**UNITEDSTATES**

**SECURITIES AND EXCHANGECOMMISSION**

**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, 2006** |
|-------------------------------------------------|
| ** **                                      |
| **or**                                          |

 

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

 

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**Commissionfile number 33-13061**

**OWENS-ILLINOIS GROUP, INC.**

(Exact name of registrant as specified in its charter)

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

 

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

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

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

Indicate by check mark whether the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act.

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

 

Indicate by checkmark if the registrant is not required to file reports pursuant toSection 13 or 15(d) of the Act.    

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

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject to suchfiling requirements for the past 90 days.

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

 

Indicate by check mark if the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (checkone):

| Large accelerated filer  x |   | Accelerated  filer  o |   | Non-accelerated  filer  o |
|--------------------------------------|--------|---------------------------------|--------|-------------------------------------|

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

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

 

The number of shares of common stock, $.01par value of Owens-Illinois Group, Inc. outstanding as of January 31, 2007 was100.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

Portions of  Owens-Illinois, Inc.Proxy Statement for The Annual Meeting of Share Owners To Be Held Wednesday,May 9, 2007 (“Proxy Statement”) are incorporated by reference into Part IIIhereof.

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

Theregistrant meets the conditions set forth in General Instructions I (1)(a) and(b) of Form 10-K and is therefore filing this Form with a partially reduceddisclosure format which omits the information otherwise required by Item 4, 11,12 and 13 as permitted 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,Inc. (the “Company”), through its subsidiaries, is the successor to a businessestablished in 1903.  The Company is oneof the world’s leading manufacturers of packaging products based on salesrevenue and is the largest manufacturer of glass containers in the world, withleading positions in Europe, North America, Asia Pacific and SouthAmerica.  The Company is also a leadingmanufacturer of healthcare packaging including plastic prescription containersand medical devices, and plastic closure systems including tamper-evident capsand child-resistant closures, with operations in the United States, Mexico,Puerto Rico, Brazil, Hungary, Malaysia and Singapore.

**Strategy and Competitive Strengths**

The Company ispursuing a strategy aimed at leveraging its global capabilities, broadening itsmarket base and focusing on modern management technologies and fundamentalsincluding incentive compensation linked to cash flows and fact-based, data-drivendecision making.

The Company’scurrent priorities include the following:

·                  Increaseprices near term to offset inflationary pressures — past and present

·                  Improveliquidity - reduce leverage

·                  Achievesuccessful European integration

·                  Improvesystem cost and capital capabilities

·                  Implementglobal procurement initiatives

·                  Modestgrowth momentum

The Company’scurrent core competitive strengths are:

·                  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

·                  Leadinghealthcare packaging businesses

·                  Experienced andmotivated management team and work force

The Company hasacquired 17 glass container businesses in 22 countries since 1990, includingbusinesses in Europe, North America, Asia Pacific and South America.  Through these acquisitions, the Company hasenhanced its global presence in order to better serve the needs of itsmultinational customers. Through global leveraging, the Company also expects toachieve purchasing and cost reduction synergies.

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The Company has 83glass manufacturing plants in 22 countries and 18 plastics packagingfacilities, 13 of which are in the United States.

**TechnologyLeader**

TheCompany believes it is a technological leader in the worldwide glass containerand plastics packaging segments of the rigid packaging market in which itcompetes.  During the five years endedDecember 31, 2006, on a continuing operations basis, the Company invested morethan $1.6 billion in capital expenditures (excluding acquisitions) andmore than $295 million in research, development and engineering to, amongother things, improve labor and machine productivity, increase capacity ingrowing markets and commercialize technology into new products.

**Worldwide Corporate Headquarters**

The principal executive office of the Company islocated at One Michael Owens Way, Perrysburg, Ohio 43551; the telephone numberis (567) 336-5000.  The Company is awholly owned subsidiary of Owens-Illinois, Inc. (“OI Inc.”).  The Company does not have a web site;however, certain general information about the Company’s operations isavailable from OI Inc.’s web site at www.o-i.com.  The Company’s annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments tothose reports filed or furnished pursuant to Section 13(a) or 15(d) of theExchange Act are available from the SEC’s web site at www.sec.gov.  Copies of the Company’s SEC filings may beobtained free of charge by writing to the Company, Attention: InvestorRelations.

**FinancialInformation about Product Segments**

Informationas to sales, earnings from continuing operations before interest income,interest expense, provision for income taxes and minority share owners’interests in earnings of subsidiaries and excluding amounts related to certain items that management considersnot representative of ongoing operations (“Segment Operating Profit”),and total assets by product segment is included in Note 19 to the ConsolidatedFinancial Statements.

**NarrativeDescription of Business**

The Company hastwo product segments: (1) Glass Containers and (2) Plastics Packaging.  Below is a description of these segments andinformation to the extent material to understanding the Company’s businesstaken as a whole.

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

**GLASS CONTAINERS PRODUCT SEGMENT**

TheCompany is the largest manufacturer of glass containers in the world.  The Company is the leading glass containermanufacturer in 19 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 eight of these countries. On a continuingoperations basis, worldwide glass container sales represented 90%, 89%, and88%, of the Company’s consolidated net sales for the years ended December 31,2006, 2005, and 2004, respectively.

**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 theU.S.  The Company manufactures theseproducts in

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awide range of sizes, shapes and colors. The Company is active in new productdevelopment 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 Companyis a major glass container supplier to all of these customers.

TheCompany sells most of its glass container products directly to customers underannual or multi-year supply agreements. The Company also sells some of its products through distributors. Glasscontainers are typically scheduled for production in order to maintainreasonable inventories in relation to customers’ forecasts of their quarterlyrequirements.

**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-ownedsubsidiary of Compagnie de Saint-Gobain, and Anchor Glass ContainerCorporation.  In addition, imports fromMexico and other countries increasingly compete in U.S. glass containersegments.  Additionally, a few majorconsumer packaged goods 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 theU.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 Rexam plc.  Except as mentioned above, the Company doesnot compete with any large, multi-national glass container manufacturersin South 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 and service.  Theprincipal competitors producing metal containers are Amcor, Ball Corporation,Crown Holdings, Inc., Rexam plc, and Silgan Holdings Inc.  The principal competitors producing plasticcontainers are Consolidated Container

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Holdings,LLC, Graham Packaging Company, Plastipak Packaging, Inc. and Silgan HoldingsInc.  The Company also competes withmanufacturers of non-rigid packaging alternatives, including flexible pouchesand aseptic cartons.

TheCompany’s unit shipments of glass containers in countries outside of the U.S.have grown substantially from levels of the early 1990’s.  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.*  In addition to the glass container operationsin the U.S., the Company’s subsidiary in Canada is the sole manufacturer ofglass containers in that country.

*South America.*  The Company is the sole manufacturer of glasscontainers in Colombia, Ecuador and Peru. In both Brazil and Venezuela, the Company is the leading manufacturer ofglass containers.  In South America,there is a large infrastructure for returnable/refillable glasscontainers.  However, with 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’s European glass containerbusiness, headquartered in Switzerland, has consolidated manufacturingoperations in 11 countries and is the largest in Europe.  The Company is a leading producer of wine andchampagne bottles in France and is the sole supplier of glass containers toScottish & Newcastle, France’s leading brewer.  In Italy, the Company is the leadingmanufacturer of glass containers and operates 12 glass container plants.  In Germany, the Company’s key customersinclude 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 in orderto operate properly. The Company believes it is well positioned to meet thisgrowing 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 exportsglass containers for food and pharmaceutical products to Australiancustomers.  In China, the glass containersegments of the packaging market are regional and highly fragmented with anumber of local competitors.  The Companyhas four modern glass container plants in China manufacturing high-quality beerbottles to serve Foster’s as well as Anheuser-Busch, which is nowproducing Budweiser® in and for the Chinese market.

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The Company continues to focus on serving the needs ofleading multi-national consumer companies as they pursue internationalgrowth opportunities.  The Companybelieves that it is often the glass container partner of choice for such multi-nationalconsumer companies due to its leadership in glass technology and its status asa high quality producer in most of the markets it serves.

**Manufacturing**

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

TheCompany operates several machine shops that assemble high-productivity glass-formingmachines and mold shops that manufacture molds and related equipment.

**Methodsof Distribution**

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

**Suppliers and Raw Materials**

Theprimary raw materials used in the Company’s glass container operations aresand, soda ash, limestone and recycled glass. Each of these materials, as well as the other raw materials used tomanufacture glass containers, has historically been available in adequatesupply from multiple sources.  Forcertain raw materials, however, there may be temporary shortages due to weatheror other factors, including disruptions in supply caused by raw materialtransportation or production delays.

**Energy**

The Company’sglass container operations require a continuous supply of significant amountsof energy, principally natural gas, fuel oil, and electrical power.  Adequate supplies of energy are generallyavailable to the Company at all of its manufacturing locations.  Energy costs typically account for 15-20% 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 market prices.  The Company continually evaluates the energymarkets with respect to its forecasted energy requirements in order to optimizeits use of commodity futures contracts. If energy costs increase

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substantially inthe future, 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 glass meltingfurnaces.

## **PLASTICS PACKAGING PRODUCT SEGMENT**

TheCompany is a leading manufacturer in North America of plastic packagingincluding healthcare containers, prescription containers, and closures. TheCompany also has plastics packaging operations in Puerto Rico, Brazil, Hungary,Malaysia and Singapore.  On a continuingoperations basis, plastics packaging sales represented 10%, 11% and 12% of theCompany’s consolidated net sales for the years ended December 31, 2006,2005 and 2004, respectively.

**Manufacturing and Products**

The exact type ofmanufacturing process the Company uses is dependent on the plastic product typeand package requirements. Injection blow-molding and injection molding areplastics manufacturing processes where plastic resin in the form of pellets orpowder is melted and then injected or otherwise forced under pressure into amold.  The mold is then cooled and theproduct is removed from the mold.

The Company’shealthcare container unit manufactures injection blow molded plastic containersfor pharmaceutical manufacturers and over-the-counter products.

The prescriptionproducts unit manufactures injection-molded plastic prescriptioncontainers.  These products are soldprimarily to drug wholesalers and major drug chains.  Containers for prescriptions include vials,ovals, closures, ointment jars, dropper bottles and prescription containersdesigned for automated filling processes.

Injection-moldingis used in the manufacture of plastic closures, deodorant canisters, inkcartridges and vials.  The Companydevelops and produces injection-molded plastic closures and closuresystems, which typically incorporate functional features such as tamperevidence and child resistance or dispensing. Other products include injection-molded containers for deodorantand toothpaste.

Compression-molding,an alternative to injection-molding which has advantages in high volumeapplications, is used in manufacturing plastic closures for carbonated softdrink and other beverage closures that require tamper evidence.

**Customers**

The Company’slargest customers for plastic healthcare containers include (in alphabeticalorder) Alcon, Bausch & Lomb, Bristol Myers Squib, Hospira, McNeil, andPfizer.   The Company’s largest customersfor prescription containers include (in alphabetical order) Albertsons, Kroger,McKesson, Medco Health Solutions, Rite-Aid and Walgreen.   The Company’s largest customers for plasticclosures include (in alphabetical order) Coca-Cola Enterprises, Cott Beverages,Nestle USA., Pepsico and Proctor & Gamble.

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The Company sellsmost plastic healthcare containers, prescription containers and closuresdirectly to customers under annual or multi-year supply agreements.  These supply agreements, except for theprescription containers business, typically allow a pass-through of resin priceincreases and decreases.  The Companyalso sells some of its products through distributors.

**Markets and Competitive Conditions**

Major markets forthe Company’s plastics packaging include consumer products and healthcare products.

The Companycompetes with other manufacturers in the plastics packaging segment on thebasis of quality, price, service and product design.  The principal competitors producing plasticspackaging are Amcor, Consolidated Container Holdings, LLC, Berry Plastics,Plastipak Packaging, Inc., and Silgan Holdings Inc.  The Company emphasizes proprietary technologyand products, new package development and packaging innovation.  The plastic closures segment is divided intovarious categories in which several suppliers compete for business on the basisof quality, price, service and product design. The principal competitorsproducing plastic closures are Alcoa, Aptar, Berry Plastics and Rexam.

In addition tocompeting with other established manufacturers in the plastics packagingsegment, the Company competes with manufacturers of other forms of rigidpackaging, principally aluminum cans and glass containers, on the basis ofquality, price, and service.  Theprincipal competitors producing metal containers are Ball Corporation, CrownHoldings, Inc., Rexam plc, and Silgan Holdings Inc.  The principal competitors producing glasscontainers in the U.S. are Saint-Gobain Containers, Inc., a wholly-ownedsubsidiary of Compagnie de Saint-Gobain, and Anchor Glass ContainerCorporation.  The Company also competeswith manufacturers of non-rigid packaging alternatives, including flexibles forfood and beverages and blister packs, in serving the packaging needs ofhealthcare customers.

**Methods of Distribution**

Inthe U.S., most of the Company’s plastic containers, plastic closures andplastic prescription containers are shipped by common carrier.  In addition, the Company’s plastics packagingoperations outside the U.S. export some products to customers beyond theirnational boundaries, which may include transportation by rail and oceandelivery in combination with common carriers.

**Suppliers and Raw Materials**

TheCompany manufactures plastic healthcare containers, closures and prescriptioncontainers using HDPE, polypropylene, PET and various other plasticresins.  The Company also purchases largequantities of batch colorants, corrugated materials and labels.  In general, these raw materials are availablein adequate supply from multiple sources. However, for certain raw materials, there may be temporary shortages dueto market conditions and other factors.

Worldwidesuppliers of plastic resins used in the production of plastics packaginginclude Chevron Phillips, ExxonMobil, and Total Petrochemicals.  Historically, prices for plastic resins havebeen subject to dramatic fluctuations. However, resin cost pass-through provisions are typical in the Company’ssupply contracts with its plastics packaging customers.

