**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D. C. 20549**

 

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** **

**FORM 10-K**

 

**(Mark One)**

 

| x                                                    | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE** |
|------------------------------------------------------|---------------------------------------------------------------------|
|                                                 | **SECURITIES EXCHANGE ACT OF 1934**                                 |
|                                                 |
| **For the fiscal year ended December 31, 2007** |
|                                                 |                                                                |
| **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-ILLINOISGROUP, INC.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                                    | ** **                         | **34-1559348** |
|-----------------------------------------------------------------|------------------------------------|----------------|
| (State or other jurisdiction of  incorporation or organization) | (IRS Employer  Identification No.) |

 

| **One Michael Owens Way, Perrysburg, Ohio**(Address of principal executive offices) | ** ** | **43551**(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**

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of 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,”“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the ExchangeAct. (Check one):

 
| Large accelerated filer x                             |   | Accelerated filer         |   o |
|-------------------------------------------------------|--------|---------------------------|---------------|
|                                                  |   |                      |          |
| Non-accelerated filer   o (do no check if   |   | Smaller reporting company |   o |
|     a 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 |
|--------|-------|------|

 

The number of shares of common stock, $.01 par valueof Owens-Illinois Group, Inc. outstanding as of January 31, 2008 was100.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Portions of  Owens-Illinois, Inc. Proxy Statement forThe Annual Meeting of Share Owners To Be Held Friday, May 9, 2008 (“ProxyStatement”) are incorporated by reference into Part III hereof.

 

The registrant, along with most of its direct andindirect wholly-owned subsidiaries, has guaranteed certain registered debtsecurities issued by one of its indirect wholly-owned subsidiaries,Owens-Brockway Glass Container Inc. (the “issuer”).  The consolidating condensed financialstatements of the registrant depicting separately the registrant, the issuer,the guarantor subsidiaries and the non-guarantor subsidiaries are presented inthe notes to the registrant’s consolidated financial statements.

 

The registrant meets the conditions set forth inGeneral Instructions I (1)(a) and (b) of Form 10-K and istherefore filing this Form with a partially reduced disclosure formatwhich omits the information otherwise required by Item 4, 11, 12 and 13 aspermitted under General Instructions I (2)(c) of Form 10-K.

 

 

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**TABLE OF 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.           |   | MANAGMENT’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.

 

OnJuly 31, 2007, the Company completed the sale of its plastics packagingbusiness for approximately $1.825 billion.

 

**Strategy andCompetitive Strengths**

** **

The Company is pursuing a strategy aimed atleveraging its global capabilities, broadening its market base and focusing onmodern management technologies and fundamentals including incentivecompensation linked to cash flows and fact-based, data-driven decision making.

 

The Company’s current core competitive strengthsare:

 

·                  Globalleadership in manufacturing glass containers

 

·                  Long-standingrelationships with a diverse group of leading consumer products companies

 

·                  Technologicalleadership and worldwide licensee network

 

·                  Low-costproduction of glass containers

 

·                  Experiencedand motivated management team and work force

 

The Company has acquired 17 glass containerbusinesses in 22 countries since 1990, including businesses in Europe, NorthAmerica, Asia Pacific and South America. Through these acquisitions, the Company has enhanced its global presencein order to better serve the needs of its multinational customers. Throughglobal leveraging, the Company also expects to achieve purchasing and costreduction synergies.

 

The Company has 83 glass manufacturing plants in22 countries.

 

**Technology Leader**

 

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 31,2007, on a continuing operations basis, the Company invested more than$1.4 billion in capital expenditures (excluding acquisitions) and morethan $247 million in research, development and engineering to, among otherthings, improve labor and machine productivity, increase capacity in growing marketsand 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

 

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aboutthe Company’s operations is available from OI Inc.’s web site atwww.o-i.com.  The Company’s annual reporton Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,and amendments to those reports filed or furnished pursuant to Section 13(a) or15(d) of the Exchange Act are available from the SEC’s web site atwww.sec.gov.  Copies of the Company’s SECfilings may be obtained free of charge by writing 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 tocertain items that management considers not representative of ongoingoperations (“Segment Operating Profit”), and total assets by reportable segmentis included in Note 19 to the Consolidated Financial Statements.

 

**NarrativeDescription of Business**

 

Belowis a description of the business and information to the extent material tounderstanding the Company’s business taken as a whole.

 

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

 

TheCompany is the largest manufacturer of glass containers in the world.  The Company is the leading glass containermanufacturer in 18 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 and 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 the U.S. The Company manufactures these productsin a wide range of sizes, shapes and colors. The Company is active in newproduct 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, principally outside the U.S.  The largest U.S. glass container customersinclude (in alphabetical order) Anheuser-Busch, Diageo, H.J. Heinz,Molson/Coors, Novartis, Pepsico, SABMiller, and Saxco-Demptos, Inc.  The largest glass container customers outsidethe U.S. include (in alphabetical order) Diageo, Foster’s, Heineken, InBev,Lion Nathan, Molson/Coors, SABMiller, and Scottish & Newcastle. The Company is a major glass container supplier to all of thesecustomers.

 

TheCompany sells most of its glass container products directly to customers underannual or multi-year supply agreements. 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 in the 1990’s and early 2000’s have given it a 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 increasingly 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 maintaining the global network of glass containercompanies that license its technology. In many developing countries, the Company’s international glassoperations have benefited in the last ten years from increased consumerspending power, a trend toward the privatization of industry, a favorableclimate for foreign investment, lowering of trade barriers and global expansionprograms by multi-national consumer companies.

 

*North America.*  Inaddition to the glass container operations in the U.S., the Company’ssubsidiary in Canada is the sole manufacturer of glass containers in thatcountry.

 

*South America.*  TheCompany is the sole manufacturer of glass containers in Colombia, Ecuador andPeru.  In both Brazil and Venezuela, theCompany is the leading manufacturer of glass containers.  In South America, there is a large infrastructurefor returnable/refillable glass containers. However, with

 

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improvingeconomic conditions in South America after the recessions of the late 1990’s,unit sales of non-returnable glass containers have grown in Venezuela, Colombiaand Brazil.

 

*Europe.*  The Company’sEuropean glass container business, headquartered in Switzerland, hasconsolidated manufacturing operations in 11 countries and is the largest inEurope.  The Company is a leadingproducer of wine and champagne bottles in France and is the sole supplier ofglass containers to Scottish & Newcastle, France’s leadingbrewer.  In Italy, the Company is theleading manufacturer of glass containers and operates 12 glass containerplants.  In Germany, the Company’s keycustomers include Scottish & Newcastle and Nestle Europe.  In The Netherlands, the Company is one of theleading suppliers of glass containers to Heineken.  The Company is a leading manufacturer ofglass containers for the U.K. spirits business. In Spain, the Company serves the market for olives in the Sevilla areaand the market for wine bottles in the Barcelona and southern France area.  In Poland, the Company is the leading glasscontainer manufacturer and operates two plants. The Company is the leading glass container manufacturer in the CzechRepublic.  In Hungary, the Company is thesole glass container manufacturer and serves the Hungarian food industry.  In Finland and the Baltic country of Estonia,the Company is the only manufacturer of glass containers.  The Company coordinates production activitiesbetween Finland and Estonia in order to efficiently serve the Finnish, Balticand Russian markets. In recent years, Western European brewers have beenestablishing beer production facilities in Central Europe and the RussianRepublic.  Because these new beer plantsuse high-speed filling lines, they require high quality glass containers inorder to operate properly. The Company believes it is well positioned to meetthis growing demand.

 

*Asia Pacific.*  The Company has glass operations in fourcountries in the Asia Pacific region: Australia, New Zealand, Indonesia andChina.  In the Asia Pacific region, theCompany is the leading manufacturer of glass containers in most of thecountries in which it competes.  InAustralia, the Company’s subsidiary operates four glass container plants,including a plant focused on serving the needs of the growing Australian wineindustry.  In New Zealand, the Company isthe sole glass container manufacturer. In Indonesia, the Company supplies the Indonesian market and exports glasscontainers for food and pharmaceutical products to Australian customers.  In China, the glass container segments of thepackaging market are regional and highly fragmented with a number of localcompetitors.  The Company has four modernglass container plants in China manufacturing high-quality beer bottles toserve Foster’s as well as Anheuser-Busch, which is now producing Budweiser® inand for the Chinese market.

 

The Company continues tofocus on serving the needs of leading multi-national consumer companies as theypursue international growth opportunities. The Company believes that it is often the glass container partner ofchoice for such multi-national consumer companies due to its leadership inglass technology and its status as a high quality producer in most of themarkets 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 and productivethan those used by competitors.  TheCompany’s machine development activities and systematic upgrading of productionequipment have given it a low-cost leadership position in the glass containersegment in most of the countries in which it competes, a key strength tocompeting successfully in the rigid packaging market.

 

TheCompany operates several machine shops that assemble and repairhigh-productivity glass-forming machines and mold shops that manufacture moldsand related 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 their nationalboundaries, which may include transportation by rail and ocean delivery incombination 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 or productiondelays.

 

**Energy**

 

TheCompany’s glass container operations require a continuous supply of significantamounts of energy, principally natural gas, fuel oil, and electricalpower.  Adequate supplies of energy aregenerally available 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 factory location andits particular energy requirements.  Thepercentage of total cost related to energy can vary significantly because ofvolatility in market prices, particularly for natural gas in particularlyvolatile markets such as North America. In order to limit the effects of fluctuations in market prices fornatural gas and fuel oil, the Company uses commodity futures contracts relatedto its forecasted requirements, principally in North America.  The objective of these futures contracts isto reduce the potential volatility in cash flows due to changing marketprices.  The Company continuallyevaluates the energy markets with respect to its forecasted energy requirementsin order to optimize its use of commodity futures contracts.  If energy costs increase substantially in thefuture, the Company could experience a corresponding increase in operatingcosts, which may not be fully recoverable through increased selling prices.

 

**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.  If sufficient high-qualityrecycled glass were available on a consistent basis, the Company has thetechnology to operate using up to 90% recycled glass.  Using recycled glass in the manufacturingprocess reduces energy costs and prolongs the operating life of the glassmelting furnaces.

 

#### **ADDITIONAL INFORMATION**

#### ** **

#### **Technical AssistanceLicense Agreements**

#### ** **

TheCompany has agreements to license its proprietary glass container technologyand provide technical assistance to 20 companies in 20 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

 

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incountries where it does not already have a direct presence.  In addition, the Company’s technicalagreements enable it to apply “best practices” developed by its worldwidelicensee network.  In the years 2007,2006 and 2005, the Company earned $19.7 million, $16.5 million and$16.2 million, respectively, in royalties and net technical assistance revenueon a continuing operations basis.

 

## **Researchand 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 $65.8 million, $48.7 million, and$50.9 million for 2007, 2006, and 2005, respectively.  The Company’s research, development andengineering activities include new products, manufacturing process control,automatic inspection and further automation of manufacturing activities.

 

## **Environmentaland Other Governmental Regulation**

## ** **

The Company’s worldwide operations, in commonwith those of the industry generally, 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. Capital expenditures for property, plant, and equipment in 2007 includedamounts for environmental control activities that were not material in theaggregate.

 

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, 2008, 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.

 

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

 

TheEuropean Union Emissions Trading Scheme (“EUETS”) commenced January 1,2005.  The EU has committed to KyotoProtocol emissions reduction targets and the EUETS is intended to facilitatesuch reduction.  The Company’smanufacturing installations which operate in EU countries will need to restrictthe volume of their CO2 emissions to the level of their individually allocatedEmissions Allowances as

 

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setby country regulators.  If the actuallevel of emissions for any installation exceeds its allocated allowance,additional allowances can be bought on the market to cover deficits;conversely, if the actual level of emissions for such installation is less thanits allocation, the excess allowances can be sold on the same market.  While no material effect is anticipated as aresult of the EUETS, the Company has sold a limited quantity of excess CO2emissions allowances in the open market during 2007.

 

TheCompany is unable to predict what environmental legal requirements may beadopted in the future.  However, theCompany continually monitors its operations in relation to environmentalimpacts and invests in environmentally friendly and emissions reducingprojects.  As such, the Company hasmade significant 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.

 

## **IntellectualProperty 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 be homogeneousin consistency, viscosity and temperature for efficient forming into glasscontainers.  The Company has proprietaryknow-how in (a) the batch house, where raw materials are stored, measuredand mixed, (b) the furnace control system and furnace combustion, and (c) theforehearth and feeding system to deliver such homogeneous glass to the formingmachines.

 

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 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 enhance 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

 

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secretsand other proprietary know-how and technology, as supplemented byadministrative and operational best practices, which contribute to the Company’scompetitive advantage.  As noted above,however, the Company does not consider that any patent or group of patentsrelating to a particular product or process is of material importance whenjudged from the standpoint of any segment 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 24,000 persons as of December 31,2007.  Approximately 95% of NorthAmerican employees are hourly workers covered by collective bargainingagreements.  The principal collectivebargaining agreement, which at December 31, 2007, covered approximately61% of the Company’s union-affiliated employees in North America will expire onMarch 31, 2008. Consistent with past practice, representatives of theCompany and the union began discussions early in 2008 in connection withnegotiating a new agreement. Approximately 58% of employees in South America are covered bycollective bargaining agreements with an average term of approximately 2-3years.  In addition, a large number ofthe Company’s employees are employed in countries in which employment lawsprovide greater bargaining or other rights to employees than the laws of theU.S.  Such employment rights require theCompany to work collaboratively with the legal representatives of the employeesto effect any changes to labor arrangements. The Company considers its employeerelations to be good and does not anticipate any material work stoppages inthe near term.

 

**Financial Information about Foreign and Domestic Operations**

 

Informationas to net sales, Segment Operating Profit, and assets of the Company’sreportable segments is included in Note 19 to the Consolidated FinancialStatements.

 

## **ITEM 1A.               RISK FACTORS**

## ** **

**Substantial Leverage – The Company’s substantial indebtednesscould adversely affect the Company’s financial health.**

 

TheCompany has a significant amount of debt. As of December 31, 2007, the Company had approximately $3.7 billionof total debt outstanding, reduced from $5.5 billion at December 31,2006.  While the debt level is lower, theCompany’s remaining indebtedness could result in the following consequences:

 

·                  Increased vulnerability to general adverseeconomic and industry conditions;

·                  Increased vulnerability to interest rateincreases for the portion of the unhedged and fixed rate borrowing swapped intovariable rates;

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

·                  Limited flexibility in reacting to theCompany’s competitors that have less debt; and

 

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·                  Limit, along with the financial and otherrestrictive covenants in the documents governing  indebtedness, among other things, the Company’sability to borrow additional funds.

** **

**Ability to Service Debt—To serviceits indebtedness, the Company will require a significant amount of cash. TheCompany’s ability to generate cash depends on many factors beyond its control.**

 

TheCompany’s ability to make payments on and to refinance its indebtedness and tofund working capital, capital expenditures, acquisitions, development effortsand other general corporate purposes depends on its ability to generate cash inthe future.  The Company has no assurancethat it will generate sufficient cash flow from operations, or that futureborrowings will be available under the secured credit agreement, in an amountsufficient to enable the Company to pay its indebtedness, or to fund otherliquidity needs. If short term interest rates increase, the Company’s debtservice cost will increase because some of its debt is subject to short termvariable interest rates. At December 31, 2007, the Company’s debt subjectto variable interest rates, including fixed rate debt swapped to variable rate,represented approximately 62% of total debt.

 

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

 

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

·                  Sell assets;

·                  Restructure debt; and/or

·                  Obtain additional debt or equity financing.

 

TheCompany can provide no assurance that it could effect or implement any of thesealternatives on satisfactory terms, if at all.

 

**Cash Used to Satisfy Other Obligations—A portion of the Company’s cashflow will be used to make payments to OI Inc. to satisfy certain debt,preferred stock and litigation-related obligations, including settlement ofasbestos-related claims.**

 

AlthoughOI Inc. does not conduct any operations, it has substantial obligations tomake payments on its outstanding public debt securities, to pay dividends onits outstanding preferred stock, 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 $28.3 million on its outstandingpublic debt securities. In addition, OI Inc. pays quarterly dividends of$5.4 million on 9,050,000 shares of its $2.375 convertible preferredstock. OI Inc.’s asbestos-related payments were $347.1 million,$162.5 million and $171.1 million for the years ended December 31,2007, 2006 and 2005, respectively. In the fourth quarter of 2007, OI Inc.recorded a charge of $115.0 million (in addition to previously recordedcharges of $3.11 billion) to cover its estimated indemnity payments andlegal fees arising from outstanding asbestos personal injury lawsuits andclaims and asbestos personal injury lawsuits and claims expected to be filed inthe next several years.

 

Asa result of the magnitude of OI Inc.’s obligations for asbestos-relatedlawsuits and its dependence on the cash flows of its subsidiaries, the Companyexpects that a substantial portion of its cash flow will be used to makepayments to OI Inc. to enable it to satisfy these obligations. Thesepayments will reduce the cash flow available to the Company for other purposes.For additional information regarding OI Inc.’s asbestos-related lawsuits,claims and payments, see Note 18 to the Consolidated Financial Statements.

 

9

----

 

**Debt Restrictions—The Company maynot be able to finance future needs or adapt its business plans to changesbecause of restrictions contained in the secured credit agreement and theindentures and instruments governing other indebtedness.**

 

Thesecured credit agreement, the indentures governing secured and unsecured notesand debentures, and certain of the agreements governing other indebtednesscontain affirmative and negative covenants that limit the ability of theCompany to take certain actions. For example, some of these indenturesrestrict, among other things, the ability of the Company and its restrictedsubsidiaries to borrow money, pay dividends on, or redeem or repurchase itsstock, make investments, create liens, enter into certain transactions withaffiliates and sell certain assets or merge with or into other companies. Theserestrictions could adversely affect the Company’s ability to operate itsbusinesses and may limit its ability to take advantage of potential businessopportunities as they arise.

 

Failureto comply with these or other covenants and restrictions contained in thesecured credit agreement, the indentures or agreements governing otherindebtedness could result in a default under those agreements, and the debtunder those agreements, together with accrued interest, could then be declaredimmediately due and payable. If a default occurs under the secured creditagreement, the lenders could cause all of the outstanding debt obligationsunder such secured credit agreement to become due and payable, which wouldresult in a default under a number of other outstanding debt securities andcould lead to an acceleration of obligations related to these debt securities.A default under the secured credit agreement, indentures or agreements governingother indebtedness could also lead to an acceleration of debt under other debtinstruments that contain cross acceleration or cross-default provisions.

 

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

 

TheCompany operates manufacturing and other facilities throughout the world.  Net sales from international operationstotaled approximately $5.6 billion, representing approximately 75% of theCompany’s net sales for the year ended December 31, 2007.  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 orexpropriation without fair compensation;

·                  Changes in government policies andregulations;

·                  Devaluations and fluctuations in currencyexchange rates;

·                  Imposition of limitations on conversions offoreign currencies into dollars or remittance of dividends and other paymentsby foreign subsidiaries;

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

·                  Hyperinflation in certain foreign countries;and

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

 

Therisks associated with operating in foreign countries may have a materialadverse effect on operations.

 

**Competition – The Company faces intense competition fromother glass container producers, as well as from makers of alternative forms ofpackaging.  Competitive pressures couldadversely affect the Company’s financial health.**

 

10

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TheCompany is subject to significant competition from other glass containerproducers, as well as from makers of alternative forms of packaging, such asaluminum cans and plastic containers. The Company competes with each rigid packaging competitor on the basisof price, quality, service and the marketing attributes of the container.  Advantages or disadvantages in any of thesecompetitive factors may be sufficient to cause the customer to considerchanging suppliers and/or using an alternative form of packaging.  The Company also competes with manufacturersof non-rigid packaging alternatives, including flexible pouches and asepticcartons, in serving the packaging needs of juice customers.

 

Pressuresfrom competitors and producers of alternative forms of packaging have resultedin excess capacity in certain countries in the past and have led to significantpricing pressures in the rigid packaging market.

 

**High Energy Costs – Higher energy costs worldwide andinterrupted power supplies may have a material adverse effect on operations.**

 

Electricalpower, natural gas, and fuel oil are vital to the Company’s operations as itrelies on a continuous power supply to conduct its business.  Depending on the location and mix of energysources, energy accounts for 15% to 25% of total production costs.  If energy costs substantially increase in thefuture, the Company could experience a significant increase in operating costs,which may have a material adverse effect on operations.

 

**Business Integration Risks – The Company may not be able toeffectively integrate additional businesses it acquires in the future.**

 

TheCompany may consider strategic transactions, including acquisitions that willcomplement, strengthen and enhance growth in its worldwide glassoperations.  The Company evaluatesopportunities on a preliminary basis from time to time but  these transactions may not advance beyond thepreliminary stages or be completed.  Suchacquisitions are subject to various risks and uncertainties, including:

 

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

·                  The potential disruption of existing businessand 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 ofthe acquired companies; and

·                  The potential impairment of relationshipswith customers.

 

Inaddition, the Company cannot make assurances that the integration andconsolidation of newly acquired businesses will achieve any anticipated costsavings and operating synergies.

 

**Customer Consolidation – The continuing consolidation of theCompany’s customer base may intensify pricing pressures and have a materialadverse effect on operations.**

 

Sincethe early 1990s, many of the Company’s largest customers have acquiredcompanies with similar or complementary product lines.  This consolidation has increased theconcentration of the Company’s business with its largest customers.  In many cases, such consolidation has beenaccompanied by pressure from customers for lower prices, reflecting theincrease in the total volume of products purchased or the elimination of aprice differential between the acquiring customer and the companyacquired.  Increased pricing pressuresfrom the Company’s customers may have a material adverse effect on operations.

 

11

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**Seasonality and Raw Materials – Profitability could beaffected by varied seasonal demands and the availability of raw materials.**

 

Dueprincipally to the seasonal nature of the brewing, iced tea and other beverageindustries, in which demand is stronger during the summer months, sales of theCompany’s products 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.

 

Theraw materials that the Company uses have historically been available inadequate supply from multiple sources. For certain raw materials, however, there may be temporary shortages dueto weather or other factors, including disruptions in supply caused by rawmaterial transportation or production delays. These shortages, as well as material increases in the cost of any of theprincipal raw materials that the Company uses, may have a material adverseeffect on operations.

 

**Environmental Risks – The Company is subject to variousenvironmental legal requirements and may be subject to new legal requirementsin the future.  These requirements mayhave a material adverse effect on operations.**

 

TheCompany’s operations and properties, both in the U.S. and abroad, are subjectto extensive laws, ordinances, regulations and other legal requirementsrelating to environmental protection, including legal requirements governinginvestigation and clean-up of contaminated properties as well as waterdischarges, air emissions, waste management and workplace health andsafety.  Such legal requirementsfrequently change and vary among jurisdictions. The Company’s operations and properties, both in the U.S. and abroad,must comply with these legal requirements. These requirements may have a material adverse effect on operations.

 

TheCompany has incurred, and expects to incur, costs for its operations to complywith environmental legal requirements, and these costs could increase in thefuture.  Many environmental legalrequirements provide for substantial fines, orders (including orders to ceaseoperations), and criminal sanctions for violations.  These legal requirements may apply toconditions at properties that the Company presently or formerly owned oroperated, as well as at other properties for which the Company may beresponsible, including those at which wastes attributable to the Company weredisposed.  A significant order orjudgment against the Company, the loss of a significant permit or license orthe imposition of a significant fine may have a material adverse effect onoperations.

 

Anumber of governmental authorities both in the U.S. and abroad have enacted, orare considering, legal requirements that would mandate certain rates ofrecycling, the use of recycled materials and/or limitations on certain kinds ofpackaging materials.  In addition, somecompanies with packaging needs have responded to such developments and/orperceived environmental concerns of consumers by using containers made in wholeor in part of recycled materials.  Suchdevelopments may reduce the demand for some of the Company’s products and/orincrease the Company’s costs, which may have a material adverse effect onoperations.

 

**Labor Relations – Some of the Company’s employees areunionized or represented by workers’ councils.**

 

TheCompany is party to a number of collective bargaining agreements with laborunions which at December 31, 2007, covered approximately 95% of the Company’shourly employees in North America

 

12

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andapproximately 58% of the employees in South America.  The agreement covering substantially all ofthe Company’s union-affiliated employees in its U.S. glass container operationsexpires on March 31, 2008. 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 uponestimates and assumptions that may differ from actual results.**

 

In preparing the Company’s consolidated financial statements inaccordance with U.S. generally accepted accounting principles, severalestimates 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.  The Company believes thataccounting for long-lived assets, pension benefit plans, and income taxesinvolves the more significant judgments and estimates used in the preparationof its consolidated financial statements. Actual results for all estimates could differ materially from theestimates and assumptions that the Company uses, which could have a materialadverse effect on the Company’s financial condition and results of operations.

 

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

 

TheCompany’s implementation of and compliance with changes in accounting rules andinterpretations could adversely affect its operating results or causeunanticipated fluctuations in its results in future periods.  The accounting rules and regulationsthat the Company must comply with are complex and continually changing.  Recent actions and public comments from theSEC have focused on the integrity of financial reporting generally.  The Financial Accounting Standards Board, orFASB, has recently introduced several new or proposed accounting standards, oris developing new proposed standards, which would represent a significantchange from current industry practices. For example, in February 2007, the Financial AccountingStandards Board issued Statement of Financial Accounting Standards No. 159,“Fair Value Option for Financial Assets and Financial Liabilities **–** Including an amendment of FASB Statement No. 115”(“FAS No. 159”).  FAS No. 159permits entities to choose to measure many financial instruments and certainother items at fair value.  The statementis effective for fiscal years beginning after November 15, 2007, thereforethe Company will adopt its provisions effective as of January 1,2008.  Adoption of FAS No. 159 isnot presently expected to have a material impact on the Company’s results ofoperations or financial position.  In addition,many companies’ accounting policies are being subjected to heightened scrutinyby regulators and the public.  While theCompany believes that its financial statements have been prepared in accordancewith U.S. generally accepted accounting

 

13

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principles,the Company cannot predict the impact of future changes to accountingprinciples or its accounting policies on its financial statements goingforward.

 

**Goodwill – A significant write down of goodwill would have amaterial adverse effect on the Company’s reported results of operations and networth.**

 

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, 2007 totaled$2,428.1 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.

 

**ITEM 1B.               UNRESOLVEDSTAFF COMMENTS**

## ** **

None.

 

**ITEM 2.                  PROPERTIES**

 

Theprincipal manufacturing facilities and other material important physicalproperties of the continuing operations of the Company at December 31,2007 are listed below.  All propertiesshown are owned in fee except where 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               |   | Scoudouc,  New Brunswick |
| Lavington, British Columbia     |   | Toronto,  Ontario        |
| Montreal, Quebec                |   |                     |
|                            |   |                     |
| ***Asia Pacific Operations***   |   |                     |
| Australia                       |   |                     |
| Glass Container Plants          |   |                     |
| Adelaide                        |   | Melbourne                |
| Brisbane                        |   | Sydney                   |

 

14

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| Mold Shop                 |   |              |
|---------------------------|--------|-------------------|
| Melbourne                 |   |              |
|                      |   |              |
| 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           |
|                      |   |              |
| 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                 |   | Stoevesandt       |
|                      |   |              |
| Hungary                   |   |              |
| Glass Container Plant     |   |              |
| Oroshaza                  |   |              |
|                      |   |              |
| Italy                     |   |              |
| Glass Container Plants    |   |              |

 

15

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| Asti                            |   | Pordenone                                  |
|---------------------------------|--------|--------------------------------------------|
| Bari (2 plants)                 |   | Terni                                      |
| Bologna                         |   | Trento                                     |
| Latina                          |   | Treviso                                    |
| Trapani                         |   | Varese                                     |
| Napoli                          |   |                                       |
|                            |   |                                       |
| Mold Shop                       |   |                                       |
| Napoli                          |   |                                       |
|                            |   |                                       |
| 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                          |   |                                       |
| 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)                       |   |                                       |

 

16

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| Venezuela                  |   |                    |
|----------------------------|--------|-------------------------|
| Glass Container Plants     |   |                    |
| Valencia                   |   | Valera                  |
| ** **                 |   |                    |
| ***Other Operations***     |   |                    |
| Machine Shops              |   |                    |
| Birmingham, United Kingdom |   | 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 well maintained andcurrently adequate for its planned production requirements over the next threeto five years.

 

**ITEM 3.                  LEGAL PROCEEDINGS**

## ** **

Forfurther information on legal proceedings, see Note 18 to the ConsolidatedFinancial Statements and the section entitled “Environmental and OtherGovernmental Regulation” in Item 1.

 

**ITEM 6.                  SELECTED FINANCIAL DATA**

## ** **

Theselected consolidated financial data presented below relates to each of thefive years in the period ended December 31, 2007.  The financial data for each of the five yearsin the period ended December 31, 2007 was derived from the auditedconsolidated financial statements of the Company.  For more information, see the “ConsolidatedFinancial Statements” included elsewhere in this document.

 

17

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| ** **                                                        | ** ** | **Years ended December 31,**     |
|-------------------------------------------------------------------|------------|-------------------------------------------------|
| ** **                                                        | ** ** | **2007**                                        | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                        | ** ** | **(Dollar amounts in millions)** |
| Consolidated operating results (a):                |       |                                            |   |   |   |   |   |   |   |   |   |
| Net sales                                                         |       | $                                               | 7,566.7 |   | $ | 6,650.4 |   | $ | 6,266.9 |   | $ | 5,366.1 |   | $ | 4,182.9 |   |
| Other revenue (b)                                                 |       | 112.5                                           |   | 98.6 |   | 103.2 |   | 134.2 |   | 83.5 |   |
|                                                              |       | 7,679.2                                         |   | 6,749.0 |   | 6,370.1 |   | 5,500.3 |   | 4,266.4 |   |
| Costs and expenses:                                               |       |                                            |   |   |   |   |   |   |   |   |   |
| Manufacturing, shipping and delivery (c)                          |       | 5,971.4                                         |   | 5,481.1 |   | 5,084.9 |   | 4,329.6 |   | 3,333.8 |   |
| Research, engineering, selling, administrative and  other (d)     |       | 737.6                                           |   | 633.8 |   | 1,031.9 |   | 445.9 |   | 501.4 |   |
| Earnings before interest expense and items below                  |       | 970.2                                           |   | 634.1 |   | 253.3 |   | 724.8 |   | 431.2 |   |
| Interest expense (e)                                              |       | 348.6                                           |   | 349.0 |   | 325.4 |   | 329.0 |   | 261.3 |   |
| Earnings (loss) from continuing operations before items below     |       | 621.6                                           |   | 285.1 |   | (72.1 | ) | 395.8 |   | 169.9 |   |
| Provision for income taxes (f)                                    |       | 147.8                                           |   | 125.3 |   | 428.9 |   | 84.9 |   | 73.1 |   |
| Minority share owners’ interests in earnings of subsidiaries |       | 59.5                                            |   | 43.6 |   | 35.9 |   | 32.9 |   | 25.8 |   |
| Earnings (loss) from continuing operations                        |       | 414.3                                           |   | 116.2 |   | (536.9 | ) | 278.0 |   | 71.0 |   |
| Net earnings (loss) of discontinued operations (g)                |       | 2.8                                             |   | (23.7 | ) | 63.1 |   | (28.0 | ) | (769.3 | ) |
| Gain on sale of discontinued operations                           |       | 1,038.5                                         |   |   |   | 1.2 |   | 70.4 |   |   |   |
| Net earnings (loss)                                               |       | $                                               | 1,455.6 |   | $ | 92.5 |   | $ | (472.6 | ) | $ | 320.4 |   | $ | (698.3 | ) |

 

18

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| ** **                                                           | ** ** | **Years ended December 31,**     | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                           | ** ** | **2007**                                        | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                           | ** ** | **(Dollar amounts in millions)** | ** ** |
| Other data:                                                          |       |                                            |       |   |   |   |   |   |   |   |   |
| The following are included in net earnings:                          |       |                                            |       |   |   |   |   |   |   |   |   |
| Depreciation                                                         |       | $                                               | 423.4      |   | $ | 427.7 |   | $ | 436.1 |   | $ | 406.3 |   | $ | 326.3 |   |
| Amortization of intangibles                                          |       | 28.9                                            |       | 22.3 |   | 22.5 |   | 18.8 |   | 16.9 |   |
| Amortization of deferred finance fees (included in interest expense) |       | 8.6                                             |       | 5.7 |   | 6.7 |   | 6.0 |   | 6.2 |   |
|                                                                 |       |                                            |       |   |   |   |   |   |   |   |   |
| Balance sheet data (at end of period):                               |       |                                            |       |   |   |   |   |   |   |   |   |
| Working capital (current assets less current liabilities)            |       | $                                               | 375        |   | $ | 216 |   | $ | 618 |   | $ | 605 |   | $ | 872 |   |
| Total assets                                                         |       | 9,325                                           |       | 9,321 |   | 9,521 |   | 10,550 |   | 9,464 |   |
| Total debt                                                           |       | 3,714                                           |       | 5,464 |   | 5,300 |   | 5,365 |   | 5,426 |   |
| Share owner’s equity                                            |       | 2,643                                           |       | 1,044 |   | 1,198 |   | 2,040 |   | 1,522 |   |

 

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| (a)    |   | Amounts  related to the Company’s plastic packaging business have been reclassified to  discontinued operations for 2003-2007 as a result of the sale of that  business in 2007. Amounts related to the Company’s plastic blow-molded  container business have been reclassified to discontinued operations for  2003-2004 as a result of the sale of that business in 2004. Amounts for the  year ended December 31, 2004, and all subsequent periods, include the  results of BSN from the date of acquisition on June 21, 2004. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (b)    |   | Other  revenue in 2006 includes a gain of $15.9 million ($11.2 million after tax)  for the curtailment of postretirement benefits in The Netherlands.                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   | Other  revenue in 2005 includes $28.1 million (pretax and after tax) from the sale  of the Company’s glass container facility in Corsico, Italy.                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   | Other  revenue in 2004 includes: (1) a gain  of $20.6 million ($14.5 million after tax) for the sale of certain real  property, and (2) a gain of $31.0 million ($13.1 million after tax) for  a restructuring in the Italian Specialty Glass business.                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (c)    |   | Amount  for 2006 includes a loss of $8.7 million ($8.4 million after tax) from the  mark to market effect of natural gas hedge contracts.                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   | Amount  for 2005 includes a gain of $3.8 million ($2.3 million after tax) from the  mark to market effect of natural gas hedge contracts.                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   | Amount  for 2004 includes a gain of $4.9 million ($3.2 million after tax) from the  mark to market effect of natural gas hedge contracts.                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (d)    |   | Amount  for 2006 includes a charge of $20.8 million ($20.7 million after tax) for CEO  transition costs and a charge of $29.7 million ($27.7 million after tax) for  the closing of the Godfrey, Illinois machine parts manufacturing operation.                                                                                                                                                                                                                                                                                                       |

 

19

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|   |   | Amount  for 2005 includes a charge of $494.0 million (pretax and after tax) to write  down goodwill in the Asia-Pacific Glass unit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | Amount  for 2004 includes a charge of $6.4 million ($5.4 million after tax) for  restructuring a life insurance program in order to comply with recent  statutory and tax regulation changes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | Amount  for 2003 includes charges totaling $244.2 million ($198.0 million after tax)  for the following: (1) $50.0 million (pretax and after tax) write-down  of an equity investment in a soda ash mining operation; (2) $37.4  million ($37.4 million after tax) for the loss on the sale of long-term notes  receivable; (3) $28.5 million ($17.8 million after tax) for the  permanent closure of the Hayward, California glass container factory;  (4) $23.9 million ($17.4 million after tax) for the shutdown of the  Perth, Australia glass container factory; and (5) $20.1 million ($19.5  million after tax) for the shutdown of the Milton, Ontario glass container  factory. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (e)    |   | Amount  for 2007 includes charges of $7.9 million ($7.3 million after tax) for note  repurchase premiums.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | Amount  for 2006 includes charges of $6.2 million (pretax and after tax) for note  repurchase premiums.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | Amount  for 2004 includes charges of $28.0 million ($18.3 million after tax) for note  repurchase premiums.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | Amount  for 2003 includes a charge of $13.2 million ($8.2 million after tax) for note  repurchase premiums.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | Includes  additional interest charges for the write off of unamortized deferred  financing fees related to the early extinguishment of debt as follows: $1.6  million ($1.5 million after tax) for 2007; $11.3 million ($10.9 million after  tax) for 2006; $2.8 million ($1.8 million after tax) for 2004; and $1.3  million ($0.9 million after tax) for 2003.                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (f)    |   | Amount  for 2007 includes a benefit of $13.5 million for the recognition of tax  credits related to restructuring of investments in certain European  operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | Amount  for 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 to  international tax restructuring.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | Amount  for 2005 includes a charge of $300.0 million to record a valuation allowance  related to accumulated deferred tax assets in the U.S. and a benefit of $5.3  million for the reversal of an accrual for potential tax liabilities related  to a previous divestiture. The accrual is no longer required based on the  Company’s reassessment of potential liabilities.                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   | Amount  for 2004 includes a benefit of $33.1 million for a tax consolidation in the  Australian glass business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (g)    |   | Amount for 2005 consists principally of  a third quarter benefit from the reversal of an accrual for potential tax  liabilities related to a previous divestiture. The accrual is no longer  required based on the Company’s reassessment of the potential liabilities.                                                                                                                                                                                                                                                                                                                                                                                                                                       |

 

20

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

## ** **

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

 

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

 

Segment Operating Profit for reportable segments was $372.2 millionhigher than the prior year.  The benefitsof higher selling prices, improved productivity, increased unit shipments, andfavorable exchange rates were partially offset by inflationary cost increases.

 

Interest expense from continuing operations for 2007 was $348.6 millioncompared to $349.0 million for 2006. Included in the 2007 interest expense was $9.5 million for both noterepurchase premiums and the write-off of unamortized finance fees related tothe November 2007 repurchase of the $625.0 million 8.75% Senior SecuredNotes.  Included in the 2006 interestexpense was $17.5 million for both note repurchase premiums and the write-offof unamortized finance fees related to the June 2006 refinancing of theCompany’s previous credit agreement and the July 2006 repurchase ofapproximately $150 million principal amount of the 8.875% Senior Secured Notesdue 2009.  Exclusive of these items, interestexpense increased approximately $7.6 million. A significant portion of the increase is interest on debt that wasrepaid during 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 for continuing operations for 2007 was $42.3 millioncompared to $19.2 million for 2006.  Theincrease of $23.1 million is primarily due to interest earned as a result ofinvesting a portion of the proceeds from the plastics July 31, 2007 saleuntil the funds were used to repay senior secured debt in the fourth quarter of2007.

 

Net earnings from continuing operations for 2007 were $414.3 millioncompared to $116.2 million for 2006. Earnings in both periods included items that management considered notrepresentative of ongoing operations. These items decreased net earnings in 2007 by $79.4 million anddecreased net earnings in 2006 by $57.0 million.

 

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

 

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

 

*Net Sales*

 

The Company’s netsales by segment for 2007 and 2006 are presented in the following table.  For further information, see SegmentInformation included in Note 19 to the Consolidated Financial Statements.

 

21

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

 

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

 

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

 
| 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 theeffects of changing foreign currency exchange rates resulted principally fromthe stronger Euro and Australian dollar.

 

*Segment Operating Profit*

 

OperatingProfit for the reportable segments in the table below includes an allocation ofsome corporate expenses based on both a percentage of sales and direct billingsbased on the costs of specific services provided.  Unallocated corporate expenses and certainother expenses not directly related to the reportable segments’ operations areincluded in Retained Corporate Costs and Other. For further information, see Segment Information included in Note 19 tothe Consolidated Financial Statements.

 
| ** **                         | ** ** | **2007**                            | ** ** | **2006** | ** ** |
|------------------------------------|------------|-------------------------------------|------------|----------|------------|
| ** **                         | ** ** | **(dollars in millions)** | ** ** |
| North America                      |       | $                                   | 265.1      |     | $          | 187.3 |   |
| Europe                             |       | 433.0                               |       | 249.6    |       |
| Asia Pacific                       |       | 154.0                               |       | 102.9    |       |
| South America                      |       | 254.9                               |       | 195.0    |       |
| Reportable segment totals          |       | 1,107.0                             |       | 734.8    |       |
| Retained corporate costs and other |       | (78.8                               | )          | (76.6    | )          |
| Consolidated totals                |       | $                                   | 1,028.2    |     | $          | 658.2 | ) |
|                                    |            |                                     |            |          |            |  |  |  |  |  |

 

Segment Operating Profit for reportable segments for 2007 increased$372.2 million, or 50.7%, to $1,107.0 million, compared with Segment OperatingProfit of $734.8 million for 2006.

 

22

----

 

The change in Segment Operating Profit for reportable segments can besummarized as follows (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 |   |
|                                              |        |        |        |        |         |        |  |

 

Retained corporate costs and other for 2007 were $78.8 million comparedwith $76.6 million for 2006.

 

*Interest Expense*

 

Interest expense from continuing operations for 2007 was $348.6 millioncompared to $349.0 million for 2006. Included in the 2007 interest expense was $9.5 million for both noterepurchase premiums and the write-off of unamortized finance fees related tothe November 2007 repurchase of the $625.0 million 8.75% Senior SecuredNotes.  Included in the 2006 interestexpense was $17.5 million for both note repurchase premiums and the write-offof unamortized finance fees related to the June 2006 refinancing of theCompany’s previous credit agreement and the July 2006 repurchase ofapproximately $150 million principal amount of the 8.875% Senior Secured Notesdue 2009.  Exclusive of these 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.

 

Interest income for continuing operations for 2007 was $42.3 millioncompared to $19.2 million for 2006.  Theincrease of $23.1 million is primarily due to interest earned as a result ofinvesting a portion of the proceeds from the July 31, 2007 plastics saleuntil the funds were used to repay senior secured debt in the fourth quarter of2007.

 

*Provisionfor 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.  The Company expectsthat the effective tax rate will not change significantly in 2008.

 

*MinorityShare Owners’ Interest in Earnings of Subsidiaries*

 

Minorityshare owners’ interest in earnings of subsidiaries for 2007 was $59.5 millioncompared to $43.6 million for 2006.  Theincrease is primarily attributed to higher earnings from the Company’soperations in South America.

 

23

----

 

*Earningsfrom 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 | ) |

 

***Executive Overview – Years ended December 2006and 2005***

 

Net sales from continuing operations were $383.5 million higher thanthe prior year principally resulting from increased unit shipments, improvedpricing, and favorable foreign currency exchange rates.

 

Segment Operating Profit for reportable segments was $41.6 millionlower than the prior year.  The benefitsof higher selling prices, improved productivity, fixed cost savings andincreased unit shipments were more than offset by inflationary cost increases.

 

Interestexpense from continuing operations for 2006 was $349.0 million compared to$325.4 million in 2005.  Included in the2006 interest expense was $17.5 million for note repurchase premiums and thewrite-off of unamortized finance fees related to the June 2006 refinancingof the Company’s previous credit agreement and the July 2006 repurchase ofapproximately $150 million principal amount of the 8.875% Senior SecuredNotes due 2009. Also contributing to the increase were higheraverage debt balances, partially offset by lower average interest rates.

 

Net earnings from continuing operations in 2006 were $116.2 millioncompared to a loss from continuing operations of $536.9 million in 2005.  Earnings in both periods included items thatmanagement considers not representative of ongoing operations.  These items decreased net earnings in 2006 by$57.0 million and decreased net earnings in 2005 by $758.3 million.

 

Capital spending for property, plant and equipment for continuingoperations was $285.0 million for 2006 compared with $373.0 million for 2005.

 

24

----

 

***Results of Operations - Comparison of 2006with 2005***

 

*Net Sales*

 

The Company’s net sales by segment for 2006 and2005 are presented in the following table. For further information, see Segment Information included in Note 19 tothe Consolidated Financial Statements.

 
| ** **                | ** ** | **2006**                            | ** ** | **2005** | ** ** |
|---------------------------|------------|-------------------------------------|------------|----------|------------|
| ** **                | ** ** | **(dollars in millions)** | ** ** |
| North America             |       | $                                   | 2,110.4    |     | $          | 1,933.1 |   |
| Europe                    |       | 2,846.6                             |       | 2,796.3  |       |
| Asia Pacific              |       | 804.9                               |       | 782.4    |       |
| South America             |       | 796.5                               |       | 685.1    |       |
| Reportable segment totals |       | 6,558.4                             |       | 6,196.9  |       |
| Other                     |       | 92.0                                |       | 70.0     |       |
| Consolidated totals       |       | $                                   | 6,650.4    |     | $          | 6,266.9 |   |

 

Netsales for 2006 increased $383.5 million, or 6.1%, over 2005.

 

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

 
| Net sales - 2005                           |   |   |   | $      | 6,266.9 |   |
|--------------------------------------------|--------|--------|--------|--------|---------|--------|
| Net effect of price and mix                |   | $      | 233.8  |   |    |   |
| Net effect of volume                       |   | 79.5   |   |   |    |
| Effects of changing foreign currency rates |   | 86.5   |   |   |    |
| Other                                      |   | (16.3  | )      |   |    |
| Total net effect on sales                  |   |   |   | 383.5  |    |
| Net sales - 2006                           |   |   |   | $      | 6,650.4 |   |
|                                            |        |        |        |        |         |        |  |

 

*Segment Operating Profit*

 

OperatingProfit for the reportable segments in the table below includes an allocation ofsome corporate expenses based on both a percentage of sales and direct billingsbased on the costs of specific services provided.  Unallocated corporate expenses and certainother expenses not directly related to the reportable segments’ operations areincluded in Retained Corporate Costs and Other. For further information, see Segment Information included in Note 19 tothe Consolidated Financial Statements.

 
| ** **                         | ** ** | **2006**                            | ** ** | **2005** | ** ** |
|------------------------------------|------------|-------------------------------------|------------|----------|------------|
| ** **                         | ** ** | **(dollars in millions)** | ** ** |
| North America                      |       | $                                   | 187.3      |     | $          | 204.1 |   |
| Europe                             |       | 249.6                               |       | 290.1    |       |
| Asia Pacific                       |       | 102.9                               |       | 125.8    |       |
| South America                      |       | 195.0                               |       | 156.4    |       |
| Reportable segment totals          |       | 734.8                               |       | 776.4    |       |
| Retained corporate costs and other |       | (76.6                               | )          | (77.5    | )          |
| Consolidated totals                |       | $                                   | 658.2      |     | $          | 698.9 |   |

 

25

----

 

Segment Operating Profit for reportable segments for 2006 decreased$41.6 million, or 5.0%, to $734.8 million, compared with Segment OperatingProfit of $776.4 million in 2005.

 

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

 
| Segment Operating Profit - 2005                                                  |   |   |   | $      | 776.4  |   |
|----------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Net effect of price, mix and unit sales volumes                                  |   | $      | 270.1  |   |   |   |
| Productivity, European capacity reduction and cost savings                       |   | 116.4  |   |   |   |
| Inflation, operating expenses, warehouse and delivery, and European  integration |   | (369.4 | )      |   |   |
| Other business impacts including pension expense, and currency translation       |   | (38.5  | )      |   |   |
| Other                                                                            |   | (20.2  | )      |   |   |
| Total net effect on Segment Operating Profit                                     |   |   |   | (41.6  | )      |
| Segment Operating Profit -2006                                                   |   |   |   | $      | 734.8  |   |
|                                                                                  |        |        |        |        |        |        |  |

 

Retained corporate costs and other for 2006 were $76.6 million comparedwith $77.5 million for 2005.

 

*Interest Expense*

 

Interestexpense from continuing operations for 2006 was $349.0 million compared to$325.4 million in 2005.  Included in the2006 interest expense was $17.5 million for both note repurchase premiums andthe write-off of unamortized finance fees related to the June 2006 refinancingof the Company’s previous credit agreement and the July 2006 repurchase ofapproximately $150 million principal amount of the 8.875% Senior SecuredNotes due 2009.  Alsocontributing to the increase were higher average debt balances, partially offsetby lower average interest rates.

 

*Provisionfor Income Taxes*

 

TheCompany’s reported effective tax rate for continuing operations was 43.9% in2006 and (594.9)% in 2005. Excluding the effects of separately taxed items inboth periods, listed in the table below, the Company’s effective tax rate forthe full year 2006 was 40.3% compared with 20.2% for the full year 2005.  The 2006 effective tax rate increasedprincipally because the Company is no longer recording tax benefits on its lossesin the United States.  A shift in mix ofearnings towards higher tax cost countries in other regions of the world alsoincreased the effective tax rate for the year.

 

*MinorityShare Owners’ Interest in Earnings of Subsidiaries*

 

Minorityshare owners’ interest in earnings of subsidiaries for continuing operationsfor 2006 was $43.6 million compared to $35.9 million for 2005. The increase isprimarily attributed to higher earnings from the Company’s operations in SouthAmerica.

