inventories                                  |       | (77.8    | )          | 70.5     |       | (36.8    | )          |
| Prepaid expenses                             |       | (7.0     | )          | 6.8      |       | 2.4      |       |
| Increase  (decrease) in current liabilities: |       |     |       |     |       |     |       |
| Accounts payable  and accrued liabilities    |       | (166.7   | )          | (13.5    | )          | (28.1    | )          |
| Salaries and  wages                          |       | (18.8    | )          | 24.9     |       | (13.8    | )          |
| U.S. and foreign  income taxes               |       | 6.4      |       | (32.4    | )          | 28.5     |       |
|                                         |       | $        | (190.1     | )        | $          | 26.2     |       | $ | (221.7 | ) |

 

Interest paid in cash, including note repurchasepremiums in 2007 and 2006, aggregated $209.3 million for 2008, $390.3 millionfor 2007, and $380.0 million for 2006.

 

Incometaxes paid (received) in cash were as follows:

 
| ** ** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
|       |       |     |       |     |       |     |       |
| Domestic   |       | $        | (0.3       | )        | $          | 0.2      |       | $ | (0.4 | ) |
| Foreign    |       | 158.4    |       | 149.2    |       | 126.8    |       |
|       |       | $        | 158.1      |     | $          | 149.4    |       | $ | 126.4 |   |

** **

**3. Inventories**  Major classes of inventory are as follows:

 
| ** **          | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
|                |       |     |       |     |       |
| Finished goods      |       | $        | 831.7      |     | $          | 861.1 |   |
| Work in process     |       | 0.8      |       | 1.4      |       |
| Raw materials       |       | 109.8    |       | 90.5     |       |
| Operating  supplies |       | 56.8     |       | 67.3     |       |
|                |       | $        | 999.1      |     | $          | 1,020.3 |   |

 

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Ifthe inventories which are valued on the LIFO method had been valued at standardcosts, which approximate current costs, consolidated inventories would behigher than reported by $32.5 million and $29.1 million, at December 31,2008 and 2007, respectively.

 

Inventorieswhich are valued at the lower of standard costs (which approximate averagecosts), or market at December 31, 2008 and 2007 were approximately $861.4million and $872.8 million, respectively.

 

**4.  EquityInvestments **Summarizedinformation pertaining to the Company’s equity associates follows:

 
| ** **                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |
| At end of year:                    |       |     |       |     |       |
| Equity in  undistributed earnings: |       |     |       |     |       |
| Foreign                            |       | $        | 35.4       |     | $          | 22.4 |   |
| Domestic                           |       | 15.2     |       | 18.7     |       |
| Total                              |       | $        | 50.6       |     | $          | 41.1 |   |

 
| ** **           | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------|------------|----------|------------|----------|------------|----------|------------|
|                 |       |     |       |     |       |     |       |
| For the year:        |       |     |       |     |       |     |       |
| Equity in  earnings: |       |     |       |     |       |     |       |
| Foreign              |       | $        | 14.1       |     | $          | 5.3      |       | $ | 2.0 |   |
| Domestic             |       | 36.7     |       | 28.8     |       | 21.4     |       |
| Total                |       | $        | 50.8       |     | $          | 34.1     |       | $ | 23.4 |   |
| Dividends  received  |       | $        | 24.5       |     | $          | 21.7     |       | $ | 43.5 |   |

 

Summarized combinedfinancial information for equity associates is as follows:

 
| ** **                            | ** ** | **2008** | ** ** | **2007 (a)** | ** ** |
|---------------------------------------|------------|----------|------------|-------------------|------------|
|                                  |       |     |       |              |       |
| At end of year:                       |       |     |       |              |       |
| Current assets                        |       | $        | 208.3      |              | $          | 191.3 |   |
| Non-current  assets                   |       | 325.9    |       | 302.4             |       |
| Total assets                          |       | 534.2    |       | 493.7             |       |
|                                  |       |     |       |              |       |
| Current  liabilities                  |       | 167.5    |       | 117.0             |       |
| Other  liabilities and deferred items |       | 182.5    |       | 265.5             |       |
| Total  liabilities and deferred items |       | 350.0    |       | 382.5             |       |
| Net assets                            |       | $        | 184.2      |              | $          | 111.2 |   |

 
| ** **    | ** ** | **2008** | ** ** | **2007 (a)** | ** ** | **2006** | ** ** |
|---------------|------------|----------|------------|-------------------|------------|----------|------------|
| For the year: |       |     |       |              |       |     |       |
| Net sales     |       | $        | 635.8      |              | $          | 535.9    |       | $ | 564.0 |   |
| Gross profit  |       | $        | 227.5      |              | $          | 176.5    |       | $ | 132.2 |   |
| Net earnings  |       | $        | 153.9      |              | $          | 112.4    |       | $ | 69.4 |   |

 

----

(a) Amounts for 2007 exclude the Company’s Caribbean investmentdue to the impairment recorded during 2007.

 

The Company’s significant equity method investmentsinclude:  (1) 43.5% of the commonshares of Vetri Speciali SpA, a specialty glass manufacturer; (2) a 25%partnership interest in General Chemical Soda 

 

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Ash (Partners), a soda ash supplier; and (3) a50% partnership interest in Rocky Mountain Bottle Company, a glass containermanufacturer.

 

**5.  ExternalDebt**   The followingtable summarizes the external long-term debt of the Company at December 31,2008 and 2007:

 
| ** **                                               | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                     |       |     |       |     |       |
| Secured Credit  Agreement:                               |       |     |       |     |       |
| Revolving Credit  Facility:                              |       |     |       |     |       |
| Revolving Loans                                          |       | $        | 18.7       |     | $          | — |   |
| Term Loans:                                              |       |     |       |     |       |
| Term Loan A  (225.0 million AUD at Dec. 31, 2008)   |       | 155.7    |       | 198.1    |       |
| Term Loan B                                              |       | 191.5    |       | 191.5    |       |
| Term Loan C  (110.8 million CAD at Dec. 31, 2008)   |       | 90.9     |       | 113.2    |       |
| Term Loan D  (€191.5 million at Dec. 31, 2008) |       | 269.6    |       | 281.8    |       |
| Senior Notes:                                            |       |     |       |     |       |
| 8.25%, due 2013                                          |       | 461.1    |       | 450.3    |       |
| 6.75%, due 2014                                          |       | 400.0    |       | 400.0    |       |
| 6.75%, due 2014  (€225 million)                     |       | 316.8    |       | 331.1    |       |
| 6.875%, due 2017  (€300 million)                    |       | 422.4    |       | 441.5    |       |
| Other                                                    |       | 104.6    |       | 101.8    |       |
|                                                     |       | 2,431.3  |       | 2,509.3  |       |
| Less amounts due  within one year                        |       | 18.2     |       | 15.2     |       |
| External  long-term debt                                 |       | $        | 2,413.1    |     | $          | 2,494.1 |   |

 

On June 14, 2006, the Company’s subsidiaryborrowers entered into the Secured Credit Agreement (the “Agreement”).  At December 31, 2008, the Agreementincluded a $900.0 million revolving credit facility, a 225.0 million Australiandollar term loan, and a 110.8 million Canadian dollar term loan, each of whichhas a final maturity date of June 15, 2012.  It also included a $191.5 million term loanand a €191.5 million term loan, each of which has a final maturity date of June 14,2013.

 

As a result of the bankruptcy of Lehman BrothersHoldings Inc. and several of its subsidiaries, the Company believes that themaximum amount available under the revolving credit facility was reduced by$32.3 million.  After further deductingamounts attributable to letters of credit and overdraft facilities that aresupported by the revolving credit facility, at December 31, 2008 theCompany’s subsidiary borrowers had unused credit of $768.4 million availableunder the Agreement.

 

The Agreement contains various covenants thatrestrict, among other things and subject to certain exceptions, the ability ofthe Company to incur certain liens, make certain investments and acquisitions,become liable under contingent obligations in certain defined instances only,make restricted junior payments, make certain asset sales within guidelines andlimits, make capital expenditures beyond a certain threshold, engage inmaterial transactions with shareholders and affiliates, participate in sale andleaseback financing arrangements, alter its fundamental business, amend certainoutstanding debt obligations, and prepay certain outstanding debt obligations.

 

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The Agreement also contains one financial maintenancecovenant, a Leverage Ratio, that requires the Company not to exceed a ratiocalculated by dividing consolidated total debt, less cash and cash equivalents,by Consolidated Adjusted EBITDA, as defined in the Agreement.  The Leverage Ratio could restrict the abilityof the Company to undertake additional financing to the extent that suchfinancing would cause the Leverage Ratio to exceed the specified maximum.