Withthe exception of Ampacet, Clariant and PolyOne, each of which does businessworldwide, most suppliers of batch colorants are regional in scope.  Historically, prices for these raw materialshave been subject to dramatic fluctuations. However, cost recovery for batch colorants is included in resinpass-through provisions which are typical of the Company’s supply contractswith its plastics packaging customers.

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Domesticsuppliers of corrugated materials include Georgia-Pacific, International Paper,Smurfit-Stone Container, Temple-Inland, and Weyerhauser.  Historically, prices for corrugated materialshave not been subject to dramatic fluctuations, except for temporary spikes ortroughs from time to time.

**Recycling**

Recyclingcontent legislation, which has been enacted in several states, requires that acertain specified minimum percentage of recycled plastic be included in certainnew plastics packaging. The Company has met such legislated standards in partdue to its material process technology. In addition, its plastics packaging manufacturing plants also recycle virtuallyall of the internal scrap generated in the production process.

#### **ADDITIONAL INFORMATION**

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

TheCompany has agreements to license its proprietary glass container technologyand provide technical assistance to 21 companies in 20 countries. In plasticspackaging, the Company has such agreements with 12 companies in 9countries.  These agreements cover areasranging from manufacturing and engineering assistance to support in functionssuch as marketing, sales and administration. The worldwide licensee network provides a stream of revenue to supportthe Company’s development activities and gives it the opportunity toparticipate in the rigid packaging market in countries where it does notalready have a direct presence.  Inaddition, the Company’s technical agreements enable it to apply “best practices”developed by its worldwide licensee network. In the years 2006, 2005 and 2004, the Company earned $17.8 million,$16.9 million and $21.1 million, respectively, in royalties and nettechnical assistance revenue on 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 $63.8 million, $65.4 million, and$59.0 million for 2006, 2005, and 2004, 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’sworldwide operations, in common with those of the industry generally, aresubject to 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.  Capital expenditures forproperty, plant and equipment for environmental control activities were notmaterial during 2006.

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.

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In North America, sales ofbeverage containers are affected by governmental regulation of packaging,including deposit return laws. As of January 1, 2007, there were 11 U.S. stateswith bottle deposit laws in effect, requiring consumer deposits of between 4and 15 cents, USD, depending on the size of the container. In Canada, there are8 provinces with consumer deposits between 5 and 20 cents Canadian, dependingon the size of the container. In Europe a number of countries have some form ofconsumer deposit law in effect, including Austria, Belgium, Denmark, Finland, Germany,The Netherlands, Norway, Sweden and Switzerland. The structure and enforcementof such laws and regulations can impact the sales of beverage containers in agiven jurisdiction. Such laws and regulations also impact the availability ofpost-consumer recycled glass for the Company to use in container production.

A number of U.S. states and Canadian provinces haverecently considered or are now considering laws and regulations to encouragecurbside, deposit return, and on-premise recycling.   Although there is no clear trend in thedirection of these state and provincial laws and regulations, the Companybelieves that U.S. states and Canadian provinces, as well as municipalitieswithin those jurisdictions, will continue to adopt recycling laws which willaffect supplies of post-consumer glass cullet.    As a large user of post-consumer cullet forbottle to bottle production, the Company has an interest in laws andregulations impacting supplies of such material in its markets.

The European Union Emissions Trading Scheme (“EUETS”)commenced January 1, 2005.  The EU hascommitted to Kyoto Protocol emissions reduction targets and the EUETS isintended to facilitate such reduction. The Company’s manufacturing installations which operate in EU countrieswill need to restrict the volume of their CO2 emissions to the level of theirindividually allocated Emissions Allowances as set by country regulators.   If the actual level of emissions for anyinstallation exceeds its allocated allowance, additional allowances can bebought on the market to cover deficits; conversely, if the actual level ofemissions for such installation is less than its allocation, the excessallowances can be sold on the same market. While no material effect is anticipated as a result of the EUETS, theCompany has sold a limited quantity of excess CO2 emissions allowances in theopen market during 2006.

TheCompany is unable to predict what environmental legal requirements may beadopted in the future.  However, theCompany continually monitorsits operations in relation to environmental impacts and invests inenvironmentally friendly and emissions reducing projects.  As such, the Company has madesignificant expenditures for environmental improvements at certain of itsfactories over the last several years; however, these expenditures did not havea material adverse affect on the Company’s results of operations.  While not expected to be material, thecompliance costs associated with legal environmental requirements are expectedto 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 make the Company’s glass formingmachines more efficient and productive than those used by our competitors.  In addition, the efficiency of the Company’sglass forming machines is enhanced by the Company’s overall approach to costefficient manufacturing technology, which extends from batch house towarehouse.  This technology isproprietary to the Company through a combination of issued patents, pendingapplications, copyrights, trade secret and proprietary know-how.

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

Inthe Company’s glass container manufacturing processes, computer control 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 secrets and other proprietaryknow-how and technology, as supplemented by administrative and operational bestpractices, which contribute to the Company’s competitive advantage.  As noted above, however, the Company does notconsider that any patent or group of patents relating to a particular productor process is of material importance when judged from the standpoint of anysegment or its businesses as a whole.

## **Seasonality**

Salesof particular glass container and plastics packaging products such as beer,food and beverage containers and closures for beverages 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 28,000 persons as ofDecember 31, 2006.  Approximately 66% ofNorth American employees are hourly workers covered by collective bargainingagreements.  The principal collectivebargaining agreement, which at December 31, 2006, covered approximately 74% ofthe Company’s union-affiliated employees in North America will expire on March31, 2008. Approximately 68% of employees in South America are covered by collectivebargaining agreements with an average term of approximately two years.  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. The Company considers its employee relationsto be good and does not anticipate any material work stoppages in the nearterm.

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**Financial Information about Foreign and DomesticOperations**

Information as tonet sales, Segment Operating Profit, and assets of the Company’s product andgeographic segments is included in Note 19 to the Consolidated FinancialStatements.

## **ITEM 1A.****                                            RISKFACTORS**

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

The Company has asignificant amount of debt.  As ofDecember 31, 2006, the Company had approximately $5.5 billion of total debtoutstanding.  The Company’s substantialindebtedness could result in the following consequences:

·                  Increasedvulnerability to general adverse economic and industry conditions;

·                  Increasedvulnerability to interest rate increases for the portion of the unhedged andfixed rate borrowing swapped into variable rates;

·                  Require theCompany to dedicate a substantial portion of cash flow from operations topayments on indebtedness, thereby reducing the availability of cash flow tofund working capital, capital expenditures, acquisitions, development effortsand other general corporate purposes;

·                  Limitedflexibility in planning for, or reacting to the Company’s competitors that haveless debt; and

·                  Limit,along with the financial and other restrictive covenants in the documentsgoverning our indebtedness, among other things, the ability to borrowadditional funds.

**Ability to Service Debt — To service its indebtedness, the Company willrequire a significant amount of cash. The Company’s ability to generate cashdepends on many factors beyond its control.**

The Company’s ability tomake payments on and to refinance its indebtedness and to fund working capital,capital expenditures, acquisitions, development efforts and other general corporatepurposes depends on its ability to generate cash in the future.  The Company has no assurance that it willgenerate sufficient cash flow from operations, or that future borrowings willbe available under the secured credit agreement, in an amount sufficient toenable the Company to pay its indebtedness, or to fund other liquidity needs.If short term interest rates increase, the Company’s debt service cost willincrease because some of its debt is subject to short term variable interestrates. At December 31, 2006, the Company’s debt subject to variableinterest rates, including fixed rate debt swapped to variable rate, representedapproximately 47% 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.

The Company can provide noassurance that it could effect or implement any of these alternatives onsatisfactory terms, if at all.

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**CashUsed to Satisfy Other Obligations — A portion of the Company’s cash flow willbe used to make payments to OI Inc. to satisfy certain debt, preferredstock 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 $40.5 million on itsoutstanding public debt securities. In addition, OI Inc. pays quarterlydividends of $5.4 million on 9,050,000 shares of its $2.375 convertiblepreferred stock. OI Inc.’s asbestos-related payments were $162.5 million,$171.1 million and $190.1 million for the years endedDecember 31, 2006, 2005 and 2004, respectively. In the fourth quarter of2006, OI Inc. recorded a charge of $120.0 million (in addition topreviously recorded charges of $2.99 billion) to cover its estimatedindemnity payments and legal fees arising from outstanding asbestos personalinjury lawsuits and claims and asbestos personal injury lawsuits and claimsexpected to be filed in the next several years.

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

**Debt Restrictions — The Company may not be able to finance future needsor adapt its business plans to changes because of restrictions contained in thesecured credit agreement and the indentures and instruments governing otherindebtedness.**

The secured creditagreement, the indentures governing secured and unsecured notes and debentures,and certain of the agreements governing other indebtedness contain affirmativeand negative covenants that limit the ability of the Company to take certainactions. For example, some of these indentures restrict, among other things,the ability of the Company and its restricted subsidiaries to borrow money, paydividends on, or redeem or repurchase its stock, make investments, createliens, enter into certain transactions with affiliates and sell certain assetsor merge with or into other companies. These restrictions could adverselyaffect the Company’s ability to operate its businesses and may limit itsability to take advantage of potential business opportunities as they arise.

Failure to comply with theseor other covenants and restrictions contained in the secured credit agreement,the indentures or agreements governing other indebtedness could result in adefault under those agreements, and the debt under those agreements, togetherwith accrued interest, could then be declared immediately due and payable. If adefault occurs under the secured credit agreement, the lenders could cause allof the outstanding debt obligations under such secured credit agreement tobecome due and payable, which would result in a default under a number of otheroutstanding debt securities and could lead to an acceleration of obligationsrelated to these debt securities. A default under the secured credit agreement,indentures or agreements governing other indebtedness could also lead to anacceleration of debt under other debt instruments that contain crossacceleration or cross-default provisions.

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

The Companyoperates manufacturing and other facilities throughout the world.  Net sales from international operationstotaled approximately $4.9 billion, representing approximately 66% of the

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Company’s net sales forthe year ended December 31, 2006.  As aresult of its international operations, the Company is subject to risks associatedwith operating in foreign countries, including:

·                  Political,social and economic instability;

·                  War, civildisturbance or acts of terrorism;

·                  Taking ofproperty by nationalization or expropriation without fair compensation;

·                  Changes ingovernment policies and regulations;

·                  Devaluations andfluctuations in currency exchange rates;

·                  Imposition oflimitations on conversions of foreign currencies into dollars or remittance ofdividends and other payments by foreign subsidiaries;

·                  Imposition orincrease of withholding and other taxes on remittances and other payments byforeign subsidiaries;

·                  Hyperinflationin certain foreign countries; and

·                  Impositions orincrease of investment and other restrictions or requirements by foreigngovernments.

The risksassociated with operating in foreign countries may have a material adverseeffect on operations.

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

The Company issubject to significant competition from other glass container producers, aswell as from makers of alternative forms of packaging, such as aluminum cansand plastic containers.  The Companycompetes with each rigid packaging competitor on the basis of price, quality,service and the marketing attributes of the container and the closure.  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.

In addition tocompeting with other large, well-established manufacturers in the glasscontainer segment, the Company competes with manufacturers of other forms ofrigid packaging, principally aluminum cans and plastic containers, on the basisof quality, price and service.  TheCompany also competes with manufacturers of non-rigid packaging alternatives,including flexible pouches and aseptic cartons, in serving the packaging needsof juice customers.

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

**HighEnergy Costs****— Higher energy costs worldwide and interrupted powersupplies may have a material adverse effect on operations.**

Electrical powerand natural gas are vital to the Company’s operations as it relies on acontinuous power supply to conduct its business.  In 2004, 2005, and 2006, higher energy costsworldwide negatively impacted the Company’s glass container segment operatingprofit by $22.8 million, $75.7 million, and $153.5 million, respectively on ayear-over-year basis.  If energy costssubstantially increase in the future, the Company could experience asignificant increase in operating costs, which may have a material adverseeffect on operations.

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

15

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In addition to theacquisition of BSN Glasspack S.A. (“BSN”) on June 21, 2004 (“BSNAcquisition”), the Company may consider strategic transactions, includingacquisitions that will complement, strengthen and enhance growth in itsworldwide glass and plastics packaging operations.  The Company evaluates opportunities on apreliminary basis from time to time but these transactions may not advance beyond the preliminary stages or becompleted.  The acquisition  of BSN and strategic transactions, includingany future acquisitions, are subject to various risks and uncertainties,including:

·                  The inability tointegrate effectively the operations, products, technologies and personnel ofthe acquired companies (some of which are located in diverse geographicregions) and achieve expected synergies;

·                  The potentialdisruption of existing business and diversion of management’s attention fromday-to-day operations;

·                  The inability tomaintain uniform standards, controls, procedures and policies;

·                  The need orobligation to divest portions of the acquired companies; and

·                  The potentialimpairment of relationships with customers.

In addition, theCompany cannot make assurances that the integration and consolidation of newlyacquired businesses, including BSN, will achieve any anticipated cost savingsand operating synergies.

**CustomerConsolidation****— The continuing consolidation of the Company’scustomer base may intensify pricing pressures and have a material adverseeffect on operations.**

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

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

Due principally tothe seasonal nature of the brewing, iced tea and other beverage industries, inwhich demand is stronger during the summer months, sales of the Company’sproducts have varied and are expected to vary by quarter.  Shipments in the U.S. and Europe aretypically greater in the second and third quarters of the year, while shipmentsin the Asia Pacific region are typically greater in the first and fourthquarters of the year, and shipments in South America are typically greater inthe third and fourth quarters of the year. Unseasonably cool weather during peak demand periods can reduce demandfor certain beverages packaged in the Company’s containers.

The raw materialsthat the Company uses have historically been available in adequate supply frommultiple sources.  For certain rawmaterials, however, there may be temporary shortages due to weather or otherfactors, including disruptions in supply caused by raw material transportationor production delays.  These shortages,as well as material increases in the cost of any of the principal raw materialsthat the Company uses, may have a material adverse effect on operations.