 

*Earningsfrom Continuing Operations*

 

For 2006, the Company recorded net earnings fromcontinuing operations of $116.2 million compared to a loss from continuingoperations of $536.9 million for the year ended December 31, 2005.  The after tax effects of the items excludedfrom Segment Operating Profit, the 2006 international net tax benefit, the taxcharge to increase the U.S. valuation allowance, the tax benefit of reversingan accrual for potential

 

26

----

 

tax liabilities, and the additional interest charges,increased or decreased earnings in 2006 and 2005 as set forth in the followingtable (dollars in millions).

 
| ** **                                                                                                                           | ** ** | **Net Earnings  Increase (Decrease)** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **Description**                                                                                                                      | ** ** | **2006**                                        | ** ** | **2005** | ** ** |
| Curtailment of postretirement benefits in The Netherlands                                                                            |       | $                                               | 11.2       |   | $ | — |   |
| Gain on the sale of the Corsico, Italy glass container facility                                                                      |       |                                            |       | 28.1 |   |
| A tax benefit from the reversal of an accrual for potential tax  liabilities                                                         |       |                                            |       | 5.3 |   |
| Reversal of non-U.S. deferred tax asset valuation allowance partially  offset by charges  related to international tax restructuring |       | 5.7                                             |       |   |   |
| Impairment of goodwill in the Asia-Pacific Glass unit                                                                                |       |                                            |       | (494.0 | ) |
| Increase in the U.S. deferred tax valuation allowance                                                                                |       |                                            |       | (300.0 | ) |
| Charge for closing the Godfrey, Illinois plant                                                                                       |       | (27.7                                           | )          |   |   |
| CEO transition charge and other                                                                                                      |       | (20.7                                           | )          |   |   |
| Note repurchase premiums and write-off of finance fees                                                                               |       | (17.1                                           | )          |   |   |
| Gain (loss) from the mark to market effect of natural gas hedge  contracts                                                           |       | (8.4                                            | )          | 2.3 |   |
|                                                                                                                                 |       |                                            |       |   |   |
| Total                                                                                                                                |       | $                                               | (57.0      | ) | $ | (758.3 | ) |
|                                                                                                                                      |            |                                                 |            |  |  |  |  |  |

 

***Discontinued Operations***

 

OnJune 11, 2007, the Company announced that it had concluded the strategicreview process of its plastics portfolio and entered into a definitiveagreement with Rexam PLC to sell its plastics packaging business.  On July 31, 2007, the Company completedthe sale for approximately $1.825 billion in cash.

 

Included in the sale were 19 plastics manufacturing plants in the U.S.(including Puerto Rico), Mexico, Brazil, Hungary, Singapore and Malaysia.  The plastics packaging business is comprisedof HealthCare Packaging and Closure & Specialty Products which design,manufacture and sell plastic packaging solutions for companies in thepharmaceutical, healthcare, food and beverage, personal care, household andautomotive industries.  The plasticspackaging business comprised the Company’s former Plastics Packaging segment.

 

Asrequired by FAS No. 144, the Company has presented the results ofoperations for the plastics packaging business in the Consolidated Results ofOperations for the years ended December 31, 2007, 2006 and 2005 asdiscontinued operations.  Interestexpense was allocated to the discontinued operations based on debt that wasrequired by an amendment to the Secured Credit Agreement to be repaid from thenet proceeds.  Amounts for the priorperiods have been reclassified to conform to this presentation. At December 31,2006, the assets and liabilities of the plastics packaging business arepresented in the Consolidated Balance Sheet as the assets and liabilities ofdiscontinued operations.

 

### **Thefollowing summarizes the revenues and expenses of the discontinued operationsas reported in the consolidated results of operations for the periodsindicated:**

 

27

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| ** **                                                        | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                        | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Revenues:**                                                     | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                         |       | $                                           | 455.0      |   | $ | 771.6 |   | $ | 812.1 |   |
| Other revenue (expense), net                                      |       | (0.1                                        | )          | 2.9 |   | 7.5 |   |
|                                                              |       | 454.9                                       |       | 774.5 |   | 819.6 |   |
| **Costs and expenses:**                                           |       |                                        |       |   |   |   |   |
| Manufacturing, shipping, and delivery                             |       | 343.5                                       |       | 602.9 |   | 634.6 |   |
| Research, development and engineering                             |       | 8.3                                         |       | 15.1 |   | 14.5 |   |
| Selling and administrative                                        |       | 20.7                                        |       | 34.4 |   | 32.9 |   |
| Interest                                                          |       | 80.6                                        |       | 139.2 |   | 141.3 |   |
| Other                                                             |       | 1.2                                         |       | 5.4 |   | 7.8 |   |
|                                                              |       | 454.3                                       |       | 797.0 |   | 831.1 |   |
| Earnings (loss) before items below                                |       | 0.6                                         |       | (22.5 | ) | (11.5 | ) |
| Provision (credit) for income taxes                               |       | (2.4                                        | )          | 1.2 |   | (12.8 | ) |
| Minority share owners’ interests in earnings of subsidiaries |       | 0.2                                         |       |   |   |   |   |
| Gain on sale of discontinued operations                           |       | 1,038.5                                     |       |   |   | 1.2 |   |
| Net earnings (loss) from discontinued operations                  |       | $                                           | 1,041.3    |   | $ | (23.7 | ) | $ | 2.5 |   |

 

### **Thegain on the sale of discontinued operations of $1,038.5 million includescharges totaling $62.1 million for debt retirement costs, consistingprincipally of redemption premiums and write off of unamortized fees, and again of $8.7 million for curtailment and settlement of pension and otherpostretirement benefits.  The gain alsoincludes a net provision for income taxes of $38.2 million, consisting of taxeson the gain of $445.0 million that are substantially offset by a credit of$406.8 million for the reversal of valuation allowances against existing taxloss carryforwards.  The sale agreementprovides for an adjustment of the selling price based on working capital levelsand certain other factors.  The Companydoes not expect any price adjustment to have a material effect on the reportedgain on the sale of discontinued operations or cash flows.**

### ** **

### **Thecondensed consolidated balance sheet at December 31, 2006 included thefollowing assets and liabilities related to the discontinued operations:**

 

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| ** **                                     | ** ** | **Balance at  December 31,  2006** | ** ** |
|------------------------------------------------|------------|----------------------------------------------|------------|
| **Assets:**                                    |       |                                         |       |
| Inventories                                    |       | $                                            | 46.9       |   |
| Accounts receivable                            |       | 56.7                                         |       |
| Other current assets                           |       | 1.2                                          |       |
| Total current assets                           |       | 104.8                                        |       |
| Goodwill                                       |       | 209.5                                        |       |
| Other long-term assets                         |       | 43.0                                         |       |
| Net property, plant and equipment              |       | 319.2                                        |       |
| Total assets                                   |       | $                                            | 676.5      |   |
| **Liabilities:**                               |       |                                         |       |
| Accounts payable and other current liabilities |       | $                                            | 70.9       |   |
| Other long-term liabilities                    |       | 1.6                                          |       |
| Total liabilities                              |       | $                                            | 72.5       |   |

 

***2007Non-operational Items***

 

*Capacity Curtailment*

 

Duringthe third and fourth quarters of 2007, the Company recorded charges totaling$100.3 million ($84.1 million after tax), for restructuring and assetimpairment in the Caribbean, Europe, and North America.  The charges reflect the initial conclusionsof the Company’s global profitability review.

 

Inthe Company’s 50%-owned affiliate in the Caribbean, 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.

 

InEurope and North America, the Company decided to curtail selected productioncapacity.  Because the futureundiscounted cash flows of the related asset groups were not sufficient torecover their carrying amounts, the assets were considered impaired.  As a result the assets were written down tothe extent their carrying amounts exceeded fair value.  The curtailment of plant capacity resulted inelimination of approximately 558 jobs and a corresponding reduction in theCompany’s workforce.  The Company accruedcertain employee separation costs, plant clean up, and other exit costs.  In total, impairments, accrued costs, andother valuation adjustments amounted to $55.3 million with probable future cashexpenditures amounting to $30.6 million. The Company expects that the majority of these costs will be paid out bythe end of 2008.

 

***2006Non-operational Items***

 

*Capacity Curtailment*

 

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 asmall recycling facility in Ohio. As a result, the Company recorded a charge of$29.7 million ($27.7 million after tax) in the third quarter of 2006.

 

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Theclosing of these facilities resulted in the elimination of approximately 260jobs and a corresponding reduction in the Company’s workforce.  The Company anticipates that it will pay outapproximately $11.5 million in cash related to insurance, benefits, plant cleanup, and other plant closing costs. The Company expects that the majority ofthese costs will be paid out by the end of 2008.

 

*CEO Transition and Other Separation Charges*

 

TheCompany recorded a fourth quarter charge of $20.8 million ($20.7 million aftertax) associated with the separation agreement with its former CEO and withseveral members of the European management team. The charge also included costsrelated to the employment agreement with the Company’s new CEO.

 

*Other Postretirement Benefits*

 

TheCompany recorded a fourth quarter gain of $15.9 million ($11.2 million aftertax) related to curtailment of certain postretirement benefits in TheNetherlands as a result of certain improvements in retiree medical benefitsoffered by the government.

 

***Tax Benefit***

 

**In the fourth quarter, the Company recorded anet tax benefit of $5.7 million from the reversal of a valuation allowanceagainst certain non-U.S. deferred tax assets due to improving operations,partially offset by charges related to international tax restructuring.**

 

***2005Non-operational Items***

 

*Impairmentof Goodwill*

 

Duringthe fourth quarter of 2005, the Company completed its annual impairment testingusing business enterprise values and determined that impairment existed in thegoodwill of its Asia Pacific Glass business unit. Lower projected cash flows asa result of competitive pricing pressures in the Company’s Australian glassoperations caused the decline in the business enterprise value.  Following a review of the valuation of theunit’s identifiable assets, the Company recorded an impairment charge of $494.0million to reduce the reported value of its goodwill.

 

*DeferredTax Valuation Allowance*

 

TheCompany recorded a non-cash charge of $300.0 million in the fourth quarter of2005 to increase the valuation allowance against its accumulated net deferredtax assets in the United States.  TheCompany had recorded net deferred tax assets related principally to asbestoscharges and net operating losses in recent years.  The amount of valuation allowance requiredunder the provisions of FAS No. 109 is dependent upon projected near-termU.S. profitability including the effects of tax planning.  During the fourth quarter of 2005, theCompany determined that an additional valuation allowance was necessary becauseof the near-term effects on U.S. profitability of continued asbestos-relatedpayments, significant interest expense, rising energy costs and other costincreases.  As a result of the lowerprojected U.S. taxable income, the Company determined that certain tax planningstrategies were no longer prudent and feasible and, therefore, were not likelyto be implemented.

 

***Capital Resources and Liquidity***

 

*Current and Long-Term Debt*

 

30

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The Company’s total debt at December 31, 2007 was $3.71 billion,compared to $5.46 billion at December 31, 2006.

 

On June 14, 2006, the Company’s subsidiaryborrowers entered into the Secured Credit Agreement (the “Agreement”).  At December 31, 2007, 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 $191.5million term loan and a €191.5 million term loan, each of which has a finalmaturity date of June 14, 2013.

 

At December 31, 2007, the Company’ssubsidiary borrowers had unused credit of $820.9 million available under theAgreement.

 

The weighted average interest rate on borrowings outstanding under theAgreement at December 31, 2007 was 6.67%.

 

The Agreement contains covenants and provisionsthat, among other things, restrict the ability of the Company and itssubsidiaries to dispose of assets, incur additional indebtedness, prepay otherindebtedness or amend certain debt instruments, pay dividends, create liens onassets, enter into contingent obligations, enter into sale and leasebacktransactions, make investments, loans or advances, make acquisitions, engage inmergers or consolidations, change the business conducted, engage in certain transactionswith affiliates and otherwise restrict certain corporate activities.  In addition, the Agreement contains financialcovenants that require the Company to maintain specified financial ratios andmeet specified tests based upon financial statements of the Company and itssubsidiaries on a consolidated basis, maximum leverage ratios and specifiedcapital expenditure tests.

 

During March 2007, a subsidiary of the Company issued Senior Notestotaling €300.0 million.  The notes bearinterest at 6.875% and are due March 31, 2017.  The notes are guaranteed by substantially allof the Company’s domestic subsidiaries. The proceeds were used to retire the $300 million principal amount of OIInc.’s 8.10% Senior Notes which matured in May 2007, and to reduceborrowings under the revolving credit facility.

 

On July 31, 2007, the Company completed the sale of its plasticspackaging business 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 provided 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% 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 July of 2006, a subsidiary of the Company used borrowingsunder the Agreement to repurchase $150.0 million principal amount of the 8.875%Senior Secured Notes due 2009.  Duringthe third quarter of 2006, the Company recorded $7.3 million of additionalinterest charges for note repurchase premiums and the related write-off ofunamortized finance fees.

 

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During the fourth quarter of 2005, the Company expanded the capacity ofits European accounts receivable securitization program from €200 million to€320 million to include operations in Italy and the United Kingdom. Theaccounts receivable securitization program provides lower costs of financingthan traditional bank debt. The terms of this expansion resulted in changingfrom off-balance sheet to on-balance sheet accounting for the program byconsolidating both the accounts receivable in the program and the securedindebtedness of the same amount. Cash inflows related to receipts fromcustomers in payment of the accounts receivable consolidated at December 13,2005 have been classified as investing cash inflows in the accompanyingConsolidated Statement of Cash Flows.

 

During October of 2006, the Company entered into a new €300million European accounts receivable securitization program.  The new program replaced the previousEuropean program, described in the preceding paragraph, which was set toterminate in October 2006.

 

Information related to the Company’s accounts receivable securitizationprogram is as follows:

 
| ** **                             | ** ** | **Dec. 31,** | ** ** | **Dec. 31,** | ** ** |
|----------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                             | ** ** | **2007**          | ** ** | **2006**          | ** ** |
| Balance (included in short-term loans) |       | $                 | 361.8      |              | $          | 279.4 |   |
|                                   |       |              |       |              |       |
| Weighted average interest rate         |       | 5.48              | %          | 5.60              | %          |
|                                        |            |                   |            |                   |            |  |  |

 

*CashFlows*

 

For2007, cash provided by continuing operating activities was $972.2 millioncompared with $272.3 million for 2006.  The 2006 amountexcludes $127.3 million of collections on receivables arising from theconsolidation of the receivables securitization program as described in Note 5to the Consolidated Financial Statements. Increased Reportable Segment Operating Profit of $372.2 millioncontributed substantially to the improvement in 2007.  Including the 2006 collection of receivablesfrom the securitization program, working capital usage improved approximately$166.0 million in 2007 compared to 2006 due to management’s continuing focus onreducing the Company’s investment in working capital.

 

OI Inc. has substantial obligations related to semiannual interestpayments on $1.05 billion of outstanding public debt securities.  In addition, OI Inc. pays aggregate annualdividends of $21.5 million on 9,050,000 share of its $2.375 convertible preferredstock.  OI Inc. also makes, and expectsin the future to make, substantial indemnity payments and payments for legalfees and expenses in connection with asbestos-related lawsuits and claims.  OI Inc.’s asbestos-related payments for 2007were $347.1 millioncompared to $162.5 million for 2006.  OI Inc. relies primarily on distributionsfrom the Company to meet these obligations. Based on OI Inc.’s expectations regarding future payments for lawsuitsand claims, and also based on the Company’s expected operating cash flow, theCompany believes that the payments to OI Inc. for any deferred amounts ofpreviously settled or otherwise determined lawsuits and claims, and theresolution of presently pending and anticipated future lawsuits and claimsassociated with asbestos, will not have a material adverse effect upon theCompany’s liquidity on a short-term or long-term basis.

 

Capital spending for property, plant and equipment (continuingoperations) was $292.5 million compared with $285.0 million in the prioryear.  The Company capitalized $27.0 millionand $25.3 million in 2007 and 2006, respectively, under capital leaseobligations with the related financing recorded as long term debt.  The Company continues to focus on reducingcapital spending and improving its return on invested capital by improvingcapital efficiency.

 

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The Company anticipates that cash flow from itsoperations and from utilization of credit available under the Agreement will besufficient to fund its operating and seasonal working capital needs, debtservice and other obligations on a short-term and long-term basis includingpayments to OI Inc., described above.

 

*Contractual Obligations and Off-Balance Sheet Arrangements*

 

The following information summarizes the Company’s significantcontractual cash obligations at December 31, 2007 (dollars in millions).

 
| ** **                                       | ** ** | **Payments due by period** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                       | ** ** | **Total**                                 | ** ** | **Less than  one year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than 5  years** | ** ** |
| **Contractual cash obligations:**      |       |                                      |       |   |   |   |   |   |   |   |   |
| Long-term debt                                   |       | $                                         | 3,215.6    |   | $ | 263.7 |   | $ | 270.0 |   | $ | 330.3 |   | $ | 2,351.6 |   |
| Capital lease obligations                        |       | 62.9                                      |       | 1.6 |   | 16.9 |   | 19.8 |   | 24.6 |   |
| Operating leases                                 |       | 169.9                                     |       | 52.4 |   | 73.9 |   | 32.9 |   | 10.7 |   |
| Interest (1)                                     |       | 1,459.0                                   |       | 254.2 |   | 428.9 |   | 373.6 |   | 402.3 |   |
| Energy purchases                                 |       | 100.8                                     |       | 98.5 |   | 2.3 |   |   |   |   |   |
| Pension benefit plan contributions               |       | 62.8                                      |       | 62.8 |   |   |   |   |   |   |   |
| Postretirement benefit plan benefit payments (1) |       | 309.5                                     |       | 24.3 |   | 47.4 |   | 46.9 |   | 190.9 |   |
| Total contractual cash obligations               |       | $                                         | 5,380.5    |   | $ | 757.5 |   | $ | 839.4 |   | $ | 803.5 |   | $ | 2,980.1 |   |

 
| ** **                                  | ** ** | **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                   |       | $                                                                       | 79.8       |   | $ | 79.8 |   |   |   |   |   |   |   |
| Guarantees                                  |       | 9.0                                                                     |       | 9.0 |   |   |   |   |   |   |   |
| Total commercial commitments                |       | $                                                                       | 88.8       |   | $ | 88.8 |   | $ | – |   | $ | – |   | $ | – |   |
|                                             |            |                                                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1) Amounts based on rates and assumptions at December 31,2007.

 

The Company is unable to make a reasonably reliable estimate as to whencash settlement with taxing authorities may occur for our unrecognized taxbenefits.  Therefore, our liability forunrecognized tax benefits is not included in the table above.  See Note 10 to the Consolidated FinancialStatements for additional information.

 

***Critical Accounting Estimates***

 

The Company’s analysis and discussion of its financial condition andresults of operations are based upon its consolidated financial statements thathave been prepared in accordance with accounting principles generally acceptedin the United States (“U.S. GAAP”).  Thepreparation of financial statements in conformity with U.S. GAAP requiresmanagement to make estimates and assumptions that affect the reported amountsof assets, liabilities, revenues and expenses, and the disclosure of contingentassets and liabilities.  The Companyevaluates these estimates and assumptions on an ongoing basis.  Estimates and assumptions are based onhistorical and other factors believed to be reasonable under the circumstancesat the time the financial statements are issued.  The results of these estimates may form thebasis of the 

 

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carrying value of certain assets and liabilities and may not be readilyapparent from other sources.  Actualresults, under conditions and circumstances different from those assumed, maydiffer from estimates.

 

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

 

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

 

*Property, Plant and Equipment*

 

The net carrying amount ofproperty, plant, and equipment (“PP&E”) at December 31, 2007 totaled$2,950.0 million, representing 32% of total assets.  Depreciation expense from continuingoperations during 2007 totaled $423.4 million, representing over 5% of totalcosts 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 isrecorded at cost, which is generally objectively quantifiable when assets arepurchased singly.   However, when assetsare purchased in groups, or as part of a business, costs assigned to PP&Eare based on an estimate of fair value of each asset at the date ofacquisition.  These estimates are basedon assumptions about asset condition, remaining useful life and marketconditions, among others.  The Companyfrequently employs expert appraisers to aid in allocating cost among assetspurchased as a group.

 

Included in the cost basisof  PP&E are those costs whichsubstantially increase the useful lives or capacity of existing PP&E.  Significant judgment is needed to determinewhich costs should be capitalized under these criteria and which costs shouldbe expensed as a repair or maintenance expenditure.  For example, the Company frequently incursvarious costs related to its existing glass melting furnaces and formingmachines and must make a determination of which costs, if any, to capitalize.  The Company relies on the experience andexpertise of its operations and engineering staff to make reasonable andconsistent judgments regarding increases in useful lives or capacity ofPP&E.

 

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

 

The estimated economicuseful life of an asset is monitored to determine its appropriateness,especially in light of changed business circumstances. For example,technological advances, excessive wear and tear, or changes in customers’requirements may result in a shorter estimated useful life than originallyanticipated. In these cases, the Company depreciates the remaining net bookvalue over the new estimated remaining life, thereby increasing depreciationexpense per year on a prospective basis. Likewise, if the estimated useful life is increased, the adjustment tothe useful life decreases depreciation expense per year on a prospectivebasis.  Changes in economic useful lifeassumptions did not have a material impact on the Company’s reported results in2007, 2006 or 2005.

 

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*Impairment of Long-Lived Assets*

 

**Property, Plant, and Equipment** –As requiredby FAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets,” the Company tests for impairment of PP&E whenever events orchanges in circumstances indicate that the carrying amount of the assets maynot be recoverable.  PP&E held foruse in the Company’s business is grouped for impairment testing at the lowestlevel for which cash flows can reasonably be identified, typically a geographicregion.  The Company assessesrecoverability by comparing the carrying amount of the asset group to theestimated undiscounted future cash flows expected to be generated by theassets.  If an asset group is consideredimpaired, the impairment loss to be recognized is measured as the amount bywhich the asset group’s carrying amount exceeds its fair value.  PP&E held for sale is reported at thelower of carrying amount or fair value less cost to sell.

 

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

 

In mid-2007, the Companybegan a strategic review of its global manufacturing footprint.  The review is expected to be ongoing in 2008and 2009.  As an initial result of thisreview, during the third and fourth quarters of 2007, the Company recordedcharges that included asset impairments in North America, the Caribbean andEurope.  It is possible that the Companymay conclude in the future that it will close or temporarily idle additionalselected facilities or production lines and reduce headcount to increase operatingperformance and cash flows.  As of December 31,2007, no other decisions had been made and no events had occurred that wouldrequire an additional evaluation of possible impairment in accordance with FAS No. 144.  For additional information on chargesrecorded in 2007 and 2006, see Note 15 to the Consolidated FinancialStatements.

 

**Goodwill** – Goodwill at December 31,2007 totaled $2,428.1 million, representing 26% of total assets.  As required by FAS No. 142, “Goodwilland Other Intangibles,” 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.

 

During the fourth quarter of 2007, the Company completed its annualtesting and determined that no impairment of goodwill existed.

 

The testing performed as of October 1, 2007, indicated asignificant excess of BEV over book value for each unit.  However, if the Company’s projected futurecash flows are substantially lower, or if the assumed weighted average cost ofcapital is substantially higher, future testing may indicate an impairment ofone or more of the Company’s reporting units and, as a result, the relatedgoodwill will also be impaired.

 

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The Company will monitor conditions throughout 2008 that might significantlyaffect the projections and variables used in the impairment test to determineif a review prior to October 1 may be appropriate.  If the results of impairment testing confirmthat a write down of goodwill is necessary, then the Company will record acharge in the fourth quarter of 2008, or earlier if appropriate.  In the event the Company would be required torecord a significant write down of goodwill, the charge would have a materialadverse effect on reported results of operations and net worth.

 

**OtherLong-Lived Assets** – Other long-lived assets include, among others,equity investments and repair parts inventories.  The Company’s equity investments arenon-publicly traded ventures with other companies in businesses related tothose of the Company.  Equity investmentsare reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount of the investment may not berecoverable.  In the event that a declinein fair value of an investment occurs, and the decline in value is consideredto be other than temporary, an impairment loss is recognized. Summarizedfinancial information of equity affiliates is included in Note 4 to theConsolidated Financial Statements.  Foradditional information on charges recorded in 2007, see Note 15 to theConsolidated Financial Statements.

 

The Company carries a significant amount of repair parts inventories inorder to provide a dependable supply of quality parts for servicing the Company’sPP&E, particularly its glass melting furnaces and forming machines.  The Company evaluates therecoverability of repair parts inventories based on undiscounted projected cashflows, excluding interest and taxes, when factors indicate that impairment mayexist.  If impairment exists, the repairparts are written down to fair value.  The Companycontinually monitors the carrying value of repair parts for recoverability,especially in light of changing business circumstances.  For example, technological advances relatedto, and changes in, the estimated future demand for products produced on theequipment to which the repair parts relate may make the repair partsobsolete.  In these circumstances, theCompany writes down the repair parts to fair value.  For additional information on a chargerecorded in 2006, see Note 15 to the Consolidated Financial Statements.

 

*Pension Benefit Plans*

 

SignificantEstimates - The determination of pension obligations and therelated pension expense or credits to operations involves significantestimates.  The most significantestimates are the discount rate used to calculate the actuarial present valueof benefit obligations and the expected long-term rate of return on planassets.  The Company uses discount ratesbased on yields of high quality fixed rate debt securities at the end of theyear.  At December 31, 2007, theweighted average discount rate for all plans was 5.87%.  The Company uses an expected long-term rateof return on assets that is based on both past performance of the various plans’assets and estimated future performance of the assets.  Due to the nature of the plans’ assets andthe volatility of debt and equity markets, actual returns may varysignificantly from year to year.  TheCompany refers to average historical returns over longer periods (up to 10years) in determining its expected rates of return because short-termfluctuations in market values do not reflect the rates of return the Companyexpects to achieve based upon its long-term investing strategy.  For purposes of determining pension chargesand credits in 2008, the Company’s estimated weighted average expectedlong-term rate of return on plan assets is 8.1%, unchanged from 2007.  The Company recorded pension expense fromcontinuing operations of $6.9 million, $36.2 million, and $3.4 million in 2005,2006, and 2007, respectively, from its principal defined benefit pensionplans.  The improvement in 2007 isprincipally a result of higher asset values in the U.S. plans.  Depending on currency translation rates, theCompany expects to record approximately $26 million of pension income for thefull year of 2008.  The expectedimprovement in 2008 is a result of higher asset values, principally in the U.S.plans.

 

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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 $20 millionin the pretax pension amount for the full year 2008.  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.

 

Recognitionof Funded Status –FAS No. 158, “Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans”, requires employers toadjust the assets and liabilities related to defined benefit plans so that theamounts reflected on the balance sheet represent the overfunded or underfundedstatus of the plans.  These funded statusamounts are measured as the difference between the fair value of plan assetsand actuarially calculated benefit obligations as of the balance sheetdate.  At December 31, 2007, theAccumulated Other Comprehensive Loss component of share owners’ equity wasdecreased by $79.1 million ($70.5 million after tax) to reflect a net increasein the funded status of the Company’s plans at that date.

 

Fundingand Credit Compliance – The Company believes it will not berequired to make cash contributions to the U.S. plans for at least severalyears.  The Company expects to contributeapproximately $62.8 million to its non-U.S. defined benefit pension plans in 2008,compared with $63.9 million in 2007.

 

*IncomeTaxes*

 

TheCompany accounts for income taxes as required by the provisions of FAS No. 109,“Accounting for Income Taxes,” under which deferred tax assets and liabilitiesare recognized for the tax effects of temporary differences between thefinancial reporting and tax bases of assets and liabilities measured usingenacted tax rates.

 

Asreferenced in Note 10 to the Financial Statements, the Company adopted FASBInterpretation 48, “Accounting forUncertainty in Income Taxes,” (“FIN 48”), as of January, 1, 2007.  Management judgment is required indetermining income tax expense and the related balance sheet amounts.  In addition, under FIN 48 judgments are requiredconcerning the 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. TheCompany believes that its recorded tax liabilities adequately provide for theprobable outcome of these assessments.

 

Deferredtax assets are also recorded for operating losses and tax credit carryforwards.However, FAS No. 109 requires that a valuation allowance be recorded whenit is more likely than not that some portion or all of the deferred tax assetswill not be realized.  This assessment islargely dependent upon projected near-term profitability including the effectsof tax planning.  Deferred tax assets andliabilities are determined separately for each tax jurisdiction in which theCompany conducts its 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 and the accrued liability for asbestos-related costs that arenot deductible until paid.  The deferredtax assets are partially offset by deferred tax liabilities, the mostsignificant of which relate to the prepaid pension asset and accelerateddepreciation.  The Company has recorded avaluation allowance for the portion of U.S. deferred tax assets not offset bydeferred tax liabilities.  During thethird quarter of 2007 the Company sold its discontinued plasticsoperations.  For tax purposes, the gainon the sale will be substantially offset by capital and net operating losscarryforwards. The credit for the corresponding reduction in the valuation allowanceof $406.8 million was classified as a component of the gain on sale ofdiscontinued operations.  In 2007 the 

 

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Companyimplemented a plan to restructure this ownership and intercompany obligationsof certain foreign subsidiaries.  Theseactions resulted in taxation of a significant portion of previously unremittedforeign earnings and will transfer a portion of the Company’s debt serviceobligations to operations outside the U.S. in order to better balance operatingcash flows with financing costs on a global basis.  The foreign earnings reported as taxable inthe U.S. were offset by net operating loss carryforwards and foreign taxcredits.  Foreign tax creditcarryforwards arising from the restructuring were fully offset by an increasein the valuation allowance.

## ** **

## **ITEM 7A.               QUALITATIVE AND QUANTITATIVEDISCLOSURES ABOUT MARKET RISK**

## ** **

Market risks relating to the Company’s operations result primarily fromfluctuations in foreign currency exchange rates, changes in interest rates, andchanges in commodity prices, principally energy.  The Company uses certain derivativeinstruments to mitigate a portion of the risk associated with changing foreigncurrency exchange rates and fluctuating energy prices.  In addition, the Company uses interest rateswap agreements to manage a portion of fixed and floating rate debt and toreduce interest expense.  Theseinstruments carry varying degrees of counterparty credit risk.  To mitigate this risk, the Company hasestablished limits on the exposure with individual counterparties and theCompany regularly monitors these exposures. Substantially all of these exposures are with counterparties that arerated single-A or above.

 

***Foreign Currency Exchange Rate Risk***

 

*Earnings of operations outside the United States*

 

A substantial portion of the Company’s operations are conducted bysubsidiaries outside the U.S.  Theprimary international markets served by the Company’s subsidiaries are inCanada, Australia, South America (principally Colombia, Brazil and Venezuela),and Europe (principally Italy, France, The Netherlands, Germany, the UnitedKingdom, and Poland).  In general,revenues earned and costs incurred by the Company’s major internationaloperations are denominated in their respective local currencies.  Consequently, the Company’s reportedfinancial results could be affected by factors such as changes in foreigncurrency exchange rates or highly inflationary economic conditions in theinternational markets in which the Company’s subsidiaries operate.  When the U.S. dollar strengthens againstforeign currencies, the reported dollar value of local currency earningsgenerally decreases; when the U.S. dollar weakens against foreign currencies,the reported U.S. dollar value of local currency earnings generally increases.  The Company does not have any significantforeign subsidiaries whose functional currency is the U.S. dollar, however, ifeconomic conditions in Venezuela were to decline, the Company may be requiredto adopt the U.S. dollar as the functional currency for its subsidiaries inthat country.  The Company does not hedgethe foreign currency exchange rate risk related to earnings of operationsoutside the United States.

 

*Borrowings not denominated in the functional currency*

 

Becausethe Company’s subsidiaries operate within their local economic environment, theCompany believes 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 

 

38

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Companyto reported losses or gains in the event the foreign currency strengthens orweakens against the U.S. dollar.

 

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

 

TheCompany believes the near term exposure to foreign currency exchange rate riskof its foreign currency risk sensitive instruments was not material at December 31,2007 and 2006.

 

***Interest Rate Risk***

 

TheCompany’s interest expense is most sensitive to changes in the general level ofU.S. interest rates applicable to its U.S. dollar indebtedness.

 

TheCompany has entered into a series of interest rate swap agreements with a totalnotional amount of $750 million that mature from 2008through 2013.  The swaps wereexecuted in order to: (i) convert a portion of the senior notes and seniordebentures fixed-rate debt into floating-rate debt; (ii) maintain acapital structure containing appropriate amounts of fixed and floating-ratedebt; and (iii) reduce net interest 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.

 

Thefollowing table provides information about the Company’s interest ratesensitivity related to its significant debt obligations and interest rate swapsat December 31, 2007.  For debtobligations, the table presents principal cash flows and related weighted-averageinterest rates by expected maturity date. For interest rate swaps, the table presents notional amounts andweighted-average interest rates by contract maturity date.  Notional amounts are used to calculate thecontractual cash flows to be exchanged under the swap contracts.

 

39

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| **(dollars in millions)**               | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **There-  after** | ** ** | **Total** | ** ** | **Fair  Value at  12/31/2007** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|-------------------|------------|-----------|------------|-------------------------------------|------------|
|                                              |       |     |       |     |       |     |       |     |       |     |       |              |       |      |       |                                |       |
| Long-term debt at variable rate:                  |       |     |       |     |       |     |       |     |       |     |       |              |       |      |       |                                |       |
| Principal by expected maturity                    |       | $        | 15.4       |     | $          | 17.6     |       | $        | 16.3       |     | $          | 191.3             |       | $         | 158.8      |                                | $          | 503.4 |   | $ | 902.8 |   | $ | 902.8 |   |
| Avg. principal outstanding                        |       | $        | 895.1      |     | $          | 878.6    |       | $        | 861.7      |     | $          | 853.5             |       | $         | 582.8      |                                | $          | 251.7 |   |   |   |   |   |
| Avg. interest rate                                |       | 6.67     | %          | 6.67     | %          | 6.67     | %          | 6.67     | %          | 6.67     | %          | 6.67              | %          |      |       |                                |       |
|                                              |       |     |       |     |       |     |       |     |       |     |       |              |       |      |       |                                |       |
| Long-term debt at fixed rate:                     |       |     |       |     |       |     |       |     |       |     |       |              |       |      |       |                                |       |
| Principal by expected maturity                    |       | $        | 250.0      |     |       |     | $          | 250.0    |       |     |       |              |       |      | $          |  1,872.6                       |       | $ | 2,372.6 |   | $ | 2,346.2 |   |
| Avg. principal outstanding                        |       | $        | 2,216.4    |     | $          | 2,122.6  |       | $        | 1,966.4    |     | $          | 1,872.6           |       | $         | 1,872.6    |                                | $          |  1,872.6 |   |   |   |   |   |
| Avg. interest rate                                |       | 7.31     | %          | 7.31     | %          | 7.29     | %          | 7.28     | %          | 7.28     | %          | 7.28              | %          |      |       |                                |       |
|                                              |       |     |       |     |       |     |       |     |       |     |       |              |       |      |       |                                |       |
| Interest rate swaps (pay variable/receive fixed): |       |     |       |     |       |     |       |     |       |     |       |              |       |      |       |                                |       |
| Notional by expected maturity                     |       | $        | 250.0      |     |       |     | $          | 250.0    |       |     |       |              |       | $         | 250.0      |                                | $          | 750.0 |   | $ | (3.1 | )  |
| Avg. notional outstanding                         |       | $        | 593.8      |     | $          | 500.0    |       | $        | 343.8      |     | $          | 250.0             |       | $         | 250.0      |                                | $          | 250.0 |   |   |   |   |   |
| Avg. pay rate margin over U.S. LIBOR              |       | 3.46     | %          | 3.45     | %          | 3.56     | %          | 3.70     | %          | 3.70     | %          | 3.70              | %          |      |       |                                |       |
| Avg. fixed receive rate                           |       | 7.79     | %          | 7.88     | %          | 8.05     | %          | 8.25     | %          | 8.25     | %          | 8.25              | %          |      |       |                                |       |
|                                                   |            |          |            |          |            |          |            |          |            |          |            |                   |            |           |            |                                     |            |  |  |  |  |  |  |  |  |  |

 

TheCompany believes the near term exposure to interest rate risk of its debtobligations and interest rate swaps has not changed materially since December 31,2006.

 

***Commodity Price 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, 2007, the Company hadentered into commodity futures contracts for approximately 50% (approximately11,680,000 MM BTUs) of its estimated North American usage requirements for thefull year of 2008.

 

TheCompany believes the near term exposure to commodity price risk of itscommodity futures contracts was not material at December 31, 2007.

 

***Forward Looking Statements***

 

This document contains “forward looking” statements within the meaningof Section 21E of the Securities Exchange Act of 1934 and Section 27Aof the Securities Act of 1933. Forward-looking statements reflect the Company’scurrent expectations and projections about future events at the time, and thusinvolve uncertainty and risk. It is possible the Company’s future financialperformance may differ from 

 

40

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expectations due to a variety of factors including, but not limited tothe following: (1) foreign currency fluctuations relative to the U.S.dollar, (2) changes in capital availability or cost, including interestrate fluctuations, (3) the general political, economic and competitiveconditions in markets and countries where the Company has its operations,including disruptions in the supply chain, competitive pricing pressures,inflation or deflation, and changes in tax rates and laws, (4) consumerpreferences for alternative forms of packaging, (5) fluctuations in rawmaterial and labor costs, (6) availability of raw materials, (7) costsand availability of energy, (8) transportation costs, (9) the abilityof the Company to raise selling prices commensurate with energy and other costincreases, (10) consolidation among competitors and customers, (11) theability of the Company to integrate operations of acquired businesses andachieve expected synergies, (12) unanticipated expenditures with respect toenvironmental, safety and health laws, (13) the performance by customers oftheir obligations under purchase agreements, and (14) the timing and occurrenceof events which are beyond the control of the Company, including events relatedto OI Inc.’s asbestos-related claims. It is not possible to foresee or identifyall such factors. Any forward looking statements in this document are based oncertain assumptions and analyses made by the Company in light of its experienceand perception of historical trends, current conditions, expected futuredevelopments, and other factors it believes are appropriate in thecircumstances. Forward-looking statements are not a guarantee of futureperformance and actual results or developments may differ materially fromexpectations. While the Company continually reviews trends and uncertaintiesaffecting the Company’s results of operations and financial condition, theCompany does not assume any obligation to update or supplement any particularforward looking statements contained in this document.

 

## **ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 
| ** **                                                      | ** ** | ** ** |
|-----------------------------------------------------------------|------------|------------|
|                                                            |       |       |
| Report of Independent Registered Public Accounting  Firm        |       |       |
|                                                            |       |       |
| Consolidated Balance Sheets at December 31, 2007  and 2006 |       |       |
|                                                            |       |       |
| For the years ended December 31, 2007, 2006, and 2005:     |       |       |
|                                                            |       |       |
| Consolidated Results of Operations                              |       |       |
| Consolidated Share Owner’s Equity                          |       |       |
| Consolidated Cash Flows                                         |       |       |
|                                                            |       |       |
| Notes to Consolidated Financial Statements                      |       |       |
|                                                            |       |       |
| Selected Quarterly Financial Data                               |       |       |

 

41

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

The Board of Directors and Share Owner ofOwens-Illinois Group, Inc.

 

We have audited the accompanying consolidatedbalance sheets of Owens-Illinois Group, Inc. and subsidiaries as of December 31,2007 and 2006, and the related consolidated statements of results ofoperations, share owner’s equity, and cash flows for each of the three years inthe period ended December 31, 2007. Our audits also included the financial statement schedule listed in theIndex at Item 15(a).  These financialstatements and schedule are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements and schedule based on ouraudits.

 

We conducted our audits in accordance withthe standards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial 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, the financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of Owens-Illinois Group, Inc. and subsidiaries at December 31,2007 and 2006, and the consolidated results of their operations and their cashflows for each of the three years in the period ended December 31, 2007,in conformity with U.S. generally accepted accounting principles.  Also, in our opinion, the related financialstatement schedule, when considered in relation to the basic financialstatements taken as a whole, presents fairly in all material respects theinformation set forth therein.

 

We also have audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States),Owens-Illinois Group, Inc.’s internal control over financial reporting asof December 31, 2007, based on criteria established in Internal Control**—**Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated February 29,2008 expressed an unqualified opinion thereon.

 

As discussed in Notes 1, 12 & 13 tothe consolidated financial statements, the Company changed its method ofaccounting for stock-based compensation, defined benefit pension plans andother postretirement plans, respectively, in 2006.

 

 
|   | /s/ Ernst & Young LLP |
|--------|--------------------------------|

 

 

Toledo, OhioFebruary 29, 2008

 

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**CONSOLIDATEDRESULTS OF OPERATIONS**   Owens-Illinois Group, Inc.

Dollars in millions, exceptper share amounts

 
| **Years ended December 31,**                        | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                               |       |     |       |     |       |     |       |
| Revenues:                                                          |       |     |       |     |       |     |       |
| Net sales                                                          |       | $        | 7,566.7    |     | $          | 6,650.4  |       | $ | 6,266.9 |   |
| Royalties and net technical assistance                             |       | 19.7     |       | 16.5     |       | 16.2     |       |
| Equity earnings                                                    |       | 34.1     |       | 23.4     |       | 20.5     |       |
| Interest                                                           |       | 42.3     |       | 19.2     |       | 16.5     |       |
| Other                                                              |       | 16.4     |       | 39.5     |       | 50.0     |       |
|                                                               |       | 7,679.2  |       | 6,749.0  |       | 6,370.1  |       |
| Costs and expenses:                                                |       |     |       |     |       |     |       |
| Manufacturing, shipping, and delivery                              |       | 5,971.4  |       | 5,481.1  |       | 5,084.9  |       |
| Research, development, and engineering                             |       | 65.8     |       | 48.7     |       | 50.9     |       |
| Selling and administrative                                         |       | 520.6    |       | 530.4    |       | 455.2    |       |
| Interest                                                           |       | 348.6    |       | 349.0    |       | 325.4    |       |
| Other                                                              |       | 151.2    |       | 54.7     |       | 525.8    |       |
|                                                               |       | 7,057.6  |       | 6,463.9  |       | 6,442.2  |       |
| Earnings (loss) from continuing operations before  items below     |       | 621.6    |       | 285.1    |       | (72.1    | )          |
| Provision for income taxes                                         |       | 147.8    |       | 125.3    |       | 428.9    |       |
| Minority share owners’ interests in  earnings of subsidiaries |       | 59.5     |       | 43.6     |       | 35.9     |       |
| Earnings (loss) from continuing operations                         |       | 414.3    |       | 116.2    |       | (536.9   | )          |
| Net earnings (loss) of discontinued  operations                    |       | 2.8      |       | (23.7    | )          | 63.1     |       |
| Gain on sale of discontinued operations                            |       | 1,038.5  |       |     |       | 1.2      |       |
| Net earnings (loss)                                                |       | $        | 1,455.6    |     | $          | 92.5     |       | $ | (472.6 | ) |

 

See accompanying Notes to theConsolidated Financial Statements.

 

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

Dollars in millions

 
| **December 31,**                                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                            |       |     |       |     |       |
| **Assets**                                                                      |       |     |       |     |       |
| **Current assets:**                                                             |       |     |       |     |       |
| Cash, including time deposits of $190.8 ($124.5  in 2006)                       |       | $        | 387.7      |     | $          | 222.7 |   |
| Short-term investments                                                          |       | 59.8     |       | 32.7     |       |
| Receivables, less allowances of $36.0 ($28.7  in 2006) for losses and discounts |       | 1,185.6  |       | 1,041.1  |       |
| Inventories                                                                     |       | 1,020.8  |       | 992.1    |       |
| Prepaid expenses                                                                |       | 40.7     |       | 39.3     |       |
| Assets of discontinued operations                                               |       |     |       | 104.8    |       |
| Total current assets                                                            |       | 2,694.6  |       | 2,432.7  |       |
|                                                                            |       |     |       |     |       |
| **Other assets:**                                                               |       |     |       |     |       |
| Equity investments                                                              |       | 81.0     |       | 96.3     |       |
| Repair parts inventories                                                        |       | 155.8    |       | 135.3    |       |
| Prepaid pension                                                                 |       | 566.4    |       | 488.5    |       |
| Deposits, receivables, and other assets                                         |       | 448.7    |       | 466.5    |       |
| Goodwill                                                                        |       | 2,428.1  |       | 2,255.2  |       |
| Assets of discontinued operations                                               |       |     |       | 571.7    |       |
| Total other assets                                                              |       | 3,680.0  |       | 4,013.5  |       |
| **Property, plant, and equipment:**                                             |       |     |       |     |       |
| Land, at cost                                                                   |       | 266.4    |       | 247.7    |       |
| Buildings and equipment, at cost:                                               |       |     |       |     |       |
| Buildings and building equipment                                                |       | 1,126.6  |       | 1,027.7  |       |
| Factory machinery and equipment                                                 |       | 4,748.1  |       | 4,325.3  |       |
| Transportation, office, and miscellaneous  equipment                            |       | 132.4    |       | 118.9    |       |
| Construction in progress                                                        |       | 149.6    |       | 123.0    |       |
|                                                                            |       | 6,423.1  |       | 5,842.6  |       |
| Less accumulated depreciation                                                   |       | 3,473.1  |       | 2,968.1  |       |
| Net property, plant, and equipment                                              |       | 2,950.0  |       | 2,874.5  |       |
| Total assets                                                                    |       | $        | 9,324.6    |     | $          | 9,320.7 |   |

 

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

 
| **December 31,**                                                                               | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Liabilities and Share Owner’s Equity**                                                       |       |     |       |     |       |
| **Current liabilities:**                                                                            |       |     |       |     |       |
| Short-term loans                                                                                    |       | $        | 435.6      |     | $          | 412.8 |   |
| Accounts payable                                                                                    |       | 957.5    |       | 890.2    |       |
| Salaries and wages                                                                                  |       | 193.1    |       | 140.7    |       |
| U.S. and foreign income taxes                                                                       |       | 42.9     |       | 61.5     |       |
| Other accrued liabilities                                                                           |       | 425.1    |       | 316.2    |       |
| Long-term debt due within one year                                                                  |       | 265.3    |       | 324.4    |       |
| Liabilities of discontinued operations                                                              |       |     |       | 70.9     |       |
| Total current liabilities                                                                           |       | 2,319.5  |       | 2,216.7  |       |
| **Liabilities of discontinued operations**                                                          |       |     |       | 1.6      |       |
| **Long-term debt**                                                                                  |       | 3,013.2  |       | 4,726.7  |       |
| **Deferred taxes**                                                                                  |       | 109.4    |       | 111.1    |       |
| **Pension benefits**                                                                                |       | 313.7    |       | 335.0    |       |
| **Nonpension postretirement benefits**                                                              |       | 287.0    |       | 293.1    |       |
| **Other liabilities**                                                                               |       | 387.2    |       | 385.6    |       |
| **Minority share owners’ interests**                                                           |       | 251.7    |       | 206.6    |       |
| **Share owner’s equity:**                                                                      |       |     |       |     |       |
| Common stock, par value $.01 per share,  1,000 shares authorized, 100 shares issued and outstanding |       | —   |       | —   |       |
| Other contributed capital                                                                           |       | 1,110.4  |       | 1,384.7  |       |
| Retained earnings                                                                                   |       | 1,709.4  |       | 253.8    |       |
| Accumulated other comprehensive loss                                                                |       | (176.9   | )          | (594.2   | )          |
| Total share owner’s equity                                                                     |       | 2,642.9  |       | 1,044.3  |       |
| Total liabilities and share owner’s equity                                                     |       | $        | 9,324.6    |     | $          | 9,320.7 |   |

 

See accompanying Notes to the ConsolidatedFinancial Statements.

 

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

Millionsof dollars

 
| **Years ended December 31,**                         | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Other contributed capital**                                       |       |     |       |     |       |     |       |
| Balance at beginning of year                                        |       | $        | 1,384.7    |     | $          | 1,272.3  |       | $ | 1,360.5 |   |
| Net distribution to Parent                                          |       | (274.3   | )          | 112.4    |       | (88.2    | )     |
| Balance at end of year                                              |       | $        | 1,110.4    |     | $          | 1,384.7  |       | $ | 1,272.3 |   |
| **Retained earnings**                                               |       |     |       |     |       |     |       |
| Balance at beginning of year                                        |       | $        | 253.8      |     | $          | 161.3    |       | $ | 633.9 |   |
| Net earnings (loss)                                                 |       | 1,455.6  |       | 92.5     |       | (472.6   | )     |
| Balance at end of year                                              |       | $        | 1,709.4    |     | $          | 253.8    |       | $ | 161.3 |   |
| **Accumulated other comprehensive income  (loss)**                  |       |     |       |     |       |     |       |
| Balance at beginning of year                                        |       | $        | (594.2     | )        | $          | (235.9   | )          | $ | 45.7 |   |
| Foreign currency translation adjustments                            |       | 325.3    |       | 268.0    |       | (288.9   | )     |
| Change in minimum pension liability, net of  tax                    |       |     |       | 40.2     |       | (7.2     | )          |
| Employee benefit plans, net of tax                                  |       | 63.8     |       | (617.2   | )          |     |       |
| Change in fair value of certain derivative  instruments, net of tax |       | 28.2     |       | (49.3    | )          | 14.5     |       |
| Balance at end of year                                              |       | $        | (176.9     | )        | $          | (594.2   | )          | $ | (235.9 | )  |
| Total share owner’s equity                                     |       | $        | 2,642.9    |     | $          | 1,044.3  |       | $ | 1,197.7 |   |
| **Total comprehensive income (loss)**                               |       |     |       |     |       |     |       |
| Net earnings (loss)                                                 |       | $        | 1,455.6    |     | $          | 92.5     |       | $ | (472.6 | )  |
| Foreign currency translation adjustments                            |       | 325.3    |       | 268.0    |       | (288.9   | )     |
| Change in minimum pension liability, net of  tax                    |       |     |       | 40.2     |       | (7.2     | )          |
| Employee benefit plans, net of tax                                  |       | 63.8     |       |     |       |     |       |
| Change in fair value of certain derivative  instruments, net of tax |       | 28.2     |       | (49.3    | )          | 14.5     |       |
| Total                                                               |       | $        | 1,872.9    |     | $          | 351.4    |       | $ | (754.2 | ) |

 

See accompanying Notes to theConsolidated Financial Statements.

 

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**CONSOLIDATEDCASH FLOWS ** Owens-Illinois Group, Inc.