 

Failure to comply with these covenants andrestrictions could result in an event of default under the Agreement.  In such an event, the Company could notrequest borrowings under the revolving facility, and all amounts outstandingunder the Agreement, together with accrued interest, could then be declaredimmediately due and payable.  If an eventof default occurs under the Agreement and the lenders cause all of the outstandingdebt obligations under the Agreement to become due and payable, this wouldresult in a default under a number of other outstanding debt securities andcould lead to an acceleration of obligations related to these debtsecurities.  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 Ratio also determines pricing under theAgreement.  The interest rate onborrowings under the Agreement is, at the Company’s option, the Base Rate orthe Eurocurrency Rate, as defined in the Agreement.  These rates include a margin linked to the LeverageRatio 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, 2008 was 4.07%.  As ofDecember 31, 2008, the Company was in compliance with all covenants andrestrictions in the Agreement.  Inaddition, the Company believes that it will remain in compliance and that itsability to borrow funds under the Agreement will not be adversely affected bythe covenants and restrictions.

 

Borrowings under the Agreement are secured bysubstantially all of the assets of the Company’s domestic subsidiaries andcertain foreign subsidiaries, which have a book value of approximately $2.0billion.  Borrowings are also secured bya pledge of intercompany debt and equity in most of the Company’s domesticsubsidiaries 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.

 

DuringMarch 2007, a subsidiary of the Company issued Senior Notes totaling €300.0million.  The notes bear interest at6.875% and are due March 31, 2017.  Thenotes are guaranteed by substantially all of the Company’s domesticsubsidiaries.  The proceeds were used toretire the $300 million principal amount of OI Inc.’s 8.10% Senior Notes whichmatured in May 2007, and to reduce borrowings under the revolving creditfacility.

 

OnJuly 31, 2007, the OI Inc. completed the sale of its plastics packagingbusiness to Rexam PLC for approximately $1.825 billion in cash.  In accordance with an amendment of theAgreement that became effective upon completion of the sale of the plasticsbusiness, the Company was required to use the net proceeds (as defined in theAgreement) to repay senior secured debt. In addition, the amendment provides for modification of certaincovenants, including the elimination of the financial covenant requiring theCompany to maintain a specified interest coverage ratio.  OI Inc. used a portion of the net proceeds inthe third quarter of 2007 to redeem all $450.0 million of the 7.75% SeniorSecured Notes and repurchase $283.1 million of the 8.875% Senior SecuredNotes.  The remaining $566.9 million ofthe 8.875% Senior Secured Notes were repurchased or discharged in accordancewith the indenture in October 2007. The remaining net proceeds, along withfunds from operations and/or additional borrowings under the revolving creditfacility, were used to redeem all $625.0 million of the 8.75%

 

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Senior Secured Notes on November 15, 2007.  TheCompany recorded $9.5 million of additional interest charges for noterepurchase premiums and the related write-off of unamortized finance fees.

 

During October 2006, the Company entered into a€300 million Europeanaccounts receivable securitization program. The program extends through October 2011, subject to annual renewal ofbackup credit lines.  In addition, theCompany participates in a receivables financing program in the Asia Pacificregion with a revolving funding commitment of 100 million Australian dollarsand 25 million New Zealand dollars that extends through July 2009 and October2009, respectively.  Informationrelated to the Company’s accounts receivable securitization program is asfollows:

 
| ** **                              | ** ** | **Dec. 31,  2008** | ** ** | **Dec. 31,  2007** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|-------------------------|------------|
|                                    |       |                    |       |                    |       |
| Balance  (included in short-term loans) |       | $                       | 293.7      |                    | $          | 361.8 |   |
|                                    |       |                    |       |                    |       |
| Weighted average  interest rate         |       | 5.31                    | %          | 5.48                    | %          |
|                                         |            |                         |            |                         |            |  |  |

 

The Company capitalized $25.6 million and $27.0million in 2008 and 2007, respectively, under capital lease obligations withthe related financing recorded as long term debt.  These amounts are included in other in thelong-term debt table above.

 

Annual maturities for all of the Company’s long-termdebt through 2013 are as follows:  2009,$18.2 million; 2010, $19.0 million; 2011, $159.0 million; 2012, $152.4 million;and 2013, $930.7 million.

 

Fairvalues at December 31, 2008, of the Company’s significant fixed rate debtobligations were as follows:

 
| ** **                            | ** ** | **Principal Amount  (millions of  dollars)** | ** ** | **Indicated  Market  Price** | ** ** | **Fair Value  (millions of  dollars)** | ** ** | **Hedge Value  (millions of  dollars)** | ** ** |
|---------------------------------------|------------|--------------------------------------------------------|------------|------------------------------|------------|---------------------------------------------|------------|---------------------------------------------------|------------|
| Senior Notes:                         |       |                                                   |       |                         |       |                                        |       |                                              |       |
| 8.25%, due 2013                       |       | $                                                      | 450.0      |                         | 96.00      |                                        | $          | 432.0                                             |       | $ | 461.1 |   |
| 6.75%, due 2014                       |       | 400.0                                                  |       | 92.75                        |       | 371.0                                       |       |                                              |       |
| 6.75%, due 2014  (€225 million)  |       | 316.8                                                  |       | 77.63                        |       | 245.9                                       |       |                                              |       |
| 6.875%, due 2017  (€300 million) |       | 422.4                                                  |       | 74.13                        |       | 313.1                                       |       |                                              |       |
|                                       |            |                                                        |            |                              |            |                                             |            |                                                   |            |  |  |  |

 

**6. Operating Leases**Rent expense attributable to all warehouse, office buildings, and equipmentoperating leases was $95.4 million in 2008, $87.4 million in 2007, and $75.7million in 2006. Minimum future rentals under operating leases are as follows: 2009,$45.5 million; 2010, $34.4 million; 2011, $22.6 million; 2012, $14.6 million;2013, $7.4 million; and 2014 and thereafter, $7.4 million.

 

**7. Foreign Currency Transactions**Aggregate foreign currency exchange gains (losses) included in other costs andexpenses were $0.6 million in 2008, $(8.1) million in 2007, and $(1.0) millionin 2006.

 

**8. Derivative Instruments**AtDecember 31, 2008, the Company had the following derivative instruments relatedto its various hedging programs:

 

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*InterestRate Swaps Designated as Fair Value Hedges*

* *

In the fourth quarter of2003 and the first quarter of 2004, the Company entered into a series ofinterest rate swap agreements with a current total notional amount of $500 millionthat mature in 2010 and 2013. The swaps were executed in order to:(i) convert a portion of the senior notes and senior debentures fixed-ratedebt into floating-rate debt; (ii) maintain a capital structure containingappropriate amounts of fixed and floating-rate debt; and (iii) reduce netinterest payments and expense in the near-term.

 

The Company’sfixed-to-variable interest rate swaps are accounted for as fair value hedges. Becausethe relevant terms of the swap agreements match the corresponding terms of thenotes, there is no hedge ineffectiveness. Accordingly, the Company recorded thenet 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.

 

Under the swaps, theCompany receives fixed rate interest amounts (equal to interest on thecorresponding hedged note) and pays interest at a six-month U.S. LIBOR rate(set in arrears) plus a margin spread (see table below). The interest ratedifferential on each swap is recognized as an adjustment of interest expenseduring each six-month period over the term of the agreement.

 

The following selectedinformation relates to fair value swaps at December 31, 2008:

 
|                                                                     | ** ** | **Amount********Hedged** | ** ** | **Average****Receive********Rate** | ** ** | **Average********Spread** | ** ** | **Asset****(Liability)********Recorded** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------|------------|------------------------------------|------------|---------------------------|------------|------------------------------------------|------------|
| OI Inc. public notes swapped by the company  through intercompany loans: |       |                     |       |                               |       |                      |       |                                     |       |
| Senior Debentures due 2010                                               |       | 250.0                    |       | 7.50                               | %          | 3.2                       | %          | 9.4                                      |       |
| Notes issued by OBGC:                                                    |       |                     |       |                               |       |                      |       |                                     |       |
| Senior Notes due 2013                                                    |       | 250.0                    |       | 8.25                               | %          | 3.7                       | %          | 11.1                                     |       |
| Total                                                                    |       | $                        | 500.0      |                               |       |                      |       |                                     | $          | 20.5 |   |
|                                                                          |            |                          |            |                                    |            |                           |            |                                          |            |  |  |

 

*Commodity Hedges*

 

The Company enters into commodity futures contractsrelated to forecasted natural gas requirements, the objectives of which are tolimit the effects of fluctuations in the future market price paid for naturalgas and the related volatility in cash flows. 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, 2008, the Company had entered into commodityfutures contracts for approximately 50% (approximately 10,200,000 MM BTUs) ofits estimated North American usage requirements for the full year of 2009 andapproximately 1% (approximately 240,000 MM BTUs) for the full year of 2010.

 

The Company accounts for the above futurescontracts on the balance sheet at fair value. The effective portion of changesin the fair value of a derivative that is designated as, and meets the requiredcriteria 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. Any material portion of the change in the fair value ofa 

 

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derivative designated as a cash flow hedge that isdeemed to be ineffective is recognized in current earnings.