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

The Company’soperations and properties, both in the U.S. and abroad, are subject toextensive laws, ordinances, regulations and other legal requirements relatingto environmental protection, including legal

16

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requirementsgoverning investigation and clean-up of contaminated properties as well aswater discharges, 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.

The Company hasincurred, and expects to incur, costs for its operations to comply withenvironmental 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 on operations.

A number ofgovernmental authorities both in the U.S. and abroad have enacted, or areconsidering, legal requirements that would mandate certain rates of recycling,the use of recycled materials and/or limitations on certain kinds of packagingmaterials such as plastics.  In addition,some companies 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.

**LaborRelations****— Some of the Company’s employees are unionized orrepresented by workers’ councils.**

The Company isparty to a number of collective bargaining agreements with labor unions whichat December 31, 2006, covered approximately 66% of the Company’s employees inNorth America and approximately 68% of the employees in South America.  The agreement covering substantially all ofthe Company’s union-affiliated employees in its U.S. glass container operationsexpires in 2008.  Agreements in SouthAmerica typically have an average term of approximately two years.  Upon the expiration of any collectivebargaining agreement, if the Company is unable to negotiate acceptablecontracts with labor unions, it could result in strikes by the affected workersand increased operating costs as a result of higher wages or benefits paid tounion members. In addition, a large number of the Company’s employees are employedin countries in which employment laws provide greater bargaining or otherrights to employees than the laws of the U.S. Such employment rights require the Company to work collaboratively withthe legal representatives of the employees to effect any changes to laborarrangements.  For example, most of theCompany’s employees in Europe are represented by workers’ councils that mustapprove any changes in conditions of employment, including salaries andbenefits and staff changes, and may impede efforts to restructure the Company’sworkforce.  Although the Company believesthat it has a good working relationship with its employees, if the Company’semployees were to engage in a strike or other work stoppage, the Company couldexperience a significant disruption of operations and/or higher ongoing laborcosts, which may have a material adverse effect on operations.

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

In preparing the Company’s consolidated financialstatements in accordance with U.S. generally accepted accounting principles,several estimates and assumptions are made that affect the accounting for andrecognition of assets, liabilities, revenues and expenses.  These estimates and assumptions must be madebecause certain information that is used in the preparation of the Company’sfinancial statements is

17

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dependent on future events, cannot be calculated witha high degree of precision from data available or is not capable of beingreadily calculated based on generally accepted methodologies.  In some cases, these estimates areparticularly difficult to determine and the Company must exercise significantjudgment.  The Company believes that accounting forpension benefit plans, contingencies and litigation, goodwill, and deferred taxassets involves the more significant judgments and estimates used in thepreparation of its consolidated financial statements.  Actual results for all estimates could differmaterially from the estimates and assumptions that the Company uses, whichcould have a material adverse effect on the Company’s financial condition andresults of operations.

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

The Company’s implementationof and compliance with changes in accounting rules and interpretations couldadversely affect its operating results or cause unanticipated fluctuations inits results in future periods.  The accountingrules and regulations that the Company must comply with are complex andcontinually changing.  Recent actions andpublic comments from the SEC have focused on the integrity of financialreporting generally.  The FinancialAccounting Standards Board, or FASB, has recently introduced several new orproposed accounting standards, or is developing new proposed standards, whichwould represent a significant change from current industry practices.  For example, in July 2006, theFinancial Accounting Standards Board issued Interpretation No. 48 (“FIN 48”), “Accountingfor Uncertainty in Income Taxes”.  Thisinterpretation was issued to clarify the accounting for uncertainty in incometaxes recognized in an enterprise’s financial statements in accordance with FASNo. 109, “Accounting for Income Taxes”. FIN 48 defines criteria that an individual tax position must meet forany part of the benefit of that position to be recognized in an enterprise’sfinancial statements and also includes requirements for measuring the amount ofthe benefit to be recognized in the financial statements.  FIN 48 is effective for fiscal yearsbeginning after December 15, 2006, therefore the Company will adopt itsprovisions effective as of January 1, 2007. The Company has not yet determined the impact of adopting FIN 48.  Inaddition, many companies’ accounting policies are being subject to heightenedscrutiny by regulators and the public. While the Company believes that its financial statements have beenprepared in accordance with U.S. generally accepted accounting principles, theCompany cannot predict the impact of future changes to accounting principles orits accounting policies on its financial statements going forward.

**Goodwill****—A significant write down of goodwill would have a material adverseeffect on the Company’s reported results of operations and net worth.**

As required by FAS No. 142, “Goodwill and Other Intangibles,” theCompany evaluates goodwill annually (or more frequently if impairmentindicators arise) for impairment using the required business valuationmethods.  These methods include the useof a weighted average cost of capital to calculate the present value of theexpected 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.

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**ITEM 2.  PROPERTIES**

Theprincipal manufacturing facilities and other material important physicalproperties of the continuing operations of the Company at December 31, 2006 arelisted below and grouped by product segment. All properties shown are owned infee except where otherwise noted.
| **Glass Containers**             | ** **   | ** **              |
|----------------------------------|--------------|-------------------------|
| ***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                     |         |                    |
|                             |         |                    |
| Machine Shops                    |         |                    |
| Brockway, PA                     |         |                    |
|                             |         |                    |
| 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                  |
|                             |         |                    |
| Mold Shop                        |         |                    |
| Melbourne                        |         |                    |
|                             |         |                    |
| China                            |         |                    |
| Glass Container  Plants          |         |                    |
| Guangzhou                        |         | Tianjin                 |
| Shanghai                         |         | Wuhan                   |
|                             |         |                    |
| Mold Shop                        |         |                    |
| Tianjin                          |         |                    |
|                             |         |                    |
| Indonesia                        |         |                    |
| Glass Container Plant            |         |                    |
| Jakarta                          |         |                    |

 

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

 

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|                                  |       |                                       |
|----------------------------------|------------|--------------------------------------------|
|                             |       |                                       |
| 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                                     |
|                             |       |                                       |
| Machine Shop                     |       |                                       |
| Birmingham                       |       |                                       |
|                             |       |                                       |
| ***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                             |       |                                       |
|                             |       |                                       |
| Machine Shop                     |       |                                       |
| Cali                             |       |                                       |
|                             |       |                                       |
| Ecuador                          |       |                                       |
| Glass Container  Plant           |       |                                       |
| Guayaquil                        |       |                                       |

 

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|                             |         |               |
|----------------------------------|--------------|--------------------|
|                             |         |               |
| Peru                             |         |               |
| Glass Container  Plant           |         |               |
| Callao                           |         |               |
|                             |         |               |
| Venezuela                        |         |               |
| Glass Container  Plants          |         |               |
| Valencia                         |         | Valera             |
|                             |         |               |
| **Plastics Packaging**           | * *     | * *           |
| ***North  American Operations*** | *** *** | *** ***       |
| United States                    |         |               |
| Berlin, OH (1)                   |         | Hamlet, NC         |
| Bowling Green, OH                |         | Hattiesburg, MS    |
| Brookville, PA                   |         | Nashua, NH         |
| Constantine, MI                  |         | Rocky Mount, NC    |
| Erie, PA                         |         | Rossville, GA (2)  |
| Franklin, IN                     |         | Washington, NJ (2) |
| Greenville, SC                   |         |               |
|                             |         |               |
| Puerto Rico                      |         |               |
| Las Piedras                      |         |               |
|                             |         |               |
| ***Asia  Pacific Operations***   |         |               |
| Malaysia                         |         |               |
| Johor Bahru (2)                  |         |               |
|                             |         |               |
| Singapore                        |         |               |
| Singapore (2)                    |         |               |
|                             |         |               |
| ***European  Operations***       |         |               |
| Hungary                          |         |               |
| Gyor (2)                         |         |               |
|                             |         |               |
| ***South  American Operations*** |         |               |
| Brazil                           |         |               |
| Sao Paulo                        |         |               |
|                             |         |               |
| **Corporate  Facilities**        |         |               |
| Perrysburg, OH  (2)              |         |               |

 

Inaddition, a glass container plant in Lurin, Peru is under construction.  

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(1)   This facility is financed in whole or in partunder tax-exempt financing agreements.

(2)            This facility isleased in whole or in part.

The Company believes thatits facilities are well maintained and currently adequate for its plannedproduction requirements over the next three to five years.

 

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## **ITEM 3.  LEGALPROCEEDINGS**

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

**PART II**

**ITEM 6.  SELECTEDFINANCIAL DATA**

Theselected consolidated financial data presented below relates to each of thefive years in the period ended December 31, 2006. The financial data for eachof the five years in the period ended December 31, 2006 was derived from theaudited consolidated financial statements of the Company. For more information,see the “Consolidated Financial Statements” included elsewhere in thisdocument.
| ** **                                                                                | ** ** | **Years ended December 31,**     |       |
|-------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2006**                                        | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** |   |
| ** **                                                                                | ** ** | **(Dollar amounts in millions)** |       |
| Consolidated operating  results (a):                                                      |       |                                            |       |   |   |   |   |   |   |   |   |
| Net sales                                                                                 |       | $                                               | 7,422.0    |   | $ | 7,079.0 |   | $ | 6,128.4 |   | $ | 4,975.6 |   | $ | 4,621.2 |   |
| Other revenue (b)                                                                         |       | 101.5                                           |       | 110.7 |   | 135.0 |   | 90.2 |   | 110.0 |   |
|                                                                                      |       | 7,523.5                                         |       | 7,189.7 |   | 6,263.4 |   | 5,065.8 |   | 4,731.2 |   |
|                                                                                      |       |                                            |       |   |   |   |   |   |   |   |   |
| Costs and expenses:                                                                       |       |                                            |       |   |   |   |   |   |   |   |   |
| Manufacturing, shipping  and delivery (c)                                                 |       | 6,084.0                                         |       | 5,719.5 |   | 4,918.4 |   | 3,967.9 |   | 3,572.9 |   |
| Research, engineering, selling,  administrative and other (d)                             |       | 688.7                                           |       | 1,087.1 |   | 507.2 |   | 656.1 |   | 373.6 |   |
| Earnings before interest  expense and items below                                         |       | 750.8                                           |       | 383.1 |   | 837.8 |   | 441.8 |   | 784.7 |   |
| Interest expense (e)                                                                      |       | 488.2                                           |       | 466.7 |   | 474.9 |   | 429.8 |   | 372.2 |   |
|                                                                                      |       |                                            |       |   |   |   |   |   |   |   |   |
| Earnings (loss) from  continuing operations before items below                            |       | 262.6                                           |       | (83.6 | ) | 362.9 |   | 12.0 |   | 412.5 |   |
| Provision for income taxes  (f)                                                           |       | 126.5                                           |       | 416.1 |   | 73.6 |   | 23.8 |   | 116.4 |   |
| Minority share owners’ interests  in earnings of subsidiaries                        |       | 43.6                                            |       | 35.9 |   | 32.9 |   | 25.8 |   | 25.5 |   |
| Earnings (loss) from  continuing operations before cumulative effect of accounting change |       | 92.5                                            |       | (535.6 | ) | 256.4 |   | (37.6 | ) | 270.6 |   |
| Net earnings (loss) of discontinued  operations (g)                                       |       |                                            |       | 63.0 |   | 64.0 |   | (660.7 | ) | 38.0 |   |
| Cumulative effect of accounting  change (h)                                               |       |                                            |       |   |   |   |   |   |   | (460.0 | ) |
|                                                                                      |       |                                            |       |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                                                       |       | $                                               | 92.5       |   | $ | (472.6 | ) | $ | 320.4 |   | $ | (698.3 | ) | $ | (151.4 | ) |

 

23

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| ** **                                                            | ** ** | **Years ended December 31,**     | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                            | ** ** | **2006**                                        | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                            | ** ** | **(Dollar amounts in millions)** | ** ** |
| Other data:                                                           |       |                                            |       |   |   |   |   |   |   |   |   |
| The following are  included in net earnings:                          |       |                                            |       |   |   |   |   |   |   |   |   |
| Depreciation                                                          |       | $                                               | 469.0      |   | $ | 480.2 |   | $ | 436.0 |   | $ | 391.9 |   | $ | 353.4 |   |
| Amortization of  intangibles                                          |       | 27.3                                            |       | 27.8 |   | 23.8 |   | 21.4 |   | 21.5 |   |
| Amortization of  deferred finance fees (included in interest expense) |       | 12.9                                            |       | 16.0 |   | 15.0 |   | 14.4 |   | 16.1 |   |
|                                                                  |       |                                            |       |   |   |   |   |   |   |   |   |
| Balance sheet data (at  end of period):                               |       |                                            |       |   |   |   |   |   |   |   |   |
| Working capital  (current assets less current liabilities)            |       | $                                               | 216        |   | $ | 618 |   | $ | 605 |   | $ | 872 |   | $ | 717 |   |
| Total assets                                                          |       | 9,321                                           |       | 9,521 |   | 10,550 |   | 9,464 |   | 9,789 |   |
| Total debt                                                            |       | 5,464                                           |       | 5,300 |   | 5,365 |   | 5,426 |   | 5,346 |   |
| Share owner’s equity                                             |       | 1,044                                           |       | 1,198 |   | 2,040 |   | 1,522 |   | 2,022 |   |

 

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(a)          Amounts for the yearended December 31, 2004 include the results of BSN from the date of acquisitionon June 21, 2004.

(b)         Other revenue in 2006includes a gain of $15.9 million ($11.2 million after tax) for the curtailmentof postretirement benefits in The Netherlands. 

Other revenue in 2005includes $28.1 million (pretax and after tax) from the sale of the Company’sglass container facility in Corsico, Italy.

Other revenue in 2004includes: (1) a gain of $20.6 million ($14.5 million after tax) for the sale ofcertain real property, and (2) a gain of $31.0 million ($13.1 million aftertax) for a restructuring in the Italian Specialty Glass business. 