Dollarsin millions

 
| **Years ended December 31,**                                                  | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Operating activities:**                                                                    |       |     |       |     |       |     |       |
| Net earnings (loss)                                                                          |       | $        | 1,455.6    |     | $          | 92.5     |       | $ | (472.6 | ) |
| Net (earnings) loss of discontinued  operations                                              |       | (2.8     | )          | 23.7     |       | (63.1    | )          |
| Gain on sale of discontinued operations                                                      |       | (1,038.5 | )          |     |       | (1.2     | )          |
| Non-cash charges (credits):                                                                  |       |     |       |     |       |     |       |
| Depreciation                                                                                 |       | 423.4    |       | 427.7    |       | 436.1    |       |
| Amortization of deferred costs                                                               |       | 28.9     |       | 22.3     |       | 22.5     |       |
| Amortization of deferred finance fees                                                        |       | 8.6      |       | 5.7      |       | 6.7      |       |
| Deferred tax provision (credit)                                                              |       | 3.2      |       | 4.6      |       | (29.1    | )          |
| Restructuring and asset impairment                                                           |       | 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     | )          |     |       |
| Impairment of goodwill                                                                       |       |     |       |     |       | 494.0    |       |
| U.S. deferred tax valuation allowance                                                        |       |     |       |     |       | 300.0    |       |
| Gains on asset sales                                                                         |       |     |       |     |       | (28.1    | )          |
| Mark to market effect of natural gas hedge  contracts                                        |       |     |       | 8.7      |       | (3.8     | )          |
| Other                                                                                        |       | 50.1     |       | 7.9      |       | 26.8     |       |
| Change in non-current operating assets                                                       |       | (7.4     | )          | (34.5    | )          | (18.9    | )          |
| Reduction of non-current liabilities                                                         |       | (85.4    | )          | (58.1    | )          | (69.5    | )          |
| Change in components of working capital                                                      |       | 36.2     |       | (257.1   | )          | (16.3    | )          |
| Cash provided by continuing operating  activities                                            |       | 972.2    |       | 272.3    |       | 583.5    |       |
| Cash provided by discontinued operating  activities                                          |       | 11.3     |       | 39.3     |       | 38.5     |       |
| Total cash provided by operating activities                                                  |       | 983.5    |       | 311.6    |       | 622.0    |       |
| **Investing activities:**                                                                    |       |     |       |     |       |     |       |
| Additions to property, plant, and equipment  - continuing                                    |       | (292.5   | )          | (285.0   | )          | (373.0   | )          |
| Additions to property, plant, and equipment  - discontinued                                  |       | (23.3    | )          | (35.3    | )          | (31.1    | )          |
| Acquisitions, net of cash acquired                                                           |       | (9.8     | )          |     |       | (11.6    | )          |
| Collections on receivables arising from  consolidation of receivables securitization program |       |     |       | 127.3    |       | 50.7     |       |
| Net cash proceeds from divestitures and  other                                               |       | 1,770.0  |       | 15.1     |       | 167.0    |       |
| Cash provided by (utilized in) investing  activities                                         |       | 1,444.4  |       | (177.9   | )          | (198.0   | )          |
| **Financing activities:**                                                                    |       |     |       |     |       |     |       |
| Additions to long-term debt                                                                  |       | 406.4    |       | 1,206.5  |       | 555.1    |       |
| Repayments of long-term debt                                                                 |       | (2,093.2 | )          | (1,341.8 | )          | (627.9   | )          |
| Net change in payable to parent                                                              |       | (300.0   | )          |     |       | (112.4   | )          |
| Distribution to parent                                                                       |       | (305.8   | )          | (174.8   | )          | (169.4   | )          |
| Increase (decrease) in short-term loans                                                      |       | (21.5    | )          | 158.9    |       | 11.6     |       |
| Net receipts (payments) for hedging  activity                                                |       | 5.7      |       | (6.8     | )          | (98.0    | )          |
| Payment of finance fees and debt retirement  costs                                           |       | (6.3     | )          | (12.3    | )          | (1.0     | )          |
| Cash utilized in financing activities                                                        |       | (2,314.7 | )          | (170.3   | )          | (442.0   | )          |
| Effect of exchange rate fluctuations on  cash                                                |       | 51.8     |       | 12.7     |       | (13.3    | )          |
| Increase (decrease) in cash                                                                  |       | 165.0    |       | (23.9    | )          | (31.3    | )          |
| Cash at beginning of year                                                                    |       | 222.7    |       | 246.6    |       | 277.9    |       |
| Cash at end of year                                                                          |       | $        | 387.7      |     | $          | 222.7    |       | $ | 246.6 |   |

 

See accompanying Notes to the ConsolidatedFinancial Statements.

 

47

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** **

**Owens-Illinois Group, Inc.**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Tabular data dollars in millions**

 

**1. SignificantAccounting Policies**

 

**Basis ofConsolidated Statements **Theconsolidated financial statements of Owens-Illinois Group, Inc. (“Company”)include the accounts of its subsidiaries. Newly acquired subsidiaries have beenincluded in the consolidated financial statements from dates of acquisition. Results of operations for the plasticspackaging business sold during 2007 have been presented as adiscontinued operation.

 

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

 

**Relationship with Owens-Illinois, Inc. **The Company is a wholly-owned subsidiary ofOwens-Illinois, Inc. (“OI Inc.”). Although OI Inc. does not conductany operations, it has substantial obligations related to outstandingindebtedness, dividends for preferred stock and asbestos-related payments.OI Inc. relies primarily on distributions from its direct and indirectsubsidiaries to meet these obligations.

 

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

 

**Nature ofOperations **The Companyis a leading manufacturer of glass container products. The Company’s principalproduct lines are glass containers for the food and beverage industries. TheCompany has glass container operations located in 22 countries. The principalmarkets and operations for the Company’s products are in North America, Europe,South America, and Australia.

 

**Use ofEstimates  T**hepreparation 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 fromthose estimates, at which time the Company would revise its estimatesaccordingly. For further information on certain of the Company’s significantestimates relative to contingent liabilities, see Note 18.

 

**Cash **The Company defines “cash”as cash and time deposits with maturities of three months or less whenpurchased. Outstanding checks in excess of funds on deposit are included inaccounts payable.

 

**FairValues of Financial Instruments **Thecarrying amounts reported for cash, short-term investments and short-term loansapproximate fair value. In addition, carrying amounts approximate fair valuefor certain long-term debt obligations subject to frequently redeterminedinterest rates. Fair values for the Company’s significant fixed rate debtobligations are generally based on published market quotations.

 

**Derivative Instruments**  The Company uses currency swaps, interest rate swaps,options, and commodity futures contracts to manage risks generally associatedwith foreign exchange rate, interest rate and commodity market volatility. Derivativefinancial instruments are included on the balance sheet at fair value. Wheneverpossible, derivative instruments aredesignated as and are effective as hedges, in accordance with accountingprinciples generally accepted in the United 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. TheCompany does not enter into derivative financial instruments for

 

48

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**Owens-Illinois Group, Inc.**

** **

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

 

tradingpurposes and is not a party to leveraged derivatives. In accordance with FAS No. 104,cash flows from fair value hedges of debt and short-term forward exchangecontracts are classified as a financing activity. Cash flows of currency swaps,interest rate swaps, and commodity futures contracts are classified asoperating activities. See Note 8 for additional information related toderivative instruments.

 

**InventoryValuation **The Companyvalues most U.S. inventories at the lower of last-in, first-out (LIFO) cost ormarket. Other inventories are valued at the lower of standard costs (whichapproximate average costs) or market.

 

**Goodwill **Goodwill represents theexcess of cost over fair value of assets of businesses acquired. Goodwill isevaluated annually, as of October 1, for impairment or more frequently ifan impairment indicator exists.

 

**IntangibleAssets and Other Long-Lived Assets**  Intangible assets are amortized over theexpected useful life of the asset. The Company evaluates the recoverability ofintangible assets and other long-lived assets based on undiscounted projectedcash flows, excluding interest and taxes, when factors indicate that impairmentmay exist. If impairment exists, the asset is written down to fair value.

 

**Property,Plant, and Equipment **Property,plant, and equipment (“PP&E”) is carried at cost and includes expendituresfor new facilities and equipment and those costs which substantially increasethe useful lives or capacity of existing PP&E. In general, depreciation iscomputed using the straight-line method and recorded over the estimated usefullife of the asset. Factory machinery and equipment is depreciated over periodsranging from 5 to 25 years with the majority of such assets (principallyglass-melting furnaces and forming machines) depreciated over 7-15 years. Buildingsand building equipment are depreciated over periods ranging from 10 to 50years. Maintenance and repairs are expensed as incurred. Costs assigned toPP&E of acquired businesses are based on estimated fair values at the dateof acquisition.

 

**RevenueRecognition **TheCompany recognizes sales, net of estimated discounts and allowances, when thetitle to the products and risk of loss are transferred to customers. Provisionsfor rebates to customers are provided in the same period that the related salesare recorded.

 

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

 

**IncomeTaxes 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, taxes are provided only on that amount ofundistributed earnings in excess of planned reinvestments.

 

**ForeignCurrency Translation **Theassets and liabilities of substantially all subsidiaries and associates aretranslated at current exchange rates and any related translation adjustmentsare recorded directly in share owners’ equity.

 

**AccountsReceivable **Receivablesare stated at amounts estimated by management to be the net realizable value. TheCompany charges off accounts receivable when it becomes apparent based upon ageor customer circumstances that amounts will not be collected.

 

**Allowancefor Doubtful Accounts **Theallowance for doubtful accounts is established through charges to the provisionfor bad debts. The Company evaluates the adequacy of the allowance for doubtfulaccounts on a periodic basis. The evaluation includes historical trends incollections and write-offs,

 

49

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**Owens-Illinois Group, Inc.**

** **

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

 

management’s judgment ofthe probability of collecting accounts and management’s evaluation of businessrisk.

 

**NewAccounting Standards **InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 157 “Fair ValueMeasurements” (“FAS No. 157”). FAS No. 157 defines fair value,establishes a framework for measuring fair value in accordance with generallyaccepted accounting principles, and expands disclosures about fair valuemeasurements. FAS No. 157 applies under other accounting pronouncementsthat require or permit fair value measurements. The statement does not requireany new fair value measurements. The statement is effective for fiscal yearsbeginning after November 15, 2007. Adoption of FAS No. 157 is notpresently expected to have a material impact on the Company’s results ofoperations or financial position.

 

In February 2007,the FASB issued Statement of Financial Accounting Standards No. 159, “FairValue Option for Financial Assets and Financial Liabilities – Including anamendment of FASB Statement No. 115” (“FAS No. 159”). FAS No. 159permits entities to choose to measure many financial instruments and certainother items at fair value. The statement is effective for fiscal yearsbeginning after November 15, 2007.  Adoptionof FAS No. 159 is not presently expected to have a material impact on theCompany’s results of operations or financial position.

 

InDecember 2007, the FASB issued Statement of Financial AccountingStandards No. 141R, “BusinessCombinations” (“FAS No. 141R”). FAS No. 141R establishes principlesand requirements for how an acquirer recognizes and measures in its financialstatements the identifiable assets acquired, the liabilities assumed, and anynoncontrolling interest in the acquiree and recognizes and measures thegoodwill acquired in the business combination or a gain from a bargainpurchase. FAS No. 141R also sets forth the disclosures required to be madein the financial statements to evaluate the nature and financial effects of thebusiness combination. SFAS No. 141R applies prospectively to businesscombinations for which the acquisition date is on or after the beginning of thefirst annual reporting period beginning on or after December 15, 2008. Accordingly,FAS No. 141R will be applied by the Company to business combinationsoccurring on or after January 1, 2009.

 

InDecember 2007, the FASB issued Statement of Financial AccountingStandards No. 160, “NoncontrollingInterests in Consolidated Financial Statements, an amendment of ARB No. 51”(“FAS No. 160”). FAS No. 160 establishes accounting and reportingstandards for the non-controlling interest in a subsidiary and the deconsolidationof a subsidiary. FAS No. 160 is effective for years beginning on or after December 15,2008. Adoption of FAS No. 160 is not presently expected to have amaterial impact on the Company’s results of operations, financial position orcash flows.

 

**StockOptions****and OtherStock-Based Compensation **TheCompany participates in OI Inc.’s five non-qualified plans, which are describedmore 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 financial statements. Thestatement requires a public entity to measure the cost of employee servicesreceived in exchange for an award of equity instruments based on the grant-datefair value of the award. That cost is recognized over the required serviceperiod (usually the vesting period). No compensation cost is recognized forequity instruments for which employees do not render the required service.

 

TheCompany adopted the provisions of FAS No. 123R effective January 1,2006 using the modified-prospective method of adoption, which requiresrecognition of compensation cost in the financial statements beginning on thedate of adoption.

 

50

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**Owens-Illinois Group, Inc.**

** **

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

 

Priorto the adoption of FAS No.123R, the Company accounted for stock options underthe disclosure-only provisions (intrinsic value method) of FAS No. 123, “Accountingfor Stock-Based Compensation.” If the Company had elected to recognizecompensation cost based on the fair value of the options granted at grant dateas allowed by FAS No. 123, pro forma net earnings would have been asfollows:

 
| ** **                                                                                                                       | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
|                                                                                                                             |       | **2005**   |       |
| Net earnings  (loss):                                                                                                            |       |       |       |
| As reported                                                                                                                      |       | $          | (472.6     | ) |
| Compensation  cost determined under fair value based method for stock option awards, net of  $4.3 million of related tax effects |       | (7.0       | )          |
| Additional  valuation allowance on deferred tax assets                                                                           |       | (4.3       | )          |
| Pro forma                                                                                                                        |       | $          | (483.9     | ) |

 

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

 
| ** **                                          | ** ** | **2007**  | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|-----------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
|                                                |       |      |       |      |       |      |       |
| Range of expected  lives of options (years)         |       | 4.75      |       | 3.50-4.75 |       | 4.75-5.00 |       |
| Range of  expected stock price volatilities         |       | 37.1-40.0 | %          | 32.7-50.5 | %          | 50.0-74.1 | %          |
| Weighted average  expected stock price volatilities |       | 39.9      | %          | 44.9      | %          | 73.9      | %          |
| Range of  risk-free interest rates                  |       | 4.1-4.6   | %          | 4.1-5.1   | %          | 4.2-4.3   | %          |
| Expected  dividend yield                            |       | 0.0       | %          | 0.0       | %          | 0.0       | %          |

 

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

 

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

 

**2. Changesin Components of Working Capital Related to Operations **Changes in the componentsof working capital related to operations (net of the effects related toacquisitions and divestitures) were as follows:

 

51

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**Owens-Illinois Group, Inc.**

** **

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

 
| ** **                                   | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Decrease  (increase) in current assets:      |       |     |       |     |       |     |       |
| Short-term  investments                      |       | $        | (27.0      | )        | $          | 22.5     |       | $ | (23.7 | ) |
| Receivables                                  |       | (16.5    | )          | (162.8   | )          | (75.2    | )          |
| Inventories                                  |       | 63.0     |       | (31.2    | )          | 73.0     |       |
| Prepaid expenses                             |       | 5.6      |       | (2.6     | )          | (4.0     | )          |
| Increase  (decrease) in current liabilities: |       |     |       |     |       |     |       |
| Accounts payable                             |       | (2.9     | )          | 51.9     |       | 47.8     |       |
| Accrued  liabilities                         |       | (63.2    | )          | (82.1    | )          | (18.4    | )          |
| Salaries and  wages                          |       | 38.3     |       | (24.4    | )          | (7.5     | )          |
| U.S. and foreign  income taxes               |       | 24.5     |       | (24.1    | )          | (24.4    | )          |
|                                         |       | $        | 21.8       |     | $          | (252.8   | )          | $ | (32.4 | ) |
| Continuing  operations                       |       | $        | 36.2       |     | $          | (257.1   | )          | $ | (16.3 | ) |
| Discontinued  operations                     |       | (14.4    | )          | 4.3      |       | (16.1    | )          |
|                                         |       | $        | 21.8       |     | $          | (252.8   | )          | $ | (32.4 | ) |

 

**3. Inventories **Major classes of inventoryare as follows:

 
| ** **          | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
| Finished goods      |       | $        | 861.1      |     | $          | 824.3 |   |
| Work in process     |       | 1.4      |       | 7.7      |       |
| Raw materials       |       | 90.5     |       | 92.9     |       |
| Operating  supplies |       | 67.8     |       | 67.2     |       |
|                |       | $        | 1,020.8    |     | $          | 992.1 |   |

 

If the inventories whichare valued on the LIFO method had been valued at standard costs, whichapproximate current costs, consolidated inventories would be higher thanreported by $29.1 million and $32.0 million at December 31, 2007 and 2006,respectively.

 

Inventories which arevalued at the lower of standard costs (which approximate average costs) ormarket at December 31, 2007 and 2006 were approximately $874.6 million and$856.9 million, respectively.

 

52

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**Owens-Illinois Group, Inc.**

** **

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

 

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

 
| ** **                         | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| At end of year:                    |       |     |       |     |       |
| Equity in  undistributed earnings: |       |     |       |     |       |
| Foreign                            |       | $        | 23.4       |     | $          | 21.3 |   |
| Domestic                           |       | 18.7     |       | 15.9     |       |
| Total                              |       | $        | 42.1       |     | $          | 37.2 |   |

 
| ** **           | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------|------------|----------|------------|----------|------------|----------|------------|
| For the year:        |       |     |       |     |       |     |       |
| Equity in  earnings: |       |     |       |     |       |     |       |
| Foreign              |       | $        | 5.3        |     | $          | 2.0      |       | $ | 6.9 |   |
| Domestic             |       | 28.8     |       | 21.4     |       | 13.6     |       |
| Total                |       | $        | 34.1       |     | $          | 23.4     |       | $ | 20.5 |   |
|                 |       |     |       |     |       |     |       |
| Dividends  received  |       | $        | 21.7       |     | $          | 43.5     |       | $ | 11.0 |   |

 

Summarized combined financial information forequity associates is as follows:

 
| ** **                            | ** ** | **2007 (a)** | ** ** | **2006** | ** ** |
|---------------------------------------|------------|-------------------|------------|----------|------------|
| At end of year:                       |       |              |       |     |       |
| Current assets                        |       | $                 | 191.3      |     | $          | 190.3 |   |
| Non-current  assets                   |       | 302.4             |       | 340.6    |       |
| Total assets                          |       | 493.7             |       | 530.9    |       |
|                                  |       |              |       |     |       |
| Current  liabilities                  |       | 117.0             |       | 157.6    |       |
| Other  liabilities and deferred items |       | 265.5             |       | 276.4    |       |
| Total  liabilities and deferred items |       | 382.5             |       | 434.0    |       |
|                                  |       |              |       |     |       |
| Net assets                            |       | $                 | 111.2      |     | $          | 96.9 |   |

 
| ** **    | ** ** | **2007 (a)** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------|------------|--------------|------------|----------|------------|----------|------------|
| For the year: |       |         |       |     |       |     |       |
| Net sales     |       | $            | 535.9      |     | $          | 564.0    |       | $ | 482.5 |   |
|          |       |         |       |     |       |     |       |
| Gross profit  |       | $            | 176.5      |     | $          | 132.2    |       | $ | 90.9 |   |
|          |       |         |       |     |       |     |       |
| Net earnings  |       | $            | 112.4      |     | $          | 69.4     |       | $ | 51.4 |   |

 

----

| (a) Amounts for 2007 exclude the Company’s  Caribbean investment due to the impairment recorded during 2007. |
|------------------------------------------------------------------------------------------------------------------------|

 

TheCompany’s significant equity method investments include: (1) 43.5% of thecommon shares of Vetri Speciali SpA, a specialty glass manufacturer; (2) a25% partnership interest in General Chemical Soda Ash (Partners), a soda ashsupplier; and (3) a 50% partnership interest in Rocky Mountain BottleCompany, a glass container manufacturer.

 

53

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**Owens-Illinois Group, Inc.**

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

 

**5. Debt   **The following tablesummarizes the long-term debt of the Company at December 31, 2007 and2006:

 
| ** **                                               | ** ** | **Dec. 31,** | ** ** | **Dec. 31,** | ** ** |
|----------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                               | ** ** | **2007**          | ** ** | **2006**          | ** ** |
| Secured Credit  Agreement:                               |       |              |       |              |       |
| Revolving Credit  Facility:                              |       |              |       |              |       |
| Revolving Loans                                          |       | $                 | —     |              | $          | 45.2 |   |
| Term Loans:                                              |       |              |       |              |       |
| Term Loan A  (225.5 million AUD at Dec. 31, 2007)   |       | 198.1             |       | 231.5             |       |
| Term Loan B                                              |       | 191.5             |       | 195.5             |       |
| Term Loan C  (110.8 million CAD at Dec. 31, 2007)   |       | 113.2             |       | 115.9             |       |
| Term Loan D  (€191.5 million at Dec. 31, 2007) |       | 281.8             |       | 257.4             |       |
| Senior Secured  Notes:                                   |       |              |       |              |       |
| 8.875%, due 2009                                         |       |              |       | 850.0             |       |
| 7.75%, due 2011                                          |       |              |       | 450.0             |       |
| 8.75%, due 2012                                          |       |              |       | 625.0             |       |
| Senior Notes:                                            |       |              |       |              |       |
| 8.25%, due 2013                                          |       | 450.3             |       | 440.8             |       |
| 6.75%, due 2014                                          |       | 400.0             |       | 400.0             |       |
| 6.75%, due 2014  (€225 million)                     |       | 331.1             |       | 296.2             |       |
| 6.875%, due 2017  (€300 million)                    |       | 441.5             |       |              |       |
| Payable to OI  Inc.                                      |       | 752.8             |       | 1,038.1           |       |
| Other                                                    |       | 118.2             |       | 105.5             |       |
| Total long-term  debt                                    |       | 3,278.5           |       | 5,051.1           |       |
| Less amounts due  within one year                        |       | 265.3             |       | 324.4             |       |
| Long-term debt                                           |       | $                 | 3,013.2    |              | $          | 4,726.7 |   |

 

On June 14,2006, the Company’s subsidiary borrowers entered into the Secured CreditAgreement (the “Agreement”). At December 31, 2007, the Agreement includeda $900.0 million revolving credit facility, a 225.0 million Australian dollarterm loan, and a 110.8 million Canadian dollar term loan, each of which has afinal maturity date of June 15, 2012. It also included a $191.5 millionterm loan and a €191.5 million term loan, each of which has a final maturitydate of June 14, 2013.

 

At December 31,2007 the Company’s subsidiary borrowers had unused credit of $820.9 millionavailable under the Agreement.

 

The interest rateon borrowings under the Revolving Credit Facility is, at the Company’s option,the Base Rate or the Adjusted Eurodollar rate. The interest rate on borrowingsunder the Revolving Credit Facility also includes a margin linked to theCompany’s Consolidated Leverage Ratio, as defined in the Agreement. The marginis limited to ranges of 1.125% to 2.0% for Eurodollar loans and 0.125% to 1.0%for Base Rate loans. The margin was reduced by 0.25% upon achievement of aspecified senior secured debt rating. The weighted average interest rate onborrowings outstanding under the Agreement at December 31, 2007 was 6.67%.While no compensating balances are required by the Agreement, the Borrowersmust pay a facility fee on the Revolving Credit Facility commitments rangingfrom 0.20% to 0.50%.

 

Borrowings underthe Agreement are secured by substantially all of the assets of the Company’sdomestic subsidiaries and certain foreign subsidiaries, which have a book valueof approximately $2.9 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.

 

54

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**Owens-Illinois Group, Inc.**

** **

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

 

TheAgreement contains covenants and provisions that, among other things, restrictthe ability of the Company and its subsidiaries to dispose of assets, incuradditional indebtedness, prepay other indebtedness or amend certain debtinstruments, pay dividends, create liens on assets, enter into contingentobligations, enter into sale and leaseback transactions, make investments,loans or advances, make acquisitions, engage in mergers or consolidations,change the business conducted, engage in certain transactions with affiliatesand otherwise restrict certain corporate activities. In addition, the Agreementcontains financial covenants that require the Company to maintain specifiedfinancial ratios and meet specified tests based upon financial statements ofthe Company and its subsidiaries on a consolidated basis, maximum leverageratios and specified capital expenditure tests.

 

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

 

On July 31, 2007, the Company completed the sale of its plasticspackaging business to Rexam PLC for approximately $1.825 billion in cash. Inaccordance with an amendment of the Agreement that became effective uponcompletion of the sale of the plastics business, the Company was required touse the net proceeds (as defined in the Agreement) to repay senior secureddebt. 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 aportion of the net proceeds in the third quarter of 2007 to redeem all $450.0million of the 7.75% Senior Secured Notes and repurchase $283.1 million of the8.875% Senior Secured Notes. The remaining $566.9 million of the 8.875% SeniorSecured Notes were repurchased or discharged in accordance with the indenturein October 2007. The remaining net proceeds, along with funds fromoperations and/or additional borrowings under the revolving credit facility,were used to redeem all $625.0 million of the 8.75% Senior Secured Notes on November 15,2007. The Company recorded $9.5 million of additional interest charges for noterepurchase premiums and the related write-off of unamortized finance fees. SeeNote 21 for additional charges for note repurchase premiums and the relatedwrite-off of unamortized finance fees included in the gain on sale of theCompany’s plastics business.

 

During July of 2006, a subsidiary of the Company used borrowingsunder the Agreement to repurchase $150.0 million principal amount of the 8.875%Senior Secured Notes due 2009. During the third quarter of 2006, the Companyrecorded $7.3 million of additional interest charges for note repurchasepremiums and the related write-off of unamortized finance fees.

 

Amounts payable toOI Inc. above equal OI Inc.’s total indebtedness. Interest costs on amountspayable to OI Inc. are charged to the Company in the same amount as incurred byOI Inc. The Company and a principal subsidiary of the Company guarantee thesenior notes and debentures of OI Inc. on a subordinated basis. The fair valueof the OI Inc. debt being guaranteed by the Company at December 31, 2007was $755.0 million.

 

During the fourth quarter of 2005, the Company expanded the capacity ofits European accounts receivable securitization program from €200 million to€320 million to include operations in Italy and the United Kingdom. Theaccounts receivable securitization program provides lower costs of financingthan traditional bank debt. The terms of this expansion resulted in changingfrom off-balance sheet to on-balance sheet accounting for the program byconsolidating both the accounts receivable in the program and the securedindebtedness of the same amount. Cash inflows related to receipts fromcustomers in 

 

55

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**Owens-Illinois Group, Inc.**

** **

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

 

payment of the accounts receivable consolidated at December 13,2005 have been classified as investing cash inflows in the accompanyingConsolidated Statement of Cash Flows.

 

During October of 2006, the Company entered into a new €300million European accounts receivable securitization program. The new programreplaced the previous European program, described in the preceding paragraph,which was set to terminate in October 2006.

 

Information related to the Company’s accounts receivable securitizationprogram is as follows:

 
| ** **                              | ** ** | **Dec. 31,** | ** ** | **Dec. 31,** | ** ** |
|-----------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                              | ** ** | **2007**          | ** ** | **2006**          | ** ** |
|                                    |       |              |       |              |       |
| Balance  (included in short-term loans) |       | $                 | 361.8      |              | $          | 279.4 |   |
|                                    |       |              |       |              |       |
| Weighted average  interest rate         |       | 5.48              | %          | 5.60              | %          |
|                                         |            |                   |            |                   |            |  |  |

 

The Companycapitalized $27.0 million and $25.3 million in 2007 and 2006, respectively,under capital lease obligations with the related financing recorded as longterm debt. These amounts are included in other in the long-term debt tableabove.

 

Annual maturitiesfor all of the Company’s long-term debt through 2012 are as follows: 2008,$265.3 million; 2009, $17.6 million; 2010, $269.3 million; 2011, $191.3million; and 2012, $158.8 million.

 

Interest paid incash, including note repurchase premiums in 2007 and 2006, aggregated $452.4million for 2007, $461.0 million for 2006, and $450.9 million for 2005.

 

Fair values at December 31,2007, 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                     |       | 103.38        |       | 465.2                 |       | 450.6                 |       |
| 6.75%, due 2014                       |       | 400.0                     |       | 99.13         |       | 396.5                 |       |                  |       |
| 6.75%, due 2014  (€225 million)  |       | 331.1                     |       | 95.00         |       | 314.5                 |       |                  |       |
| 6.875%, due 2017  (€300 million) |       | 441.5                     |       | 94.00         |       | 415.0                 |       |                  |       |

 

**6. Operating Leases** Rent expense attributable to all warehouse,office buildings and equipment operating leases was $92.8 million in 2007,$82.1 million in 2006, and $73.9 million in 2005. Minimum future rentals underoperating leases are as follows: 2008, $52.4 million; 2009, $41.7 million;2010, $32.2 million; 2011, $18.3 million; and 2012, $14.6 million; and 2013 andthereafter, $10.7 million.

 

**7. ForeignCurrency Transactions** Aggregate foreign currency exchange gains(losses) included in other costs and expenses were $(8.1) million in 2007,$(1.7) million in 2006, and $2.8 million in 2005.

 

56

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** **

**Owens-Illinois Group, Inc.**

** **

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

 

**8. Derivative Instruments  **At December 31, 2007,the Company had the following derivative instruments related to its varioushedging programs:

 

*Interest Rate Swaps Designated asFair 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$750 million that mature from 2008 through 2013. The swaps wereexecuted in order to: (i) convert a portion of the senior notes and seniordebentures fixed-rate debt into floating-rate debt; (ii) maintain acapital structure containing appropriate amounts of fixed and floating-ratedebt; and (iii) reduce net interest 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, 2007:

* *
| ** **                                                               | ** ** | **Amount** | ** ** | **Receive** | ** ** | **Average** | ** ** | **Asset**

**(Liability)** | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|----------------------------|------------|
| ** **                                                               | ** ** | **Hedged** | ** ** | **Rate**    | ** ** | **Spread**  | ** ** | **Recorded**               | ** ** |
|                                                                     |       |       |       |        |       |        |       |                       |       |
| OI Inc. public  notes swapped by the Company through intercompany loans: |       |       |       |        |       |        |       |                       |       |
| Senior Notes due  2008                                                   |       | $          | 250.0      |        | 7.35       | %           | 3.5        | %                          | $          | (0.2 | ) |
| Senior  Debentures due 2010                                              |       | 250.0      |       | 7.50        | %          | 3.2         | %          | 3.0                        |       |
| Notes issued by  a subsidiary of the Company:                            |       |       |       |        |       |        |       |                       |       |
|                                                                     |       |       |       |        |       |        |       |                       |       |
| Senior Notes due  2013                                                   |       | 250.0      |       | 8.25        | %          | 3.7         | %          | 0.3                        |       |
|                                                                     |       |       |       |        |       |        |       |                       |       |
| Total                                                                    |       | $          | 750.0      |        |       |        |       |                       | $          | 3.1 |   |
|                                                                          |            |            |            |             |            |             |            |                            |            |  |  |  |  |

 

*CommodityHedges*

 

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 eighteen months and periodically enters into commodityfutures contracts in order to hedge a portion of its usage requirements overthat period. At December 31, 2007, the Company had entered into commodityfutures contracts for approximately 50% (approximately 11,680,000 MM BTUs) ofits estimated North American usage requirements for the full year of 2008.

 

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

 

57

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**Owens-Illinois Group, Inc.**

** **

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

 

for, a cash flow hedge is recorded in theAccumulated Other Comprehensive Income component of share owners’ equity (“OCI”)and reclassified 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, 2007.

 

At December 31, 2007, an unrecognized loss of$4.5 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, 2007 was not material.

 

*OtherHedges*

 

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 useforward exchange agreements to offset the foreign currency risk for receivablesand payables not denominated in, or indexed to, their functional currencies. TheCompany records these short-term forward exchange agreements on the balancesheet at fair value and changes in the fair value are recognized in currentearnings.

 

*Balance Sheet Classification*

 

The Company records the fair values of derivativefinancial instruments on the balance sheet as follows: (1) receivables ifthe 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.

 

**9. 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.

 

58

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**Owens-Illinois Group, Inc.**

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

 

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

 
| ** **                       | ** ** | **Net Effect of  Exchange Rate  Fluctuations** | ** ** | **Deferred Tax  Effect for  Translation** | ** ** | **Change in  Minimum  Pension  Liability** | ** ** | **Change in  Certain  Derivative  Instruments** | ** ** | **Employee  Benefit  Plans** | ** ** | **Total  Accumulated  Comprehensive  Income (Loss)** | ** ** |
|----------------------------------|------------|---------------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------|------------|-----------------------------------------------------------|------------|
|                             |       |                                                          |       |                                                |       |                                            |       |                                                 |       |                         |       |                                                      |       |
| Balance on  January 1, 2005 |       | $                                                             | 171.4      |                                                | $          | 12.7                                            |       | $                                                    | (138.3     | )                            | $          | (0.1                                                      | )          | $ | — |   | $ | 45.7 |   |
|                             |       |                                                          |       |                                                |       |                                            |       |                                                 |       |                         |       |                                                      |       |
| 2005 Change                      |       | (288.9                                                        | )          |                                                |       | 7.5                                             |       | 5.3                                                  |       |                         |       | (276.1                                                    | )          |
| Translation  effect              |       |                                                          |       |                                                |       | (14.8                                           | )          |                                                 |       |                         |       | (14.8                                                     | )          |
| Tax effect                       |       |                                                          |       |                                                |       | 0.1                                             |       | 9.2                                                  |       |                         |       | 9.3                                                       |       |
|                             |       |                                                          |       |                                                |       |                                            |       |                                                 |       |                         |       |                                                      |       |
| Balance on  Dec. 31, 2005   |       | (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 | ) |

 

For 2007, foreigncurrency translation adjustments include a loss of approximately $35.1 millionrelated to a hedge of the Company’s net investment in a non-U.S. subsidiary.

 

**10.Income Taxes** Deferred income taxes reflect: (1) the nettax effects of temporary differences between the carrying amounts of assets andliabilities for financial reporting purposes and the amounts used for incometax purposes; and (2) carryovers and credits for income tax purposes.

 

59

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** **

**Owens-Illinois Group, Inc.**

** **

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

 

Significant components ofthe Company’s deferred tax assets and liabilities at December 31, 2007 and2006 are as follows:

 
| ** **                         | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  assets:              |       |     |       |     |       |
| Accrued  postretirement benefits   |       | $        | 95.8       |     | $          | 110.8 |   |
| Foreign tax  credit                |       | 417.0    |       |     |       |
| Tax loss and  credit carryovers    |       | 290.8    |       | 799.1    |       |
| Capital loss  carryovers           |       | 32.7     |       | 395.5    |       |
| Alternative  minimum tax credits   |       | 21.4     |       | 21.2     |       |
| Accrued  liabilities               |       | 178.5    |       | 191.1    |       |
| Other                              |       | 38.2     |       | 37.7     |       |
| Total deferred  tax assets         |       | 1,074.4  |       | 1,555.4  |       |
|                               |       |     |       |     |       |
| Deferred tax  liabilities:         |       |     |       |     |       |
| Property, plant,  and equipment    |       | 229.3    |       | 296.8    |       |
| Prepaid pension  costs             |       | 147.0    |       | 101.3    |       |
| Inventory                          |       | 20.0     |       | 23.2     |       |
| Other                              |       | 59.1     |       | 73.2     |       |
| Total deferred  tax liabilities    |       | 455.4    |       | 494.5    |       |
| Valuation  allowance               |       | (594.5   | )          | (1,041.1 | )          |
|                               |       |     |       |     |       |
| Net deferred  taxes                |       | $        | 24.5       |     | $          | 19.8 |   |
|                               |       |     |       |     |       |
| Total for  continuing operations   |       | $        | 24.5       |     | $          | 20.0 |   |
| Total for  discontinued operations |       | —   |       | (0.2     | )          |
|                               |       | $        | 24.5       |     | $          | 19.8 |   |

 

Deferred taxes areincluded in the Consolidated Balance Sheets at December 31, 2007 and 2006as follows:

 
| ** **                               | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
|                                     |       |     |       |     |       |
| Prepaid expenses                         |       | $        | 9.2        |     | $          | 4.6 |   |
| Deposits,  receivables, and other assets |       | 124.7    |       | 127.4    |       |
| Deferred taxes                           |       | (109.4   | )          | (112.2   | )          |
| Net deferred  taxes                      |       | $        | 24.5       |     | $          | 19.8 |   |
|                                     |       |     |       |     |       |
| Total for continuing  operations         |       | $        | 24.5       |     | $          | 20.0 |   |
| Total for  discontinued operations       |       | —   |       | (0.2     | )          |
|                                     |       | $        | 24.5       |     | $          | 19.8 |   |

 

60

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**Owens-Illinois Group, Inc.**

** **

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

 

The provision (benefit)for income taxes consists of the following:

 
| ** **                         | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current:                           |       |     |       |     |       |     |       |
| U.S. Federal                       |       | $        | —     |     | $          | —   |       | $ | — |   |
| State                              |       | 31.1     |       | 2.0      |       | 1.6      |       |
| Foreign                            |       | 145.2    |       | 113.7    |       | 133.9    |       |
|                               |       | 176.3    |       | 115.7    |       | 135.5    |       |
|                               |       |     |       |     |       |     |       |
| Deferred:                          |       |     |       |     |       |     |       |
| U.S. Federal                       |       | 8.0      |       | 9.2      |       | 214.0    |       |
| State                              |       | 1.0      |       | (14.6    | )          | 11.8     |       |
| Foreign                            |       | (1.7     | )          | 16.2     |       | (12.4    | )          |
|                               |       | 7.3      |       | 10.8     |       | 213.4    |       |
|                               |       |     |       |     |       |     |       |
| Total:                             |       |     |       |     |       |     |       |
| U.S. Federal                       |       | 8.0      |       | 9.2      |       | 214.0    |       |
| State                              |       | 32.1     |       | (12.6    | )          | 13.4     |       |
| Foreign                            |       | 143.5    |       | 129.9    |       | 121.5    |       |
|                               |       | $        | 183.6      |     | $          | 126.5    |       | $ | 348.9 |   |
|                               |       |     |       |     |       |     |       |
| Total for  continuing operations   |       | $        | 147.8      |     | $          | 125.3    |       | $ | 428.9 |   |
| Total for  discontinued operations |       | 35.8     |       | 1.2      |       | (80.0    | )          |
|                               |       | $        | 183.6      |     | $          | 126.5    |       | $ | 348.9 |   |

 

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

 
| **Continuing operations** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Domestic                       |       | $        | (65.7      | )        | $          | (174.1   | )          | $ | (28.0 | ) |
| Foreign                        |       | 687.3    |       | 459.2    |       | (44.1    | )          |
|                           |       | $        | 621.6      |     | $          | 285.1    |       | $ | (72.1 | ) |

 
| **Discontinued operations** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|----------|------------|
|                        |       |     |       |     |       |     |       |
| Domestic                    |       | $        | (1.1       | )        | $          | (19.7    | )          | $ | (28.9 | ) |
| Foreign                     |       | 1.7      |       | (2.8     | )          | 13.2     |       |
|                        |       | $        | 0.6        |     | $          | (22.5    | )          | $ | (15.7 | ) |

 

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

 

61

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** **

**Owens-Illinois Group, Inc.**

** **

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

 
| ** ** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Domestic   |       | $        | 31.8       |     | $          | (1.2     | )          | $ | 12.2 |   |
| Foreign    |       | 151.1    |       | 126.8    |       | 112.9    |       |
|       |       | $        | 182.9      |     | $          | 125.6    |       | $ | 125.1 |   |

 

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:

 
| ** **                                                                                              | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Tax provision on  pretax earnings (loss) from continuing operations at statutory U.S. Federal  tax rate |       | $        | 217.6      |     | $          | 99.8     |       | $ | (25.2 | ) |
| Increase  (decrease) in provision for income taxes due to:                                              |       |     |       |     |       |     |       |
| Goodwill  impairment                                                                                    |       |     |       |     |       | 172.9    |       |
| Valuation  allowance - U.S.                                                                             |       | (506.3   | )          | 62.6     |       | 300.0    |       |
| Foreign  subsidiary ownership restructuring                                                             |       | 545.0    |       | 21.2     |       |     |       |
| Foreign source  income taxable in the U.S.                                                              |       | 29.3     |       | 1.8      |       | 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                                                                    |       | (2.9     | )          | (13.5    | )          | 17.2     |       |
| Rate differences  on non-U.S. earnings                                                                  |       | (74.8    | )          | (14.2    | )          | (25.2    | )          |
| Adjustment for  non-U.S. tax law changes                                                                |       | (9.9     | )          | (1.6     | )          | (7.1     | )          |
| Other items                                                                                             |       | 3.6      |       | 3.9      |       | (5.5     | )          |
|                                                                                                    |       |     |       |     |       |     |       |
| Provision for  income taxes                                                                             |       | $        | 147.8      |     | $          | 125.3    |       | $ | 428.9 |   |

 

In 2007 the Companyimplemented a plan to restructure the ownership and intercompany obligations ofcertain foreign subsidiaries. These actions resulted in taxation of asignificant portion of previously unremitted foreign earnings and will transfera portion of the Company’s debt service obligations to operations outside theU.S. in order to better balance operating cash flows with financing costs on aglobal basis. The foreign earnings reported as taxable in the U.S. were offsetby net operating loss carryforwards and foreign tax credits. Foreign tax creditcarryforwards arising from the restructuring were fully offset by an increasein the valuation allowance.

 

The Company has taxholidays in certain non-U.S. jurisdictions which expire between 2012 to 2015.

 

At December 31,2007, before valuation allowance, the Company has unused research tax creditsof $10.0 million expiring from 2008 to 2028 and foreign tax credits of $417.0million expiring in 2017. The Company also has unused alternative minimum taxcredits of $21.4 million which do not expire and which will be available tooffset future U.S. Federal income tax. Approximately $140.0 million of thedeferred tax assets relate to net operating and capital loss carryforwards thatcan be carried over indefinitely with the remaining $173.5 million expiringbetween 2008 and 2027.

 

At December 31, 2007,the Company’s equity in the undistributed earnings of foreign subsidiaries forwhich income taxes had not been provided approximated $1,339.2 million. TheCompany intends to

 

62

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** **

**Owens-Illinois Group, Inc.**

** **

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

 

reinvest these earningsindefinitely in the non-U.S. operations. It is not practicable to estimate theU.S. and foreign tax which would be payable should these earnings bedistributed.

 

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

 

During the fourth quarterof 2005, the Company recorded an additional valuation allowance from bothcontinuing and discontinued operations of $306.6 million because of thenear-term effects on U.S. profitability of continued asbestos-related paymentsby OI Inc., significant interest expense, rising energy costs and other costincreases. These changes in circumstances would have increased thebeginning-of-year valuation allowance by approximately $170.0 million. In 2006,the Company recorded an additional valuation allowance from continuingoperations of $62.6 million in the United States due to the continued impact ofthe above items on profitability. In 2007, the Company reduced the valuationallowance recorded against its deferred tax assets in the United States by$506.3 million through the utilization of net operating loss and capital losscarryforwards.

 

Other internationalvaluation allowances approximating $89.0 million were established principallyin prior years in allocation of the costs of acquisitions. Any futurereductions of these components will result in reductions of goodwill.

 

During 2005, the Companyrecorded a benefit of $61.8 million from discontinued operations resulting fromthe reversal of an accrual for potential tax liabilities related to a previousdivestiture. The accrual was no longer required based on the Company’sreassessment of the potential liabilities due to several factors, includingstatute expiration in September 2005.

 

The Company adopted FASBInterpretation 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”) asof January 1, 2007. This interpretation was issued to clarify theaccounting for uncertainty in income taxes recognized in an enterprise’sfinancial statements in accordance with FAS No. 109, “Accounting forIncome Taxes.” FIN 48 defines criteria that a tax position must meet for anypart 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.

 

As a result of theadoption of FIN 48, the Company recognized no adjustment to retained earningsfor unrecognized income tax benefits. The Company reclassified $8.9 million ofdeferred tax assets related to U.S. general business credits that were previouslyoffset by a full valuation allowance to the liability for unrecognized incometax benefits. This balance sheet reclassification had no effect on share owners’equity. In connection with the adoption of FIN 48, the Company is maintainingits historical method of accruing interest (net of related tax benefits) andpenalties associated with unrecognized income tax benefits as a component ofits income tax expense.

 

The following is areconciliation of the Company’s total gross unrecognized tax benefits for theyear ended December 31, 2007:

 

63

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**Owens-IllinoisGroup, Inc.**

** **

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

 
| ** **                                                            | ** ** | **Tax** | ** ** |
|-----------------------------------------------------------------------|------------|---------|------------|
| Balance at January 1, 2007                        |       | $       |  45.8 |   |
| Additions for  tax positions of prior years                           |       | 0.1     |       |
| Reductions for  tax positions of prior years                          |       | (2.5    | )          |
| Additions based  on tax positions related to the current year         |       | 11.0    |       |
| Reductions due  to the lapse of the applicable statute of limitations |       | (1.4    | )          |
| Balance at  December 31, 2007                                    |       | $       | 53.0       |   |

 

AtDecember 31, 2007 and January 1, 2007, accrued interest and penaltiesrelated to unrecognized tax benefits were $3.7 million and$3.1 million, respectively (net of related tax benefits). Tax expense forthe year ended December 31, 2007 includes interest and penalties of$0.6 million on unrecognized tax benefits for prior years.

 

The unrecognized taxbenefit liability, including interest, as of December 31, 2007 and January 1,2007 was $53.4 million and $47.0 million respectively. Approximately $36.0million and $22.0 million as of December 31, 2007 and January 1,2007, respectively, relate to unrecognized tax benefits, which if recognized,would impact the Company’s effective income tax rate.  This amount differs from the grossunrecognized tax benefits presented in the table above because of the indirecteffect of the state unrecognized tax benefit, interest and penalties andunrecognized tax benefits that would result in the utilization of certain U.S.tax attribute carryforwards that are currently subject to a full valuationallowance due to uncertainties about their future period utilization. Due tochanges in its U.S. tax carryforward losses in 2007, approximately $7.5 millionof uncertain tax benefit previously not affecting the effective tax rate hasbeen reclassified to items affecting the effective tax rate.

 

The Company and/or one ofits subsidiaries files a U.S. federal income tax return as well as income taxreturns in multiple state and foreign jurisdictions. Tax years through 1999have been settled with the U.S. Internal Revenue Service and there is nocurrent IRS examination in progress. Due to the existence of tax attributecarryforwards (which are currently offset by full valuation allowances) in theU.S., the Company treats certain post-1999 tax positions as unsettled becauseof the taxing authorities’ ability to modify these attributes. The 2000 taxyear is the earliest open year for the Company’s other major tax jurisdictions.

 

The Company does notanticipate a significant change in the total amount of unrecognized income taxbenefits within the next twelve months.

 

**11.  Stock Options and Other Stock BasedCompensation**   TheCompany participates in OI Inc.’s five nonqualified plans under which OI Inc.has granted stock options, restricted shares and performance vested restrictedshare units:  (1) the Stock OptionPlan for Key Employees of Owens-Illinois, Inc.; (2) the Stock OptionPlan for Directors of Owens-Illinois, Inc.; (3) the 1997 EquityParticipation Plan of Owens-Illinois, Inc.; (4) the 2004 EquityIncentive Plan for Directors of Owens-Illinois, Inc.; and (5) the2005 Equity Incentive Plan of Owens-Illinois, Inc.  Total compensation cost for all grants ofshares and units under all of these plans was $23.6 million ($21.9 millionafter tax) for the year ended December 31, 2007.  Total compensation cost for grants of sharesand units was $21.7 million ($20.4 million after tax) in 2006 and $6.8 million($4.2 million after tax) in 2005.  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 

 

64

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**Owens-IllinoisGroup, Inc.**

** **

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

 

performanceof OI 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, 2007 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, 2006                |       | 6,530           |       | $               | 20.75      |            |       |          |       |   |
| Granted                                                   |       | 482             |       | 24.26           |       |            |       |          |       |
| Exercised                                                 |       | (2,994          | )          | 20.97           |       |            |       |          |       |
| Forfeited or  expired                                     |       | (556            | )          | 23.94           |       |            |       |          |       |
| Options  outstanding at Dec. 31, 2007                |       | 3,462           |       | 20.54           |       | 4.6             |       | $             | 100.2      |   |
| Options vested  or expected to vest at Dec. 31, 2007 |       | 3,416           |       | $               | 20.54      |            | 4.6        |          | $          | 98.9 |   |
| Options  exercisable at Dec. 31, 2007                |       | 2,030           |       | $               | 19.80      |            | 4.1        |          | $          | 60.4 |   |
| Shares available  for option grant at Dec. 31, 2007  |       | 3,712           |       |            |       |            |       |          |       |

 

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

 
| ** **                                                                            | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Weighted average grant-date fair  value of options granted (per share) |       | $        | 9.87       |     | $          | 7.91     |       | $ | 15.00 |   |
| Aggregate  intrinsic value of options exercised                                       |       | $        | 44.5       |     | $          | 3.7      |       | $ | 19.4 |   |
| Aggregate cash  received from options exercised                                       |       | $        | 62.8       |     | $          | 7.6      |       | $ | 20.5 |   |

 

65

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**Owens-IllinoisGroup, Inc.**

** **

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

* *

*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 directorsare immediately vested but may not be sold until the third anniversary of theshare grant or the end of the director’s then current term on the board,whichever is later.