 

The above futures contracts are accounted for ascash flow hedges at December 31, 2008.

 

At December 31, 2008, an unrecognized loss of $31.8million (pretax and after tax), related to the domestic commodity futurescontracts, was included in OCI, which will be reclassified into earnings overthe next twelve months. The ineffectiveness related to these natural gas hedgesfor the year ended December 31, 2008 was not material.

 

*Other Hedges*

* *

TheCompany’s subsidiaries may enter into short-term forward exchange or optionagreements to purchase foreign currencies at set rates in the future. Theseagreements are used to limit exposure to fluctuations in foreign currencyexchange rates for significant planned purchases of fixed assets or commoditiesthat are denominated in currencies other than the subsidiaries’ functionalcurrency. Subsidiaries may also use forward exchange agreements to offset theforeign currency risk for receivables and payables not denominated in, orindexed to, their functional currencies. The Company records these short-termforward exchange agreements on the balance sheet at fair value and changes inthe fair value are recognized in current earnings.

 

*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 if theinstrument 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 the instrumenthas a negative fair value and maturity after one year.

 

**9. Accumulated Other Comprehensive Income (Loss)**Thecomponents of comprehensive income are: (a) net earnings; (b) change in fairvalue of certain derivative instruments; (c) pension and other postretirementbenefit adjustments; and (d) foreign currency translation adjustments. The neteffect of 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.

 

Thefollowing table lists the beginning balance, yearly activity and ending balanceof each component of accumulated other comprehensive income (loss): 

 

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|                      |   | **Net Effect of  Exchange Rate  Fluctuations** | ** ** | **Deferred Tax  Effect for  Translation** | ** ** | **Change in  Minimum  Pension  Liability** | ** ** | **Change in  Certain  Derivative  Instruments** | ** ** | **Employee  Benefit  Plans** | ** ** | **Total  Accumulated  Comprehensive  Income (Loss)** |   |
|---------------------------|--------|---------------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------|------------|-----------------------------------------------------------|--------|
| Balance on Jan.  1, 2006  |   | $                                                             | (97.0      | )                                                   | $          | 12.8                                            |       | $                                                    | (145.5     | )                            | $          | 14.4                                                      |   | $ | — |   | $ | (215.3 | ) |
| 2006 Change               |   | 284.9                                                         |       |                                                |       | 55.0                                            |       | (49.3                                                | )          | (71.0                        | )          | 219.6                                                     |   |
| Translation  effect       |   |                                                          |       |                                                |       | (17.6                                           | )          |                                                 |       |                         |       | (17.6                                                     | )      |
| Tax effect                |   |                                                          |       |                                                |       | (14.8                                           | )          |                                                 |       | 23.6                         |       | 8.8                                                       |   |
| Balance  on Dec. 31, 2006 |   | 187.9                                                         |       | 12.8                                                |       | (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 |   | 493.2                                                         |       | 12.8                                                |       | —                                          |       | (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 |   | $                                                             | 61.3       |                                                | $          | 12.8                                            |       | $                                                    | —     |                         | $          | (37.4                                                     | )      | $ | (245.9 | ) | $ | (209.2 | ) |

 

For2008 and 2007, respectively, foreign currency translation adjustments include aloss of approximately $19.9 million and $35.1 million related to a hedge of theCompany’s net investment in a non-U.S. subsidiary.

 

**10. Income Taxes**Deferred incometaxes reflect: (1) the net tax effects of temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes and (2) carryovers and credits forincome tax purposes. Significant components of the Company’s deferred taxassets and liabilities at December 31, 2008 and 2007 are as follows:

 
| ** **                              | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
|                                    |       |     |       |     |       |
| Deferred tax  assets:                   |       |     |       |     |       |
| Tax loss  carryovers                    |       | $        | 233.5      |     | $          | 242.1 |   |
| Capital loss  carryovers                |       | 23.7     |       | 32.7     |       |
| Accrued  postretirement benefits        |       | 20.2     |       | 24.4     |       |
| Other,  principally accrued liabilities |       | 190.0    |       | 195.5    |       |
| Total deferred  tax assets              |       | 467.4    |       | 494.7    |       |
|                                    |       |     |       |     |       |
| Deferred tax  liabilities:              |       |     |       |     |       |
| Property, plant  and equipment          |       | 143.9    |       | 221.8    |       |
| Inventory                               |       | 13.4     |       | 20.0     |       |
| Other                                   |       | 46.1     |       | 49.7     |       |
|                                    |       |     |       |     |       |
| Total deferred  tax liabilities         |       | 203.4    |       | 291.5    |       |
| Valuation  allowance                    |       | (255.4   | )          | (213.9   | )          |
| Net deferred tax  liabilities           |       | $        | 8.6        |     | $          | (10.7 | ) |

 

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Deferred taxes are included in the ConsolidatedBalance Sheets at December 31, 2008 and 2007 as follows:

 
| ** **                               | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
|                                     |       |     |       |     |       |
| Prepaid expenses                         |       | $        | 24.8       |     | $          | 11.8 |   |
| Deposits,  receivables, and other assets |       | 101.3    |       | 124.7    |       |
| Deferred taxes                           |       | (117.5   | )          | (147.2   | )          |
|                                     |       |     |       |     |       |
| Net deferred tax  liabilities            |       | $        | 8.6        |     | $          | (10.7 | ) |

 

Theprovision for income taxes consists of the following:

 
| ** **   | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------|------------|----------|------------|----------|------------|----------|------------|
| Current:     |       |     |       |     |       |     |       |
| U.S. Federal |       | $        | (0.4       | )        | $          | —   |       | $ | — |   |
| State        |       | 0.6      |       | 0.4      |       | 0.3      |       |
| Foreign      |       | 213.0    |       | 144.3    |       | 113.1    |       |
|         |       | 213.2    |       | 144.7    |       | 113.4    |       |
| Deferred:    |       |     |       |     |       |     |       |
| U.S. Federal |       | 4.0      |       | 0.3      |       | 12.9     |       |
| State        |       | (3.2     | )          | (4.0     | )          | (3.6     | )          |
| Foreign      |       | 9.8      |       | (1.9     | )          | 16.1     |       |
|         |       | 10.6     |       | (5.6     | )          | 25.4     |       |
| Total:       |       |     |       |     |       |     |       |
| U.S. Federal |       | 3.6      |       | 0.3      |       | 12.9     |       |
| State        |       | (2.6     | )          | (3.6     | )          | (3.3     | )          |
| Foreign      |       | 222.8    |       | 142.4    |       | 129.2    |       |
|         |       | $        | 223.8      |     | $          | 139.1    |       | $ | 138.8 |   |

 

Theprovision for income taxes was calculated based on the following components ofearnings (loss) before income taxes:

 
| ** ** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Domestic   |       | $        | 191.2      |     | $          | 37.4     |       | $ | (119.1 | ) |
| Foreign    |       | 698.9    |       | 687.3    |       | 452.6    |       |
|       |       | $        | 890.1      |     | $          | 724.7    |       | $ | 333.5 |   |

 

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A reconciliation of the provision for income taxesbased on the statutory U.S. Federal tax rate of 35% to the provision for incometaxes is as follows:

 
| ** **                                                                                                        | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Tax provision  (benefit) on pretax earnings (loss) from continuing operations at statutory  U.S. Federal tax rate |       | $        | 311.5      |     | $          | 253.7    |       | $ | 116.7 |   |
| Increase  (decrease) in provision for income taxes due to:                                                        |       |     |       |     |       |     |       |
|                                                                                                              |       |     |       |     |       |     |       |
| Valuation  allowance - U.S.                                                                                       |       | (53.7    | )          | (538.3   | )          | 46.5     |       |
| Foreign subsidiary  ownership restructuring and incentives                                                        |       | 35.1     |       | 535.9    |       | 30.8     |       |
| Foreign source  income taxable in the U.S.                                                                        |       | 11.3     |       | 29.3     |       | 1.8      |       |
| Reversal of  non-U.S. tax valuation allowance                                                                     |       | —   |       | (13.4    | )          | (34.7    | )          |
| Foreign tax  credit utilization                                                                                   |       | —   |       | (47.9    | )          |     |       |
| State taxes, net  of federal benefit                                                                              |       | (1.3     | )          | (4.8     | )          | (0.3     | )          |
| Rate differences  on non-U.S. earnings                                                                            |       | (55.3    | )          | (65.8    | )          | (22.1    | )          |
| Adjustment for  non-U.S. tax law changes                                                                          |       | (20.1    | )          | (9.9     | )          | (1.6     | )          |
| Other items                                                                                                       |       | (3.7     | )          | 0.3      |       | 1.7      |       |
|                                                                                                              |       |     |       |     |       |     |       |
| Provision for  income taxes                                                                                       |       | $        | 223.8      |     | $          | 139.1    |       | $ | 138.8 |   |

 

In 2007 the Company implemented aplan to restructure the ownership and intercompany obligations of certainforeign subsidiaries. These actions resulted in taxation of a significantportion of previously unremitted foreign earnings and will transfer a portionof the Company’s debt service obligations to operations outside the U.S. inorder to better balance operating cash flows with financing costs on a globalbasis. 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 and 2015.