(c)          Amount for 2006 includesa loss of $8.7 million ($8.4 million after tax) from the mark to market effectof natural gas hedge contracts.

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

Amount for 2004 includesa gain of $4.9 million ($3.2 million after tax) from the mark to market effectof natural gas hedge contracts.

(d)         Amount for 2006 includesa 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 theGodfrey, Illinois machine parts manufacturing operation. 

Amount for 2005 includesa charge of $494.0 million (pretax and after tax) to write down goodwill in theAsia-Pacific Glass unit. 

24

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Amount for 2004 includesa charge of $6.4 million ($5.4 million after tax) for restructuring a lifeinsurance program in order to comply with recent statutory and tax regulationchanges. 

Amount for 2003 includescharges 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 ina soda ash mining operation; (2) $43.0 million ($30.1 million after tax) forthe write-down of Plastics Packaging assets in the Asia Pacific region; (3)$37.4 million ($37.4 million after tax) for the loss on the sale of long-termnotes receivable; (4) $37.4 million ($23.4 million after tax) for the estimatedloss on the sale of certain closures assets; (5) $28.5 million ($17.8 millionafter tax) for the permanent closure of the Hayward, California glass containerfactory; (6) $23.9 million ($17.4 million after tax) for the shutdown of thePerth, Australia glass container factory; (7) $20.1 million ($19.5 millionafter tax) for the shutdown of the Milton, Ontario glass container factory; and(8) $3.9 million ($2.4 million after tax) for an additional loss on the sale ofcertain closures assets.

(e)          Amount for 2006 includescharges of $6.2 million (pretax and after tax) for note repurchase premiums. 

Amount for 2004 includescharges of $28.0 million ($18.3 million after tax) for note repurchasepremiums. 

Amount for 2003 includesa charge of $13.2 million ($8.2 million after tax) for note repurchasepremiums. 

Includes additionalinterest charges for the write off of unamortized deferred financing feesrelated to the early extinguishment of debt as follows:  $11.3 million ($10.9 million after tax) for2006; $2.8 million ($1.8 million after tax) for 2004; $1.3 million ($0.9million after tax) for 2003; and $9.1 million ($5.7 million after tax) for2002.

(f)            Amount for 2006includes a benefit of $5.7 million from the reversal of a non-U.S. deferred taxasset valuation allowance partially offset by charges related to internationaltax restructuring.

Amount for 2005 includesa charge of $306.6 million to record a valuation allowance related toaccumulated deferred tax assets in the U.S. and a benefit of $5.3 million forthe reversal of an accrual for potential tax liabilities related to a previousdivestiture. The accrual is no longer required based on the Company’sreassessment of potential liabilities. 

Amount for 2004 includesa benefit of $33.1 million for a tax consolidation in the Australian glassbusiness. 

(g)         Amount for 2005 consistsprincipally of a third quarter benefit from the reversal of an accrual forpotential tax liabilities related to a previous divestiture. The accrual is nolonger required based on the Company’s reassessment of the potentialliabilities. 

Amounts related to theCompany’s plastic blow-molded container business have been reclassified todiscontinued operations for 2002-2004 as a result of the sale of that business in2004.

(h)         On January 1, 2002, theCompany adopted Financial Accounting Standards No. 142, “Goodwill and OtherIntangible Assets” (“FAS No. 142”). As required by FAS No. 142, the Companychanged its method of accounting for goodwill and discontinued amortization ofgoodwill effective January 1, 2002. Also as required by FAS No. 142, thetransitional goodwill impairment loss of $460.0 million is recognized as thecumulative effect of a change in method of accounting.

25

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## **ITEM 7.****                                                    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

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

Netsales of the Glass Containers segment were $383.5 million higher than the prioryear principally resulting from increased unit shipments, improved pricing, andfavorable foreign currency exchange rates.

Netsales of the Plastics Packaging segment were $40.5 million lower than the prioryear. Excluding the absence of $46.3 million in sales from a portion of theplastics business in the Asia Pacific region which was divested in December of2005, sales increased over the prior year. Resin cost pass-throughs more thanoffset an unfavorable product mix.

SegmentOperating Profit of the Glass Containers segment was $39.5 million lower thanthe prior year. The benefits of higher selling prices, improved productivity,fixed cost savings and increased unit shipments were more than offset byinflationary cost increases.

SegmentOperating Profit of the Plastics Packaging segment for 2006 was $12.7 millionlower than the prior year. The decrease resulted principally from the exit fromthe Asia Pacific plastics business and inflationary cost increases, partiallyoffset by improved productivity and cost savings. 

Interestexpense for 2006 was $488.2 million compared to $466.7 million in 2005.Included in the 2006 interest expense was $17.5 million for note repurchasepremiums and the write-off of unamortized finance fees related to the June 2006refinancing of the Company’s previous credit agreement and the July 2006repurchase of approximately $150 million principal amount of the 8.875% SeniorSecured Notes due 2009.

Netearnings in 2006 were $92.5 million, compared to a loss from continuingoperations of $536.6 million. Earnings in both periods included items thatmanagement considers not representative of ongoing operations. These itemsdecreased net earnings in 2006 by $57.0 million and decreased net earningsin 2005 by $764.9 million.

Capitalspending for property, plant and equipment was $320.3 million compared to$404.1 million in the prior year.

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

*NetSales*

The Company’s net salesby segment for 2006 and 2005 are presented in the following table. For furtherinformation, see Segment Information included in Note 19 to the ConsolidatedFinancial Statements. 

26

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| ** **                         | ** ** | **2006**                            | ** ** | **2005** | ** ** |
|------------------------------------|------------|-------------------------------------|------------|----------|------------|
| ** **                         | ** ** | **(dollars in millions)** | ** ** |
| Glass Containers                   |       | $                                   | 6,650.4    |     | $          | 6,266.9 |   |
| Plastics Packaging                 |       | 771.6                               |       | 812.1    |       |
|                               |       |                                |       |     |       |
| Segment and consolidated net sales |       | $                                   | 7,422.0    |     | $          | 7,079.0 |   |

 

Consolidatednet sales for 2006 increased $343.0 million, or 4.8%, to $7,422.0 million from$7,079.0 million in 2005.

Netsales of the Glass Containers segment increased $383.5 million, or 6.1%, over2005. Shipments of beer containers and beverage containers increased in 2006compared to 2005, more than offsetting reductions in most other product lines.Also contributing to the increase were generally higher selling prices.

Thechange in net sales for the Glass Containers segment can be summarized asfollows (dollars in millions):
| 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 |   |
|                                             |        |        |        |        |         |        |  |

 

Netsales of the Plastics Packaging segment decreased $40.5 million from 2005.Excluding the absence of $46.3 million in sales from a portion of the plasticsbusiness in the Asia Pacific region which was divested in December of 2005, salesincreased over the prior year. Resin cost pass-throughs more than offset anunfavorable product mix.

Thechange in net sales for the Plastics Packaging segment can be summarized asfollows:
| Net sales - 2005                              |   |   |   | $      | 812.1  |   |
|-----------------------------------------------|--------|--------|--------|--------|--------|--------|
| Effect of  increased resin cost pass-throughs |   | $      | 17.9   |   |   |   |
| Divestiture                                   |   | (46.3  | )      |   |   |
| Net effect of  price and mix                  |   | (11.2  | )      |   |   |
| Net effect of  volume                         |   | (0.2   | )      |   |   |
| Effects of  changing foreign currency rates   |   | (0.7   | )      |   |   |
| Total net effect  on sales                    |   |   |   | (40.5  | )      |
| Net sales - 2006                              |   |   |   | $      | 771.6  |   |
|                                               |        |        |        |        |        |        |  |

 

*Segment Operating Profit*

Operating Profit forproduct segments includes an allocation of some corporate expenses based onboth a percentage of sales and direct billings based on the costs of specificservices provided. For the Company’s U.S. pension plans, net periodic pensioncost has been allocated to product segments. For further information, see Segment Information included in Note 19 tothe Consolidated Financial Statements.

27

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| ** **                            | ** ** | **2006**                            | ** ** | **2005** | ** ** |
|---------------------------------------|------------|-------------------------------------|------------|----------|------------|
| ** **                            | ** ** | **(dollars in millions)** | ** ** |
| Glass Containers                      |       | $                                   | 751.3      |     | $          | 790.8 |   |
| Plastics Packaging                    |       | 114.5                               |       | 127.2    |       |
| Eliminations and other retained items |       | (91.2                               | )          | (89.4    | )          |
|                                       |            |                                     |            |          |            |  |  |

 

SegmentOperating Profit of the Glass Containers segment for 2006 decreased $39.5million, or 5.0%, to $751.3 million, compared with Segment Operating Profit of$790.8 million in 2005.

Thechange in Segment Operating Profit for the Glass Containers segment can besummarized as follows (dollars in millions):
| Segment Operating Profit -  2005                                                 |   |   |   | $      | 790.8  |   |
|----------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| 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                                                                            |   | (18.1  | )      |   |   |
| Total net effect  on Segment Operating Profit                                    |   |   |   | (39.5  | )      |
| Segment Operating  Profit -2006                                                  |   |   |   | $      | 751.3  |   |
|                                                                                  |        |        |        |        |        |        |  |

 

SegmentOperating Profit of the Plastics Packaging segment for 2006 was $114.5 millioncompared with Segment Operating Profit of $127.2 million in 2005.

Thechange in Segment Operating Profit for the Plastics Packaging segment can besummarized as follows (dollars in millions):
| Segment Operating Profit -  2005                                            |   |   |   | $      | 127.2  |   |
|-----------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Productivity and  cost savings                                              |   | $      | 14.3   |   |   |   |
| Inflation,  operating expenses, and warehouse and delivery                  |   | (9.0   | )      |   |   |
| Divestiture                                                                 |   | (8.2   | )      |   |   |
| Other business  impacts including pension expense, and currency translation |   | (3.2   | )      |   |   |
| Net effect of  price, mix and unit sales volumes                            |   | (0.1   | )      |   |   |
| Other                                                                       |   | (6.5   | )      |   |   |
| Total net effect  on Segment Operating Profit                               |   |   |   | (12.7  | )      |
| Segment Operating  Profit -2006                                             |   |   |   | $      | 114.5  |   |
|                                                                             |        |        |        |        |        |        |  |

 

Eliminations and otherretained items for 2006 were $91.2 million compared to $89.4 million for 2005.

28

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*InterestExpense*

Interest expensefor 2006 was $488.2 million compared to $466.7 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 Secured Notesdue 2009. Also contributing to the increase were higher average debt balances,partially offset by lower average interest rates.

*Provisionfor Income Taxes*

The Company’sreported effective tax rate was 48.2% in 2006 and (497.7)% in 2005. Excludingthe effects of separately taxed items in both periods, listed in the tablebelow, the Company’s effective tax rate for the full year 2006 was 40.3%compared with 29.9% for the full year 2005. The 2006 effective tax rateincreased principally because the Company is no longer recording tax benefitson its losses in the United States. A shift in mix of earnings towards highertax cost countries in other regions of the world also increased the effectivetax rate for the year.

*MinorityShare Owners’ Interest in Earnings of Subsidiaries*

Minorityshare owners’ interest in earnings of subsidiaries for 2006 was $43.6 millioncompared to $35.9 million for 2005. The increase is primarily attributed tohigher earnings from the Company’s operations in South America. 

*Earningsfrom Continuing Operations*

For 2006, theCompany recorded net earnings of $92.5 million compared to a loss fromcontinuing operations of $535.6 million for the year ended December 31, 2005.The after tax effects of the items excluded from Segment Operating Profit, the2006 international net tax benefit, the tax charge to increase the U.S.valuation allowance, the tax benefit of reversing an accrual for potential taxliabilities, and the additional interest charges, increased or decreasedearnings in 2006 and 2005 as set forth in the following table (dollars inmillions).
| ** **                                                                                                                           | ** ** | **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                                                                               |       |                         |       | (306.6 | ) |
| 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      | ) | $ | (764.9 | ) |
|                                                                                                                                      |            |                              |            |  |  |  |  |

 

29

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***Executive Overview – Years ended December 2005 and 2004***

Netsales of the Glass Containers segment were $900.8 million higher than the prioryear principally resulting from the BSN Acquisition and favorable foreigncurrency exchange rates.

Netsales of the Plastics Packaging segment were $49.8 million higher than theprior year. Higher sales from improved pricing, increased sales volume andpass-through of higher resin costs were partially offset by the absence ofsales from plastic container assets in the Asia Pacific region that weredivested in the second quarter of 2004. 

SegmentOperating Profit of the Glass Containers segment was $31.2 million higher thanthe prior year. The BSN Acquisition accounted for most of the increase. Thebenefits of stronger foreign currencies and higher selling prices werepartially offset by inflationary cost increases.

SegmentOperating Profit of the Plastics Products segment was $12.2 million higher thanthe prior year. Increases from improved pricing, sales volume, product mix anda gain from the sale of a plant related to the partial exit from the Australianplastics business more than offset increased costs.

Interestexpense was $8.2 million lower than the prior year. The decrease resulted fromlower debt levels in the third and fourth quarters of 2005 and thenon-recurrence of repurchase premiums partially offset by higher variableinterest rates and higher debt from the BSN Acquisition.

Lossfrom continuing operations in 2005 was $535.6 million down from earnings of $256.4million from continuing operations in 2004. Earnings in both periods includeditems that management considers not representative of continuing operations.These items decreased net earnings in 2005 by $764.9 million and increased netearnings in 2004 by $38.4 million.

TheCompany’s total debt at December 31, 2005 was $5.30 billion or $63.4 millionlower than the prior year balance. Exclusive of the $191.8 million increase inboth debt and accounts receivable required by a change in the Company’sEuropean accounts receivable securitization program, total debt decreased by$255.2 million to its lowest level since 1998.