 

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, 2007 |       | 861                |       | $               | 16.98      |   |
| Granted                            |       | 61                 |       | 26.07           |       |
| Vested                             |       | (361               | )          | 16.07           |       |
| Forfeited                          |       | (60                | )          | 18.23           |       |
| Nonvested at  Dec. 31, 2007   |       | 501                |       | 18.61           |       |
| Awards granted  during 2006        |       |               |       | $               | 18.74      |   |
| Awards granted  during 2005        |       |               |       | $               | 24.34      |   |

 
| ** **                         | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Total fair value  of shares vested |       | $        | 10.9       |     | $          | 7.7      |       | $ | 5.1 |   |
|                                    |            |          |            |          |            |          |            |  |  |  |

 

*Performance Vested Restricted Share Units*

 

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

 

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

 

66

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**Owens-IllinoisGroup, Inc.**

** **

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

 

Performancevested restricted share unit activity is as follows:

** **
| ** **                         | ** ** | ** **         | ** ** | **Weighted**    | ** ** |
|------------------------------------|------------|--------------------|------------|-----------------|------------|
| ** **                         | ** ** | **Number of** | ** ** | **Average**     | ** ** |
| ** **                         | ** ** | **Restricted**     | ** ** | **Grant-Date**  | ** ** |
| ** **                         | ** ** | **Shares Units**   | ** ** | **Fair Value**  | ** ** |
| ** **                         | ** ** | **(thousands)**    | ** ** | **(per share)** | ** ** |
| Nonvested at  January 1, 2007 |       | 677                |       | $               | 20.22      |   |
| Granted                            |       | 303                |       | 24.18           |       |
| Vested (none)                      |       |               |       |            |       |
| Forfeited                          |       | (17                | )          | 20.34           |       |
| Nonvested at  Dec. 31, 2007   |       | 963                |       | 21.47           |       |
| Awards granted  during 2006        |       |               |       | $               | 18.24      |   |
| Awards granted  during 2005        |       |               |       | $               | 24.22      |   |

 

Asof December 31, 2007, there was $20.5 million of total unrecognizedcompensation cost related to all unvested stock options, restricted shares andperformance vested restricted share units. That cost is expected to be recognized over a weighted average period ofapproximately four years.

 

**12.  Pension Benefit Plans**  Net expense to results of operations for allof the Company’s pension plans and certain deferred compensation arrangementsamounted to $24.9 million in 2007, $41.9 million in 2006, and $14.7 million in2005.

 

The Company has definedbenefit pension plans covering substantially all employees located in theUnited States, the United Kingdom, The Netherlands, Canada, Australia, Germanyand France.  Benefits generally are basedon compensation for salaried employees and on length of service for hourlyemployees.  The Company’s policy is tofund pension plans such that sufficient assets will be available to meet futurebenefit requirements.  The Company’sdefined benefit pension plans use a December 31 measurement date.  The following tables relate to the Company’sprincipal defined benefit pension plans.

 

67

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**Owens-IllinoisGroup, Inc.**

** **

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

 

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

 
| ** **                                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|----------|------------|
| Obligations at  beginning of year                            |       | $        | 3,879.2    |     | $          | 3,823.6 |   |
|                                                         |       |     |       |     |       |
| Change in  benefit obligations:                              |       |     |       |     |       |
| Service cost                                                 |       | 54.0     |       | 60.8     |       |
| Interest cost                                                |       | 212.0    |       | 204.3    |       |
| Actuarial gain,  including effect of changing discount rates |       | (73.6    | )          | (101.3   | )          |
| Curtailments                                                 |       | (21.9    | )          | (3.6     | )          |
| Settlements                                                  |       | (55.8    | )          |     |       |
| Participant  contributions                                   |       | 10.0     |       | 10.0     |       |
| Benefit payments                                             |       | (325.1   | )          | (251.2   | )          |
| Plan amendments                                              |       | (3.5     | )          | (7.2     | )          |
| Foreign currency  translation                                |       | 136.4    |       | 137.2    |       |
| Other                                                        |       | 6.0      |       | 6.6      |       |
| Net change in  benefit obligations                           |       | (61.5    | )          | 55.6     |       |
| Obligations at  end of year                                  |       | $        | 3,817.7    |     | $          | 3,879.2 |   |

 

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

 
| ** **                            | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Fair value at  beginning of year      |       | $        | 4,043.5    |     | $          | 3,631.4 |   |
|                                  |       |     |       |     |       |
| Change in fair  value:                |       |     |       |     |       |
| Actual gain on  plan assets           |       | 177.6    |       | 484.3    |       |
| Benefit payments                      |       | (325.1   | )          | (251.2   | )          |
| Employer contributions                |       | 63.9     |       | 69.5     |       |
| Participant  contributions            |       | 10.0     |       | 10.0     |       |
| Foreign currency  translation         |       | 115.0    |       | 102.5    |       |
| Other                                 |       |     |       | (3.0     | )          |
| Net increase in  fair value of assets |       | 41.4     |       | 412.1    |       |
| Fair value at  end of year            |       | $        | 4,084.9    |     | $          | 4,043.5 |   |

 

68

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**Owens-IllinoisGroup, Inc.**

** **

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

 

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

 
| ** **                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|
| Plan assets at  fair value                              |       | $        | 4,084.9    |     | $          | 4,043.5 |   |
| Projected  benefit obligations                          |       | 3,817.7  |       | 3,879.2  |       |
| Plan assets  greater than projected benefit obligations |       | 267.2    |       | 164.3    |       |
|                                                    |       |     |       |     |       |
| Items not yet  recognized in pension expense:           |       |     |       |     |       |
| Actuarial loss                                          |       | 700.4    |       | 764.6    |       |
| Prior service  cost                                     |       | (18.7    | )          | (15.4    | )          |
|                                                    |       | 681.7    |       | 749.2    |       |
| Net amount  recognized                                  |       | $        | 948.9      |     | $          | 913.5 |   |

 

The net amount recognizedis included in the Consolidated Balance Sheets at December 31, 2007 and2006 as follows:

 
| ** **                                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Prepaid pension                                                     |       | $        | 566.4      |     | $          | 488.5 |   |
| Current pension  liability, included with Other accrued liabilities |       | (9.2     | )          | (9.1     | )          |
| Noncurrent  pension liability, included with Pension benefits       |       | (290.0   | )          | (315.1   | )          |
| Accumulated  other comprehensive income                             |       | 681.7    |       | 749.2    |       |
| Net amount  recognized                                              |       | $        | 948.9      |     | $          | 913.5 |   |

 

The following changes inplan assets and benefit obligations were recognized in accumulated othercomprehensive income at December 31, 2007 as follows:

 
| ** **                            | ** ** | ** ** | ** ** | **Tax**    | ** ** | ** **    | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|---------------|------------|
| ** **                            | ** ** | **Pretax** | ** ** | **Effect** | ** ** | **After-tax** | ** ** |
| Current year  actuarial loss          |       | $          | 7.1        |       | $          | (4.0          | )          | $ | 11.1 |   |
| Amortization of  actuarial loss       |       | (38.2      | )          | (2.9       | )          | (35.3         | )          |
| Current year  prior service credit    |       | (3.7       | )          | (1.3       | )          | (2.4          | )          |
| Amortization of  prior service credit |       | 0.8        |       | —     |       | 0.8           |       |
| Curtailment                           |       | (20.7      | )          | (0.9       | )          | (19.8         | )          |
| Settlement                            |       | (18.6      | )          | —     |       | (18.6         | )          |
|                                  |       | (73.3      | )          | (9.1       | )          | (64.2         | )          |
| Translation                           |       |       |       |       |       | 5.8           |       |
|                                  |       | $          | (73.3      | )          | $          | (9.1          | )          | $ | (58.4 | ) |

 

The accumulated benefitobligation for all defined benefit pension plans was $3,566.0 million and$3,598.4 million at December 31, 2007 and 2006, respectively.

 

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

 

69

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**Owens-IllinoisGroup, Inc.**

** **

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

 
| ** **                         | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Service cost                       |       | $        | 54.0       |     | $          | 60.8     |       | $ | 51.7 |   |
| Interest cost                      |       | 212.0    |       | 204.3    |       | 199.7    |       |
| Expected asset  return             |       | (317.6   | )          | (298.4   | )          | (296.6   | )          |
| Settlement cost                    |       | 18.6     |       |     |       |     |       |
| Curtailment gain                   |       | (1.5     | )          |     |       |     |       |
| Other                              |       | 5.1      |       | 9.2      |       |     |       |
|                               |       |     |       |     |       |     |       |
| Amortization:                      |       |     |       |     |       |     |       |
| Prior service  cost                |       | (0.8     | )          | (0.6     | )          | (0.3     | )          |
| Loss                               |       | 38.2     |       | 61.5     |       | 49.5     |       |
| Net amortization                   |       | 37.4     |       | 60.9     |       | 49.2     |       |
| Net expense                        |       | $        | 8.0        |     | $          | 36.8     |       | $ | 4.0 |   |
|                               |       |     |       |     |       |     |       |
| Total for  continuing operations   |       | $        | 3.4        |     | $          | 36.2     |       | $ | 6.9 |   |
| Total for  discontinued operations |       | 4.6      |       | 0.6      |       | (2.9     | )          |
|                               |       | $        | 8.0        |     | $          | 36.8     |       | $ | 4.0 |   |

 

Amounts that will beamortized from accumulated other comprehensive income into net pension expenseduring 2008:

 
| Amortization:       |   |   |   |
|---------------------|--------|--------|--------|
| Loss                |   | $      | 31.1   |   |
| Prior service  cost |   | (1.0   | )      |
| Net amortization    |   | $      | 30.1   |   |

 

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

 
| ** **                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Projected  benefit obligations   |       | $        | 1,125.1    |     | $          | 1,080.6 |   |
| Fair value of  plan assets       |       | 816.1    |       | 742.6    |       |
| Accumulated  benefit obligations |       | 1,015.4  |       | 972.6    |       |
|                                  |            |          |            |          |            |  |  |

 

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

 
| ** **                     | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Discount rate                  |       | 5.87     | %          | 5.49     | %          |
| Rate of  compensation increase |       | 4.32     | %          | 4.34     | %          |

 

70

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**Owens-IllinoisGroup, Inc.**

 

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

 

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

 
| ** **                                   | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Discount rate                                |       | 5.49     | %          | 5.30     | %          | 5.52     | %          |
| Rate of compensation  increase               |       | 4.34     | %          | 4.54     | %          | 4.40     | %          |
| Expected  long-term rate of return on assets |       | 8.08     | %          | 8.08     | %          | 8.10     | %          |

 

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

 

As of December 31,2006, the Company adjusted the minimum pension liability for the pension planin the United Kingdom from the minimum liabilities recorded in 2002, 2003, 2004and 2005.  Pursuant to this requirement,the Company decreased the minimum pension liability by $38.5 million anddecreased accumulated other comprehensive loss by $38.5 million.

 

As of December 31,2006, the Company adjusted the minimum pension liability for the pension planin Canada from the minimum liabilities recorded in 2002, 2003 and 2004.  Pursuant to this requirement, the Companydecreased the minimum pension liability by $9.7 million and decreasedaccumulated other comprehensive loss by $9.7 million.

 

As of December 31,2006, the Company adjusted the minimum pension liability for the pension planin Germany from the minimum liabilities recorded in 2005.  Pursuant to this requirement, the Companydecreased the minimum pension liability by $6.8 million and decreasedaccumulated other comprehensive loss by $6.8 million.

 

The Company adopted theprovisions of Financial Accounting Standards No. 158 (“FAS No. 158”),“Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans” as of December 31, 2006.  FAS No. 158 requires employers to adjust the assets and liabilitiesrelated to defined benefit plans so that the amounts reflected on the balancesheet represent the overfunded or underfunded status of the plans.  These funded status amounts are measured asthe difference between the fair value of plan assets and benefit obligations asof the balance sheet date.  For pensionplans, the fair value of plan assets is compared to the Projected BenefitObligation (“PBO”).  In the Company’scase, the required adjustments resulted in a non-cash charge to the AccumulatedOther Comprehensive Income component of share owners’ equity.

 

The following table showsthe impact on the balance sheet of applying FAS No. 158 at December 31,2006 (dollars in millions):

 

71

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**Owens-IllinoisGroup, Inc.**

 

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

 
|                                                                     |   | **Adjustments  to apply FAS  No. 158  Increase  (decrease)** |   |
|--------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------|--------|
| Prepaid pension                                                          |   | $                                                                           | (502.5 | ) |
| Intangible  asset, included in Deposits, receivables, and other assets   |   | (9.0                                                                        | )      |
| Deferred tax  asset, included in Deposits, receivables, and other assets |   | 22.4                                                                        |   |
| Current pension  liability, included in Other accrued liabilities        |   | 9.1                                                                         |   |
| Deferred taxes                                                           |   | 1.3                                                                         |   |
| Noncurrent  pension liability, included in Pension benefits              |   | 59.5                                                                        |   |
| Accumulated  other comprehensive income (loss)                           |   | (559.0                                                                      | )      |
|                                                                          |        |                                                                             |        |  |

 

For 2007, the Company’sweighted average expected long-term rate of return on assets was 8.08%.   In developing this assumption, the Companyevaluated input from its third party pension plan asset managers, includingtheir review of asset class return expectations and long-term inflationassumptions.  The Company also consideredits historical 10-year average return (through December 31, 2006), whichwas in line with the expected long-term rate of return assumption for 2007.

 

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

 
| ** **         | ** ** | ** **            | ** ** | **Target**     | ** ** |
|--------------------|------------|-----------------------|------------|----------------|------------|
| ** **         | ** ** | **Actual Allocation** | ** ** | **Allocation** | ** ** |
| **Asset Category** | ** ** | **2007**              | ** ** | **2006**       | ** ** | **Ranges** | ** ** |
| Equity securites   |       | 63                    | %          | 64             | %          | 58-68% |   |
| Debt securities    |       | 28                    | %          | 29             | %          | 21-31% |   |
| Real estate        |       | 5                     | %          | 6              | %          | 2-12% |   |
| Other              |       | 4                     | %          | 1              | %          | 0-9% |   |
| 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.  The investment risk of the assets is limitedby appropriate diversification both within and between asset classes.  The assets for both the U.S. and non-U.S.plans are primarily invested in a broad mix of domestic and international equities,domestic and international bonds, and real estate, subject to the target assetallocation ranges.  The assets aremanaged with a view to ensuring that sufficient liquidity will be available tomeet expected cash flow requirements.

 

The Company expects tocontribute $62.8 million to its non-U.S. defined benefit pension plans in 2008.

 

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

 

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**Owens-IllinoisGroup, Inc.**

 

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

 
| **Year(s)** | ** ** | **Amount** | ** ** |
|-------------|------------|------------|------------|
| 2008        |       | $          | 247.1      |   |
| 2009        |       | 248.9      |       |
| 2010        |       | 250.2      |       |
| 2011        |       | 252.6      |       |
| 2012        |       | 258.3      |       |
| 2013 - 2017 |       | 1,335.1    |       |
|             |            |            |            |  |

 

The Company also sponsorsseveral defined contribution plans for all salaried and hourly U.S.employees.   Participation is voluntaryand participants’ contributions are based on their compensation.  The Company matches contributions ofparticipants, up to various limits, in substantially all plans.  Company contributions to these plans amountedto $6.7 million in 2007, $6.4 million in 2006, and $6.0 million in 2005.

 

**13.  Postretirement Benefits Other Than Pensions**  The Company provides certain retiree health care and life insurancebenefits covering substantially all U.S. salaried and certain hourly employees,substantially all employees in Canada and in The Netherlands.  Employees are generally eligible for benefitsupon retirement and completion of a specified number of years of creditableservice.  The Company uses a December 31measurement date to measure its Postretirement Benefit Obligations.

 

73

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**Owens-IllinoisGroup, Inc.**

 

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

 

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

 
| ** **                                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Obligations at  beginning of year                                       |       | $        | 317.6      |     | $          | 329.1 |   |
|                                                                    |       |     |       |     |       |
| Change in benefit obligations:                                          |       |     |       |     |       |
| Service cost                                                            |       | 3.0      |       | 4.3      |       |
| Interest cost                                                           |       | 17.5     |       | 16.8     |       |
| Actuarial (gain)  loss, including the effect of changing discount rates |       | (9.5     | )          | 12.4     |       |
| Curtailments                                                            |       | (9.1     | )          | (22.4    | )          |
| Benefit payments                                                        |       | (24.4    | )          | (24.9    | )          |
| Foreign currency  translation                                           |       | 14.4     |       | 2.1      |       |
| Other                                                                   |       |     |       | 0.2      |       |
| Net change in  benefit obligations                                      |       | (8.1     | )          | (11.5    | )          |
| Obligations at  end of year                                             |       | $        | 309.5      |     | $          | 317.6 |   |

 

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

 
| ** **                                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|
| Postretirement  benefit obligations                           |       | $        | 309.5      |     | $          | 317.6 |   |
|                                                          |       |     |       |     |       |
| Items not yet  recognized in net postretirement benefit cost: |       |     |       |     |       |
| Prior service  credit                                         |       | 23.8     |       | 36.6     |       |
| Actuarial loss                                                |       | (78.2    | )          | (96.4    | )          |
|                                                          |       | (54.4    | )          | (59.8    | )          |
| Net amount  recognized                                        |       | $        | 255.1      |     | $          | 257.8 |   |

 

The net amount recognizedis included in the Consolidated Balance Sheets at December 31, 2007 and2006 as follows:

 
| ** **                                                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Current  nonpension postretirement benefit, included with Other accrued liabilities |       | $        | (24.3      | )        | $          | (24.5 | ) |
| Nonpension  postretirement benefits                                                 |       | (285.2   | )          | (293.1   | )          |
| Accumulated  other comprehensive income                                             |       | 54.4     |       | 59.8     |       |
| Net (liability)  amount recognized                                                  |       | $        | (255.1     | )        | $          | (257.8 | ) |

 

The following changes inbenefit obligations were recognized in accumulated other comprehensive incomeat December 31, 2007 as follows:

 

74

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**Owens-IllinoisGroup, Inc.**

 

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

 
| ** **                            | ** ** | ** ** | ** ** | **Tax**    | ** ** | ** **    | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|---------------|------------|
| ** **                            | ** ** | **Pretax** | ** ** | **Effect** | ** ** | **After-tax** | ** ** |
| Current year  actuarial gain          |       | $          | (9.5       | )          | $          | 0.8           |       | $ | (10.3 | ) |
| Amortization of  actuarial loss       |       | (5.8       | )          | —     |       | (5.8          | )          |
| Amortization of  prior service credit |       | 3.8        |       | —     |       | 3.8           |       |
| Curtailment                           |       | 5.7        |       | (0.3       | )          | 6.0           |       |
|                                  |       | (5.8       | )          | 0.5        |       | (6.3          | )          |
| Translation                           |       |       |       |       |       | 0.9           |       |
|                                  |       | $          | (5.8       | )          | $          | 0.5           |       | $ | (5.4 | ) |

 

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

 
| ** **                         | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Service cost                       |       | $        | 3.0        |     | $          | 4.3      |       | $ | 4.5 |   |
| Interest cost                      |       | 17.4     |       | 16.8     |       | 18.5     |       |
| Curtailment gain                   |       | (14.9    | )          | (15.9    | )          |     |       |
| Other                              |       |     |       | 0.9      |       |     |       |
| Amortization:                      |       |     |       |     |       |     |       |
| Prior service  credit              |       | (3.8     | )          | (4.3     | )          | (4.3     | )          |
| Loss                               |       | 5.8      |       | 3.9      |       | 5.5      |       |
| Net amortization                   |       | 2.0      |       | (0.4     | )          | 1.2      |       |
|                               |       |     |       |     |       |     |       |
| Net postretirement  benefit cost   |       | $        | 7.5        |     | $          | 5.7      |       | $ | 24.2 |   |
|                               |       |     |       |     |       |     |       |
| Total for  continuing operations   |       | 20.7     |       | 3.2      |       | 20.9     |       |
| Total for  discontinued operations |       | (13.2    | )          | 2.5      |       | 3.3      |       |
|                               |       | $        | 7.5        |     | $          | 5.7      |       | $ | 24.2 |   |

 

Amounts that will beamortized from accumulated other comprehensive income into net postretirementbenefit cost during 2008:

 
| Amortization:       |   |   |   |
|---------------------|--------|--------|--------|
| Loss                |   | $      | 6.2    |   |
| Prior service  cost |   | (3.1   | )      |
| Net amortization    |   | $      | 3.1    |   |

 

The weighted averagediscount rate used to determine the accumulated postretirement benefit obligationwas 5.86% and 5.56% at December 31, 2007 and 2006, respectively.

 

The weighted averagediscount rate used to determine net postretirement benefit cost was 5.56%,5.45%, and 5.67% at December 31, 2007, 2006, and 2005, respectively.

 

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

 

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**Owens-IllinoisGroup, Inc.**

 

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

 
| ** **                                                                     | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Health care cost  trend rate assumed for next year                             |       | 8.51     | %          | 8.92     | %          |
| Rate to which  the cost trend rate is assumed to decline (ultimate trend rate) |       | 5.64     | %          | 5.73     | %          |
| Year that the  rate reaches the ultimate trend rate                            |       | 2009     |       | 2009     |       |

 

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

 
| ** **                                                                        | ** ** | **1-Percentage-**       | ** ** | **1-Percentage-**       | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                                        | ** ** | **Point Increase** | ** ** | **Point Decrease** | ** ** |
| Effect on total of  service and interest cost  |       | $                       |  6.8  |                    | $          | (5.1) |   |
| Effect on  accumulated postretirement benefit obligations                         |       | 20.7                    |       | (17.9)                  |       |
|                                                                                   |            |                         |            |                         |            |  |  |

 

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** | ** ** |
|-------------|------------|------------|------------|
| 2008        |       | $          | 24.3       |   |
| 2009        |       | 23.8       |       |
| 2010        |       | 23.6       |       |
| 2011        |       | 23.4       |       |
| 2012        |       | 23.5       |       |
| 2013 - 2017 |       | 110.3      |       |
|             |            |            |            |  |

 

Benefits provided by theCompany for certain hourly retirees are determined by collectivebargaining.  Most other domestic hourlyretirees receive health and life insurance benefits from a multi-employer trustestablished by collective bargaining. Payments to the trust as required by the bargaining agreements are basedupon specified amounts per hour worked and were $7.4 million in 2007, $7.4million in 2006, and $6.6 million in 2005. Postretirement health and life benefits for retirees of foreignsubsidiaries are generally provided through the national health care programsof the countries in which the subsidiaries are located.

 

FAS No. 158 requiresemployers to adjust the assets and liabilities related to defined benefit plansso that the amounts reflected on the balance sheet represent the overfunded orunderfunded status of the plans.  Thesefunded status amounts are measured as the difference between the fair value ofplan assets and benefit obligations as of the balance sheet date.  For other postretirement benefit plans, thefair value of plan assets is compared to the Accumulated Postretirement BenefitObligation (“APBO”).   In the 

 

76

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**Owens-IllinoisGroup, Inc.**

 

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

 

Company’s case, therequired adjustments resulted in a non-cash charge to the Accumulated OtherComprehensive Income component of share owners’ equity.

 

The following table showsthe impact on the balance sheet of applying FAS No. 158 at December 31,2006 (dollars in millions):

 
| ** **                                                                         | ** ** | **Adjustments  to apply FAS  No. 158   Increase  (decrease)** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| Current nonpension postretirement benefits, included  in Other accrued liabilities |       | $24.5                                                                        |       |
| Deferred taxes                                                                     |       | (1.8                                                                         | )          |
| Nonpension postretirement benefits                                                 |       | 35.4                                                                         |       |
| Accumulated other comprehensive income (loss)                                      |       | (58.1                                                                        | )          |

 

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

 

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

 

**15.**  **Other Costs and Expenses** Other costs and expenses for the year ended December 31, 2007included the following:

 

·                  During the third and fourth quarters of 2007, theCompany recorded charges totaling $100.3 million ($84.1 million after tax), forrestructuring and asset impairment in the Caribbean, Europe, and NorthAmerica.  The charges reflect the initialconclusions of the Company’s global profitability review.

 

In the Company’s50%-owned affiliate in the Caribbean, declining productivity and cash flowsresulted in impairment of the Company’s equity investment, establishment ofvaluation allowances against advances to the affiliate, and accrual of certaincontingent obligations for total charges of $45.0 million.

 

In Europe and NorthAmerica, the Company decided to curtail selected production capacity.  Because the future undiscounted cash flows ofthe related asset groups were not sufficient to recover their carrying amounts,the assets were considered impaired.  Asa result the assets were written down to the extent their carrying amountsexceeded fair value.  The curtailment ofplant capacity resulted in elimination of approximately 558 jobs and a correspondingreduction in the Company’s workforce. The Company accrued certain employee separation costs, plant clean up,and other exit costs.  In total,impairments, accrued costs, and other valuation adjustments amounted to $55.3million with probable future cash expenditures amounting to $30.6 million.  The Company expects that the majority ofthese costs will be paid out by the end of 2008.

 

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

 

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**Owens-IllinoisGroup, Inc.**

 

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

 

·                  During the third quarter of 2006, the Companyrecorded a charge of $29.7 million ($27.7 million after tax), principallyrelated to the closing of its Godfrey, Illinois machine parts manufacturingoperation.  See Note 16 for additionaldetails.

 

Other costs and expenses for the year ended December 31,2005 included the following:

 

·                  During the fourth quarter of 2005, theCompany recorded a charge of $494.0 million to write down a portion of thegoodwill in its Asia Pacific Glass business unit. See Note 20 for moreinformation.

 

·                  Manufacturingcosts for the first quarter of 2005 included a favorable adjustment ofapproximately $10.0 million to the Company’s accruals for self insured risks.

 

·                  Manufacturingcosts for the second quarter of 2005 included a favorable adjustment fordepreciation and amortization in connection with finalizing the fair values ofthe BSN Glasspack assets acquired in June 2004.  The difference between the estimated amountsrecorded in 2004 and the final amounts related to 2004 accounted for a benefitof approximately $6.5 million.

 

**16.  Restructuring Accruals  **In September 2006, theCompany announced the permanent closing of its Godfrey, Illinois machine partsmanufacturing and assembly operation. The facility was closed by the end of2006. This closing is part of a broad initiative to reduce working capital andimprove system costs.  The Company alsoclosed a small recycling facility in Ohio. As a result of these actions, the Company recorded a charge of $29.7million ($27.7 million after tax) in other costs and expenses in the thirdquarter of 2006.

 

Theclosing of these facilities resulted in the elimination of approximately 260jobs and a corresponding reduction in the Company’s workforce.  The Company anticipates that it will pay outapproximately $14.5 million in cash related to insurance, benefits, plant cleanup, and other plant closing costs. The Company expects that the majority ofthese costs will be paid out by the end of 2008.

 

Selectedinformation related to the plant closing accrual is as follows:

 
| Plant closing charges                                            |   | $      |  29.7 | ** ** |
|----------------------------------------------------------------------------|--------|--------|------------|------------|
| Write-down of assets to net realizable value |   | (11.7  | )          |
| Recognition of  employee separation benefits                               |   | (7.1   | )          |
| Net cash paid                                                              |   | (2.2   | )          |
| Other                                                                      |   | 0.7    |       |
| Remaining plant  closing accrual as of December 31, 2006              |   | 9.4    |       |
|                                                                       |   |   |       |
| Net cash paid                                                              |   | (5.3   | )          |
| Additional  charge                                                         |   | 3.0    |       |
| Other                                                                      |   | 1.5    |       |
| Remaining plant  closing accrual as of December 31, 2007              |   | $      | 8.6        |       |

 

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.

 

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**Owens-Illinois Group, Inc.**

 

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

 

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, with2007 activity translated from Euros into dollars at the December 31, 2007exchange rate:

 
| Total European  restructuring accrual (€110.9 million)            |   | $     | 134.1  |   |
|------------------------------------------------------------------------|--------|-------|--------|--------|
| Net cash paid, principally  severance and related benefits             |   | (41.0 | )      |
| Other, principally foreign  exchange translation                       |   | (12.2 | )      |
| Remaining European  restructuring accrual as of December 31, 2005 |   | 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   |   |

 

**17. Additional Interest Charges from Early Extinguishment of Debt** During 2007,the Company recorded additional interest charges of $9.5 million ($8.8 millionafter tax) for note repurchase premiums and the write-off of unamortizedfinance fees related to debt that was repaid prior to its maturity. During2006, the Company recorded additional interest charges of $17.5 million ($17.1million after tax) for note repurchase premiums and the write-off ofunamortized finance fees related to debt that was repaid prior to its maturity.During 2005, the Company recorded additional interest charges of $1.4 million($1.0 million after tax) for the write-off of unamortized finance fees relatedto the reduction of available credit under the Company’s bank credit agreement.

 

**18. 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):

 

79

 

**Owens-Illinois Group, Inc.**

 

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

 
| ** **                    | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Pending at beginning of  year |       | 18,000   |       | 32,000   |       | 35,000   |       |
| Disposed                      |       | 13,000   |       | 21,000   |       | 12,000   |       |
| Filed                         |       | 9,000    |       | 7,000    |       | 9,000    |       |
|                          |       |     |       |     |       |     |       |
| Pending at end of year        |       | 14,000   |       | 18,000   |       | 32,000   |       |

 

Based on an analysis of the lawsuits pending as of December 31, 2007, approximately 89% of plaintiffs either do not specify the monetary damages sought, or in the case of court filings, claim an amount sufficient to invoke the jurisdictional minimum of the trial court. Approximately 9% of plaintiffs specifically plead damages of $15 million or less, and 1% of plaintiffs specifically plead damages greater than $15 million but less than $100 million. Fewer than 1% of plaintiffs specifically plead damages $100 million or greater but less than $123 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, 2007 there are approximately 1,100 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, 2007, has disposed of the asbestos claims of approximately 361,000 plaintiffs and claimants at an average indemnity payment per claim of approximately $6,900. 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, 2007 ($82.6 million at December 31, 2006) 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 

 

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**Owens-Illinois Group, Inc.**

 

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

 

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 $3.22 billion through 2007, 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 expanding list of non-traditional defendants that have been sued in this litigation and found liable for substantial damage awards, the use of mass litigation screenings to generate new lawsuits, the large number of claims asserted or filed by parties who claim prior exposure to asbestos materials but have no present physical impairment as a result of such exposure, and the significant number of co-defendants that have filed for bankruptcy.

 

OI Inc. has continued to monitor trends 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 concern:

 

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 impact the number and type of future claims and lawsuits;

 

d)    the extent of decrease or increase in the inventory of pending serious disease 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 co-defendant bankruptcies; and

 

81

 

**Owens-Illinois Group, Inc.**

 

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

 

i)   the extent to which the resolution of co-defendant bankruptcies direct resources to resolve claims that are also presented to OI Inc.

 

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. 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.

 

Theultimate legal and financial liability of OI Inc. with respect to the lawsuitsand proceedings referred to above, in addition to other pending litigation,cannot be estimated with certainty. OI Inc.’s reported results of operationsfor 2007 were materially affected by the $115.0 million fourth quarter chargefor asbestos-related costs andasbestos-related payments continue to be substantial. Any futureadditional charge would likewise materially affect OI Inc.’s results ofoperations for the period in which it is recorded. Also, the continued use ofsignificant amounts of cash for asbestos-related costs has affected and willcontinue to affect the Company’s and OI Inc.’s cost of borrowing and itsability to pursue global or domestic acquisitions. However, the Companybelieves that its operating cash flows and other sources of liquidity will besufficient to fund OI Inc.’s asbestos-related payments and to fund the Company’sworking capital and capital expenditure requirements on a short-term andlong-term basis.

 

Otherlitigation is pending against the Company, in many cases involving ordinary androutine claims incidental to the business of the Company and in otherspresenting allegations that are nonroutine and involve compensatory, punitiveor treble damage claims as well as other types of relief. In accordance withFAS No. 5, the Company records a liability for such matters when it isboth probable that the liability has been incurred and the amount of theliability can be reasonably estimated. Recorded amounts are reviewed andadjusted to reflect changes in the factors upon which the estimates are basedincluding additional information, negotiations, settlements, and other events.The ultimate legal and financial liability of the Company with respect to thelawsuits and proceedings referred to above, in addition to other pendinglitigation, cannot be estimated with certainty. However, the Company believes,based on its examination and review of such matters and experience to date,that such ultimate liability will not have a material adverse effect on itsresults of operations, cash flows or financial condition.

 

**19. Segment Information**The Company’s formerPlastics Packaging segment has been reclassified to discontinued operations asa result of the July 31, 2007 sale of that business. Following the sale,the Company redefined its reportable segments and divided the former GlassContainers segment into four geographic segments: (1) North America; (2) Europe;(3) Asia Pacific; (4) South America. These four segments are alignedwith the Company’s internal approach to managing, reporting, and evaluatingperformance of its global glass operations. In connection with this change,certain assets and activities not directly related to one of the regions or toglass manufacturing are reported with Retained Corporate Costs and Other. Theseinclude licensing, equipment manufacturing, global engineering, and non-glassequity investments. Amounts for 2006 and 2005 in the following tables arepresented on the redefined basis.

 

TheCompany’s measure of profit for its reportable segments is Segment OperatingProfit, which consists of consolidated earnings from continuing operationsbefore 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 

82

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**Owens-Illinois Group, Inc.**

 

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

 

Company’smanagement uses Segment Operating Profit, in combination with selected cashflow information, to evaluate performance and to allocate resources.

 

SegmentOperating Profit for reportable segments includes an allocation of somecorporate expenses based on both a percentage of sales and direct billingsbased on the costs of specific services provided. The information below ispresented on a continuing operations basis, and therefore, the amounts excludeamounts related to the discontinued operations. See Note 21 for moreinformation.

 

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

 
| **Net Sales:**                         | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| North America                          |       | $        | 2,271.3    |     | $          | 2,110.4  |       | $ | 1,933.1 |   |
| Europe                                 |       | 3,298.7  |       | 2,846.6  |       | 2,796.3  |       |
| Asia Pacific                           |       | 934.3    |       | 804.9    |       | 782.4    |       |
| South America                          |       | 970.7    |       | 796.5    |       | 685.1    |       |
|                                   |       |     |       |     |       |     |       |
| Reportable segment totals              |       | 7,475.0  |       | 6,558.4  |       | 6,196.9  |       |
| Other                                  |       | 91.7     |       | 92.0     |       | 70.0     |       |
| Consolidated totals                    |       | 7,566.7  |       | 6,650.4  |       | 6,266.9  |       |
|                                   |       |     |       |     |       |     |       |
| Reconciliation to total  revenues:     |       |     |       |     |       |     |       |
| Royalties and net technical assistance |       | 19.7     |       | 16.5     |       | 16.2     |       |
| Equity earnings                        |       | 34.1     |       | 23.4     |       | 20.5     |       |
| Interest income                        |       | 42.3     |       | 19.2     |       | 16.5     |       |
| Other revenue                          |       | 16.4     |       | 39.5     |       | 50.0     |       |
| Total                                  |       | $        | 7,679.2    |     | $          | 6,749.0  |       | $ | 6,370.1 |   |

 
| **Segment Operating Profit:**                                                                                                                           | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                                                                    |       |     |       |     |       |     |       |
| North America                                                                                                                                           |       | $        | 265.1      |     | $          | 187.3    |       | $ | 204.1 |   |
| Europe                                                                                                                                                  |       | 433.0    |       | 249.6    |       | 290.1    |       |
| Asia Pacific                                                                                                                                            |       | 154.0    |       | 102.9    |       | 125.8    |       |
| South America                                                                                                                                           |       | 254.9    |       | 195.0    |       | 156.4    |       |
| Reportable segment totals                                                                                                                               |       | 1,107.0  |       | 734.8    |       | 776.4    |       |
| Retained corporate costs and other                                                                                                                      |       | (78.8    | )          | (76.6    | )          | (77.5    | )          |
| Consolidated totals                                                                                                                                     |       | 1,028.2  |       | 658.2    |       | 698.9    |       |
|                                                                                                                                                    |       |     |       |     |       |     |       |
| Reconciliation to earnings (loss) from continuing operations before  income taxes and minority share owners’ interest in earnings of subsidiaries: |       |     |       |     |       |     |       |
|                                                                                                                                                    |       |     |       |     |       |     |       |
| Items excluded from  Segment Operating Profit:                                                                                                          |       |     |       |     |       |     |       |
| Restructuring and asset impairments                                                                                                                     |       | (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     | )          | 3.8      |       |
| Goodwill impairment                                                                                                                                     |       |     |       |     |       | (494.0   | )          |
| Gain on sale of Corsico, Italy glass container facility                                                                                                 |       |     |       |     |       | 28.1     |       |
|                                                                                                                                                    |       |     |       |     |       |     |       |
| Interest income                                                                                                                                         |       | 42.3     |       | 19.2     |       | 16.5     |       |
| Interest expense                                                                                                                                        |       | (348.6   | )          | (349.0   | )          | (325.4   | )          |
| Total                                                                                                                                                   |       | $        | 621.6      |     | $          | 285.1    |       | $ | (72.1 | ) |

 

83

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**Owens-Illinois Group, Inc.**

 

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

 
| ** **                             | ** ** | ** **  | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | **Reportable** | ** ** | **Retained**   | ** ** | **Consoli-** | ** ** |
|----------------------------------------|------------|-------------|------------|------------|------------|-------------|------------|-------------|------------|----------------|------------|----------------|------------|--------------|------------|
| ** **                             | ** ** | **North**   | ** ** | ** ** | ** ** | **Asia**    | ** ** | **South**   | ** ** | **Segment**    | ** ** | **Corp Costs** | ** ** | **dated**    | ** ** |
| ** **                             | ** ** | **America** | ** ** | **Europe** | ** ** | **Pacific** | ** ** | **America** | ** ** | **Totals**     | ** ** | **and Other**  | ** ** | **Totals**   | ** ** |
|                                   |       |        |       |       |       |        |       |        |       |           |       |           |       |         |       |
| Total assets (1):                      |       |        |       |       |       |        |       |        |       |           |       |           |       |         |       |
| 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      |       |
| 2005                                   |       | 1,835.2     |       | 3,458.4    |       | 1,412.2     |       | 679.0       |       | 7,384.8        |       | 2,135.8        |       | 9,520.6      |       |
|                                   |       |        |       |       |       |        |       |        |       |           |       |           |       |         |       |
| Equity earnings:                       |       |        |       |       |       |        |       |        |       |           |       |           |       |         |       |
| 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         |       |
| 2005                                   |       | 8.9         |       | 7.5        |       |        |       | (0.7        | )          | 15.7           |       | 4.8            |       | 20.5         |       |
|                                   |       |        |       |       |       |        |       |        |       |           |       |           |       |         |       |
| Capital expenditures (2):              |       |        |       |       |       |        |       |        |       |           |       |           |       |         |       |
| 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         |       |
| 2005                                   |       |        |       |       |       |        |       |        |       |           |       |           |       |         |       |
| Continuing                             |       | 154.6       |       | 115.3      |       | 54.0        |       | 41.3        |       | 365.2          |       | 7.8            |       | 373.0        |       |
| Discontinued                           |       |        |       |       |       |        |       |        |       |           |       | 31.1           |       | 31.1         |       |
|                                   |       |        |       |       |       |        |       |        |       |           |       |           |       |         |       |
| Depreciation and amortization expense: |       |        |       |       |       |        |       |        |       |           |       |           |       |         |       |
| 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         |       |
| 2005                                   |       |        |       |       |       |        |       |        |       |           |       |           |       |         |       |
| Continuing                             |       | 97.5        |       | 216.5      |       | 88.2        |       | 58.1        |       | 460.3          |       | 5.0            |       | 465.3        |       |
| Discontinued                           |       |        |       |       |       |        |       |        |       |           |       | 58.7           |       | 58.7         |       |

 

----

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

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

 

84

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**Owens-Illinois Group, Inc.**

** **

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

 

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

 
| ** ** | ** ** | **United** | ** ** | ** **  | ** ** | ** ** | ** ** |
|------------|------------|------------|------------|-------------|------------|------------|------------|
| ** ** | ** ** | **States** | ** ** | **Foreign** | ** ** | **Total**  | ** ** |
| 2007       |       | $          | 678.9      |        | $          | 2,271.1    |       | $ | 2,950.0 |   |
| 2006       |       | 712.5      |       | 2,162.0     |       | 2,874.5    |       |
| 2005       |       | 718.7      |       | 2,096.7     |       | 2,815.4    |       |
|            |            |            |            |             |            |            |            |  |  |  |

 

TheCompany’s net sales by geographic segment are as follows:

 
| ** ** | ** ** | **United** | ** ** | ** **  | ** ** | ** ** | ** ** |
|------------|------------|------------|------------|-------------|------------|------------|------------|
| ** ** | ** ** | **States** | ** ** | **Foreign** | ** ** | **Total**  | ** ** |
| 2007       |       | $          | 1,920.6    |        | $          | 5,646.1    |       | $ | 7,566.7 |   |
| 2006       |       | 1,793.7    |       | 4,856.7     |       | 6,650.4    |       |
| 2005       |       | 1,637.6    |       | 4,629.3     |       | 6,266.9    |       |
|            |            |            |            |             |            |            |            |  |  |  |

 

Operationsin individual countries outside the United States that accounted for more than10% of consolidated net sales from continuing operations were in Italy (2007 -10.1%, 2005 – 10.3%) and France (2007 - 19.3%, 2006 - 19.3%, 2005 – 23.6%).

 

**20.**  **Goodwill**   The changesin the carrying amount of goodwill for the years ended December 31, 2005,2006 and 2007 are as follows:

 
| ** **                                                                                   | ** ** | **North**   | ** ** | ** ** | ** ** | **Asia**    | ** ** | **South**   | ** ** | **Corp. and** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------|------------|------------|------------|-------------|------------|-------------|------------|--------------------|------------|------------|------------|
| ** **                                                                                   | ** ** | **America** | ** ** | **Europe** | ** ** | **Pacific** | ** ** | **America** | ** ** | **Other**          | ** ** | **Total**  | ** ** |
| Balance as of January 1, 2005                                                           |       | $           | 752.1      |       | $          | 1,028.2     |       | $           | 1,004.5    |               | $          | —     |       | $ | 14.8 |   | $ | 2,799.6 |   |
| Translation effects                                                                          |       | 1.9         |       | (123.1     | )          | (39.7       | )          |        |       |               |       | (160.9     | )          |
| Write-down of goodwill                                                                       |       |        |       |       |       | (494.0      | )          |        |       |               |       | (494.0     | )          |
| Other changes, principally                                                                   |       |        |       |       |       |        |       |        |       |               |       |       |       |
| adjustments to finalize                                                                      |       |        |       |       |       |        |       |        |       |               |       | —     |       |
| acquisition purchase price                                                                   |       | (6.5        |  )    | 21.6       |       |        |       |        |       | (0.1               |  )    |  15.0 |       |
| Balance as of December 31, 2005                                                         |       | 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 |   |

 

Duringthe fourth quarter of 2005, the Company completed its annual impairment testingand determined that impairment existed in the goodwill of its Asia PacificGlass business unit. Lower projected cash flows, principally as a result ofcompetitive pricing pressures in the Company’s Australian glass operations,caused the decline in the business enterprise value. Following a review of thevaluation of the unit’s identifiable assets using discounted cash flowmeasurement techniques, the Company recorded an impairment charge of $494.0million to reduce the reported value of its goodwill.

 

85

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**Owens-Illinois Group, Inc.**

** **

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

 

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

 

**21.Discontinued Operations**On June 11, 2007, the Company announcedthat it had concluded the strategic review process of its plastics portfolioand entered into a definitive agreement with Rexam PLC to sell its plasticspackaging business. On July 31, 2007, the Company completed the sale forapproximately $1.825 billion in cash.

 

Included in the sale were 19 plastics manufacturing plants in the U.S.(including Puerto Rico), Mexico, Brazil, Hungary, Singapore and Malaysia. Theplastics packaging business is comprised of HealthCare Packaging and Closure &Specialty Products which design, manufacture and sell plastic packagingsolutions for companies in the pharmaceutical, healthcare, food and beverage,personal care, household and automotive industries. The plastics packagingbusiness comprised the Company’s former Plastics Packaging segment.

 

Asrequired by FAS No. 144, the Company has presented the results ofoperations for the plastics packaging business in the Consolidated Results ofOperations for the years ended December 31, 2007, 2006 and 2005 asdiscontinued operations. Interest expense was allocated to the discontinuedoperations based on debt that was required by an amendment to the Agreement tobe repaid from the net proceeds. Amounts for the prior periods have beenreclassified to conform to this presentation. At December 31, 2006, theassets and liabilities of the plastics packaging business are presented in theConsolidated Balance Sheet as the assets and liabilities of discontinuedoperations.

 

### **Thefollowing summarizes the revenues and expenses of the discontinued operationsas reported in the consolidated results of operations for the periodsindicated:**

 
| ** **                                                         | ** ** | **Years ended**  | ** ** |
|--------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                         | ** ** | **December 31,** | ** ** |
| **Revenues:**                                                      | ** ** | **2007**              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net sales                                                          |       | $                     | 455.0      |   | $ | 771.6 |   | $ | 812.1 |   |
| Other revenue (expense), net                                       |       | (0.1                  | )          | 2.9 |   | 7.5 |   |
|                                                               |       | 454.9                 |       | 774.5 |   | 819.6 |   |
|                                                               |       |                  |       |   |   |   |   |
| **Costs and expenses:**                                            |       |                  |       |   |   |   |   |
| Manufacturing, shipping and delivery                               |       | 343.5                 |       | 602.9 |   | 634.6 |   |
| Research, development and engineering                              |       | 8.3                   |       | 15.1 |   | 14.5 |   |
| Selling and administrative                                         |       | 20.7                  |       | 34.4 |   | 32.9 |   |
| Interest                                                           |       | 80.6                  |       | 139.2 |   | 141.3 |   |
| Other                                                              |       | 1.2                   |       | 5.4 |   | 7.8 |   |
|                                                               |       | 454.3                 |       | 797.0 |   | 831.1 |   |
| Earnings (loss) before items below                                 |       | 0.6                   |       | (22.5 | ) | (11.5 | ) |
|                                                               |       |                  |       |   |   |   |   |
| Provision (credit) for income taxes                                |       | (2.4                  | )          | 1.2 |   | (12.8 | ) |
| Minority share owners’ interests in earnings of  subsidiaries |       | 0.2                   |       |   |   |   |   |
| Gain on sale of discontinued operations                            |       | 1,038.5               |       |   |   | 1.2 |   |
|                                                               |       |                  |       |   |   |   |   |
| Net earnings (loss) from discontinued operations                   |       | $                     | 1,041.3    |   | $ | (23.7 | ) | $ | 2.5 |   |

 

86

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**Owens-Illinois Group, Inc.**

** **

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

 

### **Thegain on the sale of discontinued operations of $1,038.5 million includescharges totaling $62.1 million for debt retirement costs, consisting principallyof redemption 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 net provision for income taxes of $38.2million, consisting of taxes on the gain of $445.0 million that aresubstantially offset by a credit of $406.8 million for the reversal ofvaluation allowances against existing tax loss carryforwards. The saleagreement provides for an adjustment of the selling price based on workingcapital levels and certain other factors. The Company does not expect any priceadjustment to have a material effect on the reported gain on the sale ofdiscontinued operations or cash flows.**

### ** **

### **Thecondensed consolidated balance sheet at December 31, 2006 included thefollowing assets and liabilities related to the discontinued operations:**

 
| ** **                                      | ** ** | **Balance at**   | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **December 31,** | ** ** |
| **Assets:**                                     | ** ** | **2006**              | ** ** |
| Inventories                                     |       | $                     | 46.9       |   |
| Accounts receivable                             |       | 56.7                  |       |
| Other current assets                            |       | 1.2                   |       |
| Total current assets                            |       | 104.8                 |       |
| Goodwill                                        |       | 209.5                 |       |
| Other long-term assets                          |       | 43.0                  |       |
| Net property, plant and equipment               |       | 319.2                 |       |
| Total assets                                    |       | $                     | 676.5      |   |
|                                            |       |                  |       |
| **Liabilities:**                                |       |                  |       |
| Accounts payable and other  current liabilities |       | $                     | 70.9       |   |
| Other long-term liabilities                     |       | 1.6                   |       |
| Total liabilities                               |       | $                     | 72.5       |   |

 

**22.****Financial Information forSubsidiary Guarantors and Non-Guarantors**The following presentscondensed consolidating financial information for the Company, segregating: (1) Owens-IllinoisGroup, Inc. (the “Parent”); (2) Owens-Brockway Glass Container Inc.(the “Issuer”); (3) those domestic subsidiaries that guarantee the 8 1⁄4%, 63⁄4%, and 6 3⁄4% Euro Senior Notes of the Issuer (the “Guarantor Subsidiaries”);and (4) all other subsidiaries (the “Non-Guarantor Subsidiaries”). TheGuarantor Subsidiaries are 100% owned direct and indirect subsidiaries of theParent and their guarantees are full, unconditional and joint and several. TheParent is also a guarantor, and its guarantee is full, unconditional and jointand several.