 

TheCompany is included in OI Inc.’s consolidated tax returns. OI Inc. has netoperating losses, capital losses, alternative minimum tax credits, and researchand development credits available to offset future U.S. Federal income tax.

 

AtDecember 31, 2008, the Company’s equity in the undistributed earnings offoreign subsidiaries for which income taxes had not been provided approximated$1,583.2 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.

 

The Company adopted FASB Interpretation 48, “Accounting forUncertainty in Income Taxes,” (“FIN 48”) as of January 1, 2007. Thisinterpretation was issued to clarify the accounting for uncertainty in incometaxes recognized in an enterprise’s financial statements in accordance with FASNo. 109, “Accounting for Income Taxes.” FIN 48 defines criteria that a taxposition must meet for any part of the benefit of that position to berecognized in an enterprise’s financial statements and also includesrequirements for measuring the amount of the benefit to be recognized in thefinancial statements.

 

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As a result of the adoption of FIN 48,the Company recognized no adjustment to retained earnings for unrecognizedincome tax benefits. 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 income tax benefits. This balance sheet reclassification had noeffect on share owners’ equity. In connection with the adoption of FIN 48, the Company is maintainingits historical method of accruing interest and penalties associated withunrecognized income tax benefits as a component of its income tax expense.

 

The following is a reconciliation of the Company’s total grossunrecognized tax benefits for the year ended December 31, 2008:

 
| ** **                                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Balance at  January 1                                                 |       | $        | 53.0       |     | $          | 45.8 |   |
| Additions for  tax positions of prior years                           |       | 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         |       | 6.1      |       | 11.0     |       |
| Reductions due  to the lapse of the applicable statute of limitations |       | (3.1     | )          | (1.4     | )          |
| Reductions due  to settlements                                        |       | (2.0     | )          | —   |       |
| Balance at  December 31                                               |       | $        | 103.1      |     | $          | 53.0 |   |

 

At December 31, 2008 and December 31, 2007, accrued interestand penalties related to unrecognized tax benefits were $14.5 million and$3.9 million, respectively. Tax expense for the year endedDecember 31, 2008 includes interest and penalties of $5.4 million onunrecognized tax benefits for prior years.

 

The unrecognized tax benefit liability, including interestand penalties, as of December 31, 2008 and December 31, 2007 was $117.6 millionand $56.9 million respectively. Approximately $72.7 million and $41.1 millionas of December 31, 2008 and December 31, 2007, respectively, relate tounrecognized tax benefits, which if recognized, would impact the Company’seffective income tax rate. This amount differs from the gross unrecognized taxbenefits presented in the table above because of the unrecognized tax benefitsthat would result in the utilization of certain tax attribute carryforwardsthat are currently subject to a full valuation allowance due to uncertaintiesabout 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 yearsthrough 1999 have been settled with the U.S. Internal Revenue Service and thereis no current IRS examination in progress. 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 the earliest open year for the Company’s othermajor tax jurisdictions.

 

The Company does not anticipate a significant change in the totalamount of unrecognized income tax benefits within the next twelve months.

 

**11. Related Party Transactions**Chargesfor administrative services are allocated to the Company by OI Inc. based on anannual utilization level. Such services include compensation and benefitsadministration, payroll processing, use of certain general accounting systems,auditing, income tax planning and compliance, and treasury services. Beginning in 2008, the Company revised itsmethod of allocating corporate expenses. The Company decreased slightly thepercentage allocation based on sales and significantly expanded the number offunctions included in the allocation based on cost of services.

 

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Allocated costs also include charges associated withOI Inc.’s equity compensation plans. A substantial number of the options,restricted shares and restricted share units granted under these plans havebeen granted to key employees of another subsidiary of OI Inc., some of whosecompensation costs, including stock-based compensation, are included in anallocation of costs to all operating subsidiaries of OI Inc., including theCompany.

 

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,** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                  | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                        |       |                                        |       |   |   |   |   |
| Revenues:                                                                   |       |                                        |       |   |   |   |   |
| Sales to  affiliated companies                                              |       | $                                           | —     |   | $ | 0.3 |   | $ | 0.5 |   |
|                                                                        |       |                                        |       |   |   |   |   |
| Expenses:                                                                   |       |                                        |       |   |   |   |   |
| Administrative  services                                                    |       | 15.0                                        |       | 19.5 |   | 25.5 |   |
| Corporate  management fee                                                   |       | 60.9                                        |       | 29.1 |   | 27.1 |   |
| Trademark  royalties                                                        |       | 19.9                                        |       |   |   |   |   |
| Total expenses                                                              |       | $                                           | 95.8       |   | $ | 48.6 |   | $ | 52.6 |   |
| ** **                                                                  | ** ** | ** **                                  |       |
| The above expenses are  recorded in the statement of operations as follows: |       |
| ** **                                                                  | ** ** | **Years ended December 31,** |       |
| ** **                                                                  | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Cost of sales                                                               |       | $                                           | 0.9        |   | $ | 16.9 |   | $ | 22.6 |   |
| Selling,  general, and adminstrative expensesX                              |       | 94.9                                        |       | 31.7 |   | 30.0 |   |
| Total expenses                                                              |       | $                                           | 95.8       |   | $ | 48.6 |   | $ | 52.6 |   |
|                                                                             |            |                                             |            |  |  |  |  |  |  |  |  |  |  |

 

Intercompanyinterest is charged to the Company from OI Inc. based on intercompany debtbalances. An interest rate is calculated monthly based on OI Inc.’s totalconsolidated monthly external debt balance and the related interest expense,including finance fee amortization and commitment fees. The calculated rate(6.3% at December 31, 2008) is applied monthly to the intercompany debtbalance to determine intercompany interest expense.

 

**12. PensionBenefit Plans and Other Postretirement Benefits**

 

*PensionBenefit Plans*

 

The Company participatesin OI Inc.’s defined benefit pension plans for substantially all employeeslocated in the United States. Benefits generally are based on compensation forsalaried employees and on length of service 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 pensioncosts for each subsidiary of OI Inc. included in the plans; however,accumulated benefit obligation information and plan assets pertaining to eachsubsidiary have not been separately determined. 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. Netcredits to results of operations for the

 

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Company’s allocatedportion of the domestic pension costs amounted to $39.9 million in 2008, $23.0million in 2007, and $7.7 million in 2006.

 

OI Inc. also sponsorsseveral defined contribution plans for all salaried and hourly U.S. employeesof the Company. Participation is voluntary and participants’ contributions arebased on their compensation. OI Inc. matches contributions of participants, upto various limits, in substantially all plans. OI Inc. charges the Company forits share of the match. The Company’s share of the contributions to these plansamounted to $6.0 million in 2008, $5.7 million in 2007, and $5.5 million in2006.

 

The Company’ssubsidiaries in the United Kingdom, the Netherlands, Canada, Australia, andmany employees of Germany and France also have pension plans coveringsubstantially all employees. The following tables relate to the Company’sprincipal defined benefit pension plans in the United Kingdom, the Netherlands,Canada, Australia, Germany and France (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:

 
| ** **                                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Obligations at  beginning of year                                 |       | $        | 1,617.1    |     | $          | 1,544.4 |   |
|                                                              |       |     |       |     |       |
| Change in  benefit obligations:                                   |       |     |       |     |       |
| Service cost                                                      |       | 22.0     |       | 25.0     |       |
| Interest cost                                                     |       | 82.9     |       | 78.8     |       |
| Actuarial gain,  including the effect of change in discount rates |       | (52.7    | )          | (92.1    | )          |
| Participant  contributions                                        |       | 8.8      |       | 10.0     |       |
| Benefit payments                                                  |       | (89.4    | )          | (85.5    | )          |
| Plan amendments                                                   |       |     |       | (3.5     | )          |
| Curtailments                                                      |       | (9.5     | )          | (2.6     | )          |
| Special  termination benefits                                     |       | 4.4      |       |     |       |
| Foreign currency  translation                                     |       | (284.2   | )          | 136.4    |       |
| Other                                                             |       |     |       | 6.2      |       |
| Net change in  benefit obligations                                |       | (317.7   | )          | 72.7     |       |
| Obligations at  end of year                                       |       | $        | 1,299.4    |     | $          | 1,617.1 |   |

 

The changes in the fairvalue of the International Pension Plans’ assets for the year were as follows:

 