***Results of Operations - Comparison of 2005with 2004***

*Net Sales*

TheCompany’s net sales by segment for 2005 and 2004 are presented in the followingtable. The Plastics Packaging amounts for 2004 reflect only the continuingoperations. For further information, see Segment Information included in Note19 to the Condensed Consolidated Financial Statements. 
| ** **                         | ** ** | **2005**                            | ** ** | **2004** | ** ** |
|------------------------------------|------------|-------------------------------------|------------|----------|------------|
| ** **                         | ** ** | **(dollars in millions)** | ** ** |
| Glass Containers                   |       | $                                   | 6,266.9    |     | $          | 5,366.1 |   |
| Plastics Packaging                 |       | 812.1                               |       | 762.3    |       |
|                               |       |                                |       |     |       |
| Segment and consolidated net sales |       | $                                   | 7,079.0    |     | $          | 6,128.4 |   |

 

30

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Consolidatednet sales for 2005 increased $950.6 million, or 15.5%, to $7,079.0 million from$6,128.4 million in 2004.

Netsales of the Glass Containers segment increased $900.8 million, or 16.8%, over2004. Contributing to the increase were the additional sales from the BSNAcquisition. Increased shipments of beverage containers throughout the Americasmore than offset reduced shipments of food containers in North America.Improved pricing also had a favorable effect on net sales. Favorable currencyexchange rates accounted for about 5% of the increase. Partially offsettingthese increases was the absence of sales from the Castellar factory sold inJanuary 2005.

Thechange in net sales for the Glass Containers segment can be summarized asfollows (dollars in millions):
| Net sales - 2004                                           |   |   |   | $      | 5,366.1 |   |
|------------------------------------------------------------|--------|--------|--------|--------|---------|--------|
| Net effect of  the BSN Acquisition, volume, price, and mix |   | $      | 883.3  |   |    |   |
| Effects of  changing foreign currency rates                |   | 46.2   |   |   |    |
| Divestiture of  Castellar factory                          |   | (28.7  | )      |   |    |
|                                                       |   |   |   |   |    |
| Total net effect  on sales                                 |   |   |   | 900.8  |    |
| Net sales - 2005                                           |   |   |   | $      | 6,266.9 |   |
|                                                            |        |        |        |        |         |        |  |

 

Netsales of the Plastics Packaging segment increased $49.8 million, or 6.5%, from2004. The higher sales reflected improved pricing and sales volume in severalproduct lines, the pass-through effect of higher resin costs, and favorablecurrency translation rates. Partially offsetting these increases was theabsence of sales from plastic container assets in the Asia Pacific region thatwere divested in the second quarter of 2004. 

Thechange in net sales for the Plastics Packaging segment can be summarized asfollows (dollars in millions):
| Net sales - 2004                              |   |   |   | $      | 762.3  |   |
|-----------------------------------------------|--------|--------|--------|--------|--------|--------|
| Effect of  increased resin cost pass-throughs |   | $      | 44.8   |   |   |   |
| Net effect of  volume, price and mix          |   | 34.4   |   |   |   |
| Effects of  changing foreign currency rates   |   | 3.5    |   |   |   |
| Divestiture                                   |   | (32.9  | )      |   |   |
|                                          |   |   |   |   |   |
| Total net effect  on sales                    |   |   |   | 49.8   |   |
| Net sales - 2005                              |   |   |   | $      | 812.1  |   |
|                                               |        |        |        |        |        |        |  |

 

*Segment Operating Profit*

Operating Profit forproduct segments includes an allocation of some corporate expenses based onboth a percentage of sales and direct billings based on the costs of specificservices provided. For the Company’s U.S. pension plans, net periodic pensioncost (credit) has been allocated to product segments. The Plastics Packagingamounts for 2004 reflect only the continuing operations. For furtherinformation, see Segment Information included in Note 19 to the ConsolidatedFinancial Statements.

31

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| ** **                            | ** ** | **2005**                            | ** ** | **2004** | ** ** |
|---------------------------------------|------------|-------------------------------------|------------|----------|------------|
| ** **                            | ** ** | **(dollars in millions)** | ** ** |
| Glass Containers                      |       | $                                   | 790.8      |     | $          | 759.6 |   |
| Plastics Packaging                    |       | 127.2                               |       | 115.0    |       |
| Eliminations and other retained items |       | (89.4                               | )          | (102.2   | )          |
|                                       |            |                                     |            |          |            |  |  |

 

SegmentOperating Profit of the Glass Containers segment for 2005 increased $31.2million, or 4.1%, to $790.8 million, compared with Segment Operating Profit of$759.6 million in 2004. Factors contributing to the increase were: (1) theadditional operating profit from the BSN Acquisition; (2) increased unitshipments of beverage containers principally in the Americas; (3) favorableexchange rates; (4) generally improved selling prices; and (5) thenon-recurrence of the acquisition step-up of BSN finished goods inventory.Factors that partially offset the increase were: (1) inflationary costincreases including energy, raw material costs, and transportation; (2)temporarily idled production capacity to reduce inventory; (3) costs of theEuropean integration and new European headquarters; (4) the absence of equityearnings from Consol Limited (divested in the fourth quarter of 2004); (5) theabsence of operating profit from the Corsico and Castellar factories; and (6)reduced food container shipments in North America. 

Thechange in Segment Operating Profit for the Glass Containers segment can besummarized as follows:
| Segment Operating Profit -  2004                                      |   |   |   | $      | 759.6  |   |
|-----------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Net effect of  BSN acquisition and volume, price, and mix             |   | $      | 184.0  |   |   |   |
| Non-recurrence  of BSN inventory step-up                              |   | 31.1   |   |   |   |
| Effects of  changing foreign currency rates                           |   | 14.5   |   |   |   |
| Higher energy  costs                                                  |   | (75.7  | )      |   |   |
| Other  inflationary cost increases                                    |   | (57.7  | )      |   |   |
| Temporarily  idled production capacity to reduce inventory            |   | (20.5  | )      |   |   |
| Effects of  European integration and new European headquarter costs   |   | (18.0  | )      |   |   |
| Divestiture of  Corsico and Castellar factories and Consol investment |   | (13.6  | )      |   |   |
| Increased  delivery and warehousing costs                             |   | (4.7   | )      |   |   |
| Other                                                                 |   | (8.2   | )      |   |   |
| Total net effect  on Segment Operating Profit                         |   |   |   | 31.2   |   |
| Segment Operating  Profit -2005                                       |   |   |   | $      | 790.8  |   |
|                                                                       |        |        |        |        |        |        |  |

 

Segment Operating Profitof the Plastics Packaging segment for 2005 increased $12.2 million, or 10.6%,to $127.2 million compared with Segment Operating Profit of $115.0 million in2004. The 2005 amount includes a $6 million fourth quarter gain from the saleof one plant related to the partial exit from the Australian plastics businessand a reduction of the accrued exit costs. Also contributing to the increasewere the effects of improved pricing, product mix, and sales volume which morethan offset the effect of increases in manufacturing, shipping and deliverycosts, and the absence of profits from the plastic container assets in the AsiaPacific region that were divested in the second quarter of 2004.

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Thechange in Segment Operating Profit for the Plastics Packaging segment can besummarized as follows (dollars in millions):
| Segment Operating Profit -  2004                                       |   |   |   | $      | 115.0  |   |
|------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Net effect of  volume, price and mix                                   |   | $      | 14.8   |   |   |   |
| Partial exit of  Australian plastics business                          |   | 6.0    |   |   |   |
| Non-recurrence  plant shut down costs                                  |   | 3.7    |   |   |   |
| Divestiture                                                            |   | (4.1   | )      |   |   |
| Increased  delivery, warehousing and other inflationary cost increases |   | (4.2   | )      |   |   |
| Higher energy  costs                                                   |   | (1.9   | )      |   |   |
| Other                                                                  |   | (2.1   | )      |   |   |
| Total net effect  on Segment Operating Profit                          |   |   |   | 12.2   |   |
| Segment Operating  Profit - 2005                                       |   |   |   | $      | 127.2  |   |
|                                                                        |        |        |        |        |        |        |  |

 

Eliminationsand other retained items for 2005 were favorable by $12.8 million compared to2004. The 2005 year reflects a favorable adjustment of approximately $10.0million to the Company’s accruals for self-insured risks, partially offset byhigher retained costs for the divested blow molded plastic container businessand adjustments made to certain accruals. The 2004 year included self-insuredproperty and casualty losses that did not recur in 2005.

*InterestExpense*

Interest expensedecreased to $466.7 million in 2005 from $474.9 million in 2004. The 2004amount included $30.8 million for repurchase premiums and write-offs ofunamortized finance fees. Exclusive of that amount, interest expense increased$22.6 million in 2005 due to higher interest rates on the Company’s variablerate debt and additional interest as a result of higher debt related to the BSNAcquisition. Partially offsetting this increase was lower interest as a resultof lower average debt balances in the third and fourth quarters of 2005 andlower interest rates on fixed rate debt in the fourth quarter of 2005 comparedto the fourth quarter of 2004. 

*Provisionfor Income Taxes*

The Company’sreported effective tax rate was (497.7)% in 2005 and 20.2% in 2004. Excluding the effects of separately taxeditems in both periods, listed in the table below, the Company’s effective taxrate for 2005 was 29.9% compared with 26.9% in 2004. The higher 2005 effectiverate is principally due to a change in the mix of earnings toward higher taxinternational jurisdictions, tax legislation enacted in Ohio and recognition ofother discrete changes in deferred taxes during 2005.

*MinorityShare Owners’ Interest in Earnings of Subsidiaries*

Minority shareowners’ interest in earnings of subsidiaries for 2005 was $35.9 millioncompared to $32.9 million for 2004. 

*Earningsfrom Continuing Operations*

For 2005, theCompany recorded a loss from continuing operations of $535.6 million comparedto earnings from continuing operations of $256.4 million for the year endedDecember 31, 2004. The after tax effects of the items excluded from SegmentOperating Profit, the tax charge to increase the valuation

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allowance, the taxbenefit of reversing an accrual for potential tax liabilities, the additionalinterest charges and the tax benefit on the Australian tax consolidation,increased or decreased earnings in 2005 and 2004 as set forth in the followingtable (dollars in millions).
| ** **                                                                   | ** ** | **Net Earnings**        | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                   | ** ** | **Increase (Decrease)** | ** ** |
| **Description**                                                              | ** ** | **2005**                     | ** ** | **2004** | ** ** |
| 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                          |       |   |   |
|                                                                         |       |                         |       |   |   |
| Gain on the sale of  certain real property                                   |       |                         |       | 14.5 |   |
| Gain on a restructuring  in the Italian Specialty Glass business             |       |                         |       | 13.1 |   |
| Gain from the mark to  market effect of natural gas hedge contracts          |       | 2.3                          |       | 3.2 |   |
| A benefit for a tax  consolidation in the Australian glass business          |       |                         |       | 33.1 |   |
| Impairment of goodwill  in the Asia-Pacific Glass unit                       |       | (494.0                       | )          |   |   |
| Increase in the  deferred tax valuation allowance                            |       | (306.6                       | )          |   |   |
| Note repurchase  premiums and write-off of finance fees                      |       |                         |       | (20.1 | ) |
| Life insurance  restructuring charge                                         |       |                         |       | (5.4 | ) |
|                                                                         |       |                         |       |   |   |
| Total                                                                        |       | $                            | (764.9     | ) | $ | 38.4 |   |

 

***Discontinued Operations***

On October 7,2004, the Company announced that it had completed the sale of its blow-moldedplastic container operations in North America, South America and Europe, toGraham Packaging Company. 

Cash proceeds ofapproximately $1.2 billion were used to repay term loans under the Company’sbank credit facility, which was amended to permit the sale. The sale agreementincluded a post-closing purchase price adjustment based on changes in certainworking capital components and certain other assets and liabilities of thebusiness. This adjustment was finalized in April 2005, and Graham was paidapproximately $39 million. The adjustment did not impact results of operations.

Included in thesale were 24 plastics manufacturing plants in the U.S., two in Mexico, three inEurope and two in South America, serving consumer products companies in thefood, beverage, household, chemical and personal care industries. Theblow-molded plastic container operations were part of the consumer productsbusiness unit of the plastics packaging segment.

As required by FASNo. 144, the Company has presented the results of operations for theblow-molded plastic container business in the Consolidated Results ofOperations for 2004 as a discontinued operation. Interest expense was allocatedto discontinued operations based on debt that was required to be repaid fromthe proceeds.

The followingsummarizes the revenues and expenses of the discontinued operations as reportedin the condensed consolidated results of operations for the period indicated:

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|                                           | ** ** | **Year ended**   | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **December 31,** | ** ** |
| ** **                                | ** ** | **2004**              | ** ** |
| **Revenues:**                             |       |                  |       |
| Net sales                                 |       | $                     | 875.3      |   |
| Other revenue                             |       | 7.7                   |       |
|                                      |       | 883.0                 |       |
| **Costs and expenses:**                   |       |                  |       |
| Manufacturing, shipping  and delivery     |       | 754.6                 |       |
| Research, development  and engineering    |       | 16.0                  |       |
| Selling and  administrative               |       | 23.7                  |       |
| Interest                                  |       | 45.1                  |       |
| Other                                     |       | 22.9                  |       |
|                                      |       | 862.3                 |       |
| Earnings before items  below              |       | 20.7                  |       |
| Provision for income  taxes               |       | 27.1                  |       |
| Gain on sale of  discontinued operations  |       | 70.4                  |       |
| Net earnings from discontinued operations |       | $                     | 64.0       |   |

 

The sale of theblow-molded plastic business resulted in a substantial capital loss, primarilyrelated to previous goodwill write downs that were not deductible whenrecorded. The 2004 gain on the sale of discontinued operations of $70.4 millionincludes a credit for income taxes of $39.7 million, representing the taxbenefit from offsetting a portion of the loss against otherwise taxable capitalgains.