 

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

 

87

----

 

**Owens-Illinois Group, Inc.**

** **

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

 

 
| ** **                                              | ** ** | **December 31, 2007** | ** ** |
|---------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                              | ** ** | **Parent**                      | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Balance Sheet                                           |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| 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 |   |

 

88

----

 

**Owens-Illinois Group, Inc.**

** **

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

 
| ** **                                              | ** ** | **December 31, 2006** | ** ** |
|---------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                              | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | ** **                      | ** ** | ** ** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | **Parent**                      | ** ** | **Issuer** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Balance Sheet                                           |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Current assets:                                         |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Accounts receivable                                     |       | $                               | —     |   | $ | 78.3 |   | $ | 4.6 |   | $ | 958.2 |   | $ | — |   | $ | 1,041.1 |   |
| Inventories                                             |       |                            |       | 150.9 |   | 1.6 |   | 839.6 |   |   |   | 992.1 |   |
| Other current assets                                    |       |                            |       | 17.7 |   | 7.0 |   | 270.0 |   |   |   | 294.7 |   |
| Assets of discontinued operations                       |       |                            |       |   |   | 93.0 |   | 11.8 |   |   |   | 104.8 |   |
| Total current assets                                    |       | —                          |       | 246.9 |   | 106.2 |   | 2,079.6 |   | — |   | 2,432.7 |   |
|                                                    |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Investments in and advances to subsidiaries             |       | 2,094.3                         |       | 3,367.1 |   | 2.3 |   |   |   | (5,463.7 | ) | — |   |
| Goodwill                                                |       |                            |       | 562.1 |   | 13.9 |   | 1,679.2 |   |   |   | 2,255.2 |   |
| Other non-current assets                                |       |                            |       | 188.1 |   | 530.0 |   | 474.8 |   | (6.3 | ) | 1,186.6 |   |
| Assets of discontinued operations                       |       |                            |       |   |   | 521.6 |   | 50.1 |   |   |   | 571.7 |   |
| Total other assets                                      |       | 2,094.3                         |       | 4,117.3 |   | 1,067.8 |   | 2,204.1 |   | (5,470.0 | ) | 4,013.5 |   |
|                                                    |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Property, plant and equipment, net                      |       |                            |       | 667.3 |   | 47.8 |   | 2,159.4 |   |   |   | 2,874.5 |   |
| Total assets                                            |       | $                               | 2,094.3    |   | $ | 5,031.5 |   | $ | 1,221.8 |   | $ | 6,443.1 |   | $ | (5,470.0 | ) | $ | 9,320.7 |   |
| Current liabilities :                                   |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable and accrued liabilities                |       | $                               | —     |   | $ | 383.2 |   | $ | 52.9 |   | $ | 973.3 |   | $ | (0.8 | ) | $ | 1,408.6 |   |
| Short-term loans and long-term debt due within one year |       | 300.0                           |       | (1.7 | ) |   |   | 438.9 |   |   |   | 737.2 |   |
| Liabilities of discontinued operations                  |       |                            |       |   |   | 65.5 |   | 5.4 |   |   |   | 70.9 |   |
| Total current liabilities                               |       | 300.0                           |       | 381.5 |   | 118.4 |   | 1,417.6 |   | (0.8 | ) | 2,216.7 |   |
| Liabilities of discontinued operations                  |       |                            |       |   |   | 0.1 |   | 1.5 |   |   |   | 1.6 |   |
| Long-term debt                                          |       | 750.0                           |       | 3,291.3 |   | 20.1 |   | 665.3 |   |   |   | 4,726.7 |   |
| Other non-current liabilities and minority interests    |       |                            |       | 75.9 |   | 271.7 |   | 976.8 |   | 7.0 |   | 1,331.4 |   |
| Investments by and advances from parent                 |       |                            |       | 1,282.8 |   | 811.5 |   | 3,381.9 |   | (5,476.2 | ) | — |   |
| Share owner’s equity                               |       | 1,044.3                         |       |   |   |   |   |   |   |   |   | 1,044.3 |   |
| Total liabilities and share owner’s equity         |       | $                               | 2,094.3    |   | $ | 5,031.5 |   | $ | 1,221.8 |   | $ | 6,443.1 |   | $ | (5,470.0 | ) | $ | 9,320.7 |   |

 

89

----

 

**Owens-Illinois Group, Inc.**

** **

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

 
| ** **                                                         | ** ** | **Year ended December 31, 2007** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                         | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | ** **                                           | ** ** | ** ** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | **Parent**                                           | ** ** | **Issuer** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Results of Operations                                              |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net sales                                                          |       | $                                                    | —     |   | $ | 1,966.3 |   | $ | 1.1 |   | $ | 5,694.5 |   | $ | (95.2 | ) | $ | 7,566.7 |   |
| Interest                                                           |       |                                                 |       | — |   | 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 |   |
| Total revenue                                                      |       | 414.3                                                |       | 2,514.5 |   | 1,519.5 |   | 5,740.5 |   | (2,509.6 | ) | 7,679.2 |   |
|                                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Manufacturing, shipping, and delivery                              |       |                                                 |       | 1,658.1 |   | 2.6 |   | 4,463.5 |   | (152.8 | ) | 5,971.4 |   |
| 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 |   |
| Total costs and expense                                            |       | —                                               |       | 1,988.0 |   | 172.4 |   | 5,050.3 |   | (153.1 | ) | 7,057.6 |   |
| 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 |   |

 

90

----

 

**Owens-Illinois Group, Inc.**

** **

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

 
| ** **                                                         | ** ** | **Year ended December 31, 2006** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                         | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | ** **                                           | ** ** | ** ** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | **Parent**                                           | ** ** | **Issuer** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Results of Operations                                              |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net sales                                                          |       | $                                                    | —     |   | $ | 1,849.3 |   | $ | (3.5 | ) | $ | 4,905.6 |   | $ | (101.0 | ) | $ | 6,650.4 |   |
| Interest                                                           |       |                                                 |       | — |   | 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 |   |
| Total revenue                                                      |       | 116.2                                                |       | 2,207.4 |   | 45.6 |   | 4,961.7 |   | (581.9 | ) | 6,749.0 |   |
|                                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Manufacturing, shipping,and delivery                               |       |                                                 |       | 1,632.4 |   | (12.2 | ) | 4,005.6 |   | (144.7 | ) | 5,481.1 |   |
| 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 |   |
| Total costs and expense                                            |       | —                                               |       | 2,047.5 |   | 64.9 |   | 4,496.2 |   | (144.7 | ) | 6,463.9 |   |
| Earnings 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 from continuing operations                                |       | 116.2                                                |       | 151.0 |   | (6.8 | ) | 294.6 |   | (438.8 | ) | 116.2 |   |
| Net earnings of discontinued operations                            |       | (23.7                                                | )          |   |   | (21.8 | ) | (1.9 | ) | 23.7 |   | (23.7 | ) |
| Net earnings                                                       |       | $                                                    | 92.5       |   | $ | 151.0 |   | $ | (28.6 | ) | $ | 292.7 |   | $ | (415.1 | ) | $ | 92.5 |   |

 

91

----

 

**Owens-Illinois Group, Inc.**

** **

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

 
| ** **                                                         | ** ** | **Year ended December 31, 2005** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                         | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | ** **                                           | ** ** | ** ** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | **Parent**                                           | ** ** | **Issuer** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Results of Operations                                              |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
|                                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net sales                                                          |       | $                                                    | —     |   | $ | 1,661.9 |   | $ | (5.2 | ) | $ | 4,688.5 |   | $ | (78.3 | ) | $ | 6,266.9 |   |
| Interest                                                           |       |                                                 |       | — |   | 2.3 |   | 14.2 |   |   |   | 16.5 |   |
| Equity earnings from subsidiaries                                  |       | (525.3                                               | )          | (192.9 | ) | (9.0 | ) |   |   | 727.2 |   | — |   |
| Other equity earnings                                              |       |                                                 |       | 8.9 |   | 4.0 |   | 7.6 |   |   |   | 20.5 |   |
| Other revenue                                                      |       |                                                 |       | 52.7 |   | 8.9 |   | 49.2 |   | (44.6 | ) | 66.2 |   |
| Total revenue                                                      |       | (525.3                                               | )          | 1,530.6 |   | 1.0 |   | 4,759.5 |   | 604.3 |   | 6,370.1 |   |
|                                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Manufacturing, shipping, and delivery                              |       |                                                 |       | 1,395.7 |   | (14.8 | ) | 3,821.6 |   | (117.6 | ) | 5,084.9 |   |
| Research, engineering, selling, administrative,  and other         |       |                                                 |       | 96.2 |   | 104.7 |   | 831.0 |   |   |   | 1,031.9 |   |
| Net intercompany interest                                          |       | (85.0                                                | )          | (28.7 | ) | 57.0 |   | 56.7 |   |   |   | — |   |
| Other interest expense                                             |       | 85.0                                                 |       | 286.7 |   | (138.6 | ) | 92.3 |   |   |   | 325.4 |   |
| Total costs and expense                                            |       | —                                               |       | 1,749.9 |   | 8.3 |   | 4,801.6 |   | (117.6 | ) | 6,442.2 |   |
|                                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Earnings from continuing operations before  items below            |       | (525.3                                               | )          | (219.3 | ) | (7.3 | ) | (42.1 | ) | 721.9 |   | (72.1 | ) |
|                                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Provision for income taxes                                         |       |                                                 |       | 3.1 |   | 299.2 |   | 128.3 |   | (1.7 | ) | 428.9 |   |
|                                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Minority share owners’ interests in  earnings of subsidiaries |       |                                                 |       |   |   |   |   | 34.5 |   | 1.4 |   | 35.9 |   |
|                                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Earnings from continuing operations                                |       | (525.3                                               | )          | (222.4 | ) | (306.5 | ) | (204.9 | ) | 722.2 |   | (536.9 | ) |
| Net earnings of discontinued operations                            |       | 64.3                                                 |       |   |   | 48.0 |   | 16.3 |   | (64.3 | ) | 64.3 |   |
| Net earnings                                                       |       | $                                                    | (461.0     | ) | $ | (222.4 | ) | $ | (258.5 | ) | $ | (188.6 | ) | $ | 657.9 |   | $ | (472.6 | ) |

 

92

----

** **

**Owens-Illinois Group, Inc.**

** **

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

 
| ** **                                                | ** ** | **Year ended December 31, 2007** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | ** **                                           | ** ** | ** ** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | **Parent**                                           | ** ** | **Issuer** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Cash Flows                                                |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Cash provided by (used in) operating  activities          |       | $                                                    | —     |   | $ | 161.8 |   | $ | 1,303.4 |   | $ | 952.7 |   | $ | (1,434.4 | ) | $ | 983.5 |   |
|                                                      |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Investing Activities:                                     |       |                                                 |       | (48.0 | ) | (3.6 | ) | (240.9 | ) |   |   | (292.5 | ) |
| Additions to property, plant, and equipment-continuing    |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| 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 |   |
|                                                           |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

93

----

 

**Owens-Illinois Group, Inc.**

** **

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

 
| ** **                                                                                   | ** ** | **Year ended December 31, 2006** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                   | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                   | ** ** | ** **                                           | ** ** | ** ** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                   | ** ** | **Parent**                                           | ** ** | **Issuer** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Cash Flows                                                                                   |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| 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 |   |
|                                                                                              |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

94

----

 

**Owens-Illinois Group, Inc.**

** **

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

 
| ** **                                                                                   | ** ** | **Year ended December 31, 2005** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                   | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                   | ** ** | ** **                                           | ** ** | ** ** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                   | ** ** | **Parent**                                           | ** ** | **Issuer** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Cash Flows                                                                              | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash provided by (used in) operating activities                                              |       | $                                                    | —     |   | $ | (294.6 | ) | $ | 276.9 |   | $ | 591.2 |   | $ | 48.5 |   | $ | 622.0 |   |
|                                                                                         |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Investing Activities:                                                                        |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Additions to property, plant, and equipment - continuing                                     |       |                                                 |       | (131.3 | ) | (6.8 | ) | (234.9 | ) |   |   | (373.0 | ) |
| Additions to property, plant, and equipment - discontinued                                   |       |                                                 |       |   |   | (29.5 | ) | (1.6 | ) |   |   | (31.1 | ) |
| Collections on receivables arising from  consolidation of receivables securitization program |       |                                                 |       |   |   |   |   | 50.7 |   |   |   | 50.7 |   |
| Acquisitions, net of cash acquired                                                           |       |                                                 |       |   |   |   |   | (11.6 | ) |   |   | (11.6 | ) |
| Proceeds from sales                                                                          |       |                                                 |       | 6.9 |   | (38.7 | ) | 198.8 |   |   |   | 167.0 |   |
| Cash used in investing activities                                                            |       | —                                               |       | (124.4 | ) | (75.0 | ) | 1.4 |   | — |   | (198.0 | ) |
| Financing Activities:                                                                        |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net change in payable to OI Inc.                                                             |       | (112.4                                               | )          |   |   |   |   |   |   |   |   | (112.4 | ) |
| Net distribution to OI Inc.                                                                  |       | (169.4                                               | )          |   |   |   |   |   |   |   |   | (169.4 | ) |
| Change in intercompany transactions                                                          |       | 281.8                                                |       | 456.1 |   | (199.3 | ) | (490.1 | ) | (48.5 | ) | 0.0 |   |
| Change in short term debt                                                                    |       |                                                 |       |   |   |   |   | 11.6 |   |   |   | 11.6 |   |
| Payments of long term debt                                                                   |       |                                                 |       | (417.2 | ) | (10.8 | ) | (199.9 | ) |   |   | (627.9 | ) |
| Borrowings of long term debt                                                                 |       |                                                 |       | 381.1 |   | 6.6 |   | 167.4 |   |   |   | 555.1 |   |
| Net payments for debt-related hedging activity                                               |       |                                                 |       |   |   |   |   | (98.0 | ) |   |   | (98.0 | ) |
| Payment of finance fees                                                                      |       |                                                 |       | (1.0 | ) |   |   |   |   |   |   | (1.0 | ) |
| Cash provided by (used in) financing activities                                              |       | —                                               |       | 419.0 |   | (203.5 | ) | (609.0 | ) | (48.5 | ) | (442.0 | ) |
| Effect of exchange rate change on cash                                                       |       |                                                 |       |   |   |   |   | (13.3 | ) |   |   | (13.3 | ) |
| Net change in cash                                                                           |       | —                                               |       | — |   | (1.6 | ) | (29.7 | ) | — |   | (31.3 | ) |
| Cash at beginning of period                                                                  |       | —                                               |       | — |   | 32.2 |   | 245.7 |   | — |   | 277.9 |   |
| Cash at end of period                                                                        |       | $                                                    | —     |   | $ | — |   | $ | 30.6 |   | $ | 216.0 |   | $ | — |   | $ | 246.6 |   |

 

95

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**Selected Quarterly Financial Data(unaudited)**  The following tables present selected financialdata by quarter for the years ended December 31, 2007 and 2006:

 
| ** **                                     | ** ** | **2007 (a)** | ** ** |
|------------------------------------------------|------------|-------------------|------------|
| ** **                                     | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Year** | ** ** |
| ** **                                     | ** ** | **First**         | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** | **to** | ** ** |
| ** **                                     | ** ** | **Quarter**       | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **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 (b)        |       | 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 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 |   |

 

----

(a)                                  Amounts related to theCompany’s plastics packaging business have been reclassified to discontinuedoperations following as a result of the July 2007 sale of that business.

 

(b)                                 Amount for the secondquarter includes a benefit of $13.5 million for the recognition of tax creditsrelated to restructuring of investments in certain European operations.

 

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 ($37.8 million aftertax) for the following: (1) $38.4 million ($29.0 million after tax) forrestructuring 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.

 

96

----

 
| ** **                                     | ** ** | **2006 (c)** | ** ** |
|------------------------------------------------|------------|-------------------|------------|
| ** **                                     | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Year** | ** ** |
| ** **                                     | ** ** | **First**         | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** | **to** | ** ** |
| ** **                                     | ** ** | **Quarter**       | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Date** | ** ** |
| Net sales - continuing operations              |       | $                 | 1,488.7    |   | $ | 1,744.8 |   | $ | 1,717.5 |   | $ | 1,699.4 |   | $ | 6,650.4 |   |
| Net sales - discontinued operations            |       | 199.6             |       | 200.7 |   | 194.2 |   | 177.1 |   | 771.6 |   |
| Gross profit - continuing operations           |       | $                 | 259.2      |   | $ | 314.4 |   | $ | 313.6 |   | $ | 282.1 |   | $ | 1,169.3 |   |
| Gross profit - discontinued operations         |       | 44.1              |       | 45.5 |   | 42.9 |   | 36.2 |   | 168.7 |   |
| Earnings from continuing operations (d)        |       | 27.6              |       | 50.5 |   | 8.1 |   | 30.0 |   | 116.2 |   |
| Net earnings (loss) of discontinued operations |       | (3.3              | )          | (7.9 | ) | 0.3 |   | (12.8 | ) | (23.7 | ) |
| Net earnings                                   |       | $                 | 24.3       |   | $ | 42.6 |   | $ | 8.4 |   | $ | 17.2 |   | $ | 92.5 |   |

 

----

(c)                                  Amounts related to theCompany’s plastics packaging business have been reclassified to discontinuedoperations following as a result of the July 2007 sale of that business.

 

(d)                                 Amount for the first quarterincludes a loss of $3.5 million ($3.3 million after tax) from the mark tomarket effect of natural gas hedge contracts.

 

Amountfor the second quarter includes a loss of $1.6 million (pretax and after tax)from the mark to market effect of natural gas hedge contracts.

 

Amountfor the second quarter includes a charge of $10.2 million ($9.8 million aftertax) for the write-off of finance fees related to debt that was repaid prior toits maturity.

 

Amountfor the third quarter includes a loss of $1.6 million (pretax and after tax)from the mark to market effect of natural gas hedge contracts.

 

Amountfor the third quarter includes a charge of $7.3 million (pretax and after tax)for note repurchase premiums and the write-off of finance fees related to debtthat was repaid prior to its maturity.

 

Amountfor the third quarter includes a charge of $29.7 million ($27.7 million aftertax), principally for the closing of the Godfrey, Illinois machine parts manufacturingoperation.

 

Amountfor the fourth quarter includes a gain of $15.9 million ($11.2 million aftertax) for the curtailment of postretirement benefits in The Netherlands.

 

Amountfor the fourth quarter includes charges totaling $22.8 ($22.6 million aftertax) for the following: (1) $20.8 million ($20.7 million after tax) forCEO transition costs; and (2) $2.0 million ($1.9 million after tax) fromthe mark to market effect of natural gas hedge contracts.

 

Amountfor the fourth quarter includes a benefit of $5.7 million from the reversal ofa non-U.S. deferred tax asset valuation allowance partially offset by chargesrelated to international tax restructuring.

 

97

----

 

**ITEM 9.****                 ****CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON**

## **ACCOUNTINGAND 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.

 

Asrequired by Rule 13a-15(b) of the Exchange Act, the Company carriedout an evaluation, under the supervision and with the participation ofmanagement, including its Chief Executive Officer and Chief Financial Officer,of the effectiveness of the design and operation of the Company’s disclosurecontrols and procedures as of the end of the period covered by thisreport.  Based on the foregoing, theCompany’s Chief Executive Officer and Chief Financial Officer concluded thatthe Company’s disclosure controls and procedures were effective at thereasonable assurance level as of December 31, 2007.

 

Managementconcluded that the Company’s system of internal control over financialreporting was effective as of December 31, 2007.  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 over financialreporting. The Company is undertaking the phased implementation of a globalEnterprise Resource Planning software system and believes it is maintaining andmonitoring appropriate internal controls during the implementation period. The Company believes that the internal control environment will beenhanced as a result of implementation.

 

**Management’s Report on Internal Control over FinancialReporting**

 

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

 

Managementassessed the effectiveness of the Company’s internal control over financialreporting as of December 31, 2007. In making this assessment management used the criteria for effectiveinternal control over financial reporting as described in “Internal Control - IntegratedFramework” issued by the Committee of Sponsoring Organizations of the TreadwayCommission (the COSO framework).

 

98

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Basedon this assessment, using the criteria above, management concluded that theCompany’s system of internal control over financial reporting was effective asof December 31, 2007.

 

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.

 

99

----

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

**The Board of Directors and ShareOwner of**

**Owens-Illinois Group, Inc.**

** **

Wehave audited Owens-Illinois Group, Inc.’s internal control over financialreporting as of December 31, 2007 based on criteria established inInternal Control—Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission (the COSO criteria).Owens-Illinois Group, Inc.’s management is responsible for maintainingeffective internal control over financial reporting, and for its assessment ofthe effectiveness of internal control over financial reporting included in theaccompanying Management’s Report on Internal Control over Financial Reporting.Our responsibility is to express an opinion on the company’s internal controlover financial reporting based on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness ofinternal control based on the assessed risk, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

 

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to 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.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

Inour opinion, Owens-Illinois Group, Inc. maintained, in all materialrespects, effective internal control over financial reporting as of December 31,2007, based on the COSO criteria.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofOwens-Illinois Group, Inc. and subsidiaries as of December 31, 2007and 2006, and the related consolidated statements of results of operations,share owner’s equity, and cash flows for each of the three years in the periodended December 31, 2007 and our report dated February 29, 2008expressed an unqualified opinionthereon.

 
|                    |
|-------------------------|
|                    | /s/  Ernst & Young LLP |
|                    |
|                    |
| Toledo,  Ohio           |
| February 29,  2008 |

## ** **

100

----

## ** **

## **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.’s2008 Proxy Statement in the section entitled “Independent Registered Public AccountingFirm” and such information is incorporated herein by reference.

 

**PART IV**

 

## **ITEM 15. EXHIBITS ANDFINANCIAL 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, 2007  and 2006 |       |
|                                                            |       |
| For the years ended  December 31, 2007, 2006, and 2005     |       |
|                                                            |       |
| Consolidated Results of Operations                              |       |
| Consolidated Share Owner’s Equity                          |       |
| Consolidated Cash Flows                                         |       |
|                                                            |       |
| Notes to the Consolidated Financial Statements                  |       |
|                                                            |       |
| Exhibit Index                                              |       |

 
| **Financial Statement Schedule**                                                                                                                                  |   | **Schedule Page** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|
|                                                                                                                                                              |   |              |
| For the years ended  December 31, 2007, 2006, and 2005:                                                                                                      |   |              |
|                                                                                                                                                              |   |              |
| II - Valuation and Qualifying Accounts (Consolidated)                                                                                                             |   | S-1               |
|                                                                                                                                                              |   |              |
| All other schedules have  been omitted since the required information is not present or not present in  amounts sufficient to require submission of the schedule. |   |              |
|                                                                                                                                                              |   |              |
| (ii) Separate Financial  Statements of Affiliates Whose Securities Are Pledged As Collateral                                                                 |   |              |

 

101

----

 

**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 16, 1997, establishing the terms of the 8.10% Senior Notes due  2007; including the Form of 8.10% Senior Note due 2007 (filed as  Exhibits 4.3 and 4.5, respectively, to Owens-Illinois, Inc.’s  Form 8-K dated May 16, 1997, File No. 1-9576, and incorporated  herein by reference). |
| 4.3                                 |       | —       |   | 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 15, 1997 Indenture) (filed as  Exhibit 4.2 to Owens-Illinois, Inc.’s Form 10-Q for the  quarter ended September 30, 2001, File No. 1-9576, and incorporated  herein by reference). |
| 4.4                                 |       | —       |   | Second Supplemental  Indenture, dated as of May 27, 2003, among Owens-Illinois, Inc.,  Owens-Illinois Group, Inc., Owens-Brockway Packaging, Inc. and The  Bank of New York, as Trustee (May 15, 1997 Indenture) (filed as  Exhibit 4.12 to Owens-Brockway Glass Container Inc. registration  statement on Form S-4 dated June 24, 2003, File  No. 333-106399, and incorporated herein by reference). |
| 4.5                                 |       | —       |   | Indenture dated as of  May 20, 1998, between Owens-Illinois, Inc. and The Bank of New  York, as Trustee (filed as Exhibit 4.1 to Owens-Illinois, Inc.’s  Form 8-K dated May 20, 1998, File No. 1-9576, and incorporated  herein by reference). |
| 4.6                                 |       | —       |   | Officers’ Certificate,  dated May 20, 1998, establishing the terms of the 7.35% Senior Notes due  2008; including the Form of 7.35% Senior Note due 2008 (filed Exhibits  4.3 and 4.7, respectively, to Owens-Illinois, Inc.’s Form 8-K dated  May 20, 1998, File No. 1-9576, and incorporated herein by  reference). |
| 4.7                                 |       | —       |   | 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). |
| 4.8                                 |       | —       |   | 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 |

 

102

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| **S-K Item 601 No.** | ** ** | **Document** |
|-------------------------------------|------------|--------------|
|                                |       |         |   |   |
|                                |       |         |   | Exhibits 4.5 and 4.9,  respectively, to Owens-Illinois, Inc.’s Form 8-K filed May 20,  1998, File No. 1-9576, and incorporated herein by reference). |
| 4.9                                 |       | —       |   | 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). |

 

103

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| **S-K Item 601 No.** | ** ** | **Document** |
|-------------------------------------|------------|--------------|
|                                |       |         |   |   |
| 4.10                                |       | —       |   | 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). |
| 4.11                                |       | —       |   | Certificate of Designations,  Preferences and Relative, Participating, Optional and Other Special Rights of  Preferred Stock and Qualifications, Limitations and Restrictions thereof of  Convertible Preferred Stock of Owens-Illinois, Inc., dated May 15,  1998 (filed as Exhibit 4.10 to Owens-Illinois Inc.’s Form 8-K dated  May 20, 1998, File No. 1-9576, and incorporated herein by  reference). |
| 4.12                                |       | —       |   | 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, File No. 333-85690, and incorporated herein by  reference). |
| 4.13                                |       | —       |   | 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, File No. 333-85690, and incorporated  herein by reference). |
| 4.14                                |       | —       |   | 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). |
| 4.15                                |       | —       |   | 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, File No. 333-103263, and incorporated  herein by reference). |
| 4.16                                |       | —       |   | Additional  Supplemental Indenture, dated as of December 18, 2002, among  Owens-Brockway Glass Container Inc., the Guarantors (as defined therein) and  U.S. Bank National Association, as Trustee (filed as Exhibit 4.5 to  Owens-Illinois Group, Inc.’s Form S-4, File No. 333-103263,  and incorporated herein by reference). |
| 4.17                                |       | —       |   | 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). |
| 4.18                                |       | —       |   | 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 4.3 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). |
| 4.19                                |       | —       |   | Indenture,  dated as of December 1, 2004, by and among Owens-Brockway Glass  Container Inc., the guarantors party thereto and Law Debenture Trust Company  of New York, as trustee (filed as Exhibit 4.26 to Owens-Illinois  Group, Inc.’s Form S-4, File No. 333-123960, and incorporated  herein by reference). |

 

104

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| **S-K Item 601 No.** | ** ** | **Document** |
|-------------------------------------|------------|--------------|
|                                |       |         |   |   |
| 4.20                                |       | —       |   | Credit  Agreement, dated as of June 14, 2006, by and among the Borrowers named  therein, Owens-Illinois General, Inc., as Borrower’s agent, Deutsche  Bank AG, New York Branch, as Administrative Agent, and the other Agents,  Arrangers and Lenders named therein (filed as exhibit 4.1 to Owens-Illinois  Group, Inc.’s Form 8-K dated June 14, 2006, File  No. 33-13061, and incorporated herein by reference). |
| 4.21                                |       | —       |   | Second  Amended and Restated Intercreditor Agreement, dated as of June 14, 2006,  by and among Deutsche Bank AG, New York Branch, as Administrative Agent for  the lenders party to the Credit Agreement (as defined therein) and Deutsche  Bank Trust Company Americas, as Collateral Agent (as defined therein) and any  other parties thereto (filed as exhibit 4.2 to Owens-Illinois  Group, Inc.’s Form 8-K dated June 14, 2006, File  No. 33-13061, and incorporated herein by reference). |
| 4.22                                |       | —       |   | Second  Amended and Restated Pledge Agreement, dated as of June 14, 2006, between  Owens-Illinois Group, Inc., Owens-Brockway Packaging, Inc., and  Deutsche Bank Trust Company Americas, as Collateral Agent (as defined  therein) and any other parties thereto (filed as exhibit 4.3 to  Owens-Illinois Group, Inc.’s Form 8-K dated June 14, 2006,  File No. 33-13061, and incorporated herein by reference). |
| 4.23                                |       | —       |   | 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). |
| 4.24                                |       | —       |   | 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 August 6, 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). |

 

105

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

 

106

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

 

107

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

 

----

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

 

**SEPARATEFINANCIAL STATEMENTS OF AFFILIATES WHOSE SECURITIES ARE PLEDGED AS COLLATERAL.**

 

1)              Financialstatements of Owens-Brockway Packaging, Inc. and subsidiaries includingconsolidated balance sheets as of December 31, 2007 and 2006, and therelated statements of operations, net parent investment, and cash flows for theyears ended December 31, 2007, 2006 and 2005.

 

2)              Financialstatements of Owens-Brockway Glass Container Inc. and subsidiaries includingconsolidated balance sheets as of December 31, 2007 and 2006, and therelated statements of operations, net parent investment, and cash flows for theyears ended December 31, 2007, 2006 and 2005.

 

108

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

The Board of Directorsand Share Owner of

Owens-Brockway Packaging, Inc.

 

We have auditedthe accompanying consolidated balance sheets of Owens-Brockway Packaging, Inc.and subsidiaries as of December 31, 2007 and 2006, and the relatedconsolidated statements of results of operations, net Parent investment, andcash flows for each of the three years in the period ended December 31,2007.  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 ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  We were not engaged toperform an audit of the Company’s internal control over financialreporting.  Our audits includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion,the financial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Owens-Brockway Packaging, Inc.and subsidiaries at December 31, 2007 and 2006, and the consolidatedresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2007, in conformity with U.S. generallyaccepted accounting principles.

 

As discussed inNotes 1, 13 & 14 to the consolidated financial statements, the Companychanged its method of accounting for stock-based compensation, defined benefitpension plans and other postretirement plans, respectively, in 2006.

 

 
|   |   |  /s/ Ernst & Young LLP |
|--------|--------|--------------------------------------|

 

 

Toledo, Ohio

February 29, 2008

 

109

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

**Dollars in millions**

 
| **Years ended December 31,**                        | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                               |       |     |       |     |       |     |       |
| Revenues:                                                          |       |     |       |     |       |     |       |
| Net sales                                                          |       | $        | 7,566.7    |     | $          | 6,692.4  |       | $ | 6,356.4 |   |
| Other revenue                                                      |       | 92.4     |       | 86.5     |       | 103.8    |       |
|                                                               |       | 7,659.1  |       | 6,778.9  |       | 6,460.2  |       |
| Costs and  expenses:                                               |       |     |       |     |       |     |       |
| Manufacturing,  shipping, and delivery                             |       | 5,968.6  |       | 5,529.6  |       | 5,169.2  |       |
| Research,  development, and engineering                            |       | 65.8     |       | 49.0     |       | 51.4     |       |
| Selling and  administrative                                        |       | 401.5    |       | 410.2    |       | 361.9    |       |
| Net intercompany  interest                                         |       | (4.0     | )          | (3.0     | )          | 28.7     |       |
| Other interest  expense                                            |       | 360.2    |       | 404.6    |       | 379.5    |       |
| Other                                                              |       | 142.3    |       | 55.0     |       | 525.4    |       |
|                                                               |       | 6,934.4  |       | 6,445.4  |       | 6,516.1  |       |
| Earnings (loss)  before items below                                |       | 724.7    |       | 333.5    |       | (55.9    | )          |
|                                                               |       |     |       |     |       |     |       |
| Provision for  income taxes                                        |       | 139.1    |       | 138.8    |       | 130.6    |       |
|                                                               |       |     |       |     |       |     |       |
| Minority share  owners’ interests in earnings of subsidiaries |       | 59.5     |       | 43.7     |       | 35.9     |       |
| Net earnings  (loss)                                               |       | $        | 526.1      |     | $          | 151.0    |       | $ | (222.4 | ) |

 

See accompanyingNotes to the Consolidated Financial Statements.

 

110

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**CONSOLIDATED BALANCE SHEETS**  Owens-Brockway Packaging, Inc.

**Dollars in millions**

 
| **December 31,**                                                                                                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                                                                    |       |     |       |     |       |
| **Assets**                                                                                                                                    |       |     |       |     |       |
| **Current  assets:**                                                                                                                          |       |     |       |     |       |
| Cash, including  time deposits of $154.4 ($124.5 in 2006)                                                                                     |       | $        | 401.9      |     | $          | 241.8 |   |
| Receivables  including amount from related parties of $3.8 ($1.7 in 2006), less allowances  of $35.1 ($29.1 in 2006) for losses and discounts |       | 1,201.1  |       | 1,044.9  |       |
| Inventories                                                                                                                                   |       | 1,020.3  |       | 993.3    |       |
| Prepaid expenses                                                                                                                              |       | 35.1     |       | 42.9     |       |
| Total current  assets                                                                                                                         |       | 2,658.4  |       | 2,322.9  |       |
|                                                                                                                                          |       |     |       |     |       |
| **Other  assets:**                                                                                                                            |       |     |       |     |       |
| Equity  investments                                                                                                                           |       | 79.9     |       | 95.3     |       |
| Repair parts  inventories                                                                                                                     |       | 155.8    |       | 135.9    |       |
| Prepaid pension                                                                                                                               |       | 58.1     |       | 31.7     |       |
| Deposits,  receivables, and other assets                                                                                                      |       | 418.0    |       | 449.4    |       |
| Goodwill                                                                                                                                      |       | 2,428.1  |       | 2,255.2  |       |
| Total other  assets                                                                                                                           |       | 3,139.9  |       | 2,967.5  |       |
|                                                                                                                                          |       |     |       |     |       |
| **Property,  plant, and equipment:**                                                                                                          |       |     |       |     |       |
| Land, at cost                                                                                                                                 |       | 261.7    |       | 242.9    |       |
| Buildings and  equipment, at cost:                                                                                                            |       |     |       |     |       |
| Buildings and  building equipment                                                                                                             |       | 1,070.7  |       | 976.1    |       |
| Factory  machinery and equipment                                                                                                              |       | 4,742.1  |       | 4,346.5  |       |
| Transportation,  office, and miscellaneous equipment                                                                                          |       | 114.9    |       | 100.4    |       |
| Construction in  progress                                                                                                                     |       | 146.7    |       | 120.8    |       |
|                                                                                                                                          |       | 6,336.1  |       | 5,786.7  |       |
| Less accumulated  depreciation                                                                                                                |       | 3,431.9  |       | 2,945.5  |       |
| Net property,  plant, and equipment                                                                                                           |       | 2,904.2  |       | 2,841.2  |       |
| Total assets                                                                                                                                  |       | $        | 8,702.5    |     | $          | 8,131.6 |   |

 

111

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

**Dollars in millions**

 
| ** **                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **December 31,**                                                         | ** ** | **2007**   | ** ** | **2006**   | ** ** |
| **Liabilities  and Net Parent Investment**                                    |       |       |       |       |       |
| **Current  liabilities:**                                                     |       |       |       |       |       |
| Short-term loans                                                              |       | $          | 435.6      |       | $          | 412.8 |   |
| Accounts payable  including amount to related parties of $9.3 ($23.8 in 2006) |       | 926.5      |       | 883.3      |       |
| Salaries and  wages                                                           |       | 176.3      |       | 139.8      |       |
| U.S. and foreign  income taxes                                                |       | 118.7      |       | 138.4      |       |
| Other accrued  liabilities                                                    |       | 311.4      |       | 224.5      |       |
| Long-term debt  due within one year                                           |       | 15.2       |       | 24.4       |       |
| Total current  liabilities                                                    |       | 1,983.7    |       | 1,823.2    |       |
|                                                                          |       |       |       |       |       |
| **External  long-term debt**                                                  |       | 2,494.1    |       | 3,956.6    |       |
|                                                                          |       |       |       |       |       |
| **Deferred  taxes**                                                           |       | 147.2      |       | 153.8      |       |
|                                                                          |       |       |       |       |       |
| **Other  liabilities**                                                        |       | 701.0      |       | 708.1      |       |
|                                                                          |       |       |       |       |       |
| **Minority  share owners’ interests**                                    |       | 252.2      |       | 207.2      |       |
|                                                                          |       |       |       |       |       |
| **Net  Parent investment:**                                                   |       |       |       |       |       |
| Investment by  and advances from Parent                                       |       | 2,769.1    |       | 1,287.2    |       |
| Accumulated  other comprehensive loss                                         |       | 355.2      |       | (4.5       | )          |
| Total net Parent  investment                                                  |       | 3,124.3    |       | 1,282.7    |       |
| Total  liabilities and net Parent investment                                  |       | $          | 8,702.5    |       | $          | 8,131.6 |   |

 

See accompanyingNotes to the Consolidated Financial Statements.

 

112

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**CONSOLIDATEDNET PARENT INVESTMENT  **Owens-BrockwayPackaging, Inc.

**Dollars inmillions**

 
| **Years ended December 31,**                         | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                |       |     |       |     |       |     |       |
| **Investment  by and advances to Parent**                           |       |     |       |     |       |     |       |
| Balance at  beginning of year                                       |       | $        | 1,287.2    |     | $          | 1,313.9  |       | $ | 2,020.6 |   |
| Net intercompany  transactions                                      |       | 955.8    |       | (177.7   | )          | (484.3   | )          |
| Net earnings                                                        |       | 526.1    |       | 151.0    |       | (222.4   | )          |
| Balance at end  of year                                             |       | $        | 2,769.1    |     | $          | 1,287.2  |       | $ | 1,313.9 |   |
|                                                                |       |     |       |     |       |     |       |
| **Accumulated  other comprehensive loss**                           |       |     |       |     |       |     |       |
| Balance at  beginning of year                                       |       | $        | (4.5       | )        | $          | (215.3   | )          | $ | 67.9 |   |
| Foreign currency  translation adjustments                           |       | 305.3    |       | 284.9    |       | (290.5   | )          |
| Change in  minimum pension liability, net of tax                    |       |     |       | 22.6     |       | (7.2     | )          |
| Employee benefit  plans, net of tax                                 |       | 26.2     |       | (47.4    | )          |     |       |
| Change in fair  value of certain derivative instruments, net of tax |       | 28.2     |       | (49.3    | )          | 14.5     |       |
| Balance at end  of year                                             |       | $        | 355.2      |     | $          | (4.5     | )          | $ | (215.3 | ) |
| Total net Parent  investment                                        |       | $        | 3,124.3    |     | $          | 1,282.7  |       | $ | 1,098.6 |   |
|                                                                |       |     |       |     |       |     |       |
| **Total  comprehensive income (loss)**                              |       |     |       |     |       |     |       |
| Net earnings  (loss)                                                |       | $        | 526.1      |     | $          | 151.0    |       | $ | (222.4 | ) |
| Foreign currency  translation adjustments                           |       | 305.3    |       | 284.9    |       | (290.5   | )          |
| Change in  minimum pension liability, net of tax                    |       |     |       | 22.6     |       | (7.2     | )          |
| Employee benefit  plans, net of tax                                 |       | 26.2     |       |     |       |     |       |
| Change in fair  value of certain derivative instruments, net of tax |       | 28.2     |       | (49.3    | )          | 14.5     |       |
| Total  comprehensive income (loss)                                  |       | $        | 885.8      |     | $          | 409.2    |       | $ | (505.6 | ) |

 

See accompanying Notes to the Consolidated FinancialStatements

 

113

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

**Dollars in millions**
| ** **                                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Years ended December 31,**                                                           | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
| **Operating  activities:**                                                                            |       |       |       |       |       |       |       |
| Net earnings  (loss)                                                                                  |       | $          | 526.1      |       | $          | 151.0      |       | $ | (222.4 | ) |
| Non-cash charges  (credits):                                                                          |       |       |       |       |       |       |       |
| Depreciation                                                                                          |       | 419.7      |       | 426.5      |       | 431.3      |       |
| Amortization of  deferred costs                                                                       |       | 36.1       |       | 32.6       |       | 35.4       |       |
| Deferred tax  provision (credit)                                                                      |       | (5.6       | )          | 25.4       |       | (3.1       | )          |
| Restructuring  and asset impairment                                                                   |       | 100.3      |       | 27.5       |       |       |       |
|                                                                                                  |       |       |       |       |       |       |       |
| Reverse non-U.S.  deferred tax valuation allowance net of restructuring charges                       |       |       |       | (5.7       | )          |       |       |
| Goodwill  impairment                                                                                  |       |       |       |       |       | 494.0      |       |
| Curtailment of  postretirement benefits in The Netherlands                                            |       |       |       | (15.9      | )          |       |       |
| Gains on asset  sales                                                                                 |       |       |       |       |       | (28.1      | )          |
| Other                                                                                                 |       | (20.7      | )          | 20.7       |       | (6.4       | )          |
| Change in  non-current operating assets                                                               |       | 6.4        |       | (10.1      | )          | (14.6      | )          |
| Change in  non-current liabilities                                                                    |       | (23.8      | )          | (52.1      | )          | (58.7      | )          |
| Change in  components of working capital                                                              |       | 26.2       |       | (221.7     | )          | 80.9       |       |
| Cash provided by  operating activities                                                                |       | 1,064.7    |       | 378.2      |       | 708.3      |       |
| **Investing  activities:**                                                                            |       |       |       |       |       |       |       |
| Additions to  property, plant, and equipment                                                          |       | (290.4     | )          | (271.5     | )          | (366.2     | )          |
| Acquisitions,  net of cash acquired                                                                   |       |       |       |       |       | (11.6      | )          |
| Collections on  accounts receivable arising from consolidation of receivables securitization  program |       |       |       | 127.3      |       | 50.7       |       |
| Net cash  proceeds from divestitures and other                                                        |       | 14.1       |       | 13.6       |       | 205.7      |       |
| Cash utilized in  investing activities                                                                |       | (276.3     | )          | (130.6     | )          | (121.4     | )          |
| **Financing  activities:**                                                                            |       |       |       |       |       |       |       |
| Additions to  long-term debt                                                                          |       | 406.4      |       | 1,206.5    |       | 537.5      |       |
| Repayments of  long-term debt                                                                         |       | (2,092.2   | )          | (1,341.7   | )          | (617.1     | )          |
| Increase  (decrease) in short-term loans                                                              |       | (21.5      | )          | 158.9      |       | 11.5       |       |
| Net change in  intercompany debt                                                                      |       | 1,032.8    |       | (266.9     | )          | (414.2     | )          |
| Net receipts  (payments) for hedging activity                                                         |       | 0.7        |       | (6.8       | )          | (98.0      | )          |
| Payment of  finance fees                                                                              |       | (6.3       | )          | (12.3      | )          | (1.0       | )          |
| Cash provided by  (utilized in) financing activities                                                  |       | (680.1     | )          | (262.3     | )          | (581.3     | )          |
| Effect of  exchange rate fluctuations on cash                                                         |       | 51.8       |       | 12.6       |       | (13.3      | )          |
| Increase  (decrease) in cash                                                                          |       | 160.1      |       | (2.1       | )          | (7.7       | )          |
|                                                                                                  |       |       |       |       |       |       |       |
| Cash at  beginning of year                                                                            |       | 241.8      |       | 243.9      |       | 251.6      |       |
| Cash at end of  year                                                                                  |       | $          | 401.9      |       | $          | 241.8      |       | $ | 243.9 |   |

 

See Accompanying Notes to Consolidated FinancialStatements.

 

114

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**Owens-BrockwayPackaging, Inc.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**1. Significant AccountingPolicies**

 

**Basis ofConsolidated Statements**  The consolidated financial statements of Owens-Brockway Packaging, Inc.(“Company”) include the accounts of its subsidiaries.  Newly acquired subsidiaries have beenincluded in the consolidated financial statements from dates of acquisition.

 

The Company uses theequity method of accounting for investments in which it has a significantownership interest, generally 20% to 50%. Other investments are accounted for at cost. The Company monitorsinvestments for other than temporary declines in fair value and recordsreductions 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 and certainstate income tax purposes, the taxable income of the Company is included in theconsolidated tax returns of OI Inc. and income taxes are allocated to theCompany on a basis consistent with separate returns.

 

**Nature ofOperations**   TheCompany is a leading manufacturer of glass container products. The Company’sprincipal product lines in the Glass Containers product segment are glasscontainers for the food and beverage industries.  The Company has glass container operationslocated in 22 countries. The principal markets and operations for the Company’sglass products are in North America, Europe, South America, and Australia.

 

**Use ofEstimates**   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 those estimates, at which time theCompany would revise its estimates accordingly.

 

**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.

 

**FairValues 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 risks generally associated withforeign exchange rate, interest rate and commodity market volatility.  Derivative financial instruments areincluded on the balance sheet at fair value. Whenever possible, derivativeinstruments are designated as and are effective as hedges, in accordance withaccounting principles generally accepted in the United States.  If the underlying hedged transaction ceasesto exist, all changes in fair value of the related derivatives that have notbeen 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 a financing

 

115

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**Owens-BrockwayPackaging, Inc.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

activity.  Cash flows of currency swaps, interest rateswaps, and commodity futures contracts are classified as operating activities.See Note 8 for additional information related to derivative instruments.

 

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

 

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

 

**IntangibleAssets and Other Long-Lived Assets**  Intangible assets are amortized over theexpected useful life of the asset.  TheCompany evaluates the recoverability of intangible assets and other long-livedassets based on undiscounted projected cash flows, excluding interest andtaxes, when factors indicate that impairment may exist.  If impairment exists, the asset is writtendown to fair value.

 

**Property,Plant, and Equipment  **Property,plant, and equipment (“PP&E”) is carried at cost and includes expendituresfor new facilities and equipment and those costs which substantially increasethe useful lives or capacity of existing PP&E.  In general, depreciation is computed using thestraight-line method and recorded over the estimated useful life of theasset.  Factory machinery and equipmentis depreciated over periods ranging from 5 to 25 years with the majority ofsuch assets (principally glass-melting furnaces and forming machines) depreciatedover 7-15 years.  Buildings and buildingequipment are depreciated over periods ranging from 10 to 50 years.  Maintenance and repairs are expensed asincurred.  Costs assigned to PP&E ofacquired businesses are based on estimated fair values at the date ofacquisition.

 

**RevenueRecognition**  TheCompany recognizes sales, net of estimated discounts and allowances, when thetitle to the products and risk of loss are transferred to customers.  Provisions for rebates to customers areprovided in the same period that the related sales are recorded.

 

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

 

**IncomeTaxes 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.

 

**ForeignCurrency Translation**  The assets and liabilities of substantially all subsidiaries andassociates are translated at current exchange rates and any related translationadjustments are recorded directly in net Parent investment.

 

**AccountsReceivable   **Receivablesare stated at amounts estimated by management to be the net realizablevalue.  The Company charges off accountsreceivable when it becomes apparent based upon age or customer circumstancesthat amounts will not be collected.

 

**Allowancefor Doubtful Accounts  **Theallowance for doubtful accounts is established through charges to the provisionfor bad debts.  The Company evaluates theadequacy of the allowance 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.

 

116

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**Owens-BrockwayPackaging, Inc.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NewAccounting Standards  **InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 157 “Fair ValueMeasurements” (“FAS No. 157”).  FAS No. 157defines fair value, establishes a framework for measuring fair value inaccordance with generally accepted accounting principles, and expandsdisclosures about fair value measurements. FAS No. 157 applies under other accounting pronouncements thatrequire or permit fair value measurements. The statement does not require any new fair value measurements.  The statement is effective for fiscal yearsbeginning after November 15, 2007.  Adoption of FAS No. 157 is not presently expected to have amaterial impact on the Company’s results of operations or financial position.

 

In February 2007,the FASB issued Statement of Financial Accounting Standards No. 159, “FairValue Option for Financial Assets and Financial Liabilities – Including anamendment of FASB Statement No. 115” (“FAS No. 159”).  FAS No. 159 permits entities to chooseto measure many financial instruments and certain other items at fairvalue.  The statement is effective forfiscal years beginning after November 15, 2007.   Adoption of FAS No. 159 is notpresently expected to have a material impact on the Company’s results ofoperations or financial position.

 

InDecember 2007, the FASB issued Statement of Financial AccountingStandards 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 business combinationor a gain from a bargain purchase.  FAS No. 141Ralso sets forth the disclosures required to be made in the financial statementsto evaluate the nature and financial effects of the business combination.  SFAS No. 141R applies prospectively to businesscombinations for which the acquisition date is on or after the beginning of thefirst annual reporting period beginning on or after December 15,2008.  Accordingly, FAS No. 141Rwill be applied by the Company to business combinations occurring on or after January 1,2009.

 

InDecember 2007, the FASB issued Statement of Financial AccountingStandards No. 160, “NoncontrollingInterests in Consolidated Financial Statements, an amendment of ARB No. 51”(“FAS No. 160”).  FAS No. 160establishes accounting and reporting standards for the non-controlling interestin a subsidiary and the deconsolidation of a subsidiary.  FAS No. 160 is effective for yearsbeginning on or after December 15, 2008. Adoption of FAS No. 160 is not presently expected to have amaterial impact on the Company’s results of operations, financial position orcash flows.

 

**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 

 

117

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**Owens-BrockwayPackaging, Inc.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

25%per year beginning on the first anniversary. In general, options expire following termination of employment or theseventh anniversary of the option grant.

 

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 directorsvest on the third anniversary of the share grant or the end of the director’sthen current term on the board, whichever is later.

 

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 the estimated number of shares into which the restricted shareunit will be converted change, an adjustment will be recorded to recognize theaccumulated difference in amortization between the revised and previousestimates.

 

*Accounting*

 

Prior to January 1,2006, OI Inc. accounted for these equity compensation plans under therecognition and measurement provisions of Accounting Principles Board (APB)Opinion No.25, “Accounting for Stock Issued to Employees”, and relatedinterpretations, as permitted by FAS No. 123, “Accounting for Stock-BasedCompensation” (FAS No. 123).  Assuch, compensation cost for stock options was not recognized in theConsolidated Results of Operations since all stock options granted had anexercise price equal to the market value of the underlying common stock on thedate of the grant.  Prior to January 1,2006, compensation cost was recognized for restricted shares and restrictedshare units.  Effective January 1,2006, OI Inc. adopted the fair value recognition provisions of FAS No. 123(R), “Share-Based Payment” (FAS No. 123R), using the modified-prospectivemethod.  Under this method, compensationcost recognized after January 1, 2006 includes: (1) compensation costfor all share-based payments granted through December 31, 2005, but forwhich the requisite service period had not been completed as of December 31,2005, based on the grant date fair value estimated in accordance with theoriginal 

 

118

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**Owens-BrockwayPackaging, Inc.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

provisions of FAS No.123,and (2) compensation cost for share-based payments granted subsequent to December 31,2005, based on the grant date fair value estimated in accordance with theprovisions of FAS No. 123R.

 

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 operating subsidiariesof OI Inc. on an intercompany basis.