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| ** **                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
| Fair value at  beginning of year    |       | $        | 1,376.8    |     | $          | 1,253.3 |   |
|                                |       |     |       |     |       |
| Change in fair  value:              |       |     |       |     |       |
| Actual gain  (loss) on plan assets  |       | (220.6   | )          | 24.4     |       |
| Benefit payments                    |       | (89.4    | )          | (85.5    | )          |
| Employer  contributions             |       | 60.1     |       | 59.6     |       |
| Participant  contributions          |       | 8.8      |       | 10.0     |       |
| Foreign currency  translation       |       | (213.7   | )          | 115.0    |       |
| Net change in  fair value of assets |       | (454.8   | )          | 123.5    |       |
| Fair value at  end of year          |       | $        | 922.0      |     | $          | 1,376.8 |   |

 

The funded status of theInternational Pension Plans at year end was as follows:

 
| ** **                                           | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
| Plan assets at  fair value                           |       | $        | 922.0      |     | $          | 1,376.8 |   |
| Projected  benefit obligations                       |       | 1,299.4  |       | 1,617.1  |       |
| Plan assets less  than projected benefit obligations |       | (377.4   | )          | (240.3   | )          |
| Items not yet  recognized in pension expense:        |       |     |       |     |       |
| Actuarial loss                                       |       | 362.9    |       | 212.0    |       |
| Prior service  credit                                |       | (15.1    | )          | (14.7    | )          |
|                                                 |       | 347.8    |       | 197.3    |       |
| Net amount  recognized                               |       | $        | (29.6      | )        | $          | (43.0 | ) |

 

The net amount recognizedis included in the Consolidated Balance Sheets at December 31, 2008 and2007 as follows:

 
| ** **                                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Prepaid pension                                                     |       | $        | —     |     | $          | 58.1 |   |
| Current pension  liability, included with Other accrued liabilities |       | (7.2     | )          | (8.5     | )          |
| Noncurrent  pension liability, included with Pension benefits       |       | (370.2   | )          | (289.9   | )          |
| Accumulated  other comprehensive income                             |       | 347.8    |       | 197.3    |       |
| Net amount  recognized                                              |       | $        | (29.6      | )        | $          | (43.0 | ) |

 

The following changes inplan assets and benefit obligations were recognized in accumulated othercomprehensive income at December 31, 2008 as follows:

 

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| ** **                            | ** ** | **Pretax** | ** ** | **Tax  Effect** | ** ** | **After-tax** |   |
|---------------------------------------|------------|------------|------------|-----------------|------------|---------------|--------|
| Current year  actuarial (gain) loss   |       | $          | 226.7      |            | $          | (62.2         | )      | $ | 164.5 |   |
| Amortization of  actuarial loss       |       | (5.2       | )          | 1.1             |       | (4.1          | )      |
| Amortization of  prior service credit |       | 0.6        |       | (0.1            | )          | 0.5           |   |
| Curtailment                           |       | (8.5       | )          | 2.4             |       | (6.1          | )      |
|                                  |       | 213.6      |       | (58.8           | )          | 154.8         |   |
| Translation                           |       |       |       |            |       | (44.9         | )      |
|                                  |       | $          | 213.6      |            | $          | (58.8         | )      | $ | 109.9 |   |

 

The accumulated benefitobligation for all defined benefit pension plans was $1,463.8 million and$1,129.5 million at December 31, 2007 and 2008, respectively.

 

The components of theInternational Pension Plans’ net pension expense were as follows:

 
| ** **                   | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Service cost                 |       | $        | 21.9       |     | $          | 25.0     |       | $ | 28.1 |   |
| Interest cost                |       | 82.9     |       | 78.8     |       | 69.1     |       |
| Expected asset  return       |       | (96.5    | )          | (94.5    | )          | (81.5    | )          |
| Curtailment loss             |       | 0.1      |       | 0.1      |       |     |       |
| Special  termination benefit |       | 4.4      |       |     |       |     |       |
| Other                        |       | (1.1     | )          | 5.2      |       |     |       |
|                         |       |     |       |     |       |     |       |
| Amortization:                |       |     |       |     |       |     |       |
| Prior service  cost (credit) |       | (0.6     | )          | (0.1     | )          | 0.2      |       |
| Loss                         |       | 5.2      |       | 11.4     |       | 15.8     |       |
| Net amortization             |       | 4.6      |       | 11.3     |       | 16.0     |       |
| Net expense                  |       | $        | 16.3       |     | $          | 25.9     |       | $ | 31.7 |   |

 

Amounts that will beamortized from accumulated other comprehensive income into net pension expenseduring 2009:

 
| Amortization:         |   |   |   |
|-----------------------|--------|--------|--------|
| Loss                  |   | $      | 5.2    |   |
| Prior service  credit |   | (0.8   | )      |
| Net amortization      |   | $      | 4.4    |   |

 

The following informationis for plans with projected benefit obligations in excess of the fair value ofplan assets at year end:

 

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|                           |   | **2008** | ** ** | **2007** |   |
|--------------------------------|--------|----------|------------|----------|--------|
| Projected  benefit obligations |   | $        | 1,299.4    |     | $      | 1,114.6 |   |
| Fair value of  plan assets     |   | 922.0    |       | 816.1    |   |
|                                |        |          |            |          |        |  |  |

 

The following informationis for plans with accumulated benefit obligations in excess of the fair valueof plan assets at year end:

 
| ** **                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Accumulated  benefit obligations |       | $        | 1,129.5    |     | $          | 1,008.3 |   |
| Fair value of  plan assets       |       | 922.0    |       | 816.1    |       |
|                                  |            |          |            |          |            |  |  |

 

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

 
|                           |   | **2008** | ** ** | **2007** |   |
|--------------------------------|--------|----------|------------|----------|--------|
| Discount rate                  |   | 5.88     | %          | 5.46     | %      |
| Rate of  compensation increase |   | 2.65     | %          | 3.39     | %      |

 

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

 
| ** **                                   | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Discount rate                                |       | 5.46     | %          | 4.92     | %          | 4.57     | %          |
| Rate of  compensation increase               |       | 3.39     | %          | 3.34     | %          | 3.78     | %          |
| Expected  long-term rate of return on assets |       | 6.96     | %          | 7.16     | %          | 7.15     | %          |

 

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 2008, the Company’sweighted average expected long-term rate of return on assets was 6.96%. 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, 2007), whichwas in line with the expected long-term rate of return assumption for 2008.

 

The weighted averageactual asset allocations and weighted average target allocation ranges by assetcategory for the Company’s pension plan assets were as follows:

 

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| ** **              | ** ** | **Actual Allocation** | ** ** | **Target  Allocation** | ** ** |
|-------------------------|------------|----------------------------|------------|------------------------|------------|
| **Asset Category** | ** ** | **2008**                   | ** ** | **2007**               | ** ** | **Ranges** | ** ** |
| Equity securites        |       | 31                         | %          | 63                     | %          | 28-38% |   |
| Debt securities         |       | 56                         | %          | 28                     | %          | 44-54% |   |
| Real estate             |       | 5                          | %          | 5                      | %          | 0-10% |   |
| Other                   |       | 8                          | %          | 4                      | %          | 8-18% |   |
| Total                   |       | 100                        | %          | 100                    | %          |   |   |

 

It is the Company’spolicy to invest pension plan assets in a diversified portfolio consisting ofan array of asset classes within the above target asset allocation ranges. Theinvestment risk of the assets is limited by appropriate diversification bothwithin and between asset classes. The assets are primarily invested in a broadmix of domestic and international equities, domestic and international bonds,and real estate, subject to the target asset allocation ranges. The assets aremanaged with a view to ensuring that sufficient liquidity will be available tomeet expected cash flow requirements.

 

Based on exchange ratesat the end of 2008, the Company expects to contribute approximately $70 millionto $75 million to its defined benefit pension plans in 2009.

 

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

 
| **Year(s)** | ** ** | **Amount** | ** ** |
|-------------|------------|------------|------------|
| 2009        |       |       | 97.0       |   |
| 2010        |       |       | 70.0       |   |
| 2011        |       |       | 70.0       |   |
| 2012        |       |       | 74.0       |   |
| 2013        |       |       | 76.9       |   |
| 2014 - 2018 |       |       | 400.2      |   |

 

*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 net periodicpostretirement benefit cost, as allocated by OI Inc., for domestic employeeswas $5.8 million, $8.1 million, and $14.7 million, at December 31, 2008,2007, and 2006, 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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The changes in the InternationalPostretirement Benefit Plans obligations were as follows: 

 
| ** **                                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Obligations at  beginning of year                                       |       | $        | 95.0       |     | $          | 76.9 |   |
|                                                                    |       |     |       |     |       |
| Change in  benefit obligations:                                         |       |     |       |     |       |
| Service cost                                                            |       | 1.2      |       | 1.3      |       |
| Interest cost                                                           |       | 4.5      |       | 4.0      |       |
| Actuarial (gain)  loss, including the effect of changing discount rates |       | (11.9    | )          | 2.5      |       |
| Curtailments                                                            |       | (2.9     | )          | (0.8     | )          |
| Special  termination benefits                                           |       | 0.9      |       |     |       |
| Benefit payments                                                        |       | (3.1     | )          | (3.3     | )          |
| Foreign currency  translation                                           |       | (16.7    | )          | 14.4     |       |
| Net change in  benefit obligations                                      |       | (28.0    | )          | 18.1     |       |
| Obligations at  end of year                                             |       | $        | 67.0       |     | $          | 95.0 |   |