Discontinuedoperations of $63.0 million for 2005 includes $61.8 million for a benefit fromthe reversal of an accrual for potential tax liabilities related to a previousdivestiture. The accrual is no longer required based on the Company’sreassessment of the potential liabilities due to several factors, includingstatute expiration in September 2005. The balance of $1.2 million relates to anadjustment of the 2004 gain on the sale of the blow-molded plastic containeroperations principally from finalizing certain tax allocations.

***2006 Non-operational Items***

*CapacityCurtailment*

In September 2006,the Company announced the permanent closing of its Godfrey, Illinois machineparts manufacturing operation. The facility was closed by the end of the year.This closing is part of a broad initiative to reduce working capital andimprove system costs. The Company also closed a small recycling facility inOhio. As a result, the Company recorded a charge of $29.7 million ($27.7million after tax) in the third quarter of 2006.

The closing of thesefacilities resulted in the elimination of approximately 260 jobs and acorresponding reduction in the Company’s workforce. The Company anticipatesthat it will pay out approximately $11.5 million in cash related to insurance,benefits, plant clean up, and other plant closing costs. The Company expectsthat the majority of these costs will be paid out by the end of 2008.

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*CEOTransition and Other Separation Charges*

The Company recorded afourth quarter charge of $20.8 million ($20.7 million after tax) associatedwith the separation agreement with its former CEO and with several members ofthe European management team. The charge also included costs related to theemployment agreement with the Company’s new CEO.

*OtherPostretirement Benefits*

The Company recorded afourth quarter gain of $15.9 million ($11.2 million after tax) related tocurtailment of certain postretirement benefits in The Netherlands as a resultof certain improvements in retiree medical benefits offered by the government.

Tax Benefit

In the fourth quarter,the Company recorded a net tax benefit of $5.7 million from the reversal of avaluation allowance against certain non-U.S. deferred tax assets due toimproving operations, partially offset by charges related to international taxrestructuring.  

***2005 Non-operational Items***

*Impairmentof Goodwill*

During thefourth 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*

The Companyrecorded a non-cash charge of $306.6 million in the fourth quarter of 2005 toincrease the valuation allowance against its accumulated net deferred taxassets in the United States.  The Companyhad recorded net deferred tax assets related principally to asbestos chargesand net operating losses in recent years. The amount of valuation allowance required under the provisions of FASNo. 109 is dependent upon projected near-term U.S. profitability including theeffects of tax planning.  During thefourth quarter of 2005, the Company determined that an additional valuationallowance was necessary because of the near-term effects on U.S. profitabilityof continued asbestos-related payments, significant interest expense, rising energycosts and other cost increases.  As aresult of the lower projected U.S. taxable income, the Company determined thatcertain tax planning strategies were no longer prudent and feasible and,therefore, were not likely to be implemented.

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***Capital Resources and Liquidity***

*Current and Long-TermDebt*

The Company's total debt at December 31,2006 was $5.46billion, compared to $5.30 billion at December 31, 2005.  

On June 14, 2006, the Company’ssubsidiary borrowers entered into the Secured Credit Agreement (the“Agreement”).  Proceeds from theAgreement were used to repay all outstanding amounts under the previous creditagreement. At December 31, 2006, the Agreement included a $900.0 millionrevolving credit facility, a 292.5 million Australian dollar term loan, and a134.6 million Canadian dollar term loan, each of which has a final maturitydate of June 15, 2012. It also included a $195.5 million term loan and a €195.5million term loan each of which have a final maturity date of June 14, 2013.The Agreement also permits the Company, at its option, to refinance certain ofits outstanding notes and debentures prior to their scheduled maturity. TheCompany recorded $10.2 million of additional interest charges for the write-offof unamortized finance fees related to the early repayment of the previouscredit agreement. 

At December 31, 2006, theCompany’s subsidiary borrowers had unused credit of $765.6 million availableunder the Agreement.

The weighted averageinterest rate on borrowings outstanding under the Agreement at December 31,2006 was 6.52%. 

The Agreement containscovenants and provisions that, among other things, restrict the ability of theCompany and its subsidiaries to dispose of assets, incur additionalindebtedness, prepay other indebtedness or amend certain debt instruments, paydividends, create liens on assets, enter into contingent obligations, enterinto sale and leaseback transactions, make investments, loans or advances, makeacquisitions, engage in mergers or consolidations, change the businessconducted, engage in certain transactions with affiliates and otherwiserestrict certain corporate activities. In addition, the Agreement contains financial covenants that require theCompany to maintain specified financial ratios and meet specified tests basedupon financial statements of the Company and its subsidiaries on a consolidatedbasis, including minimum interest coverage ratios, maximum leverage ratios andspecified capital expenditure tests.

During Julyof 2006, a subsidiary of the Company used borrowings under the Agreement torepurchase $150.0 million principal amount of the 8.875% Senior Secured Notesdue 2009.  During the third quarter, theCompany recorded $7.3 million of additional interest charges for noterepurchase premiums and the related write-off of unamortized finance fees.

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During thefourth quarter of 2005, the Company expanded the capacity of its Europeanaccounts receivable securitization program from €200 million to €320 million toinclude operations in Italy and the United Kingdom. The accounts receivablesecuritization program provides lower costs of financing than traditional bankdebt. The terms of this expansion resulted in changing from off-balance sheetto on-balance sheet accounting for the program by consolidating both theaccounts receivable in the program and the secured indebtedness of the sameamount.

During Octoberof 2006, the Company entered into a new €300 million European accountsreceivable securitization program.  Thenew program replaces the previous European program, described in the precedingparagraph, which was set to terminate in October 2006.  

At December31, 2006, the European program had a balance of $195.0 million, and the AsiaPacific program had a balance of $84.4 million recorded in short termloans.  The interest rate on the accountsreceivable securitization program is a local short term variable rate plus amargin over the variable rate of 0.70% for the European program and 0.85% forthe Asia Pacific program.  The weightedaverage interest rate on borrowings under the European program was 4.81% atDecember 31, 2006.  The weighted averageinterest rate on borrowings under the Asia Pacific program was 7.43% atDecember 31, 2006.  These programs havematurity dates ranging from January of 2008 through October of 2011. 

*CashFlows*

For 2006, cash providedby operating activities was $311.6 million compared with $622.0 million for2005. The 2006 and 2005 amounts exclude $127.3 million and $50.7 million,respectively, of collections on receivables arising from the consolidation ofthe receivables securitization program as described in Note 5 to theConsolidated Financial Statements. Software acquisition and development costs and payments of approximately$33.7 million for European restructuring activities required more cash in 2006than in 2005.  Working capital alsorequired more cash in 2006 than in 2005 due to increased production and salesactivities, principally in the fourth quarter, and because the change in 2006lacked the benefit of the reductions achieved in 2005 as part of Company’sfocus on working capital improvement.

For the year endedDecember 31, 2006, the Company paid $461.0 million in cash interest comparedwith $450.9 million for 2005.  The 2006amount included $6.2 million for repurchase premiums.  

OI Inc. has substantialobligations related to semiannual interest payments on $1.05 billion ofoutstanding public debt securities.  Inaddition, OI Inc. pays aggregate annual dividends of $21.5 million on 9,050,000share of its $2.375 convertible preferred stock.  OI Inc. also makes, and expects in the futureto make, substantial indemnity payments and payments for legal fees andexpenses in connection with asbestos-related lawsuits and claims.  OI Inc.’s asbestos-related payments for 2006were $162.5 million down from $171.1 million for 2005.  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 was$320.3 million compared to $404.1 million in the prior year.  The lower capital spending was principallydue to the completion of the new glass container manufacturing facility inWindsor, CO. in the fourth quarter of 2005. In addition, the Companycapitalized $25.3 million under capital lease obligations with the relatedfinancing recorded as long term

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debt.  TheCompany continues to focus on reducing capital spending and improving itsreturn on invested capital by improving capital efficiency.  

The Company anticipatesthat cash flow from its opera­tions and from utiliza­tion of credit availableunder the Agreement will be sufficient to fund its operating and seasonalworking capital needs, debt service and other obligations on a short-term andlong-term basis including payments to OI Inc., described above.

*Contractual Obligationsand Off-Balance Sheet Arrangements*

The following information summarizes theCompany’s significant contractual cash obligations at December 31, 2006(dollars in millions).
| ** **                                   | ** ** | **Payments due by period** | ** ** |
|----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                   | ** ** | ** **                                | ** ** | **Less than** | ** ** | ** ** | ** ** | ** ** | ** ** | **More than 5** | ** ** |
| ** **                                   | ** ** | **Total**                                 | ** ** | **one year** | ** ** | **1-2 years** | ** ** | **3-5 years** | ** ** | **years** | ** ** |
| Contractual cash  obligations:               |       |                                      |       |   |   |   |   |   |   |   |   |
| Long-term debt                               |       | $                                         | 5,019.5    |   | $ | 323.0 |   | $ | 1,141.2 |   | $ | 923.3 |   | $ | 2,632.0 |   |
| Capital lease obligations                    |       | 31.6                                      |       | 1.4 |   | 2.9 |   | 2.6 |   | 24.7 |   |
| Operating leases                             |       | 146.0                                     |       | 49.2 |   | 61.6 |   | 26.9 |   | 8.3 |   |
| Interest                                     |       | 2,128.9                                   |       | 406.7 |   | 710.3 |   | 512.6 |   | 499.3 |   |
| Pension benefit plan contributions           |       | 55.3                                      |       | 55.3 |   |   |   |   |   |   |   |
| Postretirement benefit plan benefit payments |       | 230.3                                     |       | 24.5 |   | 47.6 |   | 46.4 |   | 111.8 |   |
| Total  contractual cash obligations          |       | $                                         | 7,611.6    |   | $ | 860.1 |   | $ | 1,963.6 |   | $ | 1,511.8 |   | $ | 3,276.1 |   |

 
| ** **                     | ** ** | **Amount of commitment expiration per period** | ** ** |
|--------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                     | ** ** | ** **                                                              | ** ** | **Less than** | ** ** | ** ** | ** ** | ** ** | ** ** | **More than 5** | ** ** |
| ** **                     | ** ** | **Total**                                                               | ** ** | **one year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **years** | ** ** |
| Other commercial  commitments: |       |                                                                    |       |   |   |   |   |   |   |   |   |
| Standby letters of credit      |       | $                                                                       | 89.2       |   | $ | 89.2 |   |   |   |   |   |   |   |
| Guarantees                     |       | 9.0                                                                     |       |   |   |   |   |   |   | $ | 9.0 |   |
| Total commercial  commitments  |       | $                                                                       | 98.2       |   | $ | 89.2 |   | $ | — |   | $ | — |   | $ | 9.0 |   |
|                                |            |                                                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Critical Accounting Estimates***

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

The impact of and any associated risks related toestimates and assumptions are discussed within Management’s Discussion andAnalysis of Financial Condition and Results of Operations, as well as in

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the Notes to the Consolidated Financial Statements, ifapplicable, where estimates and assumptions affect the Company’s reported andexpected financial results.

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

*Property,Plant and Equipment*

The net carrying amount of property, plant and equipment(“PP&E”) at December 31, 2006 totaled $3,193.7 million, representing34% of total assets.  Depreciationexpense during 2006 totaled $469.0 million, representing over 6% of total costsand expenses. Given the significance of PP&E and associated depreciation tothe Company’s consolidated financial statements, the determinations of anasset’s cost basis and its economic useful life are considered to be criticalaccounting estimates. 

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

Included in the cost basis of  PP&E are those costs which substantiallyincrease 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 moldingmachines and must make a determination of which costs, if any, tocapitalize.  The Company relies on theexperience and expertise of its operations and engineering staff to makereasonable and consistent judgments regarding increases in useful lives orcapacity of PP&E.

**Estimated Useful Life** — PP&E is generally depreciatedusing the straight-line method, which deducts equal amounts of the cost of eachasset from earnings each period over its estimated economic useful life.  Economic useful life is the duration of timean asset is expected to be productively employed by the Company, which may beless than its physical life. Management’s assumptions on the following factors,among others, affect the determination of estimated economic useful life: wearand tear, product and process obsolescence, technical standards, and changes inmarket demand. 

The estimated economic useful life of an asset is monitored todetermine its appropriateness, especially in light of changed businesscircumstances. For example, technological advances, excessive wear and tear, orchanges in customers’ requirements may result in a shorter estimated usefullife than originally anticipated. In these cases, the Company depreciates theremaining net book value over the new estimated remaining life, therebyincreasing depreciation expense per year on a prospective basis.  Likewise, if the estimated useful life isincreased, the adjustment to the useful life decreases depreciation expense peryear on a prospective basis.  Over thepast three years, changes in economic useful life assumptions have not had amaterial impact on the Company’s reported results. 

*Impairment of Long-Lived Assets*

**Property, Plant and Equipment** —As required by FAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets,” the Company tests forimpairment of PP&E whenever events or changes in circumstances indicatethat the carrying amount of the assets may not be recoverable.  PP&E held for

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use in the Company’s business is grouped for impairment testing atthe lowest level for which cash flows can reasonably be identified, typically afactory.  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 requires estimation of the fair value ofPP&E based on the discounted value of projected future cash flows generatedby the asset group.  The assumptionsunderlying cash flow projections represent management’s best estimates at thetime of the impairment review.  Factorsthat management must estimate include: industry and market conditions, salesvolume and prices, costs to produce, inflation, etc.  Changes in key assumptions or actualconditions which differ from estimates could result in an impairmentcharge.  The Company uses reasonable andsupportable assumptions when performing impairment reviews and cannot predictthe occurrence of future events and circumstances that could result inimpairment charges.  There were no materialcharges for impairment of asset groups held for use in 2006, 2005, or2004.  As part of the actions taken toclose its Godfrey, Illinois machine parts manufacturing operation, the Company recognized a charge forimpairment of assets to be sold or abandoned of $3.8 million in 2006.  See Note 16 to the Consolidated FinancialStatements.