 

**2.  Changes in Components of Working CapitalRelated to Operations**Changes in the components of workingcapital related to operations (net of the effects related to acquisitions anddivestitures) were as follows:

 
| ** **                                   | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Decrease  (increase) in current assets:      |       |     |       |     |       |     |       |
| Receivables                                  |       | $        | (30.1      | )        | $          | (173.9   | )          | $ | (68.9 | ) |
| Inventories                                  |       | 70.5     |       | (36.8    | )          | 58.1     |       |
| Prepaid expenses                             |       | 6.8      |       | 2.4      |       | (4.7     | )          |
| Increase  (decrease) in current liabilities: |       |     |       |     |       |     |       |
| Accounts payable  and accrued liabilities    |       | (13.5    | )          | (28.1    | )          | 32.4     |       |
| Salaries and  wages                          |       | 24.9     |       | (13.8    | )          | (2.8     | )          |
| U.S. and foreign  income taxes               |       | (32.4    | )          | 28.5     |       | 66.8     |       |
|                                         |       | $        | 26.2       |     | $          | (221.7   | )          | $ | 80.9 |   |

 

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

 
| ** **          | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
| Finished goods      |       | $        | 861.1      |     | $          | 825.0 |   |
| Work in process     |       | 1.4      |       | 7.7      |       |
| Raw materials       |       | 90.5     |       | 93.8     |       |
| Operating  supplies |       | 67.3     |       | 66.8     |       |
|                |       | $        | 1,020.3    |     | $          | 993.3 |   |

 

If the inventories whichare valued on the LIFO method had been valued at standard costs, whichapproximate current costs, consolidated inventories would be higher thanreported by $29.1 million and $20.8 million, at December 31, 2007 and2006, respectively.

 

Inventories which arevalued at the lower of standard costs (which approximate average costs), ormarket at December 31, 2007 and 2006 were approximately $872.8 million and$859.3 million, respectively.

 

119

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**Owens-BrockwayPackaging, Inc.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**4.  Equity Investments **Summarized informationpertaining to the Company’s equity associates follows:

 
| ** **                         | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |
| At end of year:                    |       |     |       |     |       |
| Equity in  undistributed earnings: |       |     |       |     |       |
| Foreign                            |       | $        | 22.4       |     | $          | 20.3 |   |
| Domestic                           |       | 18.7     |       | 15.9     |       |
| Total                              |       | $        | 41.1       |     | $          | 36.2 |   |

 
| ** **           | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------|------------|----------|------------|----------|------------|----------|------------|
|                 |       |     |       |     |       |     |       |
| For the year:        |       |     |       |     |       |     |       |
| Equity in  earnings: |       |     |       |     |       |     |       |
| Foreign              |       | $        | 5.3        |     | $          | 2.0      |       | $ | 6.9 |   |
| Domestic             |       | 28.8     |       | 21.4     |       | 13.6     |       |
| Total                |       | $        | 34.1       |     | $          | 23.4     |       | $ | 20.5 |   |
| Dividends  received  |       | $        | 21.7       |     | $          | 43.5     |       | $ | 11.0 |   |

 

Summarized combined financial information forequity associates is as follows:

 
| ** **                            | ** ** | **2007 (a)** | ** ** | **2006** | ** ** |
|---------------------------------------|------------|-------------------|------------|----------|------------|
|                                  |       |              |       |     |       |
| At end of year:                       |       |              |       |     |       |
| Current assets                        |       | $                 | 191.3      |     | $          | 190.3 |   |
| Non-current  assets                   |       | 302.4             |       | 340.6    |       |
| Total assets                          |       | 493.7             |       | 530.9    |       |
|                                  |       |              |       |     |       |
| Current liabilities                   |       | 117.0             |       | 157.6    |       |
| Other  liabilities and deferred items |       | 265.5             |       | 276.4    |       |
| Total  liabilities and deferred items |       | 382.5             |       | 434.0    |       |
| Net assets                            |       | $                 | 111.2      |     | $          | 96.9 |   |

 
| ** **    | ** ** | **2007 (a)** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------|------------|--------------|------------|----------|------------|----------|------------|
|          |       |         |       |     |       |     |       |
| For the year: |       |         |       |     |       |     |       |
| Net sales     |       | $            | 535.9      |     | $          | 564.0    |       | $ | 482.5 |   |
|          |       |         |       |     |       |     |       |
| Gross profit  |       | $            | 176.5      |     | $          | 132.2    |       | $ | 90.9 |   |
|          |       |         |       |     |       |     |       |
| Net earnings  |       | $            | 112.4      |     | $          | 69.4     |       | $ | 51.4 |   |

 

----

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

 

TheCompany’s significant equity method investments include:  (1) 43.5% of the common shares of VetriSpeciali SpA, a specialty glass manufacturer; (2) a 25% partnershipinterest in General Chemical Soda Ash (Partners), a soda ash supplier; and (3) a50% partnership interest in Rocky Mountain Bottle Company, a glass containermanufacturer.

 

120

----

 

**Owens-BrockwayPackaging, Inc.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**5.  External Debt**   The following table summarizes the externallong-term debt of the Company at December 31, 2007 and 2006:

 
| ** **                                               | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                     |       |     |       |     |       |
| Secured Credit  Agreement:                               |       |     |       |     |       |
| Revolving Credit  Facility:                              |       |     |       |     |       |
| Revolving Loans                                          |       | $        | —     |     | $          | 45.2 |   |
| Term Loans:                                              |       |     |       |     |       |
| Term Loan A  (225.0 million AUD at Dec. 31, 2007)   |       | 198.1    |       | 231.5    |       |
| Term Loan B                                              |       | 191.5    |       | 195.5    |       |
| Term Loan C  (110.8 million CAD at Dec. 31, 2007)   |       | 113.2    |       | 115.9    |       |
| Term Loan D  (€191.5 million at Dec. 31, 2007) |       | 281.8    |       | 257.4    |       |
| Senior Secured  Notes:                                   |       |     |       |     |       |
| 8.875%, due 2009                                         |       |     |       | 850.0    |       |
| 7.75%, due 2011                                          |       |     |       | 450.0    |       |
| 8.75%, due 2012                                          |       |     |       | 625.0    |       |
| Senior Notes:                                            |       |     |       |     |       |
| 8.25%, due 2013                                          |       | 450.3    |       | 440.8    |       |
| 6.75%, due 2014                                          |       | 400.0    |       | 400.0    |       |
| 6.75%, due 2014  (€225 million)                     |       | 331.1    |       | 296.2    |       |
| 6.875%, due 2017  (€300 million)                    |       | 441.5    |       |     |       |
| Other                                                    |       | 101.8    |       | 73.5     |       |
|                                                     |       | 2,509.3  |       | 3,981.0  |       |
| Less amounts due  within one year                        |       | 15.2     |       | 24.4     |       |
| External  long-term debt                                 |       | $        | 2,494.1    |     | $          | 3,956.6 |   |

 

On June 14,2006, the Company’s subsidiary borrowers entered into the Secured CreditAgreement (the “Agreement”).  At December 31,2007, 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. Italso included a $191.5 million term loan and a €191.5 million term loan, eachof which has a final maturity date of June 14, 2013.

 

At December 31,2007 the Company’s subsidiary borrowers had unused credit of $820.9 millionavailable under the Agreement.

 

The interest rateon borrowings under the Revolving Credit Facility is, at the Company’s option,the Base Rate or the Adjusted Eurodollar rate. The interest rate on borrowings under the Revolving Credit Facility alsoincludes a margin linked to the Company’s Consolidated Leverage Ratio, asdefined in the Agreement.  The margin islimited to ranges of 1.125% to 2.0% for Eurodollar loans and 0.125% to 1.0% forBase Rate loans.  The weighted averageinterest rate on borrowings outstanding under the Agreement at December 31,2007 was 6.67%. While no compensating balances are required by the Agreement,the Borrowers must pay a facility fee on the Revolving Credit Facilitycommitments ranging from 0.20% to 0.50%.

 

Borrowings underthe Agreement are secured by substantially all of the assets of the Company’sdomestic subsidiaries and certain foreign subsidiaries, which have a book valueof approximately $2.3 billion. Borrowings are also secured by a pledge of intercompany debt and equityin most of the Company’s domestic subsidiaries and stock of certain foreignsubsidiaries.  All borrowings under theagreement are guaranteed by substantially all domestic subsidiaries of theCompany for the term of the Agreement.

 

121

----

 

**Owens-BrockwayPackaging, Inc.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

TheAgreement contains covenants and provisions that, among other things, restrictthe ability of the Company and its subsidiaries to dispose of assets, incuradditional indebtedness, prepay other indebtedness or amend certain debtinstruments, pay dividends, create liens on assets, enter into contingentobligations, enter into sale and leaseback transactions, make investments,loans or advances, make acquisitions, engage in mergers or consolidations,change the business conducted, engage in certain transactions with affiliatesand otherwise restrict certain corporate activities.  In addition, the Agreement contains financialcovenants that require the Company to maintain specified financial ratios andmeet specified tests based upon financial statements of the Company and itssubsidiaries on a consolidated basis, maximum leverage ratios and specifiedcapital expenditure tests.

 

During March 2007, a subsidiary of the Company issued Senior Notestotaling €300.0 million.  The notes bearinterest at 6.875% and are due March 31, 2017.  The notes are guaranteed by substantially allof the Company’s domestic subsidiaries. The proceeds were used to retire the $300 million principal amount of OIInc.’s 8.10% Senior Notes which matured in May 2007, and to reduceborrowings under the revolving credit facility.

 

On July 31, 2007, the OI Inc. completed the sale of its plasticspackaging business 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% 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 July of 2006, a subsidiary of the Company used borrowingsunder the Agreement to repurchase $150.0 million principal amount of the 8.875%Senior Secured Notes due 2009.  Duringthe third quarter of 2006, the Company recorded $7.3 million of additionalinterest charges for note repurchase premiums and the related write-off of unamortizedfinance fees.

 

During the fourth quarter of 2005, the Company expanded the capacity ofits European accounts receivable securitization program from €200 million to€320 million to include operations in Italy and the United Kingdom. Theaccounts receivable securitization program provides lower costs of financingthan traditional bank debt. The terms of this expansion resulted in changingfrom off-balance sheet to on-balance sheet accounting for the program byconsolidating both the accounts receivable in the program and the securedindebtedness of the same amount. Cash inflows related to receipts fromcustomers in payment of the accounts receivable consolidated at December 13,2005 have been classified as investing cash inflows in the accompanyingConsolidated Statement of Cash Flows.

 

During October of 2006, the Company entered into a new €300million European accounts receivable securitization program.  The new program replaced the previousEuropean program, described in the preceding paragraph, which was set toterminate in October 2006.

 

Information related to the Company’s accounts receivable securitizationprogram is as follows:

 

122

----

 

**Owens-BrockwayGlass Container Inc.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 
| ** **                              | ** ** | **Dec. 31,** | ** ** | **Dec. 31,** | ** ** |
|-----------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                              | ** ** | **2007**          | ** ** | **2006**          | ** ** |
|                                    |       |              |       |              |       |
| Balance  (included in short-term loans) |       | $                 | 361.8      |              | $          | 279.4 |   |
|                                    |       |              |       |              |       |
| Weighted average  interest rate         |       | 5.48              | %          | 5.60              | %          |
|                                         |            |                   |            |                   |            |  |  |

 

The Companycapitalized $27.0 million and $13.2 million in 2007 and 2006, respectively,under capital lease obligations with the related financing recorded as longterm debt.  These amounts are included inother in the long-term debt table above.

 

Annual maturitiesfor all of the Company’s long-term debt through 2012 are as follows: 2008,$15.2 million; 2009, $16.6 million; 2010, $15.2 million; 2011, $190.2 million;and 2012, $157.6 million.

 

Interest paid incash, including note repurchase premiums in 2007 and 2006, aggregated $390.3million for 2007, $380.0 million for 2006, and $365.2 million for 2005.

 

Fair values at December 31,2007, 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      |          | 103.38     |                  | $          | 465.2                 |       | $ | 450.6 |   |
| 6.75%, due 2014                       |       | 400.0                     |       | 99.13         |       | 396.5                 |       |                  |       |
| 6.75%, due 2014  (€225 million)  |       | 331.1                     |       | 95.00         |       | 314.5                 |       |                  |       |
| 6.875%, due 2017  (€300 million) |       | 441.5                     |       | 94.00         |       | 415.0                 |       |                  |       |
|                                       |            |                           |            |               |            |                       |            |                       |            |  |  |  |

 

**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 OI Inc. debt beingguaranteed was $755.0 at December 31, 2007.

 

**7.  Operating Leases**   Rent expense attributable to all warehouse,office buildings, and equipment operating leases was $87.4 million in 2007,$75.7 million in 2006, and $66.5 million in 2005.  Minimum future rentals under operating leasesare as follows:  2008, $47.3 million;2009, $36.3 million; 2010, $28.4 million; 2011, $17.4 million; and 2012, $14.3million; and 2013 and thereafter, $10.0 million.

 

**8.  Foreign Currency Transactions**   Aggregate foreign currency exchange gains(losses) included in other costs and expenses were $(8.1) million in 2007,$(1.0) million in 2006, and $2.8 million in 2005.

 

**9.  Derivative Instruments **At December 31, 2007,the Company had the following derivative instruments related to its varioushedging programs:

 

123

----

 

**Owens-BrockwayPackaging, Inc.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

*Interest Rate 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$750 million that mature from 2008 through 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’s fixed-to-variableinterest rate swaps are accounted for as fair value hedges.  Because the relevant terms of the swapagreements 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 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 each swap is recognized as anadjustment of interest expense during each six-month period over the term ofthe agreement.

 

The following selectedinformation relates to fair value swaps at December 31, 2007:

 
| ** **                                                               | ** ** | ** ** | ** ** | **Average** | ** ** | ** **  | ** ** | **Asset**       | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|-----------------|------------|
| ** **                                                               | ** ** | **Amount** | ** ** | **Receive** | ** ** | **Average** | ** ** | **(Liability)** | ** ** |
| ** **                                                               | ** ** | **Hedged** | ** ** | **Rate**    | ** ** | **Spread**  | ** ** | **Recorded**    | ** ** |
|                                                                     |       |       |       |        |       |        |       |            |       |
| OI Inc. public notes swapped by the company through  intercompany loans: |
| Senior Notes due  2008                                                   |       | $          | 250.0      |        | 7.35       | %           | 3.5        | %               | $          | (0.2 | ) |
| Senior  Debentures due 2010                                              |       | 250.0      |       | 7.50        | %          | 3.2         | %          | 3.0             |       |
|                                                                     |       |       |       |        |       |        |       |            |       |
| Notes issued by  OBGC:                                                   |       |       |       |        |       |        |       |            |       |
| Senior Notes due  2013                                                   |       | 250.0      |       | 8.25        | %          | 3.7         | %          | 0.3             |       |
| Total                                                                    |       | $          | 750.0      |        |       |        |       |            | $          | 3.1 |   |

 

*CommodityHedges*

 

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 eighteen months andperiodically enters into commodity futures contracts in order to hedge aportion of its usage requirements over that period.  At December 31, 2007, the Company hadentered into commodity futures contracts for approximately 50% (approximately11,680,000 MM BTUs) of its estimated North American usage requirements for thefull year of 2008.

 

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 shareowners’ equity (“OCI”) and reclassified into earnings in the same period orperiods during which the underlying hedged item affects earnings.  Any material portion of the change in thefair value of a derivative designated as a cash flow hedge that is deemed to beineffective is recognized in current earnings.

 

124

----

 

**Owens-BrockwayPackaging, Inc.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

The above futures contracts are accounted for ascash flow hedges at December 31, 2007.

 

At December 31, 2007, an unrecognized loss of$4.5 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 31,2007 was not material.

 

*OtherHedges*

 

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 fair values of derivativefinancial instruments on the balance sheet as follows: (1) receivables ifthe 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.  Accumulated Other Comprehensive Income (Loss)**   The components ofcomprehensive income are: (a) net earnings; (b) change in fair valueof certain derivative instruments; (c) pension and other postretirementbenefit adjustments; and (d) foreign currency translationadjustments.  The net effect of exchangerate fluctuations generally reflects changes in the relative strength of theU.S. dollar against major foreign currencies between the beginning and end ofthe year.

 

The following table lists the beginning balance, yearly activity andending balance of each component of accumulated other comprehensive income(loss):

 

125

----

 

**Owens-BrockwayPackaging, Inc.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 
| ** **                     | ** ** | **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, 2005  |       | $                                                             | 193.5      |                                                | $          | 12.8                                            |       | $                                                    | (138.3     | )                            | $          | (0.1                                                      | )          | $ | — |   | $ | 67.9 |   |
| 2005 Change                    |       | (290.5                                                        | )          |                                                |       | 7.5                                             |       | 5.3                                                  |       |                         |       | (277.7                                                    | )          |
| Translation  effect            |       |                                                          |       |                                                |       | (14.8                                           | )          |                                                 |       |                         |       | (14.8                                                     | )          |
| Tax effect                     |       |                                                          |       |                                                |       | 0.1                                             |       | 9.2                                                  |       |                         |       | 9.3                                                       |       |
| Balance on  Dec. 31, 2005 |       | (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 |   |

 

For 2007, foreigncurrency translation adjustments include a loss of approximately $35.1 millionrelated to a hedge of the Company’s net investment in a non-U.S. subsidiary.

 

**11.  Income Taxes**  Deferred income taxes reflect:  (1) the net tax effects of temporarydifferences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for income tax purposes and(2) carryovers and credits for income tax purposes. Significant components ofthe Company’s deferred tax assets and liabilities at December 31, 2007 and 2006are as follows:

 
| ** **                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
|                                    |       |     |       |     |       |
| Deferred tax  assets:                   |       |     |       |     |       |
| Tax loss  carryovers                    |       | $        | 268.1      |     | $          | 289.5 |   |
| Capital loss  carryovers                |       | 32.7     |       | 34.4     |       |
| Accrued  postretirement benefits        |       | 24.4     |       | 23.4     |       |
| Other,  principally accrued liabilities |       | 195.5    |       | 239.0    |       |
| Total deferred  tax assets              |       | 520.7    |       | 586.3    |       |
|                                    |       |     |       |     |       |
| Deferred tax  liabilities:              |       |     |       |     |       |
| Property, plant  and equipment          |       | 221.8    |       | 242.9    |       |
| Inventory                               |       | 20.0     |       | 21.8     |       |
| Other                                   |       | 49.7     |       | 64.7     |       |
| Total deferred  tax liabilities         |       | 291.5    |       | 329.4    |       |
| Valuation  allowance                    |       | (239.9   | )          | (264.9   | )          |
| Net deferred tax  liabilities           |       | $        | (10.7      | )        | $          | (8.0 | ) |

 

126

----

 

**Owens-BrockwayPackaging, Inc.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

Deferred taxes areincluded in the Consolidated Balance Sheets at December 31, 2007 and 2006 asfollows:

 
| ** **                               | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
|                                     |       |     |       |     |       |
| Prepaid expenses                         |       | $        | 11.8       |     | $          | 15.7 |   |
| Deposits,  receivables, and other assets |       | 124.7    |       | 130.1    |       |
| Deferred taxes                           |       | (147.2   | )          | (153.8   | )          |
| Net deferred tax  liabilities            |       | $        | (10.7      | )        | $          | (8.0 | ) |

 

The provision for incometaxes consists of the following:

 
| ** **   | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|--------------|------------|------------|------------|------------|------------|------------|------------|
| ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current:     |       |       |       |       |       |       |       |
| U.S. Federal |       | $          | —     |       | $          | —     |       | $ | — |   |
| State        |       | 0.4        |       | 0.3        |       | 0.3        |       |
| Foreign      |       | 144.3      |       | 113.1      |       | 133.4      |       |
|         |       | 144.7      |       | 113.4      |       | 133.7      |       |
|         |       |       |       |       |       |       |       |
| Deferred:    |       |       |       |       |       |       |       |
| U.S. Federal |       | 0.3        |       | 12.9       |       | 1.7        |       |
| State        |       | (4.0       | )          | (3.6       | )          | 8.0        |       |
| Foreign      |       | (1.9       | )          | 16.1       |       | (12.8      | )          |
|         |       | (5.6)      |       | 25.4       |       | (3.1       | )          |
|         |       |       |       |       |       |       |       |
| Total:       |       |       |       |       |       |       |       |
| U.S. Federal |       | 0.3        |       | 12.9       |       | 1.7        |       |
| State        |       | (3.6       | )          | (3.3       | )          | 8.3        |       |
| Foreign      |       | 142.4      |       | 129.2      |       | 120.6      |       |
|         |       | $          | 139.1      |       | $          | 138.8      |       | $ | 130.6 |   |

 

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

 
| ** ** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
|       |       |     |       |     |       |     |       |
| Domestic   |       | $        | 37.4       |     | $          | (119.1   | )          | $ | (20.7 | ) |
| Foreign    |       | 687.3    |       | 452.6    |       | (35.2    | )          |
|       |       | $        | 724.7      |     | $          | 333.5    |       | $ | (55.9 | ) |

 

 

127

----

 

**Owens-BrockwayPackaging, Inc.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

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

 
| ** ** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
|       |       |     |       |     |       |     |       |
| Domestic   |       | $        | 0.2        |     | $          | (0.4     | )          | $ | — |   |
| Foreign    |       | 149.2    |       | 126.8    |       | 112.9    |       |
|       |       | $        | 149.4      |     | $          | 126.4    |       | $ | 112.9 |   |

 

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:

 
| ** **                                                      | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                            |       |     |       |     |       |     |       |
| Tax provision  (benefit) on pretax earnings (loss) at statutory |       |     |       |     |       |     |       |
| U.S. Federal tax  rate                                          |       | $        | 253.7      |     | $          | 116.7    |       | $ | (19.6 | ) |
| Increase  (decrease) in provision for income taxes due to:      |       |     |       |     |       |     |       |
| Valuation  allowance - U.S.                                     |       | (538.3   | )          | 46.5     |       | 7.0      |       |
| Foreign  subsidiary ownership restructuring                     |       | 545.0    |       | 21.2     |       |     |       |
| Foreign source  income taxable in the U.S.                      |       | 29.3     |       | 1.8      |       | 1.8      |       |
| Reversal of  non-U.S. tax valuation allowance                   |       | (13.4    | )          | (34.7    | )          |     |       |
| Foreign tax  credit utilization                                 |       | (47.9    | )          |     |       |     |       |
| Goodwill  impairment                                            |       |     |       |     |       | 172.9    |       |
| State taxes, net  of federal benefit                            |       | (4.8     | )          | (0.3     | )          | 2.5      |       |
| Rate differences  on non-U.S. earnings                          |       | (74.9    | )          | (12.5    | )          | (24.3    | )          |
| Adjustment for  non-U.S. tax law changes                        |       | (9.9     | )          | (1.6     | )          | (7.1     | )          |
| Other items                                                     |       | 0.3      |       | 1.7      |       | (2.6     | )          |
|                                                            |       |     |       |     |       |     |       |
| Provision for  income taxes                                     |       | $        | 139.1      |     | $          | 138.8    |       | $ | 130.6 |   |

 

In 2007 the Companyimplemented a plan to restructure the ownership and intercompany obligations ofcertain foreign subsidiaries. These actions resulted in taxation of asignificant portion of previously unremitted foreign earnings and will transfera portion of the Company’s debt service obligations to operations outside theU.S. in order to better balance operating cash flows with financing costs on aglobal basis. The foreign earnings reported as taxable in the U.S. were offsetby net operating loss carryforwards and foreign tax credits. Foreign tax creditcarryforwards arising from the restructuring were fully offset by an increasein the valuation allowance.

 

The Company has taxholidays 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, 2007, theCompany’s equity in the undistributed earnings of foreign subsidiaries forwhich income taxes had not been provided approximated $1,399.2 million. TheCompany intends to reinvest these earnings indefinitely in the non-U.S.operations. It is not practicable to estimate the U.S. and foreign tax whichwould be payable should these earnings be distributed.

 

**12.  Related Party Transactions  **Charges for administrativeservices are allocated to the Company by OI Inc. based on an annual utilizationlevel.  Such services includecompensation and benefits administration, payroll processing, use of certaingeneral accounting systems, auditing, income tax planning and compliance, andtreasury services.

 

Allocated costs also include charges associated withOI Inc.’s equity compensation plans.  Asubstantial number of the options, restricted shares and restricted share unitsgranted under these plans have been granted to key employees of anothersubsidiary of OI Inc., some of whose compensation costs, including stock-basedcompensation, are included in an allocation of costs to all operatingsubsidiaries of OI Inc., including the Company.

 

128

----

** **

**Owens-BrockwayPackaging, Inc.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

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,** | ** ** |
|--------------------------------|------------|---------------------------------------------|------------|
| ** **                     | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                      |       |                                        |       |   |   |   |   |
| Sales to  affiliated companies |       | $                                           | 0.3        |   | $ | 0.5 |   | $ | 0.7 |   |
| Expenses:                      |       |                                        |       |   |   |   |   |
| Administrative  services       |       | 19.5                                        |       | 25.5 |   | 19.9 |   |
| Corporate  management fee      |       | 29.1                                        |       | 27.1 |   | 23.4 |   |
| Total expenses                 |       | $                                           | 48.6       |   | $ | 52.6 |   | $ | 43.3 |   |
|                                |            |                                             |            |  |  |  |  |  |  |  |  |  |  |

 

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

 
| ** **                                    | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| Cost of sales                                 |       | $                                           | 16.9       |   | $ | 22.6 |   | $ | 17.7 |   |
| Selling,  general, and adminstrative expenses |       | 31.7                                        |       | 30.0 |   | 25.6 |   |
| Total expenses                                |       | $                                           | 48.6       |   | $ | 52.6 |   | $ | 43.3 |   |

 

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(7.6% at December 31, 2007) is applied monthly to the intercompany debt balanceto determine intercompany interest expense.

 

**13. PensionBenefit Plans**   TheCompany participates in OI Inc.’s defined benefit pension plans forsubstantially all employees located in the United States. Benefits generallyare based on compensation for salaried employees and on length of service forhourly employees. OI Inc.’s policy is to fund pension plans such thatsufficient assets will be available to meet future benefit requirements. Independentactuaries determine pension costs for each subsidiary of OI Inc. included inthe plans; however, accumulated benefit obligation information and plan assetspertaining to each subsidiary have not been separately determined. As such, theaccumulated benefit obligation and the plan assets related to the pension plansfor domestic employees have been retained by another subsidiary of OI Inc. Netcredits to results of operations for the Company’s allocated portion of thedomestic pension costs amounted to $23.0 million in 2007, $7.7 million in 2006,and $21.5 million in 2005.

 

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 $5.7 million in 2007, $5.5 million in 2006, and $5.2 million in 2005.

 

The Company’ssubsidiaries in the United Kingdom, the Netherlands, Canada, Australia, Germanyand France also have pension plans covering substantially all employees. Thefollowing tables relate to the

 

129

----

** **

**Owens-BrockwayPackaging, Inc.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

Company’s principaldefined 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:

 
| ** **                                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Obligations at  beginning of year                                 |       | $        | 1,544.4    |     | $          | 1,447.7 |   |
|                                                              |       |     |       |     |       |
| Change in benefit  obligations:                                   |       |     |       |     |       |
| Service cost                                                      |       | 25.0     |       | 28.1     |       |
| Interest cost                                                     |       | 78.8     |       | 69.1     |       |
| Actuarial gain,  including the effect of change in discount rates |       | (92.1    | )          | (73.8    | )          |
| Participant  contributions                                        |       | 10.0     |       | 10.0     |       |
| Benefit payments                                                  |       | (85.5    | )          | (70.7    | )          |
| Plan amendments                                                   |       | (3.5     | )          | (7.2     | )          |
| Curtailments                                                      |       | (2.6     | )          |     |       |
| Foreign currency  translation                                     |       | 136.4    |       | 137.2    |       |
| Other                                                             |       | 6.2      |       | 4.0      |       |
|                                                              |       |     |       |     |       |
| Net change in  benefit obligations                                |       | 72.7     |       | 96.7     |       |
|                                                              |       |     |       |     |       |
| Obligations at  end of year                                       |       | $        | 1,617.1    |     | $          | 1,544.4 |   |

 

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

 
| ** **                            | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Fair value at  beginning of year      |       | $        | 1,253.3    |     | $          | 1,068.6 |   |
|                                  |       |     |       |     |       |
| Change in fair  value:                |       |     |       |     |       |
| Actual gain on  plan assets           |       | 24.4     |       | 77.0     |       |
| Benefit payments                      |       | (85.5    | )          | (70.7    | )          |
| Employer  contributions               |       | 59.6     |       | 65.8     |       |
| Participant  contributions            |       | 10.0     |       | 10.0     |       |
| Foreign currency  translation         |       | 115.0    |       | 102.6    |       |
|                                  |       |     |       |     |       |
| Net increase in  fair value of assets |       | 123.5    |       | 184.7    |       |
|                                  |       |     |       |     |       |
| Fair value at  end of year            |       | $        | 1,376.8    |     | $          | 1,253.3 |   |

 

130

----

 

**Owens-BrockwayPackaging, Inc.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 
| ** **                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                 |       |     |       |     |       |
| Plan assets at  fair value                           |       | $        | 1,376.8    |     | $          | 1,253.3 |   |
| Projected  benefit obligations                       |       | 1,617.1  |       | 1,544.4  |       |
|                                                 |       |     |       |     |       |
| Plan assets less  than projected benefit obligations |       | (240.3   | )          | (291.1   | )          |
|                                                 |       |     |       |     |       |
| Items not yet  recognized in pension expense:        |       |     |       |     |       |
| Actuarial loss                                       |       | 212.0    |       | 244.2    |       |
| Prior service  cost                                  |       | (14.7    | )          | (9.2     | )          |
|                                                 |       |     |       |     |       |
|                                                 |       | 197.3    |       | 235.0    |       |
|                                                 |       |     |       |     |       |
| Net amount  recognized                               |       | $        | (43.0      | )        | $          | (56.1 | ) |

 

The net amount recognizedis included in the Consolidated Balance Sheets at December 31, 2007 and2006 as follows:

 
| ** **                                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                |       |     |       |     |       |
| Prepaid pension                                                     |       | $        | 58.1       |     | $          | 31.7 |   |
| Current pension  liability, included with Other accrued liabilities |       | (8.5     | )          | (7.7     | )          |
| Noncurrent  pension liability, included with Pension benefits       |       | (289.9   | )          | (315.1   | )          |
| Accumulated  other comprehensive income                             |       | 197.3    |       | 235.0    |       |
|                                                                |       |     |       |     |       |
| Net amount  recognized                                              |       | $        | (43.0      | )        | $          | (56.1 | ) |

 

The following changes inplan assets and benefit obligations were recognized in accumulated othercomprehensive income at December 31, 2007 as follows:

 
| ** **                            | ** ** | **Pretax** | ** ** | **Tax  Effect** | ** ** | **After-tax** | ** ** |
|---------------------------------------|------------|------------|------------|-----------------|------------|---------------|------------|
|                                  |       |       |       |            |       |          |       |
| Current year  actuarial gain          |       | $          | (25.6      | )               | $          | (4.0          | )          | $ | (21.6 | ) |
| Amortization of  actuarial loss       |       | (11.4      | )          | (2.9            | )          | (8.5          | )          |
| Current year  prior service credit    |       | (3.7       | )          | (1.3            | )          | (2.4          | )          |
| Amortization of  prior service credit |       | 0.1        |       | —          |       | 0.1           |       |
| Curtailment                           |       | (2.9       | )          | (0.9            | )          | (2.0          | )          |
|                                  |       |       |       |            |       |          |       |
|                                  |       |       |       |            |       |          |       |
|                                  |       | (43.5      | )          | (9.1            | )          | (34.4         | )          |
| Translation                           |       |       |       |            |       | 5.8           |       |
|                                  |       | $          | (43.5      | )               | $          | (9.1          | )          | $ | (28.6 | ) |

 

The accumulated benefitobligation for all defined benefit pension plans was $1,288.3 million and$1,463.8 million at December 31, 2006 and 2007, respectively.

 

131

----

 

**Owens-BrockwayPackaging, Inc.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 
| ** **             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|
| Service cost           |       | $        | 25.0       |     | $          | 28.1     |       | $ | 23.0 |   |
| Interest cost          |       | 78.8     |       | 69.1     |       | 68.4     |       |
| Expected asset  return |       | (94.5    | )          | (81.5    | )          | (75.0    | )          |
| Curtailment loss       |       | 0.1      |       |     |       |     |       |
| Other                  |       | 5.2      |       |     |       |     |       |
|                   |       |     |       |     |       |     |       |
| Amortization:          |       |     |       |     |       |     |       |
| Prior service  cost    |       | (0.1     | )          | 0.2      |       | 0.7      |       |
| Loss                   |       | 11.4     |       | 15.8     |       | 9.7      |       |
|                   |       |     |       |     |       |     |       |
| Net amortization       |       | 11.3     |       | 16.0     |       | 10.4     |       |
|                   |       |     |       |     |       |     |       |
| Net expense            |       | $        | 25.9       |     | $          | 31.7     |       | $ | 26.8 |   |

 

Amounts that will beamortized from accumulated other comprehensive income into net pension expenseduring 2008:

 
| Amortization:         |   |   |   |
|-----------------------|--------|--------|--------|
| Loss                  |   | $      | 6.1    |   |
| Prior service  credit |   | (0.5   | )      |
|                  |   |   |   |
| Net amortization      |   | $      | 5.6    |   |
|                       |        |        |        |  |  |

 

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

 
| ** **                     | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Projected benefit  obligations |       | $        | 1,114.6    |     | $          | 1,065.4 |   |
| Fair value of  plan assets     |       | 816.1    |       | 742.6    |       |
|                                |            |          |            |          |            |  |  |

 

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

 
| ** **                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Accumulated  benefit obligations |       | $        | 1,008.3    |     | $          | 1,065.4 |   |
| Fair value of  plan assets       |       | 816.1    |       | 962.7    |       |
|                                  |            |          |            |          |            |  |  |

 

132

----

 

**Owens-BrockwayPackaging, Inc.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 
| ** **                     | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Discount rate                  |       | 5.46     | %          | 4.92     | %          |
| Rate of  compensation increase |       | 3.39     | %          | 3.34     | %          |

 

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

 
| ** **                                   | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                         |       |     |       |     |       |     |       |
| Discount rate                                |       | 4.92     | %          | 4.57     | %          | 5.15     | %          |
| Rate of  compensation increase               |       | 3.34     | %          | 3.78     | %          | 3.41     | %          |
| Expected  long-term rate of return on assets |       | 7.16     | %          | 7.15     | %          | 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.

 

As of December 31,2006, the Company adjusted the minimum pension liability for the pension planin the United Kingdom from the minimum liabilities recorded in 2002, 2003, 2004and 2005. Pursuant to this requirement, the Company decreased the minimumpension liability by $38.5 million and decreased accumulated othercomprehensive loss by $38.5 million.

 

As of December 31,2006, the Company adjusted the minimum pension liability for the pension planin Canada from the minimum liabilities recorded in 2002, 2003 and 2004. Pursuantto this requirement, the Company decreased the minimum pension liability by$9.7 million and decreased accumulated other comprehensive loss by $9.7million.

 

As of December 31,2006, the Company adjusted the minimum pension liability for the pension planin Germany from the minimum liabilities recorded in 2005. Pursuant to thisrequirement, the Company decreased the minimum pension liability by $6.8million and decreased accumulated other comprehensive loss by $6.8 million.

 

The Company adopted theprovisions of Financial Accounting Standards No. 158 (“FAS No. 158”),“Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans” as of December 31, 2006. FAS No. 158 requires employers toadjust the assets and liabilities related to defined benefit plans so that theamounts reflected on the balance sheet represent the overfunded or underfundedstatus of the plans. These funded status amounts are measured as the differencebetween the fair value of plan assets and benefit obligations as of the balancesheet date. For pension plans, the fair value of plan assets is compared to theProjected Benefit Obligation (“PBO”). In the Company’s case, the requiredadjustments resulted in a non-cash charge to the Accumulated OtherComprehensive Income component of net parent investment.

 

133

----

 

**Owens-BrockwayPackaging, Inc.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

The following table showsthe impact on the balance sheet of applying FAS No. 158 at December 31,2006 (dollars in millions):

 
| ** **                                                               | ** ** | **Adjustments  to apply FAS  No. 158  Increase  (decrease)** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| Prepaid pension                                                          |       | $                                                                           | 10.3       |   |
| Intangible  asset, included in Deposits, receivables, and other assets   |       | (9.0                                                                        | )          |
| Deferred tax  asset, included in Deposits, receivables, and other assets |       | 22.4                                                                        |       |
| Current pension  liability, included in Other accrued liabilities        |       | 7.7                                                                         |       |
| Deferred taxes                                                           |       | 0.5                                                                         |       |
| Noncurrent  pension liability, included in Other liabilities             |       | 59.5                                                                        |       |
| Accumulated  other comprehensive income (loss)                           |       | (44.0                                                                       | )          |
|                                                                          |            |                                                                             |            |  |

 

For 2007, the Company’sweighted average expected long-term rate of return on assets was 7.16%. 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, 2006), whichwas in line with the expected long-term rate of return assumption for 2007.

 

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  Ranges** | ** ** |
|-------------------------|------------|----------------------------|------------|--------------------------------|------------|
| ** **              |
| **Asset Category** | ** ** | **2007**                   | ** ** | **2006**                       | ** ** | ** ** |
| Equity securites        |       | 63                         | %          | 64                             | %          | 58-68% |   |
| Debt securities         |       | 28                         | %          | 29                             | %          | 21-31% |   |
| Real estate             |       | 5                          | %          | 6                              | %          | 2-12% |   |
| Other                   |       | 4                          | %          | 1                              | %          | 0-9% |   |
|                    |       |                       |       |                           |       |   |   |
| 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.

 

The Company expects tocontribute $62.0 million to its defined benefit pension plans in 2008.

 

134

----

 

**Owens-BrockwayPackaging, Inc.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 
| **Year(s)** | ** ** | **Amount** | ** ** |
|-------------|------------|------------|------------|
| 2008        |       | $          | 82.7       |   |
| 2009        |       | 84.3       |       |
| 2010        |       | 86.6       |       |
| 2011        |       | 88.2       |       |
| 2012        |       | 93.1       |       |
| 2013 - 2017 |       | 497.6      |       |
|             |            |            |            |  |

 

**14. PostretirementBenefits Other Than Pensions**  OI Inc. provides certain retiree health care and life insurance benefitscovering substantially all U.S. salaried and certain hourly employees andsubstantially all employees in Canada and The Netherlands. Employees aregenerally eligible for benefits upon retirement and completion of a specifiednumber of years of creditable service. Independent actuaries determinepostretirement benefit costs for each subsidiary of OI Inc.; however,accumulated postretirement benefit obligation information pertaining to eachsubsidiary has not been separately determined. As such, the accumulatedpostretirement benefit obligation has been retained by another subsidiary of OIInc.

 

The Company’s netperiodic postretirement benefit cost, as allocated by OI Inc., for domesticemployees was $8.1 million, $14.7 million, and $14.5 million at December 31,2007, 2006, and 2005, 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).

 

135

----

 

**Owens-BrockwayPackaging, Inc.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

Thechanges in the International Postretirement Benefit Plans obligations were asfollows: 

 
| ** **                                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                    |       |     |       |     |       |
| Obligations at  beginning of year                                       |       | $        | 76.9       |     | $          | 100.0 |   |
|                                                                    |       |     |       |     |       |
| Change in  benefit obligations:                                         |       |     |       |     |       |
| Service cost                                                            |       | 1.3      |       | 1.9      |       |
| Interest cost                                                           |       | 4.0      |       | 4.2      |       |
| Actuarial (gain)  loss, including the effect of changing discount rates |       | 2.5      |       | (9.5     | )          |
| Curtailments                                                            |       | (0.8     | )          | (18.8    | )          |
| Benefit payments                                                        |       | (3.3     | )          | (3.0     | )          |
| Foreign currency  translation                                           |       | 14.4     |       | 2.1      |       |
|                                                                    |       |     |       |     |       |
| Net change in  benefit obligations                                      |       | 18.1     |       | (23.1    | )          |
|                                                                    |       |     |       |     |       |
| Obligations at  end of year                                             |       | $        | 95.0       |     | $          | 76.9 |   |

 

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

 
| ** **                                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|
| Postretirement  benefit obligations                           |       | $        | 95.0       |     | $          | 76.9 |   |
|                                                          |       |     |       |     |       |
| Items not yet  recognized in net postretirement benefit cost: |       |     |       |     |       |
| Actuarial loss                                                |       | (7.3     | )          | (4.4     | )          |
|                                                          |       |     |       |     |       |
| Net amount  recognized                                        |       | $        | 87.7       |     | $          | 72.5 |   |

 

The net amount recognizedis included in the Consolidated Balance Sheets at December 31, 2007 and2006 as follows:

 
| ** **                                                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Current  nonpension postretirement benefit, included with Other accrued liabilities |       | $        | (3.7       | )        | $          | (3.2 | ) |
| Nonpension  postretirement benefits                                                 |       | (91.3    | )          | (73.7    | )          |
| Accumulated  other comprehensive income                                             |       | 7.3      |       | 4.4      |       |
|                                                                                |       |     |       |     |       |
| Net (liability)  amount recognized                                                  |       | $        | (87.7      | )        | $          | (72.5 | ) |

 

The following changes inbenefit obligations were recognized in accumulated other comprehensive incomeat December 31, 2007 as follows:

 

136

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**Owens-BrockwayPackaging, Inc.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| ** **                      | ** ** | **Pretax** | ** ** | **Tax Effect** | ** ** | **After-tax** | ** ** |
|---------------------------------|------------|------------|------------|---------------------|------------|---------------|------------|
| Current year  actuarial loss    |       | $          | 2.5        |                | $          | 0.8           |       | $ | 1.7 |   |
| Amortization of  actuarial loss |       | 0.3        |       | —              |       | 0.3           |       |
| Curtailment                     |       | (0.8       | )          | (0.3                | )          | (0.5          | )          |
|                            |       |       |       |                |       |          |       |
|                            |       | 2.0        |       | 0.5                 |       | 1.5           |       |
| Translation                     |       |       |       |                |       | 0.9           |       |
|                            |       | $          | 2.0        |                | $          | 0.5           |       | $ | 2.4 |   |

 

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:

 
| ** **                       | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Service cost                     |       | $        | 1.3        |     | $          | 1.9      |       | $ | 1.9 |   |
| Interest cost                    |       | 4.0      |       | 4.2      |       | 4.6      |       |
| Curtailment                      |       |     |       | (15.9    | )          |     |       |
| Other                            |       |     |       | 0.6      |       |     |       |
|                             |       |     |       |     |       |     |       |
| Amortization:                    |       |     |       |     |       |     |       |
| Loss                             |       | (0.3     | )          | (1.0     | )          | (0.2     | )          |
|                             |       |     |       |     |       |     |       |
| Net  postretirement benefit cost |       | $        | 5.0        |     | $          | (10.2    | )          | $ | 6.3 |   |

 

The weighted averagediscount rate used to determine the accumulated postretirement benefitobligation was 4.8% and 5.4% at December 31, 2007 and 2006, respectively.

 

The weighted averagediscount rate used to determine net postretirement benefit cost was 5.2% at December 31,2007, 4.8% at December 31, 2006, and 5.4% at December 31, 2005.

 

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

 
| ** **                                                                     | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Health care cost  trend rate assumed for next year                             |       | 9.65     | %          | 8.68     | %          |
| Rate to which  the cost trend rate is assumed to decline (ultimate trend rate) |       | 4.82     | %          | 4.88     | %          |
| Year that the  rate reaches the ultimate trend rate                            |       | 2009     |       | 2009     |       |

 

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:

 

137

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**Owens-BrockwayPackaging, Inc.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| ** **                                                | ** ** | **1-Percentage-  Point Increase** | ** ** | **1-Percentage-  Point Decrease** |   |
|-----------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|--------|
| Effect on total  of service and interest cost             |       | $                                 | 5.9        |                              | $      | (4.4 | ) |
| Effect on  accumulated postretirement benefit obligations |       | 12.7                              |       | (11.0                             | )      |
|                                                           |            |                                   |            |                                   |        |  |  |

 

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

 
| **Year(s)** | ** ** | **Amount** | ** ** |
|-------------|------------|------------|------------|
| 2008        |       | $          | 3.7        |   |
| 2009        |       | 3.8        |       |
| 2010        |       | 4.2        |       |
| 2011        |       | 4.5        |       |
| 2012        |       | 5.3        |       |
| 2013 - 2017 |       | 27.2       |       |
|             |            |            |            |  |

 

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 collectivebargaining. Payments to the trust as required by the bargaining agreements arebased upon specified amounts per hour worked and were $7.4 million in 2007,$6.6 million in 2006, and $5.7 million in 2005. Postretirement health and lifebenefits for retirees of foreign subsidiaries are generally provided throughthe national health care programs of the countries in which the subsidiariesare located.

 

FAS No. 158 requiresemployers to adjust the assets and liabilities related to defined benefit plansso that the amounts reflected on the balance sheet represent the overfunded orunderfunded status of the plans. These funded status amounts are measured asthe difference between the fair value of plan assets and benefit obligations asof the balance sheet date. For other postretirement benefit plans, the fairvalue of plan assets is compared to the Accumulated Postretirement BenefitObligation (“APBO”). In the Company’s case, the required adjustments resultedin a non-cash charge to the Accumulated Other Comprehensive Income component ofnet parent investment. The following table shows the impact on the balancesheet of applying FAS No. 158 at December 31, 2006 (dollars inmillions):

 

138

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**Owens-Brockway Packaging, Inc.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| ** **                                                                         | ** ** | **Adjustments  to apply FAS  No. 158****Increase  (decrease)** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| Current  nonpension postretirement benefits, included in Other accrued liabilities |       | $                                                                             | 3.2        |   |
| Deferred taxes                                                                     |       | (1.8                                                                          | )          |
| Nonpension  postretirement benefits, included in Other liabilities                 |       | 2.0                                                                           |       |
| Accumulated  other comprehensive income (loss)                                     |       | (3.4                                                                          | )          |
|                                                                                    |            |                                                                               |            |  |

 

**15. Other Revenue **Other revenue in 2006 includes a gain of $15.9 million ($11.2 millionafter tax) related to curtailment of certain postretirement benefits in TheNetherlands.

 

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

 

**16. Other Costs and Expenses**Othercosts and expenses for the year ended December 31, 2007 included thefollowing:

 

·                  During the thirdand fourth quarters of 2007, the Company recorded charges totaling $100.3million ($84.1 million after tax), for restructuring and asset impairment inthe Caribbean, Europe, and North America. The charges reflect the initialconclusions of the Company’s global profitability review.

 

In the Company’s50%-owned affiliate in the Caribbean, declining productivity and cash flowsresulted in impairment of the Company’s equity investment, establishment ofvaluation allowances against advances to the affiliate, and accrual of certaincontingent obligations for total charges of $45.0 million.

 

In Europe and NorthAmerica, the Company decided to curtail selected production capacity. Becausethe future undiscounted cash flows of the related asset groups were notsufficient to recover their carrying amounts, the assets were consideredimpaired. As a result the assets were written down to the extent their carryingamounts exceeded fair value. The curtailment of plant capacity resulted inelimination of approximately 558 jobs and a corresponding reduction in theCompany’s workforce. The Company accrued certain employee separation costs,plant clean up, and other exit costs. In total, impairments, accrued costs, andother valuation adjustments amounted to $55.3 million with probable future cashexpenditures amounting to $30.6 million. The Company expects that the majorityof these costs will be paid out by the end of 2008.

 

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) related to theclosing of its Godfrey, Illinois machine parts manufacturing operation. SeeNote 17 for additional details.

 

Other costs and expensesfor the year ended December 31, 2005 included the following:

 

139

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**Owens-Brockway Packaging, Inc.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

·                  During thefourth quarter of 2005, the Company recorded a charge of $494.0 million towrite down a portion of the goodwill in its Asia Pacific Glass business unit. See Note 21 for more information.

 

·                  Manufacturing costs for the second quarter of2005 included a favorable adjustment for depreciation and amortization inconnection with finalizing the fair values of the BSN Glasspack assets acquiredin June 2004. The difference between the estimated amounts recorded in2004 and the final amounts related to 2004 accounted for a benefit ofapproximately $6.5 million.

 

**17. Restructuring Accruals **In September 2006, the Company announced the permanent closing ofits Godfrey, Illinois machine parts manufacturing and assembly operation. Thefacility was closed by the end of 2006. This closing is part of a broadinitiative to reduce working capital and improve system costs. As a result ofthese actions, the Company recorded a charge of $27.5 million ($25.6 millionafter tax) in other costs and expenses in the third quarter of 2006.

 

Theclosing of this facility resulted in the elimination of approximately 260 jobsand a corresponding reduction in the Company’s workforce. The Companyanticipates that it will pay out approximately $12.0 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 2008.

 

Selectedinformation related to the plant closing accrual is as follows:

 
| Plant closing  charges                                        |   | $      | 27.5   |   |
|---------------------------------------------------------------|--------|--------|--------|--------|
| Write-down of  assets to net realizable value                 |   | (11.7  | )      |
| Recognition of  employee separation benefits                  |   | (7.1   | )      |
| Net cash paid                                                 |   | (1.8   | )      |
| Other                                                         |   | 1.3    |   |
| Remaining plant  closing accrual as of December 31, 2006 |   | 8.2    |   |
|                                                          |   |   |   |
| Net cash paid                                                 |   | (2.2   | )      |
| Other                                                         |   | (0.2   | )      |
| Remaining plant  closing accrual as of December 31, 2007 |   | $      | 5.8    |   |

 

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, with2007 activity translated from Euros into dollars at the December 31, 2007exchange rate:

 

140

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**Owens-Brockway Packaging, Inc.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| Total European  restructuring accrual (€110.9 million)            |   | $     | 134.1  |   |
|------------------------------------------------------------------------|--------|-------|--------|--------|
| Net cash paid,  principally severance and related benefits             |   | (41.0 | )      |
| Other,  principally foreign exchange translation                       |   | (12.2 | )      |
| Remaining  European restructuring accrual as of December 31, 2005 |   | 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   |   |
|                                                                        |        |       |        |        |  |

 

**18. Contingencies **Certain litigation ispending 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 arereviewed 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 of the Company inrespect to this pending litigation cannot be estimated with certainty. However,the Company believes, based on its examination and review of such matters andexperience to date, that such ultimate liability will not have a materialadverse effect on its results of operations or financial condition.