 

The funded status of the International Postretirement Benefit Plans atyear end was as follows:

 
|                                                          |   | **2008** | ** ** | **2007** |   |
|---------------------------------------------------------------|--------|----------|------------|----------|--------|
| Postretirement  benefit obligations                           |   | $        | 67.0       |     | $      | 95.0 |   |
|                                                          |   |     |       |     |   |
| Items not yet  recognized in net postretirement benefit cost: |   |     |       |     |   |
| Actuarial gain                                                |   | 6.8      |       | (7.3     | )      |
| Net amount  recognized                                        |   | $        | 73.8       |     | $      | 87.7 |   |

 

The net amount recognizedis included in the Consolidated Balance Sheets at December 31, 2008 and2007 as follows:

 
| ** **                                                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Current  nonpension postretirement benefit, included with Other accrued liabilities |       | $        | (3.1       | )        | $          | (3.7 | ) |
| Nonpension  postretirement benefits                                                 |       | (63.9    | )          | (91.3    | )          |
| Accumulated  other comprehensive income                                             |       | (6.8     | )          | 7.3      |       |
| Net liability  recognized                                                           |       | $        | (73.8      | )        | $          | (87.7 | ) |

 

The following changes inbenefit obligations were recognized in accumulated other comprehensive incomeat December 31, 2008 as follows:

 

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| ** **                      | ** ** | **Pretax** | ** ** | **Tax  Effect** | ** ** | **After-tax** | ** ** |
|---------------------------------|------------|------------|------------|-----------------|------------|---------------|------------|
| Current year  actuarial loss    |       | $          | (10.4      | )               | $          | 3.0           |       | (7.4 | ) |
| Amortization of  actuarial loss |       | 0.1        |       |            |       | 0.1           |       |
| Curtailment                     |       | (2.5       | )          | 0.7             |       | (1.8          | )          |
|                            |       | (12.8      | )          | 3.7             |       | (9.1          | )          |
| Translation                     |       |       |       |            |       | (1.2          | )          |
|                            |       | $          | (12.8      | )               | $          | 3.7           |       | $ | (10.3 | ) |
|                                 |            |            |            |                 |            |               |            |  |  |  |

 

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:

 
| ** **                       | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Service cost                     |       | $        | 1.2        |     | $          | 1.3      |       | $ | 1.9 |   |
| Interest cost                    |       | 4.5      |       | 4.0      |       | 4.2      |       |
| Curtailment                      |       |     |       |     |       | (15.9    | )          |
| Special  termination benefit     |       | 0.9      |       |     |       |     |       |
| Other                            |       | 0.1      |       |     |       | 0.6      |       |
|                             |       |     |       |     |       |     |       |
| Amortization:                    |       |     |       |     |       |     |       |
| Gain                             |       | (0.1     | )          | (0.3     | )          | (1.0     | )          |
| Net  postretirement benefit cost |       | $        | 6.6        |     | $          | 5.0      |       | $ | (10.2 | ) |

 

The weighted averagediscount rate used to determine the accumulated postretirement benefitobligation was 6.4% and 4.8% at December 31, 2008 and 2007, respectively.

 

The weighted averagediscount rate used to determine net postretirement benefit cost was 4.8% at December 31,2008, 5.2% at December 31, 2007, and 4.8% at December 31, 2006.

 

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

 
| ** **                                                                     | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Health care cost  trend rate assumed for next year                             |       | 9.00     | %          | 9.65     | %          |
| Rate to which  the cost trend rate is assumed to decline (ultimate trend rate) |       | 5.00     | %          | 4.82     | %          |
| Year that the  rate reaches the ultimate trend rate                            |       | 2010     |       | 2010     |       |

 

Assumed health care costtrend rates affect the amounts reported for the postretirement benefit plans. Aone-percentage-point change in assumed health care cost trend rates would havethe following effects:

 

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| ** **                                                | ** ** | **1-Percentage-  Point Increase** | ** ** | **1-Percentage-  Point Decrease** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| Effect on total  of service and interest cost             |       | $                                      | 0.9        |                                   | $          | 0.7 |   |
| Effect on  accumulated postretirement benefit obligations |       | 9.3                                    |       | 7.7                                    |       |
|                                                           |            |                                        |            |                                        |            |  |  |

 

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** | ** ** |
|-------------|------------|------------|------------|
| 2009        |       |       | $          | 3.1 |   |
| 2010        |       |       | 3.4        |   |
| 2011        |       |       | 3.7        |   |
| 2012        |       |       | 4.1        |   |
| 2013        |       |       | 4.4        |   |
| 2014 - 2018 |       |       | 25.9       |   |
|             |            |            |            |  |  |

 

Benefits provided by OIInc. for certain hourly retirees of the Company are determined by collectivebargaining. Most other domestic hourly retirees receive health and lifeinsurance benefits from a multi-employer trust established by collective bargaining.Payments to the trust as required by the bargaining agreements are based uponspecified amounts per hour worked and were $8.9 million in 2008, $7.4 millionin 2007, and $6.6 million in 2006. Postretirement health and life benefits forretirees of foreign subsidiaries are generally provided through the nationalhealth care programs of the countries in which the subsidiaries are located.

 

**13. OtherIncome**Other incomein 2006 includes a gain of $15.9 million ($11.2 million after tax) related tocurtailment of certain postretirement benefits in The Netherlands.

 

**14. OtherExpense**Other expense for the year ended December 31,2008****included the following:

 

·                  The Companyrecorded charges totaling $132.4 million ($110.1 million after tax and minorityshareowners’ interests), for restructuring and asset impairment. The chargesreflect the additional decisions reached in the Company’s ongoing strategicreview of its global manufacturing footprint. See Note 15 for additionalinformation.

 

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) recorded in 2007 with an additional $0.9 million(before and after tax) recorded in the first quarter of 2008.

 

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·                  The Companyrecorded charges totaling $55.3 million ($40.2 million after tax), forrestructuring and asset impairment. The charges reflect the additionaldecisions reached in the Company’s ongoing strategic review of its globalmanufacturing footprint. See Note 15for additional information.

 

Other costs and expensesfor the year ended December 31, 2006 included the following:

 

·                  During the third quarter of 2006, the Companyrecorded a charge of $27.5 million ($25.6 million after tax), principallyrelated to the closing of its Godfrey, Illinois machine parts manufacturingoperation.

 

**15. RestructuringAccruals**Beginning in 2007, the Company commenced a strategicreview of its global profitability and manufacturing footprint. The combined 2007 and 2008 charges, amountingto $187.7 million ($150.3 million after tax and minority shareowners’interests) and approximately 1,800 jobs and corresponding reduction in theCompany’s workforce, reflect the decisions reached through December 31,2008 in the Company’s ongoing strategic review of its global manufacturingfootprint commenced in mid-2007. Amounts recorded by the Company do not includeany gains that may be realized upon the ultimate sale or disposition of closedfacilities.

 

2007

Duringthe third and fourth quarters of 2007, the Company recorded restructuringcharges totaling $55.3 million ($40.2 million after tax), for restructuring andasset impairment in Europe and North America.

 

Asa result of its strategic review, the Company decided to curtail selectedproduction capacity. Because the future undiscounted cash flows of the relatedasset groups were not sufficient to recover their carrying amounts, certainassets were considered impaired. As a result, those assets were written down tothe extent their carrying amounts exceeded fair value. The curtailment of plantcapacity resulted in elimination of approximately 560 jobs and a correspondingreduction in the Company’s workforce. The Company accrued certain employeeseparation costs, plant clean up, and other exit costs.

 

2008

During2008, the Company recorded restructuring charges totaling $132.4 million($110.1 million after tax and minority share owners’ interests). The 2008charges consisted primarily of $85.5 million for the closure of two Canadianplants with additional charges across all segments as well as in RetainedCorporate Costs and Other.

 

Asa continuation of the Company’s strategic review in 2008, the Company decidedto curtail and realign selected production capacity and other activities acrossall segments as well as in Retained Corporate Costs and Other. Because thefuture undiscounted cash flows of the related asset groups were not sufficientto recover their carrying amounts, certain assets were considered impaired. Asa result, those assets were written down to the extent their carrying amountsexceeded fair value. The curtailment of plant capacity and realignment ofselected operations will result in elimination of approximately 1,240 jobs anda corresponding reduction in the Company’s workforce. The Company accruedcertain employee separation costs, plant clean up, and other exit costs.

 

Probablecash expenditures for the 2007 and 2008 charges are expected to totalapproximately $110 million. The Company expects that the majority of these costswill be paid out by the end of 2009.