**Goodwill** —Goodwill at December 31, 2006 totaled $2,464.7 million, representing 26% oftotal assets.  As requiredby FAS No. 142, “Goodwill and Other Intangibles,” the Company evaluatesgoodwill annually (or more frequently if impairment indicators arise) forimpairment.  The Company conducts itsevaluation as of October 1 of each year. Goodwill impairment testing is performed using the business enterprisevalue (“BEV”) of each reporting unit which is calculated as of a measurementdate by determining the present value of debt-free, after-tax projected futurecash flows, discounted at the weighted average cost of capital of ahypothetical third party buyer.  This BEVis then compared to the book value of each reporting unit as of the measurementdate to assess whether an impairment of goodwill may exist.

During the fourth quarter of 2006, the Companycompleted its annual testing and determined that no impairment of goodwillexisted.

If the Company’s projected future cash flows weresubstantially lower, or if the assumed weighted average cost of capital wassubstantially higher, the testing performed as of October 1, 2006, may haveindicated an impairment of one or more of the Company’s reporting units and, asa result, the related goodwill would also have been impaired.  For example, if projected future cash flowshad been decreased by 5%, or alternatively, if the weighted average cost ofcapital had been increased by 5%, the resulting lower BEV's would still have exceededthe book value of each reporting unit by a significant margin in all casesexcept for the Asia Pacific Glass reporting unit. Because the BEV for the AsiaPacific Glass reporting unit exceeded its book value by approximately 7%, theresults of the impairment testing could be negatively affected by relativelymodest changes in the assumptions and projections. At December 31, 2006,the goodwill of the Asia Pacific Glass reporting unit accounted forapproximately $500 million of the Company's consolidated goodwill.

The Company will monitor conditions throughout 2007that might significantly affect the projections and variables used in theimpairment test to determine if a review prior to October 1 may beappropriate.  If the results ofimpairment testing confirm that a write down of goodwill is necessary, then theCompany will record a charge in the fourth quarter of 2007, or earlier ifappropriate.  In the event the Companywould be required to record a significant write down of goodwill, the chargewould have a material adverse effect on reported results of operations and networth.

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**Other Long-Lived Assets** — Other long-lived assets include, amongothers, 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 the ConsolidatedFinancial Statements.  There were nomaterial charges for impairment of equity investments in 2006, 2005 or 2004.

Repair parts inventories are carried in order to provide adependable supply of quality parts for servicing the Company’s PP&E,particularly its glass melting furnaces and molding 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 Company continually monitors thecarrying value of repair parts for recoverability, especially in light ofchanging business circumstances.  Forexample, technological advances related to, and changes in, the estimatedfuture demand for products produced on the equipment to which the repair partsrelate may make the repair parts obsolete. In these circumstances, the Company writes down the repair parts to fairvalue.  As part of the actions taken toclose its Godfrey, Illinois machine parts manufacturing operation, the Company recognized a write-down ofexcess repair parts inventories of $7.9 million in 2006.  See Note 16 to the Consolidated FinancialStatements.

*PensionBenefit 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 assets usedin calculating the pension charges or credits for the year.  The Company uses discount rates based onyields of highly rated fixed income debt securities at the end of theyear.  At December 31, 2006, the weightedaverage discount rate for all plans was 5.49%. The Company uses an expected long-term rate of return on assets that isbased on both past performance of the various plans’ assets and estimatedfuture performance of the assets.  Due tothe nature of the plans’ assets and the volatility of debt and equity markets,results may vary significantly from year to year.  For example, actual returns in the Company’stwo largest plans were negative in each of the years 2000-2002.  The returns exceeded 20% in 2003, 18% in2004, 10% in 2005 and 16% in 2006.  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 2007, the Company’s estimated weightedaverage expected long-term rate of return on pension assets is 8.1% compared to8.1% for the year ended December 31, 2006. The Company recorded pension expense of $8.7million, $4.0 million, and$36.8 million in 2004, 2005, and 2006, respectively, from its principal definedbenefit pension plans.  The increase innet pension expense in 2006 resulted from lower return rates, the use of anupdated mortality table reflecting longer lifetimes, and higheramortization.  Depending on currencytranslation rates, the Company expects to record approximately $1.7 million ofpension income for the full year of 2007. The expected improvement in 2007 is principally the result of higherasset values in the U.S. plans.

Future effects onreported results of operations depend on economic conditions and investmentperformance.  For example, a one-halfpercentage point change in the actuarial assumption regarding the expectedreturn on assets would result in a change of approximately $19 million inpretax pension expense for the full year 2007. In addition, changes in external factors, including the fair values ofplan assets and the discount rates used to calculate plan liabilities, couldhave a significant effect on the recognition of funded status as describedbelow.  

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Recognition ofFunded Status – In September 2006, the Financial AccountingStandards Board issued Statement of Financial Accounting Standards No. 158(“FAS No. 158”), “Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans”.  The Companyadopted the provisions of FAS No. 158 as of December 31, 2006.  FAS No. 158 requires employers to adjust theassets and liabilities related to defined benefit plans so that the amountsreflected on the balance sheet represent the overfunded or underfunded statusof the plans.  These funded statusamounts are measured as the difference between the fair value of plan assetsand benefit obligations as of the balance sheet date.  For pension plans, the fair value of planassets is compared to the Projected Benefit Obligation (“PBO”).  For other postretirement benefit plans, thefair value of plan assets is compared to the Accumulated Postretirement BenefitObligation (“APBO”). In the Company’s case, the required adjustments resultedin a non-cash charge of $639.9 million ($617.1 million after tax) to theAccumulated Other Comprehensive Income component of share owners’ equity.  The most significant of the requiredadjustments was a $502.5 million reduction of the prepaid pension asset atDecember 31, 2006.  

Funding and CreditCompliance - The Company believes it will not be required tomake cash contributions to the U.S. plans for at least several years.  The Company expects to contributeapproximately $55 million to its non-U.S. defined benefit pension plans in2007, down from $69.5 million in 2006. The covenants under the Company’s Secured Credit Agreement were notaffected by the $617.1 million reduction in the Company’s net worth under FASNo. 158. 

*Income Taxes*

The Company accounts forincome taxes under the provisions of FASNo. 109, “Accounting for Income Taxes,” under which deferred taxassets and liabilities are recognized for the tax effects of temporarydifferences between the financial reporting and tax bases of assets andliabilities measured using the enacted tax rate.  Income tax expense was $126.5 million for theyear ended December 31, 2006.

Management judgment isrequired in determining income tax expense and the related balance sheetamounts.  Judgments are requiredconcerning the ultimate outcome of tax contingencies and the realization ofdeferred tax assets.  Actual income taxespaid may vary from estimates, depending upon changes in income tax laws, actualresults of operations, and the final audit of tax returns by taxingauthorities. Tax assessments may arise several years after tax returns havebeen filed. The Company believes that its recorded tax liabilities adequatelyprovide for the probable outcome of these assessments.

Deferred tax assets arealso recorded for operating losses and tax credit carryforwards. However, FAS No. 109 requires that a valuationallowance be recorded when it is more likely than not that some portion or allof the deferred tax assets will not be realized.  This assessment is largely dependent uponprojected near-term profitability including the effects of tax planning.  Deferred tax assets and liabilities are determinedseparately for each tax jurisdiction in which the Company conducts itsoperations or otherwise incurs taxable income or losses.  In the United States, the Company hasrecorded significant deferred tax assets, the largest of which relate to netoperating losses, capital losses, tax credits and the accrued liability for OIInc.’s asbestos-related costs that are not deductible until paid.  The deferred tax assets are partially offsetby deferred tax liabilities, the most significant of which relate to theprepaid pension asset and accelerated depreciation.  The Company has recorded a valuationallowance for the portion of U.S. deferred tax assets not offset by deferredtax liabilities.  Under the newaccounting standard for recognition of the funded status of postretirementbenefit plans (as described above under *PensionBenefit Plans*), in 2006 the Company was required to write off asignificant portion of its prepaid pension asset, principally related to theU.S. pension plans, and increase recorded liabilities for other U.S.plans.  The related deferred taxliabilities and assets were also adjusted. As a result, in 2006 the Company was required to record an additionalvaluation allowance of $197.5 million.

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## **ITEM7A.               QUALITATIVEAND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK**

Market risksrelating to the Company's operations result primarily from fluctuations inforeign currency exchange rates, changes in interest rates, and changes incommodity prices, principally energy. The Company uses certain derivative instruments to mitigate a portion ofthe risk associated with changing foreign currency exchange rates andfluctuating energy prices.  Inaddition, the Company uses interest rate swap agreements to manage a portion offixed and floating rate debt and to reduce interest expense.  These instruments carry varying degrees ofcounterparty credit risk.  To mitigatethis risk, the Company has established limits on the exposure with individualcounterparties and the Company regularly monitors these exposures.  Substantially all of these exposures are withcounterparties that are rated single-A or above.

***Foreign Currency Exchange Rate Risk***

*Earnings of operations outside the United States*

A substantialportion of the Company's operations are conducted by subsidiaries outside theU.S.  The primary international marketsserved by the Company's subsidiaries are in Canada, Australia, South America(principally Colombia, Brazil and Venezuela), and Europe (principally Italy,France, the Netherlands, Germany, the United Kingdom, and Poland).  In general, revenues earned and costsincurred by the Company's major international operations are denominated intheir respective local currencies.  Consequently,the Company's reported financial results could be affected by factors such aschanges in foreign currency exchange rates or highly inflationary economicconditions in the international markets in which the Company's subsidiariesoperate.  When the U.S. dollar strength­ensagainst foreign curren­cies, the reported dollar value of local currencyearnings generally decreases; when the U.S. dollar weakens against foreigncurrencies, the reported U.S. dollar value of local currency earnings generallyincreases.  The Company does not have anysignificant foreign subsidiaries that are denominated in the U.S. dollar,however, if economic conditions in Venezuela were to decline, the Company maybe required to adopt the U.S. dollar as the functional currency for itssubsidiaries in that country.  TheCompany does not hedge the foreign currency exchange rate risk related toearnings of operations outside the United States.

*Borrowingsnot denominated in the functional currency*

Because theCompany'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 Company to reported losses orgains in the event the foreign currency strengthens or weakens against the U.S.dollar.

Availableexcess funds of a subsidiary may be redeployed throughintercompany loans to other subsidiaries for debt repayment, capitalinvestment, or other cash requirements. Generally, each intercompany loan is denominated in the lender’s localcurrency giving rise to foreign currency exchange rate risk for theborrower.  To mitigate this risk, thelender generally enters into a forward exchange contract which effectivelyswaps the intercompany loan and related interest to its local currency.  

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Certain of the Company’ssubsidiaries in the United States and Europe have entered into short termforward exchange contracts which effectively swap intercompany loans to othersubsidiaries that are denominated in the functional currency of theborrowers.  These contracts swap theprincipal amount of loans and in some cases they swap the related interest.

The Company believes thenear term exposure to foreign currency exchange rate risk of its foreigncurrency risk sensitive instruments was not material at December 31, 2006 and2005.

***Interest Rate Risk***

The Company’sinterest expense is most sensitive to changes in the general level of U.S.interest rates applicable to its U.S. dollar indebtedness.  

The Company has enteredinto a series of interest rate swap agreements with a total notional amount of$1.25 billion that mature from 2007 through 2013.  The swaps were executed in order to:(i) convert a portion of the senior notes and senior debentures fixed-ratedebt into floating-rate debt; (ii) maintain a capital structure containingappropriate amounts of fixed and floating-rate debt; and (iii) reduce netinterest payments and expense in the near-term.

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

The followingtable provides information about the Company’s interest rate sensitivityrelated to its significant debt obligations and interest rate swaps at December31, 2006.  For debt obligations, thetable presents principal cash flows and related weighted-average interest ratesby expected maturity date.  For interestrate swaps, the table presents notional amounts and weighted-average interestrates by contract maturity date. Notional amounts are used to calculate the contractual cash flows to beexchanged under the swap contracts.

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|                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Fair**          | ** ** |
|----------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|-------------------|------------|
| ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **There-** | ** ** | ** ** | ** ** | **Value at** | ** ** |
| **(dollars in millions)**                | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009**   | ** ** | **2010**   | ** ** | **2011**   | ** ** | **after**  | ** ** | **Total**  | ** ** | **12/31/2006**    | ** ** |
| Long-term debt  at variable rate:                  |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |              |       |
| Principal by expected maturity                     |       | $          | 26.2       |       | $          | 14.4       |       | $          | 34.0       |       | $          | 60.6       |       | $          | 171.1      |              | $          | 644.7 |   | $ | 951.0 |   | $ | 951.0 |   |
| Avg. principal outstanding                         |       | $          | 898.3      |       | $          | 845.5      |       | $          | 828.5      |       | $          | 797.0      |       | $          | 688.4      |              | $          | 605.9 |   |   |   |   |   |
| Avg. interest rate                                 |       | 6.60       | %          | 6.60       | %          | 6.52       | %          | 6.52       | %          | 6.52       | %          | 6.52       | %          |       |       |              |       |
|                                               |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |              |       |
| Long-term debt  at fixed rate:                     |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |              |       |
| Principal by expected maturity                     |       | $          | 300.0      |       | $          | 250.0      |       | $          | 850.0      |       | $          | 250.0      |       | $          | 450.0      |              | $          | 2,021.2 |   | $ | 4,121.2 |   | $ | 4,209.9 |   |
| Avg. principal outstanding                         |       | $          | 3,933.7    |       | $          | 3,665.0    |       | $          | 2,827.5    |       | $          | 2,565.0    |       | $          | 2,190.0    |              | $          | 2,021.2 |   |   |   |   |   |
| Avg. interest rate                                 |       | 8.00       | %          | 8.03       | %          | 7.83       | %          | 7.81       | %          | 7.83       | %          | 7.83       | %          |       |       |              |       |
|                                               |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |              |       |
| Interest rate  swaps (pay variable/receive fixed): |       |       |       |       |       |       |       |       |       |       |       |       |       |       |       |              |       |
|                                               |
| Notional by expected maturity                      |       | $          | 300.0      |       | $          | 250.0      |       |       |       | $          | 250.0      |       |       |       | $          | 250.0             |       | $ | 1,050.0 |   | $ | 21.1 |   |
| Avg. notional outstanding                          |       | $          | 862.5      |       | $          | 593.8      |       | $          | 500.0      |       | $          | 343.8      |       | $          | 250.0      |              | $          | 250.0 |   |   |   |   |   |
| Avg. pay rate margin over U.S. LIBOR               |       | 3.60       | %          | 3.46       | %          | 3.45       | %          | 3.56       | %          | 3.70       | %          | 3.70       | %          |       |       |              |       |
| Avg. fixed  receive rate                           |       | 7.75       | %          | 7.79       | %          | 7.88       | %          | 8.05       | %          | 8.25       | %          | 8.25       | %          |       |       |              |       |

 

The Company believes thenear term exposure to interest rate risk of its debt obligations and interestrate swaps has not changed materially since December 31, 2005.