 

**19. Segment Information **During 2007,****the Company redefined its reportable segmentsand divided the former Glass Containers segment into four geographic segments: (1) NorthAmerica; (2) Europe; (3) Asia Pacific; (4) South America. Thesefour segments are aligned with the Company’s internal approach to managing,reporting, and evaluating performance of its global glass operations. Inconnection with this change, certain assets and activities not directly relatedto one of the regions or to glass manufacturing are reported with Other. Theseinclude licensing, equipment manufacturing, global engineering, and non-glassequity investments. Amounts for 2006 and 2005 in the following tables arepresented on the redefined basis.

 

TheCompany’s measure of profit for its reportable segments is Segment OperatingProfit, which consists of consolidated earnings before interest income, interestexpense, provision for income taxes and minority share owners’ interests inearnings of subsidiaries and excludes amounts related to certain items thatmanagement considers not representative of ongoing operations. The Company’smanagement uses Segment Operating Profit, in combination with selected cashflow information, to evaluate performance and to allocate resources.

 

SegmentOperating Profit for reportable segments includes an allocation of somecorporate expenses based on both a percentage of sales and direct billingsbased on the costs of specific services provided.

 

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

 

141

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**Owens-Brockway Packaging, Inc.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| **Net Sales:**                | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| North America                      |       | $        | 2,271.3    |     | $          | 2,110.4  |       | $ | 1,933.1 |   |
| Europe                             |       | 3,298.7  |       | 2,846.6  |       | 2,796.3  |       |
| Asia Pacific                       |       | 934.3    |       | 804.9    |       | 782.4    |       |
| South America                      |       | 970.7    |       | 796.5    |       | 685.1    |       |
|                               |       |     |       |     |       |     |       |
| Reportable segment  totals         |       | 7,475.0  |       | 6,558.4  |       | 6,196.9  |       |
| Other                              |       | 91.7     |       | 134.0    |       | 159.5    |       |
| Consolidated  totals               |       | 7,566.7  |       | 6,692.4  |       | 6,356.4  |       |
|                               |       |     |       |     |       |     |       |
| Reconciliation  to total revenues: |       |     |       |     |       |     |       |
| Other revenue                      |       | 92.4     |       | 86.5     |       | 103.8    |       |
| Total                              |       | $        | 7,659.1    |     | $          | 6,778.9  |       | $ | 6,460.2 |   |

 
| **Segment Operating Profit:**                                                                                       | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                                          |       |     |       |     |       |     |       |   |   |   |
| North America                                                                                                                 |       | $        | 265.1      |     | $          | 187.3    |       | $ | 204.1 |   |
| Europe                                                                                                                        |       | 433.0    |       | 249.6    |       | 290.1    |       |
| Asia Pacific                                                                                                                  |       | 154.0    |       | 102.9    |       | 125.8    |       |
| South America                                                                                                                 |       | 254.9    |       | 195.0    |       | 156.4    |       |
| Reportable  segment totals                                                                                                    |       | 1,107.0  |       | 734.8    |       | 776.4    |       |
| Other                                                                                                                         |       | 47.3     |       | 10.0     |       | 24.2     |       |
| Consolidated  totals                                                                                                          |       | 1,154.3  |       | 744.8    |       | 800.6    |       |
|                                                                                                                          |       |     |       |     |       |     |       |
| Reconciliation  to earnings (loss) before income taxes and minority share owners’ interest in  earnings of subsidiaries: |       |     |       |     |       |     |       |
|                                                                                                                          |       |     |       |     |       |     |       |
| Items excluded  from Segment Operating Profit:                                                                                |       |     |       |     |       |     |       |
| Restructuring  and asset impairments                                                                                          |       | (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     | )          | 3.8      |       |
| Goodwill  impairment                                                                                                          |       |     |       |     |       | (494.0   | )          |
| Gain on sale of  Corsico, Italy glass container facility                                                                      |       |     |       |     |       | 28.1     |       |
|                                                                                                                          |       |     |       |     |       |     |       |
| Interest income                                                                                                               |       | 26.9     |       | 16.6     |       | 13.8     |       |
| Interest expense                                                                                                              |       | (356.2   | )          | (401.6   | )          | (408.2   | )          |
| Total                                                                                                                         |       | $        | 724.7      |     | $          | 333.5    |       | $ | (55.9 | ) |
|                                                                                                                               |            |          |            |          |            |          |            |  |  |  |  |  |  |

 

142

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**Owens-Brockway Packaging, Inc.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| ** **                             | ** ** | **North  America** | ** ** | **Europe** | ** ** | **Asia  Pacific** | ** ** | **South  America** | ** ** | **Total  Reportable  Segments** | ** ** | **Other** | ** ** | **Consoli-  dated  Totals** | ** ** |
|----------------------------------------|------------|--------------------|------------|------------|------------|-------------------|------------|--------------------|------------|---------------------------------|------------|-----------|------------|-----------------------------|------------|
| Total assets:                          |       |
| 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                     |       |
| 2005                                   |       | 1,830.7            |       | 3,458.4    |       | 1,412.2           |       | 679.0              |       | 7,380.3                         |       | 379.2     |       | 7,759.5                     |       |
| Equity earnings:                       |       |
| 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                        |       |
| 2005                                   |       | 8.9                |       | 7.5        |       |              |       | (0.7               | )          | 15.7                            |       | 4.8       |       | 20.5                        |       |
| Capital expenditures (1):              |       |
| 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                       |       |
| 2005                                   |       | 154.6              |       | 115.3      |       | 54.0              |       | 41.3               |       | 365.2                           |       | 1.0       |       | 366.2                       |       |
| Depreciation and amortization expense: |       |
| 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                       |       |
| 2005                                   |       | 97.5               |       | 216.5      |       | 88.2              |       | 58.1               |       | 460.3                           |       | 6.4       |       | 466.7                       |       |

 

----

 (1)  Excludes property, plant andequipment acquired through acquisitions.

 

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

 
| ** ** | ** ** | **United  States** | ** ** | **Foreign** | ** ** | **Total** | ** ** |
|------------|------------|--------------------|------------|-------------|------------|-----------|------------|
|       |       |               |       |        |       |      |       |   |   |   |
| 2007       |       | $                  | 633.1      |        | $          | 2,271.1   |       | $ | 2,904.2 |   |
| 2006       |       | 668.4              |       | 2,172.8     |       | 2,841.2   |       |
| 2005       |       | 694.7              |       | 2,121.6     |       | 2,816.3   |       |

 

TheCompany’s net sales by geographic segment are as follows:

 
| ** ** | ** ** | **United  States** | ** ** | **Foreign** | ** ** | **Total** | ** ** |
|------------|------------|--------------------|------------|-------------|------------|-----------|------------|
|       |       |               |       |        |       |      |       |   |   |   |
| 2007       |       | $                  | 1,920.6    |        | $          | 5,646.1   |       | $ | 7,566.7 |   |
| 2006       |       | 1,787.6            |       | 4,904.8     |       | 6,692.4   |       |
| 2005       |       | 1,621.1            |       | 4,735.3     |       | 6,356.4   |       |

 

Operationsin individual countries outside the United States that accounted for more than10% ofconsolidated net sales were in Italy (2007 - 10.1%, 2005 – 10.3%) andFrance (2007 - 19.3%,2006 - 19.3%, 2005 – 23.6%).

 

**20. Additional Interest Chargesfrom 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

 

143

----

 

**Owens-Brockway Packaging, Inc.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

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. During 2005, the Companyrecorded additional interest charges of $1.4 million ($1.0 million after tax)for the write-off of unamortized finance fees related to the reduction ofavailable credit under the Company’s bank credit agreement.

 

**21.****Goodwill **The changesin the carrying amount of goodwill for the years ended December 31, 2005,2006 and 2007 are as follows:

 
| ** **                                                                                   | ** ** | **North  America** | ** ** | **Europe** | ** ** | **Asia  Pacific** | ** ** | **South  America** | ** ** | **Other** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------|------------|------------|------------|-------------------|------------|--------------------|------------|-----------|------------|-----------|------------|
| Balance as of  January 1, 2005                                                          |       | $                  | 752.1      |       | $          | 1,028.2           |       | $                  | 1,004.5    |      | $          | —    |       | $ | 14.8 |   | $ | 2,799.6 |   |
| Translation  effects                                                                         |       | 1.9                |       | (123.1     | )          | (39.7             | )          |               |       |      |       | (160.9    | )          |
| Write-down of  goodwill                                                                      |       |               |       |       |       | (494.0            | )          |               |       |      |       | (494.0    | )          |
| Other changes,  principally adjustments to finalize acquisition purchase price               |       | (6.5               | )          | 21.6       |       |              |       |               |       | (0.1      | )          | 15.0      |       |
| Balance as of  December 31, 2005                                                        |       | 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 |   |

 

During the fourth quarterof 2005, the Company completed its annual impairment testing and determinedthat impairment existed in the goodwill of its Asia Pacific Glass businessunit. Lower projected cash flows principally as a result of competitive pricingpressures in the Company’s Australian glass operations caused the decline inthe business enterprise value. Following a review of the valuation of the unit’sidentifiable assets using discounted cash flow measurement techniques, theCompany recorded an impairment charge of $494.0 million to reduce the reportedvalue of its goodwill.

 

144

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

The Board of Directorsand Share Owner of

Owens-Brockway GlassContainer Inc.

 

We have auditedthe accompanying consolidated balance sheets of Owens-Brockway Glass ContainerInc. and subsidiaries as of December 31, 2007 and 2006, and the relatedconsolidated statements of results of operations, net Parent investment, andcash flows for each of the three years in the period ended December 31,2007.  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 ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  We were not engaged toperform an audit of the 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 and significantestimates made by management, and evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion,the financial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Owens-Brockway Glass ContainerInc. and subsidiaries at December 31, 2007 and 2006, and the consolidatedresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2007, in conformity with U.S. generallyaccepted accounting principles.

 

As discussed inNotes 1, 12 and 13 to the consolidated financial statements, the Companychanged its method of accounting for stock-based compensation, defined benefitpension plans and other postretirement plans, respectively, in 2006.

 
|                   |                            |
|------------------------|---------------------------------|
|                   | /s/ Ernst &  Young LLP |
|                   |                            |
|                   |                            |
| Toledo, Ohio           |                            |
| February 29, 2008 |                            |

 

145

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**CONSOLIDATED RESULTS OF OPERATIONS**  Owens-Brockway Glass Container Inc.

Dollars inmillions

 
| **Years ended December 31,**                        | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                               |       |     |       |     |       |     |       |
| Revenues:                                                          |       |     |       |     |       |     |       |
| Net sales                                                          |       | $        | 7,566.7    |     | $          | 6,692.4  |       | $ | 6,356.4 |   |
| Other revenue                                                      |       | 92.4     |       | 86.5     |       | 103.8    |       |
|                                                               |       | 7,659.1  |       | 6,778.9  |       | 6,460.2  |       |
| Costs and  expenses:                                               |       |     |       |     |       |     |       |
| Manufacturing,  shipping, and delivery                             |       | 5,968.6  |       | 5,529.6  |       | 5,169.2  |       |
| Research,  development, and engineering                            |       | 65.8     |       | 49.0     |       | 51.4     |       |
| Selling and  administrative                                        |       | 401.5    |       | 410.2    |       | 361.9    |       |
| Net intercompany  interest                                         |       | (4.0     | )          | (3.0     | )          | 28.7     |       |
| Other interest  expense                                            |       | 360.2    |       | 404.6    |       | 379.5    |       |
| Other                                                              |       | 142.3    |       | 55.0     |       | 525.4    |       |
|                                                               |       | 6,934.4  |       | 6,445.4  |       | 6,516.1  |       |
| Earnings (loss)  before items below                                |       | 724.7    |       | 333.5    |       | (55.9    | )          |
|                                                               |       |     |       |     |       |     |       |
| Provision for  income taxes                                        |       | 139.1    |       | 138.8    |       | 130.6    |       |
|                                                               |       |     |       |     |       |     |       |
| Minority share  owners’ interests in earnings of subsidiaries |       | 59.5     |       | 43.7     |       | 35.9     |       |
| Net earnings  (loss)                                               |       | $        | 526.1      |     | $          | 151.0    |       | $ | (222.4 | ) |

 

See accompanyingNotes to the Consolidated Financial Statements.

 

146

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** **

**CONSOLIDATED BALANCE SHEETS**  Owens-Brockway Glass Container Inc.

Dollars inmillions

 
| **December 31,**                                                                                                                         | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Assets**                                                                                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Current  assets:**                                                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash, including  time deposits of $154.4 ($124.5 in 2006)                                                                                     |       | $          | 401.9      |       | $          | 241.8 |   |
| Receivables  including amount from related parties of $3.8 ($1.7 in 2006), less allowances  of $35.1 ($29.1 in 2006) for losses and discounts |       | 1,201.1    |       | 1,044.9    |       |
| Inventories                                                                                                                                   |       | 1,020.3    |       | 993.3      |       |
| Prepaid expenses                                                                                                                              |       | 35.1       |       | 42.9       |       |
| Total current  assets                                                                                                                         |       | 2,658.4    |       | 2,322.9    |       |
|                                                                                                                                          |       |       |       |       |       |
| **Other  assets:**                                                                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Equity  investments                                                                                                                           |       | 79.9       |       | 95.3       |       |
| Repair parts  inventories                                                                                                                     |       | 155.8      |       | 135.9      |       |
| Prepaid pension                                                                                                                               |       | 58.1       |       | 31.7       |       |
| Deposits,  receivables, and other assets                                                                                                      |       | 418.0      |       | 449.4      |       |
| Goodwill                                                                                                                                      |       | 2,428.1    |       | 2,255.2    |       |
| Total other  assets                                                                                                                           |       | 3,139.9    |       | 2,967.5    |       |
|                                                                                                                                          |       |       |       |       |       |
| **Property,  plant, and equipment:**                                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Land, at cost                                                                                                                                 |       | 261.7      |       | 242.9      |       |
| Buildings and  equipment, at cost:                                                                                                            |       |       |       |       |       |
| Buildings and  building equipment                                                                                                             |       | 1,070.7    |       | 976.1      |       |
| Factory  machinery and equipment                                                                                                              |       | 4,742.1    |       | 4,346.5    |       |
| Transportation,  office, and miscellaneous equipment                                                                                          |       | 114.9      |       | 100.4      |       |
| Construction in  progress                                                                                                                     |       | 146.7      |       | 120.8      |       |
|                                                                                                                                          |       | 6,336.1    |       | 5,786.7    |       |
| Less accumulated  depreciation                                                                                                                |       | 3,431.9    |       | 2,945.5    |       |
|                                                                                                                                          |       |       |       |       |       |
| Net property,  plant, and equipment                                                                                                           |       | 2,904.2    |       | 2,841.2    |       |
|                                                                                                                                          |       |       |       |       |       |
| Total assets                                                                                                                                  |       | $          | 8,702.5    |       | $          | 8,131.6 |   |

 

147

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**CONSOLIDATEDBALANCE SHEETS**  Owens-Brockway Glass Container Inc.(continued)

Dollars inmillions

 
| **December 31,**                                                         | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Liabilities  and Net Parent Investment**                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Current  liabilities:**                                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Short-term loans                                                              |       | $          | 435.6      |       | $          | 412.8 |   |
| Accounts payable  including amount to related parties of $9.3 ($23.8 in 2006) |       | 926.5      |       | 883.3      |       |
| Salaries and  wages                                                           |       | 176.3      |       | 139.8      |       |
| U.S. and foreign  income taxes                                                |       | 118.7      |       | 138.4      |       |
| Other accrued  liabilities                                                    |       | 311.4      |       | 224.5      |       |
| Long-term debt  due within one year                                           |       | 15.2       |       | 24.4       |       |
| Total current  liabilities                                                    |       | 1,983.7    |       | 1,823.2    |       |
|                                                                          |       |       |       |       |       |
| **External  long-term debt**                                                  |       | 2,494.1    |       | 3,956.6    |       |
| ** **                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Deferred  taxes**                                                           |       | 147.2      |       | 153.8      |       |
| ** **                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other  liabilities**                                                        |       | 701.0      |       | 708.1      |       |
| ** **                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Minority  share owners’ interests**                                    |       | 252.2      |       | 207.2      |       |
| ** **                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  Parent investment:**                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Investment by  and advances from Parent                                       |       | 2,769.1    |       | 1,287.2    |       |
| Accumulated  other comprehensive loss                                         |       | 355.2      |       | (4.5       | )          |
| Total net Parent  investment                                                  |       | 3,124.3    |       | 1,282.7    |       |
| Total  liabilities and net Parent investment                                  |       | $          | 8,702.5    |       | $          | 8,131.6 |   |

 

See accompanying Notes to the Consolidated FinancialStatements.

 

148

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**CONSOLIDATEDNET PARENT INVESTMENT  **Owens-BrockwayGlass Container Inc.

Dollars inmillions

** **
| **Years ended December 31,**                         | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                |       |     |       |     |       |     |       |
| **Investment  by and advances to Parent**                           |       |     |       |     |       |     |       |
| Balance at  beginning of year                                       |       | $        | 1,287.2    |     | $          | 1,313.9  |       | $ | 2,020.6 |   |
| Net intercompany  transactions                                      |       | 955.8    |       | (177.7   | )          | (484.3   | )          |
| Net earnings                                                        |       | 526.1    |       | 151.0    |       | (222.4   | )          |
|                                                                |       |     |       |     |       |     |       |
| Balance at end  of year                                             |       | $        | 2,769.1    |     | $          | 1,287.2  |       | $ | 1,313.9 |   |
|                                                                |       |     |       |     |       |     |       |
| **Accumulated  other comprehensive loss**                           |       |     |       |     |       |     |       |
| Balance at  beginning of year                                       |       | $        | (4.5       | )        | $          | (215.3   | )          | $ | 67.9 |   |
| Foreign currency  translation adjustments                           |       | 305.3    |       | 284.9    |       | (290.5   | )          |
| Change in  minimum pension liability, net of tax                    |       |     |       | 22.6     |       | (7.2     | )          |
| Employee benefit  plans, net of tax                                 |       | 26.2     |       | (47.4    | )          |     |       |
| Change in fair  value of certain derivative instruments, net of tax |       | 28.2     |       | (49.3    | )          | 14.5     |       |
| Balance at end  of year                                             |       | $        | 355.2      |     | $          | (4.5     | )          | $ | (215.3 | ) |
| Total net Parent  investment                                        |       | $        | 3,124.3    |     | $          | 1,282.7  |       | $ | 1,098.6 |   |
|                                                                |       |     |       |     |       |     |       |
| **Total  comprehensive income (loss)**                              |       |     |       |     |       |     |       |
| Net earnings  (loss)                                                |       | $        | 526.1      |     | $          | 151.0    |       | $ | (222.4 | ) |
| Foreign currency  translation adjustments                           |       | 305.3    |       | 284.9    |       | (290.5   | )          |
| Change in  minimum pension liability, net of tax                    |       |     |       | 22.6     |       | (7.2     | )          |
| Employee benefit  plans, net of tax                                 |       | 26.2     |       |     |       |     |       |
| Change in fair  value of certain derivative instruments, net of tax |       | 28.2     |       | (49.3    | )          | 14.5     |       |
|                                                                |       |     |       |     |       |     |       |
| Total  comprehensive income (loss)                                  |       | $        | 885.8      |     | $          | 409.2    |       | $ | (505.6 | ) |

 

See accompanying Notes to the Consolidated FinancialStatements.

 

149

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

 

Dollars inmillions

** **
| **Years ended December 31,**                                                           | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Operating  activities:**                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net earnings  (loss)                                                                                  |       | $          | 526.1      |       | $          | 151.0      |       | $ | (222.4 | ) |
| Non-cash charges  (credits):                                                                          |       |       |       |       |       |       |       |
| Depreciation                                                                                          |       | 419.7      |       | 426.5      |       | 431.3      |       |
| Amortization of deferred  costs                                                                       |       | 36.1       |       | 32.6       |       | 35.4       |       |
| Deferred tax  provision (credit)                                                                      |       | (5.6       | )          | 25.4       |       | (3.1       | )          |
| Restructuring  and asset impairment                                                                   |       | 100.3      |       | 27.5       |       |       |       |
| Reverse non-U.S.  deferred tax valuation allowance net of restructuring charges                       |       |       |       | (5.7       | )          |       |       |
| Goodwill impairment                                                                                   |       |       |       |       |       | 494.0      |       |
| Curtailment of  postretirement benefits in The Netherlands                                            |       |       |       | (15.9      | )          |       |       |
| Gains on asset  sales                                                                                 |       |       |       |       |       | (28.1      | )          |
| Other                                                                                                 |       | (20.7      | )          | 20.7       |       | (6.4       | )          |
| Change in  non-current operating assets                                                               |       | 6.4        |       | (10.1      | )          | (14.6      | )          |
| Change in  non-current liabilities                                                                    |       | (23.8      | )          | (52.1      | )          | (58.7      | )          |
| Change in  components of working capital                                                              |       | 26.2       |       | (221.7     | )          | 80.9       |       |
| Cash provided by  operating activities                                                                |       | 1,064.7    |       | 378.2      |       | 708.3      |       |
| **Investing  activities:**                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Additions to  property, plant, and equipment                                                          |       | (290.4     | )          | (271.5     | )          | (366.2     | )          |
| Acquisitions,  net of cash acquired                                                                   |       |       |       |       |       | (11.6      | )          |
| Collections on  accounts receivable arising from consolidation of receivables securitization  program |       |       |       | 127.3      |       | 50.7       |       |
| Net cash  proceeds from divestitures and other                                                        |       | 14.1       |       | 13.6       |       | 205.7      |       |
| Cash utilized in  investing activities                                                                |       | (276.3     | )          | (130.6     | )          | (121.4     | )          |
| **Financing  activities:**                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Additions to  long-term debt                                                                          |       | 406.4      |       | 1,206.5    |       | 537.5      |       |
| Repayments of  long-term debt                                                                         |       | (2,092.2   | )          | (1,341.7   | )          | (617.1     | )          |
| Increase  (decrease) in short-term loans                                                              |       | (21.5      | )          | 158.9      |       | 11.5       |       |
| Net change in  intercompany debt                                                                      |       | 1,032.8    |       | (266.9     | )          | (414.2     | )          |
| Net receipts  (payments) for hedging activity                                                         |       | 0.7        |       | (6.8       | )          | (98.0      | )          |
| Payment of  finance fees                                                                              |       | (6.3       | )          | (12.3      | )          | (1.0       | )          |
| Cash provided by  (utilized in) financing activities                                                  |       | (680.1     | )          | (262.3     | )          | (581.3     | )          |
| Effect of  exchange rate fluctuations on cash                                                         |       | 51.8       |       | 12.6       |       | (13.3      | )          |
| Increase  (decrease) in cash                                                                          |       | 160.1      |       | (2.1       | )          | (7.7       | )          |
| Cash at  beginning of year                                                                            |       | 241.8      |       | 243.9      |       | 251.6      |       |
| Cash at end of  year                                                                                  |       | $          | 401.9      |       | $          | 241.8      |       | $ | 243.9 |   |

 

See accompanying Notes to the Consolidated FinancialStatements.

 

150

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** **

**Owens-BrockwayGlass Container Inc.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**1. Significant AccountingPolicies**

 

**Basis ofConsolidated Statements **The consolidated financial statements ofOwens-Brockway Glass Container Inc. (“Company”) include the accounts of itssubsidiaries. Newly acquired subsidiaries have been included in theconsolidated financial statements from dates of acquisition.

 

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

 

**Relationship with Owens-Brockway Packaging, Inc., Owens-IllinoisGroup, Inc.****and Owens-Illinois, Inc. **The Company is a wholly-ownedsubsidiary of Owens-Brockway Packaging, Inc. (“OB Packaging”), and anindirect subsidiary of Owens-Illinois Group, Inc. (“OI Group”) andOwens-Illinois, Inc. (“OI Inc.”). Although OI Inc. does not conductany operations, it has substantial obligations related to outstandingindebtedness, dividends for preferred stock and asbestos-related payments.OI Inc. relies primarily on distributions from its direct and indirectsubsidiaries to meet these obligations.

 

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

 

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

 

**Use ofEstimates **The preparation of financial statementsin conformity with accounting principles generally accepted in the UnitedStates requires management of the Company to make estimates and assumptionsthat affect certain amounts reported in the financial statements andaccompanying notes. Actual results may differ from those estimates, at whichtime the Company would revise its estimates accordingly.

 

**Cash **The Company defines “cash” as cash and time depositswith maturities of three months or less when purchased. Outstanding checks inexcess of funds on deposit are included in accounts payable.

 

**FairValues of Financial Instruments **The carrying amounts reported for cash,short-term investments and short-term loans approximate fair value. Inaddition, carrying amounts approximate fair value for certain long-term debtobligations subject to frequently redetermined interest rates. Fair values forthe Company’s significant fixed rate debt obligations are generally based onpublished market quotations.

 

**Derivative Instruments **The Companyuses currency swaps, interest rate swaps, options, and commodity futurescontracts to manage risks generally associated with foreign exchange rate,interest rate and commodity market volatility. Derivative financial instruments are included on thebalance sheet at fair value. Whenever possible, derivative instrumentsare designated as and are effective as hedges, in accordance with accountingprinciples generally accepted in the United States. If the underlying hedgedtransaction ceases to exist, all changes in fair value of the related derivativesthat have not been settled are recognized in current earnings. The Company doesnot enter into derivative financial instruments for trading purposes and is nota party to leveraged derivatives. In accordance with FAS No. 104, cashflows from fair value hedges of debt and short-term forward exchange contractsare classified as a financing

 

151

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**Owens-BrockwayGlass Container Inc.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

activity.Cash flows of currency swaps, interest rate swaps, and commodity futurescontracts are classified as operating activities. See Note 8 for additionalinformation related to derivative instruments.

 

**InventoryValuation **The Company values most U.S. inventoriesat the lower of last-in, first-out (LIFO) cost or market. Other inventories arevalued at the lower of standard costs (which approximate average costs) ormarket.

 

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

 

**IntangibleAssets and Other Long-Lived Assets **Intangible assets are amortized over theexpected useful life of the asset. The Company evaluates the recoverability ofintangible assets and other long-lived assets based on undiscounted projectedcash flows, excluding interest and taxes, when factors indicate that impairmentmay exist. If impairment exists, the asset is written down to fair value.

 

**Property,Plant, and Equipment **Property, plant, and equipment (“PP&E”)is carried at cost and includes expenditures for new facilities and equipmentand those costs which substantially increase the useful lives or capacity ofexisting PP&E. In general, depreciation is computed using the straight-linemethod and recorded over the estimated useful life of the asset. Factorymachinery and equipment is depreciated over periods ranging from 5 to 25 yearswith the majority of such assets (principally glass-melting furnaces andforming machines) depreciated over 7-15 years. Buildings and building equipmentare depreciated over periods ranging from 10 to 50 years. Maintenance andrepairs are expensed as incurred. Costs assigned to PP&E of acquiredbusinesses are based on estimated fair values at the date of acquisition.

 

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

 

**Shippingand Handling Costs **Shipping and handling costs are includedwith manufacturing, shipping, and delivery costs in the Consolidated Statementsof Operations.

 

**IncomeTaxes on Undistributed Earnings **In general, the Company plans to continueto reinvest the undistributed earnings of foreign subsidiaries and foreigncorporate joint ventures accounted for by the equity method. Accordingly, taxesare provided only on that amount of undistributed earnings in excess of plannedreinvestments.

 

**ForeignCurrency Translation **The assets and liabilities ofsubstantially all subsidiaries and associates are translated at currentexchange rates and any related translation adjustments are recorded directly innet Parent investment.

 

**AccountsReceivable **Receivables are stated at amountsestimated by management to be the net realizable value. The Company charges offaccounts receivable when it becomes apparent based upon age or customer circumstancesthat amounts will not be collected.

 

**Allowancefor Doubtful Accounts **The allowance for doubtful accounts isestablished through charges to the provision for bad debts. The Companyevaluates the adequacy of the allowance for doubtful accounts on a periodicbasis. The evaluation includes historical trends in collections and write-offs,management’s judgment of the probability of collecting accounts and management’sevaluation of business risk.

 

152

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**Owens-BrockwayGlass Container Inc.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NewAccounting Standards **In September 2006, the FinancialAccounting Standards Board (“FASB”) issued Statement of Financial AccountingStandards No. 157 “Fair Value Measurements” (“FAS No. 157”). FAS No. 157defines fair value, establishes a framework for measuring fair value inaccordance with generally accepted accounting principles, and expandsdisclosures about fair value measurements. FAS No. 157 applies under otheraccounting pronouncements that require or permit fair value measurements. Thestatement does not require any new fair value measurements. The statement iseffective for fiscal years beginning after November 15, 2007. Adoption ofFAS No. 157 is not presently expected to have a material impact on theCompany’s results of operations or financial position.

 

In February 2007,the FASB issued Statement of Financial Accounting Standards No. 159, “FairValue Option for Financial Assets and Financial Liabilities – Including anamendment of FASB Statement No. 115” (“FAS No. 159”). FAS No. 159permits entities to choose to measure many financial instruments and certainother items at fair value. The statement is effective for fiscal yearsbeginning after November 15, 2007. Adoption of FAS No. 159 is notpresently expected to have a material impact on the Company’s results ofoperations or financial position.

 

InDecember 2007, the FASB issued Statement of Financial Accounting Standards No. 141R, “BusinessCombinations” (“FAS No. 141R”). FAS No. 141R establishes principlesand requirements for how an acquirer recognizes and measures in its financialstatements the identifiable assets acquired, the liabilities assumed, and anynoncontrolling interest in the acquiree and recognizes and measures thegoodwill acquired in the business combination or a gain from a bargainpurchase. FAS No. 141R also sets forth the disclosures required to be madein the financial statements to evaluate the nature and financial effects of thebusiness combination. SFAS No. 141R applies prospectively to businesscombinations for which the acquisition date is on or after the beginning of thefirst annual reporting period beginning on or after December 15, 2008. Accordingly,FAS No. 141R will be applied by the Company to business combinationsoccurring on or after January 1, 2009.

 

InDecember 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “NoncontrollingInterests in Consolidated Financial Statements, an amendment of ARB No. 51”(“FAS No. 160”). FAS No. 160 establishes accounting and reportingstandards for the non-controlling interest in a subsidiary and thedeconsolidation of a subsidiary. FAS No. 160 is effective for yearsbeginning on or after December 15, 2008. Adoption of FAS No. 160 is not presently expectedto have a material impact on the Company’s results of operations, financialposition or cash flows.

 

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

 

*StockOptions*

 

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

 

Foroptions granted after March 21, 2005, no options may be exercised in wholeor in part during the first year after the date granted. In general, subject tochange in control, these options become exercisable

 

153

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**Owens-BrockwayGlass Container Inc.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

25%per year beginning on the first anniversary. 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 common stock.The fair value of options granted after March 21, 2005, is amortized overthe vesting periods which range from 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 on the first anniversary and unvested sharesare forfeited upon termination of employment. Shares granted to directors veston the third anniversary of the share grant or the end of the director’s thencurrent term on the board, whichever is later.

 

Thefair value of the shares is equal to the market price of the shares on the dateof the grant. The fair value of restricted shares granted before March 22,2005, is amortized ratably over the 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 of vested units receive 0.5 to 1.5 shares of OIInc.’s common stock for each unit, depending upon the attainment ofconsolidated performance goals established by the Compensation Committee of OIInc.’s Board of Directors. If minimum goals are not met, no shares will beissued. Granted but unvested restricted share units are forfeited upontermination of employment, unless certain retirement criteria are met.

 

Thefair value of each restricted share unit is equal to the product of the fairvalue of OI Inc.’s common stock on the date of grant and the estimated numberof shares into which the restricted share unit will be converted. The fairvalue of restricted share units is amortized ratably over the vesting period. Shouldthe estimated 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*

 

Prior to January 1,2006, OI Inc. accounted for these equity compensation plans under therecognition and measurement provisions of Accounting Principles Board (APB)Opinion No.25, “Accounting for Stock Issued to Employees”, and relatedinterpretations, as permitted by FAS No. 123, “Accounting for Stock-BasedCompensation” (FAS No. 123). As such, compensation cost for stock optionswas not recognized in the Consolidated Results of Operations since all stockoptions granted had an exercise price equal to the market value of theunderlying common stock on the date of the grant. Prior to January 1,2006, compensation cost was recognized for restricted shares and restrictedshare units. Effective January 1, 2006, OI Inc. adopted the fair valuerecognition provisions of FAS No. 123 (R), “Share-Based Payment” (FAS No. 123R),using the modified-prospective method. Under this method, compensation costrecognized after January 1, 2006 includes: (1) compensation cost forall share-based payments granted through December 31, 2005, but for whichthe requisite service period had not been completed as of December 31,2005, based on the grant date fair value estimated in accordance with theoriginal

 

154

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**Owens-BrockwayGlass Container Inc.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

provisions of FAS No.123,and (2) compensation cost for share-based payments granted subsequent to December 31,2005, based on the grant date fair value estimated in accordance with theprovisions of FAS No. 123R.

 

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. Changesin Components of Working Capital Related to Operations  **Changes in the components of working capital relatedto operations (net of the effects related to acquisitions and divestitures)were as follows:

 
| ** **                                   | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Decrease  (increase) in current assets:      |       |     |       |     |       |     |       |
| Receivables                                  |       | $        | (30.1      | )        | $          | (173.9   | )          | $ | (68.9 | ) |
| Inventories                                  |       | 70.5     |       | (36.8    | )          | 58.1     |       |
| Prepaid expenses                             |       | 6.8      |       | 2.4      |       | (4.7     | )          |
| Increase  (decrease) in current liabilities: |       |     |       |     |       |     |       |
| Accounts payable  and accrued liabilities    |       | (13.5    | )          | (28.1    | )          | 32.4     |       |
| Salaries and  wages                          |       | 24.9     |       | (13.8    | )          | (2.8     | )          |
| U.S. and foreign  income taxes               |       | (32.4    | )          | 28.5     |       | 66.8     |       |
|                                         |       | $        | 26.2       |     | $          | (221.7   | )          | $ | 80.9 |   |

 

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

 
| ** **          | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
| Finished goods      |       | $        | 861.1      |     | $          | 825.0 |   |
| Work in process     |       | 1.4      |       | 7.7      |       |
| Raw materials       |       | 90.5     |       | 93.8     |       |
| Operating  supplies |       | 67.3     |       | 66.8     |       |
|                |       | $        | 1,020.3    |     | $          | 993.3 |   |

 

If the inventories whichare valued on the LIFO method had been valued at standard costs, whichapproximate current costs, consolidated inventories would be higher thanreported by $29.1 million and $20.8 million, at December 31, 2007 and2006, respectively.

 

Inventories which arevalued at the lower of standard costs (which approximate average costs), ormarket at December 31, 2007 and 2006 were approximately $872.8 million and$859.3 million, respectively.

 

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

 

155

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**Owens-BrockwayGlass Container Inc.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| ** **                         | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| At end of year:                    |       |     |       |     |       |
| Equity in  undistributed earnings: |       |     |       |     |       |
| Foreign                            |       | $        | 22.4       |     | $          | 20.3 |   |
| Domestic                           |       | 18.7     |       | 15.9     |       |
| Total                              |       | $        | 41.1       |     | $          | 36.2 |   |

 
| ** **           | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------|------------|----------|------------|----------|------------|----------|------------|
| For the year:        |       |     |       |     |       |     |       |
| Equity in  earnings: |       |     |       |     |       |     |       |
| Foreign              |       | $        | 5.3        |     | $          | 2.0      |       | $ | 6.9 |   |
| Domestic             |       | 28.8     |       | 21.4     |       | 13.6     |       |
| Total                |       | $        | 34.1       |     | $          | 23.4     |       | $ | 20.5 |   |
| Dividends  received  |       | $        | 21.7       |     | $          | 43.5     |       | $ | 11.0 |   |

 

Summarized combinedfinancial information for equity associates is as follows:

 
| ** **                            | ** ** | **2007 (a)** | ** ** | **2006** | ** ** |
|---------------------------------------|------------|-------------------|------------|----------|------------|
| At end of year:                       |       |              |       |     |       |
| Current assets                        |       | $                 | 191.3      |     | $          | 190.3 |   |
| Non-current  assets                   |       | 302.4             |       | 340.6    |       |
| Total assets                          |       | 493.7             |       | 530.9    |       |
|                                  |       |              |       |     |       |
| Current  liabilities                  |       | 117.0             |       | 157.6    |       |
| Other  liabilities and deferred items |       | 265.5             |       | 276.4    |       |
| Total  liabilities and deferred items |       | 382.5             |       | 434.0    |       |
| Net assets                            |       | $                 | 111.2      |     | $          | 96.9 |   |

 
| ** **    | ** ** | **2007 (a)** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------|------------|--------------|------------|----------|------------|----------|------------|
| For the year: |       |         |       |     |       |     |       |
| Net sales     |       | $            | 535.9      |     | $          | 564.0    |       | $ | 482.5 |   |
| Gross profit  |       | $            | 176.5      |     | $          | 132.2    |       | $ | 90.9 |   |
| Net earnings  |       | $            | 112.4      |     | $          | 69.4     |       | $ | 51.4 |   |

 

----

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

 

TheCompany’s significant equity method investments include: (1) 43.5% of thecommon shares of Vetri Speciali SpA, a specialty glass manufacturer; (2) a25% partnership interest in General Chemical Soda Ash (Partners), a soda ashsupplier; and (3) a 50% partnership interest in Rocky Mountain Bottle Company,a glass container manufacturer.

 

156

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**Owens-BrockwayGlass Container Inc.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**5. ExternalDebt**  The following table summarizes the externallong-term debt of the Company at December 31, 2007 and 2006:

 
| ** **                                               | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                     |       |     |       |     |       |
| Secured Credit  Agreement:                               |       |     |       |     |       |
| Revolving Credit  Facility:                              |       |     |       |     |       |
| Revolving Loans                                          |       | $        | —     |     | $          | 45.2 |   |
| Term Loans:                                              |       |     |       |     |       |
| Term Loan A  (225.0 million AUD at Dec. 31, 2007)   |       | 198.1    |       | 231.5    |       |
| Term Loan B                                              |       | 191.5    |       | 195.5    |       |
| Term Loan C  (110.8 million CAD at Dec. 31, 2007)   |       | 113.2    |       | 115.9    |       |
| Term Loan D  (€191.5 million at Dec. 31, 2007) |       | 281.8    |       | 257.4    |       |
| Senior Secured  Notes:                                   |       |     |       |     |       |
| 8.875%, due 2009                                         |       |     |       | 850.0    |       |
| 7.75%, due 2011                                          |       |     |       | 450.0    |       |
| 8.75%, due 2012                                          |       |     |       | 625.0    |       |
| Senior Notes:                                            |       |     |       |     |       |
| 8.25%, due 2013                                          |       | 450.3    |       | 440.8    |       |
| 6.75%, due 2014                                          |       | 400.0    |       | 400.0    |       |
| 6.75%, due 2014  (€225 million)                     |       | 331.1    |       | 296.2    |       |
| 6.875%, due 2017  (€300 million)                    |       | 441.5    |       |     |       |
| Other                                                    |       | 101.8    |       | 73.5     |       |
|                                                     |       | 2,509.3  |       | 3,981.0  |       |
| Less amounts due  within one year                        |       | 15.2     |       | 24.4     |       |
| External  long-term debt                                 |       | $        | 2,494.1    |     | $          | 3,956.6 |   |

 

On June 14,2006, the Company’s subsidiary borrowers entered into the Secured CreditAgreement (the “Agreement”). At December 31, 2007, the Agreement includeda $900.0 million revolving credit facility, a 225.0 million Australian dollarterm loan, and a 110.8 million Canadian dollar term loan, each of which has afinal maturity date of June 15, 2012. It also included a $191.5 millionterm loan and a €191.5 million term loan, each of which has a final maturitydate of June 14, 2013.

 

At December 31,2007 the Company’s subsidiary borrowers had unused credit of $820.9 millionavailable under the Agreement.

 

The interest rateon borrowings under the Revolving Credit Facility is, at the Company’s option,the Base Rate or the Adjusted Eurodollar rate. The interest rate on borrowingsunder the Revolving Credit Facility also includes a margin linked to theCompany’s Consolidated Leverage Ratio, as defined in the Agreement. The marginis limited to ranges of 1.125% to 2.0% for Eurodollar loans and 0.125% to 1.0%for Base Rate loans. The weighted average interest rate on borrowingsoutstanding under the Agreement at December 31, 2007 was 6.67%. While nocompensating balances are required by the Agreement, the Borrowers must pay afacility fee on the Revolving Credit Facility commitments ranging from 0.20% to0.50%.

 

Borrowings underthe Agreement are secured by substantially all of the assets of the Company’sdomestic subsidiaries and certain foreign subsidiaries, which have a book valueof approximately $2.3 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.

 

157

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**Owens-BrockwayGlass Container Inc.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

TheAgreement contains covenants and provisions that, among other things, restrictthe ability of the Company and its subsidiaries to dispose of assets, incuradditional indebtedness, prepay other indebtedness or amend certain debtinstruments, pay dividends, create liens on assets, enter into contingentobligations, enter into sale and leaseback transactions, make investments,loans or advances, make acquisitions, engage in mergers or consolidations,change the business conducted, engage in certain transactions with affiliatesand otherwise restrict certain corporate activities. In addition, the Agreementcontains financial covenants that require the Company to maintain specifiedfinancial ratios and meet specified tests based upon financial statements ofthe Company and its subsidiaries on a consolidated basis, maximum leverageratios and specified capital expenditure tests.

 

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

 

On July 31, 2007, the OI Inc. completed the sale of its plasticspackaging business to Rexam PLC for approximately $1.825 billion in cash. Inaccordance with an amendment of the Agreement that became effective uponcompletion of the sale of the plastics business, the Company was required touse the net proceeds (as defined in the Agreement) to repay senior secureddebt. 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 portionof the net proceeds in the third quarter of 2007 to redeem all $450.0 millionof the 7.75% Senior Secured Notes and repurchase $283.1 million of the 8.875%Senior Secured Notes. The remaining $566.9 million of the 8.875% Senior SecuredNotes were repurchased 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% 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 July of 2006, a subsidiary of the Company used borrowingsunder the Agreement to repurchase $150.0 million principal amount of the 8.875%Senior Secured Notes due 2009. During the third quarter of 2006, the Companyrecorded $7.3 million of additional interest charges for note repurchasepremiums and the related write-off of unamortized finance fees.

 

During the fourth quarter of 2005, the Company expanded the capacity ofits European accounts receivable securitization program from €200 million to€320 million to include operations in Italy and the United Kingdom. Theaccounts receivable securitization program provides lower costs of financingthan traditional bank debt. The terms of this expansion resulted in changingfrom off-balance sheet to on-balance sheet accounting for the program byconsolidating both the accounts receivable in the program and the securedindebtedness of the same amount. Cash inflows related to receipts fromcustomers in payment of the accounts receivable consolidated at December 13,2005 have been classified as investing cash inflows in the accompanyingConsolidated Statement of Cash Flows.

 

During October of 2006, the Company entered into a new €300million European accounts receivable securitization program. The new programreplaced the previous European program, described in the preceding paragraph,which was set to terminate in October 2006.

 

Information related to the Company’s accounts receivable securitizationprogram is as follows:

 

158

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**Owens-BrockwayGlass Container Inc.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| ** **                              | ** ** | **Dec. 31,** | ** ** | **Dec. 31,** | ** ** |
|-----------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                              | ** ** | **2007**          | ** ** | **2006**          | ** ** |
|                                    |       |              |       |              |       |
| Balance  (included in short-term loans) |       | $                 | 361.8      |              | $          | 279.4 |   |
|                                    |       |              |       |              |       |
| Weighted average  interest rate         |       | 5.48              | %          | 5.60              | %          |
|                                         |            |                   |            |                   |            |  |  |

 

The Companycapitalized $27.0 million and $13.2 million in 2007 and 2006, respectively,under capital lease obligations with the related financing recorded as longterm debt. These amounts are included in other in the long-term debt tableabove.

 

Annual maturitiesfor all of the Company’s long-term debt through 2012 are as follows: 2008,$15.2 million; 2009, $16.6 million; 2010, $15.2 million; 2011, $190.2 million;and 2012, $157.6 million.

 

Interest paid incash, including note repurchase premiums in 2007 and 2006, aggregated $390.3million for 2007, $380.0 million for 2006, and $365.2 million for 2005.

 

Fair values at December 31,2007, 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      |          | 103.38     |                  | $          | 465.2                 |       | $ | 450.6 |   |
| 6.75%, due 2014                       |       | 400.0                     |       | 99.13         |       | 396.5                 |       |                  |       |
| 6.75%, due 2014  (€225 million)  |       | 331.1                     |       | 95.00         |       | 314.5                 |       |                  |       |
| 6.875%, due 2017  (€300 million) |       | 441.5                     |       | 94.00         |       | 415.0                 |       |                  |       |
|                                       |            |                           |            |               |            |                       |            |                       |            |  |  |  |

 

**6. OperatingLeases  **Rent expense attributable to all warehouse, officebuildings, and equipment operating leases was $87.4 million in 2007, $75.7 millionin 2006, and $66.5 million in 2005. Minimum future rentals under operatingleases are as follows: 2008, $47.3 million; 2009, $36.3 million; 2010, $28.4million; 2011, $17.4 million; and 2012, $14.3 million; and 2013 and thereafter,$10.0 million.

 

**7. ForeignCurrency Transactions  **Aggregate foreign currency exchange gains(losses) included in other costs and expenses were $(8.1) million in 2007,$(1.0) million in 2006, and $2.8 million in 2005.

 

**8. Derivative Instruments  **At December 31, 2007, the Company had thefollowing derivative instruments related to its various hedging programs:

 

*Interest Rate Swaps Designated asFair 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$750 million that mature from 2008 through 2013. The swaps wereexecuted in order to: (i) convert a portion of the senior notes and seniordebentures fixed-rate debt into floating-rate debt; (ii) maintain acapital structure containing appropriate 

 

159

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**Owens-BrockwayGlass Container Inc.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

amounts of fixed andfloating-rate debt; and (iii) reduce net interest payments and expense inthe 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, 2007:

 
| ** **                                                               | ** ** | ** ** | ** ** | **Average** | ** ** | ** **  | ** ** | **Asset**       | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|-----------------|------------|
| ** **                                                               | ** ** | **Amount** | ** ** | **Receive** | ** ** | **Average** | ** ** | **(Liability)** | ** ** |
| ** **                                                               | ** ** | **Hedged** | ** ** | **Rate**    | ** ** | **Spread**  | ** ** | **Recorded**    | ** ** |
|                                                                     |       |       |       |        |       |        |       |            |       |
| OI Inc. public  notes swapped by the company through intercompany loans: |       |       |       |        |       |        |       |
| Senior Notes due  2008                                                   |       | $          | 250.0      |        | 7.35       | %           | 3.5        | %               | $          | (0.2 | ) |
| Senior  Debentures due 2010                                              |       | 250.0      |       | 7.50        | %          | 3.2         | %          | 3.0             |       |
|                                                                     |       |       |       |        |       |        |       |            |       |
| Notes issued by  OBGC:                                                   |       |       |       |        |       |        |       |            |       |
|                                                                     |       |       |       |        |       |        |       |            |       |
| Senior Notes due  2013                                                   |       | 250.0      |       | 8.25        | %          | 3.7         | %          | 0.3             |       |
|                                                                     |       |       |       |        |       |        |       |            |       |
| Total                                                                    |       | $          | 750.0      |        |       |        |       |            | $          | 3.1 |   |
|                                                                          |            |            |            |             |            |             |            |                 |            |  |  |  |  |

 

*CommodityHedges*

 

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 eighteen months and periodically enters into commodityfutures contracts in order to hedge a portion of its usage requirements overthat period. At December 31, 2007, the Company had entered into commodityfutures contracts for approximately 50% (approximately 11,680,000 MM BTUs) ofits estimated North American usage requirements for the full year of 2008.

 

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 derivative designated as a cash flow hedge that is deemed to be ineffectiveis recognized in current earnings.

 

The above futures contracts are accounted for ascash flow hedges at December 31, 2007.

 

At December 31, 2007, an unrecognized loss of$4.5 million (pretax and after tax), related to the domestic commodity futurescontracts, was included in OCI, which will be reclassified into earnings overthe next 

 

160

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**Owens-BrockwayGlass Container Inc.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

twelve months. The ineffectiveness related to thesenatural gas hedges for the year ended December 31, 2007 was not material.

 

*OtherHedges*

 

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 fair values of derivativefinancial instruments on the balance sheet as follows: (1) receivables ifthe 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.

 

**9. AccumulatedOther Comprehensive Income (Loss)  **The components of comprehensive incomeare: (a) net earnings; (b) change in fair value of certain derivativeinstruments; (c) pension and other postretirement benefit adjustments; and(d) foreign currency translation adjustments. The net effect of exchangerate fluctuations generally reflects changes in the relative strength of theU.S. dollar against major foreign currencies between the beginning and end ofthe year.