 

Selectedinformation related to the restructuring accrual is as follows:

 

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| ** **                                                    | ** ** | **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     | )          |
| Remaining  restructuring accrual as of December 31, 2008 |       | $                   | 47.6       |                  | $          | —    |       | $         | 16.3       |   | $ | 63.9 |   |

 

*BSN Acquisition*

 

Duringthe second quarter of 2005, the Company concluded its evaluation of acquiredcapacity in connection with the acquisition of BSN Glasspack S.A. and announcedthe permanent closing of its Düsseldorf, Germany glass container factory, andthe shutdown of a furnace at its Reims, France glass container facility, bothin 2005. These actions were part of the European integration strategy tooptimally align the manufacturing capacities with the market and improveoperational efficiencies. As a result, the Company recorded an accrual of €47.1million through an adjustment to goodwill.

 

Theseactions resulted in the elimination of approximately 400 jobs and acorresponding reduction in the Company’s workforce. The Company anticipatesthat it will pay a total of approximately €110.9 million in cash related toseverance, benefits, plant clean-up, and other plant closing costs related torestructuring accruals.

 

TheEuropean restructuring accrual recorded in the second quarter of 2005 was inaddition to the initial estimated accrual of €63.8 million recorded in 2004.Selected information related to the restructuring accrual is as follows, with2008 activity translated from Euros into dollars at the December 31, 2008exchange rate:

 
| Remaining  European restructuring accrual as of January 1, 2006   |   | $     | 80.9   |   |
|-------------------------------------------------------------------|--------|-------|--------|--------|
| Net cash paid,  principally severance and related benefits        |   | (33.7 | )      |
| Partial reversal  of accrual (goodwill adjustment)                |   | (7.6  | )      |
| Other,  principally foreign exchange translation                  |   | (1.5  | )      |
| Remaining  European restructuring accrual as of December 31, 2006 |   | 38.1  |   |
| Net cash paid,  principally severance and related benefits        |   | (17.8 | )      |
| Other,  principally foreign exchange translation                  |   | 7.4   |   |
| Remaining  European restructuring accrual as of December 31, 2007 |   | 27.7  |   |
| Net cash paid,  principally severance and related benefits        |   | (6.1  | )      |
| Other,  principally foreign exchange translation                  |   | (4.8  | )      |
| Remaining  European restructuring accrual as of December 31, 2008 |   | $     | 16.8   |   |

 

**16.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 are

 

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nonroutine and involvecompensatory, punitive or treble damage claims as well as other types ofrelief. In accordance with FAS No. 5, “Accounting for Contingencies,” theCompany records a liability for such matters when it is both probable that theliability has been incurred and the amount of the liability can be reasonablyestimated. Recorded amounts are reviewed and adjusted to reflect changes in thefactors upon which the estimates are based including additional information,negotiations, settlements, and other events. The ultimate legal and financialliability of the Company in respect to this pending litigation cannot beestimated with certainty. 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.

 

**17. SegmentInformation**The Company has four reportable segments basedon its four geographic locations: (1) North America; (2) Europe; (3) AsiaPacific; (4) South America. These four segments are aligned with the Company’sinternal approach to managing, reporting, and evaluating performance of itsglobal glass operations. Certain assets and activities not directly related toone of the regions or to glass manufacturing are reported with Other. Theseinclude licensing, equipment manufacturing, global engineering, and non-glassequity investments.

 

TheCompany’s measure of profit for its reportable segments is Segment OperatingProfit, which consists of consolidated earnings before interest income,interest expense, provision for income taxes and minority share owners’interests in earnings of subsidiaries and excludes amounts related to certainitems that management considers not representative of ongoing operations. TheCompany’s management uses Segment Operating Profit, in combination withselected cash flow information, to evaluate performance and to allocateresources.

 

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. decreasedslightly the percentage allocation based on sales and significantly expandedthe number of functions included in the allocation based on cost of services. It is notpracticable to quantify the net effect of these changes on periods prior to2008.

 

Financialinformation regarding the Company’s reportable segments is as follows:

 
| ** **                 | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net Sales:            |       |     |       |     |       |     |       |   |   |   |
| Europe                     |       | $        | 3,497.8    |     | $          | 3,298.7  |       | $ | 2,846.6 |   |
| North America              |       | 2,209.7  |       | 2,271.3  |       | 2,110.4  |       |
| South America              |       | 1,135.9  |       | 970.7    |       | 796.5    |       |
| Asia Pacific               |       | 964.1    |       | 934.3    |       | 804.9    |       |
| Reportable  segment totals |       | 7,807.5  |       | 7,475.0  |       | 6,558.4  |       |
| Other                      |       | 77.2     |       | 91.7     |       | 134.0    |       |
| Net sales                  |       | $        | 7,884.7    |     | $          | 7,566.7  |       | $ | 6,692.4 |   |

 

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| ** **                                                                                          | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Segment Operating Profit:                                                                 |       |     |       |     |       |     |       |   |   |   |
| Europe                                                                                              |       | $        | 477.8      |     | $          | 433.0    |       | $ | 249.6 |   |
| North America                                                                                       |       | 185.2    |       | 265.1    |       | 187.3    |       |
| South America                                                                                       |       | 331.0    |       | 254.9    |       | 195.0    |       |
| Asia Pacific                                                                                        |       | 162.8    |       | 154.0    |       | 102.9    |       |
| Reportable  segment totals                                                                          |       | 1,156.8  |       | 1,107.0  |       | 734.8    |       |
|                                                                                                |       |     |       |     |       |     |       |
| Items excluded  from Segment Operating Profit:                                                      |       |     |       |     |       |     |       |
| Other                                                                                               |       | 68.1     |       | 47.3     |       | 10.0     |       |
| Restructuring  and asset impairments                                                                |       | (133.3   | )          | (100.3   | )          | (27.5    | )          |
| CEO and other  transition charges                                                                   |       |     |       |     |       | (6.0     | )          |
| Curtailment of  postretirement benefits in The Netherlands                                          |       |     |       |     |       | 15.9     |       |
| Mark to market  effect of natural gas hedge contracts                                               |       |     |       |     |       | (8.7     | )          |
|                                                                                                |       |     |       |     |       |     |       |
| Interest income                                                                                     |       | 36.1     |       | 26.9     |       | 16.6     |       |
| Interest expense                                                                                    |       | (237.6   | )          | (356.2   | )          | (401.6   | )          |
| Earnings before  income taxes and minority share owners’ interests in earnings of subsidiaries |       | $        | 890.1      |     | $          | 724.7    |       | $ | 333.5 |   |

 
| ** **                              | ** ** | **North  America** | ** ** | **Europe** | ** ** | **Asia  Pacific** | ** ** | **South  America** | ** ** | **Total  Reportable  Segments** | ** ** | **Other** | ** ** | **Consoli-  dated  Totals** | ** ** |
|-----------------------------------------|------------|--------------------|------------|------------|------------|-------------------|------------|--------------------|------------|---------------------------------|------------|-----------|------------|-----------------------------|------------|
| Total assets:                           |       |               |       |       |       |              |       |               |       |                            |       |      |       |                        |       |
| 2008                                    |       | $                  | 1,792.3    |       | $          | 3,758.4           |       | $                  | 1,239.6    |                            | $          | 976.2     |       | $                           | 7,766.5    |   | $ | 127.9 |   | $ | 7,894.4 |   |
| 2007                                    |       | 1,936.0            |       | 4,124.1    |       | 1,558.1           |       | 965.7              |       | 8,583.9                         |       | 94.6      |       | 8,678.5                     |       |
| 2006                                    |       | 1,765.7            |       | 3,838.0    |       | 1,454.4           |       | 765.7              |       | 7,823.8                         |       | 307.8     |       | 8,131.6                     |       |
| Equity earnings:                        |       |               |       |       |       |              |       |               |       |                            |       |      |       |                        |       |
| 2008                                    |       | $                  | 12.6       |       | $          | 14.1              |       | $                  | —     |                            | $          | —    |       | $                           | 26.7       |   | $ | 24.1 |   | $ | 50.8 |   |
| 2007                                    |       | 10.4               |       | 8.0        |       |              |       | (2.7               | )          | 15.7                            |       | 18.4      |       | 34.1                        |       |
| 2006                                    |       | 10.5               |       | 6.9        |       |              |       | (4.8               | )          | 12.6                            |       | 10.8      |       | 23.4                        |       |
| Capital  expenditures (1):              |       |               |       |       |       |              |       |               |       |                            |       |      |       |                        |       |
| 2008                                    |       | $                  | 90.5       |       | $          | 151.9             |       | $                  | 57.6       |                            | $          | 57.3      |       | $                           | 357.3      |   | 3.6 |   | $ | 360.9 |   |
| 2007                                    |       | 65.9               |       | 129.2      |       | 42.0              |       | 51.1               |       | 288.2                           |       | 2.2       |       | 290.4                       |       |
| 2006                                    |       | 57.8               |       | 105.4      |       | 47.8              |       | 59.2               |       | 270.2                           |       | 1.3       |       | 271.5                       |       |
| Depreciation and  amortization expense: |       |               |       |       |       |              |       |               |       |                            |       |      |       |                        |       |
| 2008                                    |       | $                  | 98.7       |       | $          | 222.0             |       | $                  | 80.4       |                            | $          | 56.5      |       | $                           | 457.6      |   | $ | 2.6 |   | $ | 460.2 |   |
| 2007                                    |       | 107.3              |       | 210.3      |       | 81.7              |       | 54.3               |       | 453.6                           |       | 2.2       |       | 455.8                       |       |
| 2006                                    |       | 110.2              |       | 203.3      |       | 81.4              |       | 56.3               |       | 451.2                           |       | 7.9       |       | 459.1                       |       |

 

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(1) Excludes property,plant and equipment acquired through acquisitions.