 

161

----

 

**Owens-Brockway Glass Container Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 
| ** **                     | ** ** | **Net Effect of  Exchange Rate  Fluctuations** | ** ** | **Deferred Tax  Effect for  Translation** | ** ** | **Change in  Minimum  Pension  Liability** | ** ** | **Change in  Certain  Derivative  Instruments** | ** ** | **Employee  Benefit  Plans** | ** ** | **Total  Accumulated  Comprehensive  Income (Loss)** | ** ** |
|--------------------------------|------------|---------------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------|------------|-----------------------------------------------------------|------------|
|                           |       |                                                          |       |                                                |       |                                            |       |                                            |       |                         |       |                                                      |       |
| Balance on  Jan. 1, 2005  |       | $                                                             | 193.5      |                                                | $          | 12.8                                            |       | $                                               | (138.3     | )                            | $          | (0.1                                                      | )          | $ | — |   | $ | 67.9 |   |
|                           |       |                                                          |       |                                                |       |                                            |       |                                            |       |                         |       |                                                      |       |
| 2005 Change                    |       | (290.5                                                        | )          |                                                |       | 7.5                                             |       | 5.3                                             |       |                         |       | (277.7                                                    | )          |
| Translation  effect            |       |                                                          |       |                                                |       | (14.8                                           | )          |                                            |       |                         |       | (14.8                                                     | )          |
| Tax effect                     |       |                                                          |       |                                                |       | 0.1                                             |       | 9.2                                             |       |                         |       | 9.3                                                       |       |
| Balance on  Dec. 31, 2005 |       | (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 |   |
|                                |            |                                                               |            |                                                     |            |                                                 |            |                                                 |            |                              |            |                                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

For 2007, foreigncurrency translation adjustments include a loss of approximately $35.1 millionrelated to a hedge of the Company’s net investment in a non-U.S. subsidiary.

 

**10.  Income Taxes**  Deferred income taxes reflect:  (1) the net tax effects of temporarydifferences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for income tax purposes and(2) carryovers and credits for income tax purposes. Significant components ofthe Company’s deferred tax assets and liabilities at December 31, 2007 and 2006are as follows:

 
| ** **                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
|                                    |       |     |       |     |       |
| Deferred tax  assets:                   |       |     |       |     |       |
| Tax loss  carryovers                    |       | $        | 268.1      |     | $          | 289.5 |   |
| Capital loss  carryovers                |       | 32.7     |       | 34.4     |       |
| Accrued  postretirement benefits        |       | 24.4     |       | 23.4     |       |
| Other,  principally accrued liabilities |       | 195.5    |       | 239.0    |       |
| Total deferred  tax assets              |       | 520.7    |       | 586.3    |       |
|                                    |       |     |       |     |       |
| Deferred tax  liabilities:              |       |     |       |     |       |
| Property, plant  and equipment          |       | 221.8    |       | 242.9    |       |
| Inventory                               |       | 20.0     |       | 21.8     |       |
| Other                                   |       | 49.7     |       | 64.7     |       |
| Total deferred  tax liabilities         |       | 291.5    |       | 329.4    |       |
| Valuation  allowance                    |       | (239.9   | )          | (264.9   | )          |
| Net deferred tax  liabilities           |       | $        | (10.7      | )        | $          | (8.0 | ) |

 

 

162

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Deferred taxes areincluded in the Consolidated Balance Sheets at December 31, 2007 and 2006 asfollows:

 
| ** **                               | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
|                                     |       |     |       |     |       |
| Prepaid expenses                         |       | $        | 11.8       |     | $          | 15.7 |   |
| Deposits,  receivables, and other assets |       | 124.7    |       | 130.1    |       |
| Deferred taxes                           |       | (147.2   | )          | (153.8   | )          |
| Net deferred tax  liabilities            |       | $        | (10.7      | )        | $          | (8.0 | ) |

 

The provision for incometaxes consists of the following:

 
| ** **   | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|--------------|------------|------------|------------|------------|------------|------------|------------|
| ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current:     |       |       |       |       |       |       |       |
| U.S. Federal |       | $          | —     |       | $          | —     |       | $ | — |   |
| State        |       | 0.4        |       | 0.3        |       | 0.3        |       |
| Foreign      |       | 144.3      |       | 113.1      |       | 133.4      |       |
|         |       | 144.7      |       | 113.4      |       | 133.7      |       |
|         |       |       |       |       |       |       |       |
| Deferred:    |       |       |       |       |       |       |       |
| U.S. Federal |       | 0.3        |       | 12.9       |       | 1.7        |       |
| State        |       | (4.0       | )          | (3.6       | )          | 8.0        |       |
| Foreign      |       | (1.9       | )          | 16.1       |       | (12.8      | )          |
|         |       | (5.6)      |       | 25.4       |       | (3.1       | )          |
|         |       |       |       |       |       |       |       |
| Total:       |       |       |       |       |       |       |       |
| U.S. Federal |       | 0.3        |       | 12.9       |       | 1.7        |       |
| State        |       | (3.6       | )          | (3.3       | )          | 8.3        |       |
| Foreign      |       | 142.4      |       | 129.2      |       | 120.6      |       |
|         |       | $          | 139.1      |       | $          | 138.8      |       | $ | 130.6 |   |

 

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

 
| ** ** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
|       |       |     |       |     |       |     |       |
| Domestic   |       | $        | 37.4       |     | $          | (119.1   | )          | $ | (20.7 | ) |
| Foreign    |       | 687.3    |       | 452.6    |       | (35.2    | )          |
|       |       | $        | 724.7      |     | $          | 333.5    |       | $ | (55.9 | ) |

 

 

163

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

 
| ** ** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
|       |       |     |       |     |       |     |       |
| Domestic   |       | $        | 0.2        |     | $          | (0.4     | )          | $ | — |   |
| Foreign    |       | 149.2    |       | 126.8    |       | 112.9    |       |
|       |       | $        | 149.4      |     | $          | 126.4    |       | $ | 112.9 |   |

 

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:

 

 
| ** **                                                      | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                            |       |     |       |     |       |     |       |
| Tax provision  (benefit) on pretax earnings (loss) at statutory |       |     |       |     |       |     |       |
| U.S. Federal tax  rate                                          |       | $        | 253.7      |     | $          | 116.7    |       | $ | (19.6 | ) |
| Increase  (decrease) in provision for income taxes due to:      |       |     |       |     |       |     |       |
| Valuation  allowance - U.S.                                     |       | (538.3   | )          | 46.5     |       | 7.0      |       |
| Foreign  subsidiary ownership restructuring                     |       | 545.0    |       | 21.2     |       |     |       |
| Foreign source  income taxable in the U.S.                      |       | 29.3     |       | 1.8      |       | 1.8      |       |
| Reversal of  non-U.S. tax valuation allowance                   |       | (13.4    | )          | (34.7    | )          |     |       |
| Foreign tax  credit utilization                                 |       | (47.9    | )          |     |       |     |       |
| Goodwill  impairment                                            |       |     |       |     |       | 172.9    |       |
| State taxes, net  of federal benefit                            |       | (4.8     | )          | (0.3     | )          | 2.5      |       |
| Rate differences  on non-U.S. earnings                          |       | (74.9    | )          | (12.5    | )          | (24.3    | )          |
| Adjustment for  non-U.S. tax law changes                        |       | (9.9     | )          | (1.6     | )          | (7.1     | )          |
| Other items                                                     |       | 0.3      |       | 1.7      |       | (2.6     | )          |
|                                                            |       |     |       |     |       |     |       |
| Provision for  income taxes                                     |       | $        | 139.1      |     | $          | 138.8    |       | $ | 130.6 |   |

 

In 2007 the Companyimplemented a plan to restructure the ownership and intercompany obligations ofcertain foreign subsidiaries. These actions resulted in taxation of asignificant portion of previously unremitted foreign earnings and will transfera portion of the Company’s debt service obligations to operations outside theU.S. in order to better balance operating cash flows with financing costs on aglobal basis. The foreign earnings reported as taxable in the U.S. were offsetby net operating loss carryforwards and foreign tax credits. Foreign tax creditcarryforwards arising from the restructuring were fully offset by an increasein the valuation allowance.

 

The Company has taxholidays 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, 2007, theCompany’s equity in the undistributed earnings of foreign subsidiaries forwhich income taxes had not been provided approximated $1,399.2 million. TheCompany intends to reinvest these earnings indefinitely in the non-U.S.operations. It is not practicable to estimate the U.S. and foreign tax whichwould be payable should these earnings be distributed.

 

**11.  Related Party Transactions  **Charges for administrativeservices are allocated to the Company by OI Inc. based on an annual utilizationlevel.  Such services includecompensation and benefits administration, payroll processing, use of certaingeneral accounting systems, auditing, income tax planning and compliance, andtreasury services.

 

Allocated costs also include charges associated withOI Inc.’s equity compensation plans.  Asubstantial number of the options, restricted shares and restricted share unitsgranted under these plans have been granted to key employees of anothersubsidiary of OI Inc., some of whose compensation costs, including stock-basedcompensation, are included in an allocation of costs to all operatingsubsidiaries of OI Inc., including the Company.

 

164

----

 

**Owens-Brockway Glass Container Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

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,** | ** ** |
|--------------------------------|------------|---------------------------------------------|------------|
| ** **                     | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
|                           |       |                                        |       |   |   |   |   |
| Revenues:                      |       |                                        |       |   |   |   |   |
| Sales to  affiliated companies |       | $                                           | 0.3        |   | $ | 0.5 |   | $ | 0.7 |   |
| Expenses:                      |       |                                        |       |   |   |   |   |
| Administrative  services       |       | 19.5                                        |       | 25.5 |   | 19.9 |   |
| Corporate  management fee      |       | 29.1                                        |       | 27.1 |   | 23.4 |   |
| Total expenses                 |       | $                                           | 48.6       |   | $ | 52.6 |   | $ | 43.3 |   |

 

The above expensesare recorded in the statement of operations as follows:

 
| ** **                                    | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                          |       |                                        |       |   |   |   |   |
| Cost of sales                                 |       | $                                           | 16.9       |   | $ | 22.6 |   | $ | 17.7 |   |
| Selling,  general, and adminstrative expenses |       | 31.7                                        |       | 30.0 |   | 25.6 |   |
| Total expenses                                |       | $                                           | 48.6       |   | $ | 52.6 |   | $ | 43.3 |   |

 

Intercompanyinterest is charged to the Company from OI Inc. based on intercompany debtbalances.  An interest rate is calculatedmonthly based on OI Inc.’s total consolidated monthly external debt balance andthe related interest expense, including finance fee amortization and commitmentfees. The calculated rate (7.6% at December 31, 2007) is applied monthlyto the intercompany debt balance to determine intercompany interest expense.

 

**12.  Pension Benefit Plans**   The Company participates in OI Inc.’sdefined benefit pension plans for substantially all employees located in theUnited States.  Benefits generally arebased on compensation for salaried employees and on length of service forhourly employees.  OI Inc.’s policy is tofund pension plans such that sufficient assets will be available to meet futurebenefit requirements.  Independentactuaries determine pension costs for each subsidiary of OI Inc. included in theplans; however, accumulated benefit obligation information and plan assetspertaining to each subsidiary have not been separately determined.  As such, the accumulated benefit obligationand the plan assets related to the pension plans for domestic employees havebeen retained by another subsidiary of OI Inc. Net credits to results of operations for the Company’s allocated portionof the domestic pension costs amounted to $23.0 million in 2007, $7.7 millionin 2006, and $21.5 million in 2005.

 

OI Inc. also sponsorsseveral defined contribution plans for all salaried and hourly U.S. employeesof the Company.   Participation isvoluntary and participants’ contributions are based on their compensation.  OI Inc. matches contributions ofparticipants, up to various limits, in substantially all plans.  OI Inc. charges the Company for its share ofthe match.  The Company’s share of thecontributions to these plans amounted to $5.7 million in 2007, $5.5 million in2006, and $5.2 million in 2005.

 

The Company’s subsidiariesin the United Kingdom, the Netherlands, Canada, Australia, Germany and Francealso have pension plans covering substantially all employees.  The following tables relate to the 

 

165

----

 

**Owens-Brockway Glass Container Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

Company’s principaldefined 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:

 
| ** **                                                        | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Obligations at  beginning of year                                 |       | $          | 1,544.4    |       | $          | 1,447.7 |   |
|                                                              |       |       |       |       |       |
| Change in  benefit obligations:                                   |       |       |       |       |       |
| Service cost                                                      |       | 25.0       |       | 28.1       |       |
| Interest cost                                                     |       | 78.8       |       | 69.1       |       |
| Actuarial gain,  including the effect of change in discount rates |       | (92.1      | )          | (73.8      | )          |
| Participant  contributions                                        |       | 10.0       |       | 10.0       |       |
| Benefit payments                                                  |       | (85.5      | )          | (70.7      | )          |
| Plan amendments                                                   |       | (3.5       | )          | (7.2       | )          |
| Curtailments                                                      |       | (2.6       | )          |       |       |
| Foreign currency  translation                                     |       | 136.4      |       | 137.2      |       |
| Other                                                             |       | 6.2        |       | 4.0        |       |
| Net change in  benefit obligations                                |       | 72.7       |       | 96.7       |       |
| Obligations at  end of year                                       |       | $          | 1,617.1    |       | $          | 1,544.4 |   |

 

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

 
| ** **                            | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|
| ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fair value at  beginning of year      |       | $          | 1,253.3    |       | $          | 1,068.6 |   |
|                                  |       |       |       |       |       |
| Change in fair  value:                |       |       |       |       |       |
| Actual gain on  plan assets           |       | 24.4       |       | 77.0       |       |
| Benefit payments                      |       | (85.5      | )          | (70.7      | )          |
| Employer  contributions               |       | 59.6       |       | 65.8       |       |
| Participant  contributions            |       | 10.0       |       | 10.0       |       |
| Foreign currency  translation         |       | 115.0      |       | 102.6      |       |
| Net increase in  fair value of assets |       | 123.5      |       | 184.7      |       |
| Fair value at  end of year            |       | $          | 1,376.8    |       | $          | 1,253.3 |   |

 

166

----

 

**Owens-Brockway Glass Container Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 
| ** **                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                 |       |     |       |     |       |
| Plan assets at  fair value                           |       | $        | 1,376.8    |     | $          | 1,253.3 |   |
| Projected  benefit obligations                       |       | 1,617.1  |       | 1,544.4  |       |
| Plan assets less  than projected benefit obligations |       | (240.3   | )          | (291.1   | )          |
|                                                 |       |     |       |     |       |
| Items not yet  recognized in pension expense:        |       |     |       |     |       |
| Actuarial loss                                       |       | 212.0    |       | 244.2    |       |
| Prior service  cost                                  |       | (14.7    | )          | (9.2     | )          |
|                                                 |       | 197.3    |       | 235.0    |       |
| Net amount  recognized                               |       | $        | (43.0      | )        | $          | (56.1 | ) |

 

The net amount recognizedis included in the Consolidated Balance Sheets at December 31, 2007 and2006 as follows:

 
| ** **                                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                |       |     |       |     |       |
| Prepaid pension                                                     |       | $        | 58.1       |     | $          | 31.7 |   |
| Current pension  liability, included with Other accrued liabilities |       | (8.5     | )          | (7.7     | )          |
| Noncurrent  pension liability, included with Pension benefits       |       | (289.9   | )          | (315.1   | )          |
| Accumulated  other comprehensive income                             |       | 197.3    |       | 235.0    |       |
| Net amount  recognized                                              |       | $        | (43.0      | )        | $          | (56.1 | ) |

 

The following changes inplan assets and benefit obligations were recognized in accumulated othercomprehensive income at December 31, 2007 as follows:

 
| ** **                            | ** ** | ** ** | ** ** | **Tax**    | ** ** | ** **    | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|---------------|------------|
| ** **                            | ** ** | **Pretax** | ** ** | **Effect** | ** ** | **After-tax** | ** ** |
|                                  |       |       |       |       |       |          |       |
| Current year  actuarial gain          |       | $          | (25.6      | )          | $          | (4.0          | )          | $ | (21.6 | ) |
| Amortization of  actuarial loss       |       | (11.4      | )          | (2.9       | )          | (8.5          | )          |
| Current year  prior service credit    |       | (3.7       | )          | (1.3       | )          | (2.4          | )          |
| Amortization of  prior service credit |       | 0.1        |       | —     |       | 0.1           |       |
| Curtailment                           |       | (2.9       | )          | (0.9       | )          | (2.0          | )          |
|                                  |       | (43.5      | )          | (9.1       | )          | (34.4         | )          |
| Translation                           |       |       |       |       |       | 5.8           |       |
|                                  |       | $          | (43.5      | )          | $          | (9.1          | )          | $ | (28.6 | ) |

 

The accumulated benefitobligation for all defined benefit pension plans was $1,288.3 million and$1,463.8 million at December 31, 2006 and 2007, respectively.

 

167

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

 
| ** **             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|
|                   |       |     |       |     |       |     |       |
| Service cost           |       | $        | 25.0       |     | $          | 28.1     |       | $ | 23.0 |   |
| Interest cost          |       | 78.8     |       | 69.1     |       | 68.4     |       |
| Expected asset  return |       | (94.5    | )          | (81.5    | )          | (75.0    | )          |
| Curtailment loss       |       | 0.1      |       |     |       |     |       |
| Other                  |       | 5.2      |       |     |       |     |       |
|                   |       |     |       |     |       |     |       |
| Amortization:          |       |     |       |     |       |     |       |
| Prior service  cost    |       | (0.1     | )          | 0.2      |       | 0.7      |       |
| Loss                   |       | 11.4     |       | 15.8     |       | 9.7      |       |
| Net amortization       |       | 11.3     |       | 16.0     |       | 10.4     |       |
| Net expense            |       | $        | 25.9       |     | $          | 31.7     |       | $ | 26.8 |   |

 

Amounts that will beamortized from accumulated other comprehensive income into net pension expenseduring 2008:

 
| Amortization:         |   |   |   |
|-----------------------|--------|--------|--------|
| Loss                  |   | $      | 6.1    |   |
| Prior service  credit |   | (0.5   | )      |
| Net amortization      |   | $      | 5.6    |   |

 

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

 
| ** **                     | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
|                           |       |     |       |     |       |
| Projected  benefit obligations |       | $        | 1,114.6    |     | $          | 1,065.4 |   |
| Fair value of  plan assets     |       | 816.1    |       | 742.6    |       |
|                                |            |          |            |          |            |  |  |

 

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

 
| ** **                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
|                             |       |     |       |     |       |
| Accumulated  benefit obligations |       | $        | 1,008.3    |     | $          | 1,065.4 |   |
| Fair value of  plan assets       |       | 816.1    |       | 962.7    |       |
|                                  |            |          |            |          |            |  |  |

 

168

----

 

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

 
| ** **                     | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
|                           |       |     |       |     |       |
| Discount rate                  |       | 5.46     | %          | 4.92     | %          |
| Rate of  compensation increase |       | 3.39     | %          | 3.34     | %          |

 

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

 
| ** **                                   | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                         |       |     |       |     |       |     |       |
| Discount rate                                |       | 4.92     | %          | 4.57     | %          | 5.15     | %          |
| Rate of  compensation increase               |       | 3.34     | %          | 3.78     | %          | 3.41     | %          |
| Expected  long-term rate of return on assets |       | 7.16     | %          | 7.15     | %          | 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 pension expense is based on the averageremaining service of employees.

 

As of December 31,2006, the Company adjusted the minimum pension liability for the pension planin the United Kingdom from the minimum liabilities recorded in 2002, 2003, 2004and 2005.  Pursuant to this requirement,the Company decreased the minimum pension liability by $38.5 million anddecreased accumulated other comprehensive loss by $38.5 million.

 

As of December 31,2006, the Company adjusted the minimum pension liability for the pension planin Canada from the minimum liabilities recorded in 2002, 2003 and 2004.  Pursuant to this requirement, the Companydecreased the minimum pension liability by $9.7 million and decreasedaccumulated other comprehensive loss by $9.7 million.

 

As of December 31,2006, the Company adjusted the minimum pension liability for the pension planin Germany from the minimum liabilities recorded in 2005.  Pursuant to this requirement, the Companydecreased the minimum pension liability by $6.8 million and decreasedaccumulated other comprehensive loss by $6.8 million.

 

The Company adopted theprovisions of Financial Accounting Standards No. 158 (“FAS No. 158”),“Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans” as of December 31, 2006.  FAS No. 158 requires employers to adjust the assets and liabilitiesrelated to defined benefit plans so that the amounts reflected on the balancesheet represent the overfunded or underfunded status of the plans.  These funded status amounts are measured asthe difference between the fair value of plan assets and benefit obligations asof the balance sheet date.  For pensionplans, the fair value of plan assets is compared to the Projected BenefitObligation (“PBO”).  In the Company’scase, the required adjustments resulted in a non-cash charge to the AccumulatedOther Comprehensive Income component of net parent investment.

 

169

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**Owens-BrockwayGlass Container Inc.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

The following table showsthe impact on the balance sheet of applying FAS No. 158 at December 31,2006 (dollars in millions):

 
| ** **                                                               | ** ** | **Adjustments  to apply FAS  No. 158** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                               | ** ** | **Increase  (decrease)**                              | ** ** |
|                                                                     |       |                                                  |       |
| Prepaid pension                                                          |       | $                                                     | 10.3       |   |
| Intangible  asset, included in Deposits, receivables, and other assets   |       | (9.0                                                  | )          |
| Deferred tax  asset, included in Deposits, receivables, and other assets |       | 22.4                                                  |       |
| Current pension  liability, included in Other accrued liabilities        |       | 7.7                                                   |       |
| Deferred taxes                                                           |       | 0.5                                                   |       |
| Noncurrent  pension liability, included in Other liabilities             |       | 59.5                                                  |       |
| Accumulated  other comprehensive income (loss)                           |       | (44.0                                                 | )          |
|                                                                          |            |                                                       |            |  |

 

For 2007, the Company’sweighted average expected long-term rate of return on assets was 7.16%.   In developing this assumption, the Companyevaluated input from its third party pension plan asset managers, includingtheir review of asset class return expectations and long-term inflationassumptions.  The Company also consideredits historical 10-year average return (through December 31, 2006), whichwas in line with the expected long-term rate of return assumption for 2007.

 

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

 
| ** **              | ** ** | ** **                 | ** ** | ** **     | ** ** | **Target** | ** ** |
|-------------------------|------------|----------------------------|------------|----------------|------------|------------|------------|
| ** **              | ** ** | **Actual Allocation** | ** ** | **Allocation** | ** ** |
| **Asset Category** | ** ** | **2007**                   | ** ** | **2006**       | ** ** | **Ranges** | ** ** |
|                    |       |                       |       |           |       |       |       |
| Equity securites        |       | 63                         | %          | 64             | %          | 58-68      | %          |
| Debt securities         |       | 28                         | %          | 29             | %          | 21-31      | %          |
| Real estate             |       | 5                          | %          | 6              | %          | 2-12       | %          |
| Other                   |       | 4                          | %          | 1              | %          | 0-9        | %          |
| 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.  The investment risk of the assets is limited byappropriate diversification both within 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 are managed with a view toensuring that sufficient liquidity will be available to meet expected cash flowrequirements.

 

The Company expects tocontribute $62.0 million to its defined benefit pension plans in 2008.

 

170

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**Owens-BrockwayGlass Container Inc.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

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

 
| **Year(s)** | ** ** | **Amount** | ** ** |
|-------------|------------|------------|------------|
|        |       |       |       |   |
| 2008        |       |       | $          | 82.7 |   |
| 2009        |       |       | 84.3       |   |
| 2010        |       |       | 86.6       |   |
| 2011        |       |       | 88.2       |   |
| 2012        |       |       | 93.1       |   |
| 2013 - 2017 |       |       | 497.6      |   |
|             |            |            |            |  |  |

 

**13.  Postretirement Benefits Other Than Pensions**   OI Inc. provides certain retiree health careand life insurance benefits covering substantially all U.S. salaried andcertain hourly employees and substantially all employees in Canada and TheNetherlands.  Employees are generallyeligible for benefits upon retirement and completion of a specified number ofyears of creditable service. Independent actuaries determine postretirementbenefit costs for each subsidiary of OI Inc.; however, accumulatedpostretirement benefit obligation information pertaining to each subsidiary hasnot been separately determined.  As such,the accumulated postretirement benefit obligation has been retained by anothersubsidiary of OI Inc.

 

The Company’s netperiodic postretirement benefit cost, as allocated by OI Inc., for domesticemployees was $8.1 million, $14.7 million, and $14.5 million at December 31,2007, 2006, and 2005, respectively.

 

The Company’ssubsidiaries in Canada and the Netherlands also have postretirement benefitplans covering substantially all employees. The following tables relate to the Company’s postretirement benefit planin Canada and the Netherlands (the International Postretirement Benefit Plans).

 

171

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**Owens-BrockwayGlass Container Inc.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

The changes in theInternational Postretirement Benefit Plans obligations were as follows: 

 
| ** **                                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                    |       |     |       |     |       |
| Obligations at  beginning of year                                       |       | $        | 76.9       |     | $          | 100.0 |   |
|                                                                    |       |     |       |     |       |
| Change in  benefit obligations:                                         |       |     |       |     |       |
| Service cost                                                            |       | 1.3      |       | 1.9      |       |
| Interest cost                                                           |       | 4.0      |       | 4.2      |       |
| Actuarial (gain)  loss, including the effect of changing discount rates |       | 2.5      |       | (9.5     | )          |
| Curtailments                                                            |       | (0.8     | )          | (18.8    | )          |
| Benefit payments                                                        |       | (3.3     | )          | (3.0     | )          |
| Foreign currency  translation                                           |       | 14.4     |       | 2.1      |       |
| Net change in  benefit obligations                                      |       | 18.1     |       | (23.1    | )          |
| Obligations at  end of year                                             |       | $        | 95.0       |     | $          | 76.9 |   |

 

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

 
| ** **                                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                          |       |     |       |     |       |
| Postretirement  benefit obligations                           |       | $        | 95.0       |     | $          | 76.9 |   |
|                                                          |       |     |       |     |       |
| Items not yet  recognized in net postretirement benefit cost: |       |     |       |     |       |
| Actuarial loss                                                |       | (7.3     | )          | (4.4     | )          |
|                                                          |       |     |       |     |       |
| Net amount  recognized                                        |       | $        | 87.7       |     | $          | 72.5 |   |

 

The net amount recognizedis included in the Consolidated Balance Sheets at December 31, 2007 and2006 as follows:

 
| ** **                                                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                |       |     |       |     |       |
| Current  nonpension postretirement benefit, included with Other accrued liabilities |       | $        | (3.7       | )        | $          | (3.2 | ) |
| Nonpension  postretirement benefits                                                 |       | (91.3    | )          | (73.7    | )          |
| Accumulated  other comprehensive income                                             |       | 7.3      |       | 4.4      |       |
| Net (liability)  amount recognized                                                  |       | $        | (87.7      | )        | $          | (72.5 | ) |

 

The following changes inbenefit obligations were recognized in accumulated other comprehensive incomeat December 31, 2007 as follows:

 

172

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**Owens-BrockwayGlass Container Inc.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 
| ** **                      | ** ** | ** ** | ** ** | **Tax**    | ** ** | ** **    | ** ** |
|---------------------------------|------------|------------|------------|------------|------------|---------------|------------|
| ** **                      | ** ** | **Pretax** | ** ** | **Effect** | ** ** | **After-tax** | ** ** |
|                            |       |       |       |       |       |          |       |
| Current year  actuarial loss    |       | $          | 2.5        |       | $          | 0.8           |       | $ | 1.7 |   |
| Amortization of  actuarial loss |       | 0.3        |       | —     |       | 0.3           |       |
| Curtailment                     |       | (0.8       | )          | (0.3       | )          | (0.5          | )          |
|                            |       | 2.0        |       | 0.5        |       | 1.5           |       |
| Translation                     |       |       |       |       |       | 0.9           |       |
|                            |       | $          | 2.0        |       | $          | 0.5           |       | $ | 2.4 |   |

 

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:

 

| ** **                      | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                            |       |     |       |     |       |     |       |
| Service cost                    |       | $        | 1.3        |     | $          | 1.9      |       | $ | 1.9 |   |
| Interest cost                   |       | 4.0      |       | 4.2      |       | 4.6      |       |
| Curtailment                     |       |     |       | (15.9    | )          |     |       |
| Other                           |       |     |       | 0.6      |       |     |       |
|                            |       |     |       |     |       |     |       |
| Amortization:                   |       |     |       |     |       |     |       |
| Loss                            |       | (0.3     | )          | (1.0     | )          | (0.2     | )          |
| Net postretirement benefit cost |       | $        | 5.0        |     | $          | (10.2    | )          | $ | 6.3 |   |

 

The weighted averagediscount rate used to determine the accumulated postretirement benefitobligation was 4.8% and 5.4% at December 31, 2007 and 2006, respectively.

 

The weighted averagediscount rate used to determine net postretirement benefit cost was 5.2% at December 31,2007, 4.8% at December 31, 2006, and 5.4% at December 31, 2005.

 

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

 
| ** **                                                                     | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                           |       |     |       |     |       |
| Health care cost  trend rate assumed for next year                             |       | 9.65     | %          | 8.68     | %          |
| Rate to which  the cost trend rate is assumed to decline (ultimate trend rate) |       | 4.82     | %          | 4.88     | %          |
| Year that the  rate reaches the ultimate trend rate                            |       | 2009     |       | 2009     |       |

 

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

 

173

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**Owens-BrockwayGlass Container Inc.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 
| ** **                                                | ** ** | **1-Percentage-**       | ** ** | **1-Percentage-**       | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                | ** ** | **Point Increase** | ** ** | **Point Decrease** | ** ** |
|                                                      |       |                    |       |                    |       |
| Effect on total  of service and interest cost             |       | $                       | 5.9        |                    | $          | (4.4 | ) |
| Effect on  accumulated postretirement benefit obligations |       | 12.7                    |       | (11.0                   | )          |
|                                                           |            |                         |            |                         |            |  |  |

 

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

 
| **Year(s)** | ** ** | ** ** | **Amount** | ** ** |
|-------------|------------|------------|------------|------------|
|        |       |       |       |       |
| 2008        |       |       | $          | 3.7        |   |
| 2009        |       |       | 3.8        |       |
| 2010        |       |       | 4.2        |       |
| 2011        |       |       | 4.5        |       |
| 2012        |       |       | 5.3        |       |
| 2013 - 2017 |       |       | 27.2       |       |
|             |            |            |            |            |  |

 

Benefits provided by OIInc. for certain hourly retirees of the Company are determined by collectivebargaining.  Most other domestic hourlyretirees receive health and life insurance benefits from a multi-employer trustestablished by collective bargaining. Payments to the trust as required by the bargaining agreements are basedupon specified amounts per hour worked and were $7.4 million in 2007, $6.6million in 2006, and $5.7 million in 2005. Postretirement health and life benefits for retirees of foreignsubsidiaries are generally provided through the national health care programsof the countries in which the subsidiaries are located.

 

FAS No. 158 requiresemployers to adjust the assets and liabilities related to defined benefit plansso that the amounts reflected on the balance sheet represent the overfunded orunderfunded status of the plans.  Thesefunded status amounts are measured as the difference between the fair value ofplan assets and benefit obligations as of the balance sheet date.  For other postretirement benefit plans, the fairvalue of plan assets is compared to the Accumulated Postretirement BenefitObligation (“APBO”).   In the Company’scase, the required adjustments resulted in a non-cash charge to the AccumulatedOther Comprehensive Income component of net parent investment.  The following table shows the impact on thebalance sheet of applying FAS No. 158 at December 31, 2006 (dollarsin millions):

 

174

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**Owens-BrockwayGlass Container Inc.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 
| ** **                                                                         | ** ** | **Adjustments  to apply FAS  No. 158** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **Increase  (decrease)**                              | ** ** |
|                                                                               |       |                                                  |       |
| Current  nonpension postretirement benefits, included in Other accrued liabilities |       | $                                                     | 3.2        |   |
| Deferred taxes                                                                     |       | (1.8                                                  | )          |
| Nonpension  postretirement benefits, included in Other liabilities                 |       | 2.0                                                   |       |
| Accumulated  other comprehensive income (loss)                                     |       | (3.4                                                  | )          |
|                                                                                    |            |                                                       |            |  |

 

**14.  Other Revenue  **Other revenue in 2006 includes a gain of $15.9 million ($11.2 millionafter tax) related to curtailment of certain postretirement benefits in TheNetherlands.

 

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

 

**15.  Other Costs and Expenses**Othercosts and expenses for the year ended December 31, 2007 included thefollowing:

 

·      Duringthe third and fourth quarters of 2007, the Company recorded charges totaling$100.3 million ($84.1 million after tax), for restructuring and assetimpairment in the Caribbean, Europe, and North America.  The charges reflect the initial conclusionsof the Company’s global profitability review.

 

In the Company’s50%-owned affiliate in the Caribbean, declining productivity and cash flowsresulted in impairment of the Company’s equity investment, establishment ofvaluation allowances against advances to the affiliate, and accrual of certaincontingent obligations for total charges of $45.0 million.

 

In Europe and NorthAmerica, the Company decided to curtail selected production capacity.  Because the future undiscounted cash flows ofthe related asset groups were not sufficient to recover their carrying amounts,the assets were considered impaired.  Asa result the assets were written down to the extent their carrying amountsexceeded fair value.  The curtailment ofplant capacity resulted in elimination of approximately 558 jobs and acorresponding reduction in the Company’s workforce.  The Company accrued certain employeeseparation costs, plant clean up, and other exit costs.  In total, impairments, accrued costs, andother valuation adjustments amounted to $55.3 million with probable future cashexpenditures amounting to $30.6 million. The Company expects that the majority of these costs will be paid out bythe end of 2008.

 

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

 

·      During the third quarter of 2006, the Company recorded a charge of $27.5million ($25.6 million after tax) related to the closing of its Godfrey,Illinois machine parts manufacturing operation. See Note 16 for additionaldetails.

 

Other costs and expensesfor the year ended December 31, 2005 included the following:

 

175

----

 

**Owens-BrockwayGlass Container Inc.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

·      Duringthe fourth quarter of 2005, the Company recorded a charge of $494.0 million towrite down a portion of the goodwill in its Asia Pacific Glass business unit. See Note 21 for more information.

 

·      Manufacturing costs for the second quarter of2005 included a favorable adjustment for depreciation and amortization inconnection with finalizing the fair values of the BSN Glasspack assets acquiredin June 2004.  The differencebetween the estimated amounts recorded in 2004 and the final amounts related to2004 accounted for a benefit of approximately $6.5 million.

 

**16.  Restructuring Accruals  **In September 2006, the Company announced the permanent closing ofits Godfrey, Illinois machine parts manufacturing and assembly operation. Thefacility was closed by the end of 2006. This closing is part of a broad initiativeto reduce working capital and improve system costs.  As a result of these actions, the Companyrecorded a charge of $27.5 million ($25.6 million after tax) in other costs andexpenses in the third quarter of 2006.

 

Theclosing of this facility resulted in the elimination of approximately 260 jobsand a corresponding reduction in the Company’s workforce.  The Company anticipates that it will pay outapproximately $12.0 million in cash related to insurance, benefits, plant cleanup, and other plant closing costs. The Company expects that the majority ofthese costs will be paid out by the end of 2008.

 

Selectedinformation related to the plant closing accrual is as follows:

 
| Plant closing  charges                                        |   | $     | 27.5   |   |
|---------------------------------------------------------------|--------|-------|--------|--------|
| Write-down of  assets to net realizable value                 |   | (11.7 | )      |
| Recognition of  employee separation benefits                  |   | (7.1  | )      |
| Net cash paid                                                 |   | (1.8  | )      |
| Other                                                         |   | 1.3   |   |
| Remaining plant  closing accrual as of December 31, 2006 |   | 8.2   |   |
| Net cash paid                                                 |   | (2.2  | )      |
| Other                                                         |   | (0.2  | )      |
| Remaining plant  closing accrual as of December 31, 2007 |   | $     | 5.8    |   |

 

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, with2007 activity translated from Euros into dollars at the December 31, 2007exchange rate:

 

176

----

** **

**Owens-BrockwayGlass Container Inc.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 
| Total  European restructuring accrual (€110.9 million)            |   | $     | 134.1  |   |
|------------------------------------------------------------------------|--------|-------|--------|--------|
| Net  cash paid, principally severance and related benefits             |   | (41.0 | )      |
| Other,  principally foreign exchange translation                       |   | (12.2 | )      |
| Remaining  European restructuring accrual as of December 31, 2005 |   | 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   |   |

 

**17. Contingencies **Certain litigation ispending 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. Theultimate legal and financial liability of the Company in respect to thispending 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 or financial condition.

 

**18.  Segment Information **During 2007,****the Company redefined its reportable segmentsand divided the former Glass Containers segment into four geographicsegments:  (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.  In connection with thischange, certain assets and activities not directly related to one of theregions or to glass manufacturing are reported with Other.  These include licensing, equipmentmanufacturing, global engineering, and non-glass equity investments.  Amounts for 2006 and 2005 in the followingtables are presented on the redefined basis.

 

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.  The Company’s management uses SegmentOperating Profit, in combination with selected cash flow information, toevaluate performance and to allocate resources.

 

SegmentOperating Profit for reportable segments includes an allocation of somecorporate expenses based on both a percentage of sales and direct billingsbased on the costs of specific services provided.

 

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

 

177

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**Owens-BrockwayGlass Container Inc.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 
| **Net Sales:**                | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| North  America                     |       | $        | 2,271.3    |     | $          | 2,110.4  |       | $ | 1,933.1 |   |
| Europe                             |       | 3,298.7  |       | 2,846.6  |       | 2,796.3  |       |
| Asia  Pacific                      |       | 934.3    |       | 804.9    |       | 782.4    |       |
| South  America                     |       | 970.7    |       | 796.5    |       | 685.1    |       |
| Reportable  segment totals         |       | 7,475.0  |       | 6,558.4  |       | 6,196.9  |       |
| Other                              |       | 91.7     |       | 134.0    |       | 159.5    |       |
| Consolidated  totals               |       | 7,566.7  |       | 6,692.4  |       | 6,356.4  |       |
|                               |       |     |       |     |       |     |       |
| Reconciliation  to total revenues: |       |     |       |     |       |     |       |
| Other  revenue                     |       | 92.4     |       | 86.5     |       | 103.8    |       |
| Total                              |       | $        | 7,659.1    |     | $          | 6,778.9  |       | $ | 6,460.2 |   |

 

 
| **Segment Operating Profit:**                                                                                       | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| North  America                                                                                                                |       | $        | 265.1      |     | $          | 187.3    |       | $ | 204.1 |   |
| Europe                                                                                                                        |       | 433.0    |       | 249.6    |       | 290.1    |       |
| Asia  Pacific                                                                                                                 |       | 154.0    |       | 102.9    |       | 125.8    |       |
| South  America                                                                                                                |       | 254.9    |       | 195.0    |       | 156.4    |       |
| Reportable  segment totals                                                                                                    |       | 1,107.0  |       | 734.8    |       | 776.4    |       |
| Other                                                                                                                         |       | 47.3     |       | 10.0     |       | 24.2     |       |
| Consolidated  totals                                                                                                          |       | 1,154.3  |       | 744.8    |       | 800.6    |       |
|                                                                                                                          |       |     |       |     |       |     |       |
| Reconciliation  to earnings (loss) before income taxes and minority share owners’ interest in  earnings of subsidiaries: |       |     |       |     |       |     |       |
|                                                                                                                          |       |     |       |     |       |     |       |
| Items  excluded from Segment Operating Profit:                                                                                |       |     |       |     |       |     |       |
| Restructuring  and asset impairments                                                                                          |       | (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     | )          | 3.8      |       |
| Goodwill  impairment                                                                                                          |       |     |       |     |       | (494.0   | )          |
| Gain  on sale of Corsico, Italy glass container facility                                                                      |       |     |       |     |       | 28.1     |       |
|                                                                                                                          |       |     |       |     |       |     |       |
| Interest  income                                                                                                              |       | 26.9     |       | 16.6     |       | 13.8     |       |
| Interest  expense                                                                                                             |       | (356.2   | )          | (401.6   | )          | (408.2   | )          |
| Total                                                                                                                         |       | $        | 724.7      |     | $          | 333.5    |       | $ | (55.9 | ) |

 

178

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**Owens-BrockwayGlass Container Inc.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 
| ** **                              | ** ** | ** **  | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | **Total**      | ** ** | ** ** | ** ** | **Consoli-** | ** ** |
|-----------------------------------------|------------|-------------|------------|------------|------------|-------------|------------|-------------|------------|----------------|------------|------------|------------|--------------|------------|
| ** **                              | ** ** | **North**   | ** ** | ** ** | ** ** | **Asia**    | ** ** | **South**   | ** ** | **Reportable** | ** ** | ** ** | ** ** | **dated**    | ** ** |
| ** **                              | ** ** | **America** | ** ** | **Europe** | ** ** | **Pacific** | ** ** | **America** | ** ** | **Segments**   | ** ** | **Other**  | ** ** | **Totals**   | ** ** |
|                                    |       |        |       |       |       |        |       |        |       |           |       |       |       |         |       |
| Total  assets:                          |       |        |       |       |       |        |       |        |       |           |       |       |       |         |       |
| 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      |       |
| 2005                                    |       | 1,830.7     |       | 3,458.4    |       | 1,412.2     |       | 679.0       |       | 7,380.3        |       | 379.2      |       | 7,759.5      |       |
|                                    |       |        |       |       |       |        |       |        |       |           |       |       |       |         |       |
| Equity  earnings:                       |       |        |       |       |       |        |       |        |       |           |       |       |       |         |       |
| 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         |       |
| 2005                                    |       | 8.9         |       | 7.5        |       |        |       | (0.7        | )          | 15.7           |       | 4.8        |       | 20.5         |       |
|                                    |       |        |       |       |       |        |       |        |       |           |       |       |       |         |       |
| Capital  expenditures (1):              |       |        |       |       |       |        |       |        |       |           |       |       |       |         |       |
| 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        |       |
| 2005                                    |       | 154.6       |       | 115.3      |       | 54.0        |       | 41.3        |       | 365.2          |       | 1.0        |       | 366.2        |       |
|                                    |       |        |       |       |       |        |       |        |       |           |       |       |       |         |       |
| Depreciation  and amortization expense: |       |        |       |       |       |        |       |        |       |           |       |       |       |         |       |
| 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        |       |
| 2005                                    |       | 97.5        |       | 216.5      |       | 88.2        |       | 58.1        |       | 460.3          |       | 6.4        |       | 466.7        |       |

 

----

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

 

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

 
| ** ** | ** ** | **United** | ** ** | ** **  | ** ** | ** ** | ** ** |
|------------|------------|------------|------------|-------------|------------|------------|------------|
| ** ** | ** ** | **States** | ** ** | **Foreign** | ** ** | **Total**  | ** ** |
|       |       |       |       |        |       |       |       |   |   |   |
| 2007       |       | $          | 633.1      |        | $          | 2,271.1    |       | $ | 2,904.2 |   |
| 2006       |       | 668.4      |       | 2,172.8     |       | 2,841.2    |       |
| 2005       |       | 694.7      |       | 2,121.6     |       | 2,816.3    |       |

 

TheCompany’s net sales by geographic segment are as follows:

 
| ** ** | ** ** | **United** | ** ** | ** **  | ** ** | ** ** | ** ** |
|------------|------------|------------|------------|-------------|------------|------------|------------|
| ** ** | ** ** | **States** | ** ** | **Foreign** | ** ** | **Total**  | ** ** |
|       |       |       |       |        |       |       |       |
| 2007       |       | $          | 1,920.6    |        | $          | 5,646.1    |       | $ | 7,566.7 |   |
| 2006       |       | 1,787.6    |       | 4,904.8     |       | 6,692.4    |       |
| 2005       |       | 1,621.1    |       | 4,735.3     |       | 6,356.4    |       |
|            |            |            |            |             |            |            |            |  |  |  |

 

Operations in individualcountries outside the United States that accounted for more than 10% of consolidatednet sales were in Italy (2007 - 10.1%, 2005 – 10.3%) and France (2007 - 19.3%, 2006- 19.3%, 2005 – 23.6%).

 

**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

 

179

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**Owens-BrockwayGlass Container Inc.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

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.  During 2005, the Company recorded additionalinterest charges of $1.4 million ($1.0 million after tax) for the write-off ofunamortized finance fees related to the reduction of available credit under theCompany’s bank credit agreement.

 

**20.**  **Goodwill**   The changes in the carrying amount ofgoodwill for the years ended December 31, 2005, 2006 and 2007 are asfollows:

 
| ** **                                                                                   | ** ** | **North**   | ** ** | ** ** | ** ** | **Asia**    | ** ** | **South**   | ** ** | ** ** | ** ** | ** **   | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------|------------|------------|------------|-------------|------------|-------------|------------|------------|------------|--------------|------------|
| ** **                                                                                   | ** ** | **America** | ** ** | **Europe** | ** ** | **Pacific** | ** ** | **America** | ** ** | **Other**  | ** ** | **Total**    | ** ** |
| Balance  as of January 1, 2005                                                          |       | $           | 752.1      |       | $          | 1,028.2     |       | $           | 1,004.5    |       | $          | —       |       | $ | 14.8 |   | $ | 2,799.6 |   |
| Translation  effects                                                                         |       | 1.9         |       | (123.1     | )          | (39.7       | )          |        |       |       |       | (160.9       | )          |
| Write-down  of goodwill                                                                      |       |        |       |       |       | (494.0      | )          |        |       |       |       | (494.0       | )          |
| Other  changes, principally adjustments to finalize acquisition purchase price               |       | (6.5        | )          | 21.6       |       |        |       |        |       | (0.1       | )          |  

15.0 |       |
| Balance  as of December 31, 2005                                                        |       | 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 |   |

 

During the fourth quarterof 2005, the company completed its annual impairment testing and determinedthat impairment existed in the goodwill of its asia pacific glass businessunit. Lower projected cash flows principally as a result of competitive pricingpressures in the company’s australian glass operations caused the decline inthe business enterprise value.  Followinga review of the valuation of the unit’s identifiable assets using discountedcash flow measurement techniques, the company recorded an impairment charge of$494.0 million to reduce the reported value of its goodwill.

 

180

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# ** **

# **SIGNATURES**

# ** **

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned thereunto duly authorized.

 

 
|                          | OWENS-ILLINOIS GROUP,  INC.   |
|-------------------------------|-------------------------------|
|                          |                          |
|                          |                          |
|                          | (Registrant)                  |   |
|                          |                          |
|                          |                          |
|                          | By:                           |  /s/   JAMES  W. BAEHREN |
|                          |                          |   |
|                          | James  W. Baehren             |
|                          | Vice  President and Secretary |
|                          |                          |
|                          |                          |
| Date: February 29,  2008 |                          |
|                               |                               |  |  |

 

181

----

 

**Signatures**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of Owens-Illinois Group, Inc.and in the capacities and on the dates indicated.

 
| **Signatures**        | ** ** | **Title**                                                           |
|-----------------------|------------|---------------------------------------------------------------------|
|                  |       |                                                                |   |   |
| Albert P.L. Stroucken |       | Chairman and Chief  Executive Officer (Principal Executive Officer) |
|                  |       |                                                                |   |   |
| Edward C. White       |       | President (Principal  Financial and Accounting Officer); Director   |
|                  |       |                                                                |   |   |
| James W. Baehren      |       | Vice President and  Secretary; Director                             |
|                  |       |                                                                |   |   |
| L. Richard Crawford   |       | Director                                                            |

 

 
|                          |              | By: | /s/   James W. Baehren |
|-------------------------------|-------------------|-----|----------------------------------|
|                          | James  W. Baehren |
|                          | Attorney-in-fact  |
|                          |              |
| Date: February 29,  2008 |              |

 

182

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**INDEX TO FINANCIAL STATEMENT SCHEDULE**

 

**Financial Statement Schedule of Owens-IllinoisGroup, Inc. and Subsidiaries:**

 

For the years ended December 31, 2007, 2006, and2005:

 
| ** **                                                 | **PAGE** |
|------------------------------------------------------------|----------|
|                                                       |     |
| II – Valuation and Qualifying Accounts (Consolidated) | S-1      |

 

----

 

**OWENS-ILLINOIS GROUP, INC.**

 

**SCHEDULE II – VALUATION ANDQUALIFYING ACCOUNTS (CONSOLIDATED)**

 

**Years ended December 31, 2007, 2006, and 2005**

**(Millions of Dollars)**

 

Reserves deducted from assets in the balance sheets:

 

Allowances for losses and discounts on receivables

 
| ** ** | ** ** | ** **          | **Additions** | ** **          | ** ** | ** ** | ** ** |
|------------|------------|---------------------|---------------|---------------------|------------|------------|------------|
| ** ** | ** ** | **Balance at** | ** **    | **Charged to** | ** ** | ** ** | ** ** | ** ** | ** ** | **Balance** | ** ** |
| ** ** | ** ** | **beginning**       | ** **    | **costs and**  | ** ** | ** ** | ** ** | **Deductions** | ** ** | **at end of** | ** ** |
| ** ** | ** ** | **of period**  | ** **    | **expenses**        | ** ** | **Other**  | ** ** | **(Note 1)** | ** ** | **period** | ** ** |
|       |       |                |          |                |       |       |       |   |   |   |   |
| 2007       |       | $                   | 28.7          |                | $          | 4.1        |       | $ | 8.1 |   | $ | 4.9 |   | $ | 36.0 |   |
|       |       |                |          |                |       |       |       |   |   |   |   |
| 2006       |       | $                   | 22.5          |                | $          | 4.2        |       | $ | 5.3 |   | $ | 3.3 |   | $ | 28.7 |   |
|       |       |                |          |                |       |       |       |   |   |   |   |
| 2005       |       | $                   | 26.1          |                | $          | 6.9        |       | $ | (4.3 | ) | $ | 6.2 |   | $ | 22.5 |   |

 

----

(1)          Deductionsfrom allowances for losses and discounts on receivables represent uncollectiblenotes and accounts written off.

 

S-1

----