 

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

 
| ** ** | ** ** | **United  States** | ** ** | **Foreign** | ** ** | **Total** | ** ** |
|------------|------------|--------------------|------------|-------------|------------|-----------|------------|
| 2008       |       | $                  | 636.3      |        | $          | 1,966.1   |       | $ | 2,602.4 |   |
| 2007       |       | 633.1              |       | 2,271.1     |       | 2,904.2   |       |
| 2006       |       | 668.4              |       | 2,172.8     |       | 2,841.2   |       |
|            |            |                    |            |             |            |           |            |  |  |  |

 

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

 
|   |   | **United  States** | ** ** | **Foreign** | ** ** | **Total** |   |
|--------|--------|--------------------|------------|-------------|------------|-----------|--------|
| 2008   |   | $                  | 1,894.8    |        | $          | 5,989.9   |   | $ | 7,884.7 |   |
| 2007   |   | 1,920.6            |       | 5,646.1     |       | 7,566.7   |   |
| 2006   |   | 1,787.6            |       | 4,904.8     |       | 6,692.4   |   |
|        |        |                    |            |             |            |           |        |  |  |  |

 

Operations inindividual countries outside the United States that accounted for more than 10%of consolidated net sales were in Italy (2008 - 10.7%, 2007 - 10.1%) and France(2008 - 14.7%, 2007 - 19.3%, 2006 - 19.3%).

 

**18. AdditionalInterest Charges from Early Extinguishment of Debt** During2007, the Company recorded additional interest charges of $9.5 million ($8.8million after tax) for note repurchase premiums and the write-off ofunamortized finance fees related to debt that was repaid prior to its maturity.During 2006, the Company recorded additional interest charges of $17.5 million($17.1 million after tax) for note repurchase premiums and the write-off ofunamortized finance fees related to debt that was repaid prior to its maturity.

 

**19. Goodwill**The changes in the carrying amount of goodwill for the years ended December 31,2006, 2007 and 2008 are as follows:

 
| ** **                                                                                   | ** ** | **North  America** | ** ** | **Europe** | ** ** | **Asia  Pacific** | ** ** | **South America** | ** ** | **Other** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------|------------|------------|------------|-------------------|------------|-------------------|------------|-----------|------------|-----------|------------|
| Balance as of  January 1, 2006                                                          |       | $                  | 747.5      |       | $          | 926.7             |       | $                 | 470.8      |      | $          | —    |       | $ | 14.7 |   | $ | 2,159.7 |   |
| Translation  effects                                                                         |       | 2.8                |       | 99.5       |       | 31.3              |       |              |       |      |       | 133.6     |       |
| Other changes,  principally adjustments to reverse foreign deferred tax valuation allowances |       | (28.7              | )          | (9.2       | )          |              |       |              |       | (0.2      | )          | (38.1     | )          |
| Balance as of  December 31, 2006                                                        |       | 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 |   |

 

Duringthe fourth quarters of 2008, 2007 and 2006, the Company completed its annualimpairment testing and determined that no impairment existed.

 

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**20.  Fair Value Measurements **In September 2006, theFASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (FAS No. 157),**which defines fair value,establishes a framework for measuring fair value and enhances disclosure aboutfair value measurements.  On February 2,2008, the FASB issued FASB Staff Position No. 157-2 (FSP 157-2) whichdelays the effective date of FAS No. 157 for nonfinancial assets andnonfinancial liabilities, except for items that are recognized or disclosed atfair value in the financial statements on at least an annual basis.  Where the measurement objective specificallyrequires the use of “fair value” the Company has adopted the provisions of FAS No. 157related to financial assets and financial liabilities as of January 1,2008. The adoption of FAS No. 157 had no impact on the Company.

 

FAS No. 157clarifies that fair value is an exit price, representing the amount that wouldbe received to sell an asset or paid to transfer a liability (exit price) inthe principal or most advantageous market for the asset or liability in anorderly transaction between market participants.  FAS No. 157 establishes a three-tierfair value hierarchy, which prioritizes the inputs used in measuring fair valueas follows:

 

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

*Level 2:* Inputs, other than quotedprices in active markets, that are observable either directly or indirectly;and

*Level 3:* Unobservable inputs forwhich there is little or no market data, which requires the Company to developassumptions.

 

TheCompany’s derivative assets 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 the $0.4net derivative liability as Level 2 in the hierarchy.  The Company also evaluates counterparty riskin determining fair values.

 

TheCompany adopted Statement of Financial Accounting Standards No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities-Including anAmendment of FASB Statement No. 115” (“FAS No. 159”), effective January 1,2008.  This standard permits entities tochoose to measure many financial instruments and certain other items at fairvalue.  While FAS No. 159 becameeffective January 1, 2008, the Company did not elect the fair valuemeasurement option for any of its financial assets or liabilities.

 

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# **SIGNATURES**

# ** **

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

 

 
|                          | OWENS-ILLINOIS  GROUP, INC. |
|-------------------------------|-----------------------------|
|                          |                        |
|                          |                        |
|                          |                        | (Registrant) |
|                          |                        |
|                          |                        |
|                          | By                          | : /s/   James  W. Baehren |
|                          |                        |
|                          |                        | James W. Baehren |
|                          |                        | Attorney-in-fact |
|                          |                        |   |
|                          |                        |   |
| Date:  February 17, 2009 |                        |   |
|                               |                             |  |  |  |  |

 

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**Signatures**

 

Pursuant to the requirements of the Securities ExchangeAct of 1934, this report has been signed below by the following persons onbehalf of Owens-Illinois Group, Inc. and in the capacities and on thedates 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 17, 2009 |   |                                     |
|                               |        |                                          |  |

 

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**INDEX TO FINANCIAL STATEMENT SCHEDULE**

 

**Financial Statement Schedule ofOwens-Illinois Group, Inc. and Subsidiaries:**

 

For the years ended December 31,2008, 2007, and 2006:

 
| ** **                                                  | ** ** | **PAGE** |
|-------------------------------------------------------------|------------|----------|
|                                                        |       |     |
| II —  Valuation and Qualifying Accounts (Consolidated) |       | S-1      |

 

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**OWENS-ILLINOIS GROUP, INC.**

 

**SCHEDULEII — VALUATION AND QUALIFYING ACCOUNTS (CONSOLIDATED)**

 

**Years ended December 31,2008, 2007, and 2006**

**(Millions of Dollars)**

 

Reserves deducted fromassets in the balance sheets:

 

Allowances for losses anddiscounts on receivables

 
| ** ** | ** ** | ** **          | ** ** | **Additions**       | ** ** | ** ** | ** ** | ** **        | ** ** |
|------------|------------|---------------------|------------|---------------------|------------|------------|------------|-------------------|------------|
| ** ** | ** ** | **Balance at** | ** ** | **Charged to** | ** ** | ** ** | ** ** | ** **        | ** ** | **Balance** | ** ** |
| ** ** | ** ** | **beginning**       | ** ** | **costs and**  | ** ** | ** ** | ** ** | **Deductions**    | ** ** | **at end of** | ** ** |
| ** ** | ** ** | **of period**  | ** ** | **expenses**        | ** ** | **Other**  | ** ** | **(Note 1)** | ** ** | **period** | ** ** |
|       |       |                |       |                |       |       |       |              |       |   |   |
| 2008       |       | $                   | 36.0       |                | $          | 8.1        |       | $                 | (0.7       | ) | $ | 3.7 |   | $ | 39.7 |   |
|       |       |                |       |                |       |       |       |              |       |   |   |
| 2007       |       | $                   | 28.7       |                | $          | 4.1        |       | $                 | 8.1        |   | $ | 4.9 |   | $ | 36.0 |   |
|       |       |                |       |                |       |       |       |              |       |   |   |
| 2006       |       | $                   | 22.5       |                | $          | 4.2        |       | $                 | 5.3        |   | $ | 3.3 |   | $ | 28.7 |   |

 

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| (1) | Deductions from  allowances for losses and discounts on receivables represent uncollectible  notes and accounts written off. |
|-----|------------------------------------------------------------------------------------------------------------------------------|

 

S-1

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