***Commodity Price Risk***

The Company hasexposure to commodity price risk, principally related to energy.  The Company believes it can mitigate aportion 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:

·                  AtDecember 31, 2006, the Company had entered into commodity futures contracts forapproximately 57% (approximately 13,450,000 MM BTUs) of its expected NorthAmerican natural gas usage for full year of 2007 and approximately 9%(approximately 2,160,000 MM BTUs) for the full year of 2008.  

The Companybelieves the near term exposure to commodity price risk of its commodityfutures contracts was not material at December 31, 2006 and 2005.

***Forward Looking Statements***

This document contains "forward looking"statements within the meaning of Section 21E of the Securities Exchange Act of1934 and Section 27A of the Securities Act of 1933. Forward-looking statementsreflect the Company's current expectations and projections about future eventsat the time, and thus involve

46

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uncertainty and risk. It is possible the Company'sfuture financial performance may differ from expectations due to a variety offactors including, but not limited to the following: (1) foreign currencyfluctuations relative to the U.S. dollar, (2) changes in capital availabilityor cost, including interest rate fluctuations, (3) the general political,economic and competitive conditions in markets and countries where the Companyhas its operations, including disruptions in the supply chain, competitivepricing pressures, inflation or deflation, and changes in tax rates and laws,(4) consumer preferences for alternative forms of packaging, (5) fluctuationsin raw material and labor costs, (6) availability of raw materials, (7) costsand availability of energy, (8) transportation costs, (9) the ability of theCompany to raise selling prices commensurate with energy and other costincreases, (10) consolidation among competitors and customers, (11) the abilityof the Company to integrate operations of acquired businesses and achieveexpected 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.

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**ITEM 8.           FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**
|                                                            | ** ** | ** ** |
|------------------------------------------------------------|------------|------------|
|                                                       |       |       |
| Report  of Independent Registered Public Accounting Firm   |       |       |
|                                                       |       |       |
| Consolidated Balance Sheets at December 31, 2006 and  2005 |       |       |
|                                                       |       |       |
| For the years  ended December 31, 2006, 2005, and 2004:    |       |       |
|                                                       |       |       |
| Consolidated Results of Operations                         |       |       |
| Consolidated Share Owners' Equity                          |       |       |
| Consolidated  Cash Flows                                   |       |       |
|                                                       |       |       |
| Notes to Consolidated Financial Statements                 |       |       |
|                                                       |       |       |
| Selected Quarterly Financial Data                          |       |       |

 

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directorsand Share Owner of

Owens-IllinoisGroup, Inc.

We have audited the accompanying consolidated balancesheets of Owens-Illinois Group, Inc. and subsidiaries as of December 31, 2006and 2005, 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, 2006.  Our audits alsoincluded the financial statement schedule listed in the Index at Item 15.  These financial statements and schedule arethe responsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements and schedule based on our audits.

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in thefinancial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Owens-Illinois Group,Inc. and subsidiaries at December 31, 2006 and 2005, and the consolidatedresults of its operations and its cash flows for each of the three years in theperiod ended December 31, 2006, in conformity with U.S. generally acceptedaccounting principles.  Also, in ouropinion, the related financial statement schedule, when considered in relationto the basic financial statements taken as a whole, presents fairly in allmaterial respects the information set forth therein.

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of Owens-IllinoisGroup, Inc.’s internal control over financial reporting as of December 31,2006, based on criteria established in Internal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated March 1, 2007 expressed an unqualified opinion thereon.

Asdiscussed in Notes 1, 12 and 13 to the consolidated financial statements, theCompany changed its method of accounting for stock-based compensation, definedbenefit pension plans and other postretirement plans, respectively, in 2006.
|               |   | Ernst & Young LLP |
|---------------|--------|-----------------------|
|          |   |                  |
|          |   |                  |
| Toledo, Ohio  |   |                  |
| March 1, 2007 |   |                  |

 

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**CONSOLIDATED RESULTS OFOPERATIONS**Owens-IllinoisGroup, Inc.

Dollars in millions
| **Years ended December 31,**                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Revenues:                                                      |       |     |       |     |       |     |       |
| Net sales                                                      |       | $        | 7,422.0    |     | $          | 7,079.0  |       | $ | 6,128.4 |   |
| Royalties and  net technical assistance                        |       | 17.8     |       | 16.9     |       | 21.1     |       |
| Equity earnings                                                |       | 25.7     |       | 22.6     |       | 27.8     |       |
| Interest                                                       |       | 19.5     |       | 16.6     |       | 15.3     |       |
| Other                                                          |       | 38.5     |       | 54.6     |       | 70.8     |       |
|                                                           |       | 7,523.5  |       | 7,189.7  |       | 6,263.4  |       |
| Costs and expenses:                                            |       |     |       |     |       |     |       |
| Manufacturing,  shipping, and delivery                         |       | 6,084.0  |       | 5,719.5  |       | 4,918.4  |       |
| Research and  development                                      |       | 32.2     |       | 29.8     |       | 25.4     |       |
| Engineering                                                    |       | 31.6     |       | 35.6     |       | 33.6     |       |
| Selling and  administrative                                    |       | 564.8    |       | 488.1    |       | 402.3    |       |
| Interest                                                       |       | 488.2    |       | 466.7    |       | 474.9    |       |
| Other                                                          |       | 60.1     |       | 533.6    |       | 45.9     |       |
|                                                           |       | 7,260.9  |       | 7,273.3  |       | 5,900.5  |       |
| Earnings (loss) from  continuing operations before items below |       | 262.6    |       | (83.6    | )          | 362.9    |       |
| Provision for income  taxes                                    |       | 126.5    |       | 416.1    |       | 73.6     |       |
|                                                           |       | 136.1    |       | (499.7   | )          | 289.3    |       |
| Minority share owners'  interests in earnings of subsidiaries  |       | 43.6     |       | 35.9     |       | 32.9     |       |
| Earnings (loss) from  continuing operations                    |       | 92.5     |       | (535.6   | )          | 256.4    |       |
| Net earnings (loss) of  discontinued operations                |       |     |       | 63.0     |       | 64.0     |       |
| Net (loss) earnings                                            |       | $        | 92.5       |     | $          | (472.6   | )          | $ | 320.4 |   |

 

See accompanying Notes tothe Consolidated Financial Statements.

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**CONSOLIDATEDBALANCE SHEETS**Owens-IllinoisGroup, Inc.

Millions ofdollars
| **December 31,**                                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Assets**                                                                      |       |     |       |     |       |
| **Current assets:**                                                             |       |     |       |     |       |
| Cash, including  time deposits of $124.5 ($117.0 in 2005)                       |       | $        | 222.7      |     | $          | 246.6 |   |
| Short-term  investments                                                         |       | 32.7     |       | 51.9     |       |
| Receivables,  less allowances of $52.4 ($47.4 in 2005) for losses and discounts |       | 1,097.8  |       | 1,006.2  |       |
| Inventories                                                                     |       | 1,039.0  |       | 940.4    |       |
| Prepaid expenses                                                                |       | 40.5     |       | 37.2     |       |
| Total current  assets                                                           |       | 2,432.7  |       | 2,282.3  |       |
| **Other assets:**                                                               |       |     |       |     |       |
| Equity  investments                                                             |       | 108.7    |       | 114.9    |       |
| Repair parts  inventories                                                       |       | 143.0    |       | 170.3    |       |
| Prepaid pension                                                                 |       | 488.5    |       | 988.1    |       |
| Deposits,  receivables, and other assets                                        |       | 489.4    |       | 443.3    |       |
| Goodwill                                                                        |       | 2,464.7  |       | 2,369.2  |       |
| Total other  assets                                                             |       | 3,694.3  |       | 4,085.8  |       |
| **Property, plant, and equipment:**                                             |       |     |       |     |       |
| Land, at cost                                                                   |       | 253.4    |       | 240.0    |       |
| Buildings and  equipment, at cost:                                              |       |     |       |     |       |
| Buildings and  building equipment                                               |       | 1,116.7  |       | 1,045.3  |       |
| Factory machinery  and equipment                                                |       | 4,912.1  |       | 4,620.4  |       |
| Transportation,  office, and miscellaneous equipment                            |       | 124.1    |       | 123.6    |       |
| Construction in  progress                                                       |       | 146.3    |       | 116.7    |       |
|                                                                            |       | 6,552.6  |       | 6,146.0  |       |
| Less accumulated  depreciation                                                  |       | 3,358.9  |       | 2,993.5  |       |
| Net property,  plant, and equipment                                             |       | 3,193.7  |       | 3,152.5  |       |
| Total assets                                                                    |       | $        | 9,320.7    |     | $          | 9,520.6 |   |

 

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Millions of dollars

 
| **December 31,**                                                                               | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Liabilities  and Share Owner's Equity Current liabilities:**                                      |       |     |       |     |       |
| Short-term loans                                                                                    |       | $        | 412.8      |     | $          | 26.3 |   |
| Accounts payable                                                                                    |       | 940.0    |       | 843.0    |       |
| Salaries and wages                                                                                  |       | 149.0    |       | 153.0    |       |
| U.S. and foreign income taxes                                                                       |       | 61.5     |       | 32.6     |       |
| Other accrued liabilities                                                                           |       | 329.0    |       | 357.0    |       |
| Long-term debt due within one year                                                                  |       | 324.4    |       | 252.0    |       |
| Total current liabilities                                                                           |       | 2,216.7  |       | 1,663.9  |       |
| **Long-term  debt**                                                                                 |       | 4,726.7  |       | 5,022.0  |       |
| **Deferred  taxes**                                                                                 |       | 112.2    |       | 441.1    |       |
| **Pension  benefits**                                                                               |       | 335.0    |       | 311.4    |       |
| **Nonpension  postretirement benefits**                                                             |       | 293.1    |       | 277.1    |       |
| **Other  liabilities**                                                                              |       | 385.9    |       | 425.9    |       |
| **Commitments  and contingencies**                                                                  |       |     |       |     |       |
| **Minority  share owners' interests**                                                               |       | 206.8    |       | 181.5    |       |
| **Share  owner's equity:**                                                                          |       |     |       |     |       |
| Common stock, par value $.01 per share, 1,000 shares  authorized, 100 shares issued and outstanding |       | —   |       | —   |       |
| Other contributed capital                                                                           |       | 1,384.7  |       | 1,272.3  |       |
| Retained earnings                                                                                   |       | 253.8    |       | 161.3    |       |
| Accumulated other comprehensive income (loss)                                                       |       | (594.2   | )          | (235.9   | )          |
| Total share owner's equity                                                                          |       | 1,044.3  |       | 1,197.7  |       |
| Total liabilities and  share owner's equity                                                         |       | $        | 9,320.7    |     | $          | 9,520.6 |   |

 

See accompanying Notes tothe Consolidated Financial Statements.

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

Millions ofdollars
| **Years ended December 31,**                          | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|----------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                                 |       |       |       |       |       |       |       |
| **Other  contributed capital**                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance at beginning of year                                         |       | $          | 1,272.3    |       | $          | 1,360.5    |       | $ | 1,451.7 |   |
| Net distribution to Parent                                           |       | 112.4      |       | (88.2      | )          | (91.2      | )          |
| Balance at end of year                                               |       | 1,384.7    |       | 1,272.3    |       | 1,360.5    |       |
|                                                                 |       |       |       |       |       |       |       |
| **Retained  earnings**                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance at beginning of year                                         |       | 161.3      |       | 633.9      |       | 313.5      |       |
| Net earnings (loss)                                                  |       | 92.5       |       | (472.6     | )          | 320.4      |       |
| Balance at end of year                                               |       | 253.8      |       | 161.3      |       | 633.9      |       |
|                                                                 |       |       |       |       |       |       |       |
| **Accumulated  other comprehensive income (loss)**                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance at beginning of year                                         |       | (235.9     | )          | 45.7       |       | (243.1     | )          |
| Foreign currency translation adjustments                             |       | 268.0      |       | (288.9     | )          | 317.4      |       |
| Change in minimum pension liability, net of tax                      |       | 40.2       |       | (7.2       | )          | (27.5      | )          |
| Adjustment to initially apply FAS No. 158, net of  tax               |       | (617.2     | )          |       |       |       |       |
| Change in fair value of certain derivative  instruments, net  of tax |       | (49.3      | )          | 14.5       |       | (1.1       | )          |
| Balance at end of year                                               |       | (594.2     | )          | (235.9     | )          | 45.7       |       |
|                                                                 |       |       |       |       |       |       |       |
| Total share  owner’s equity                                     |       | $          | 1,044.3    |       | $          | 1,197.7    |       | $ | 2,040.1 |   |
|                                                                 |       |       |       |       |       |       |       |
| **Total  comprehensive income (loss)**                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net earnings (loss)                                                  |       | $          | 92.5       |       | $          | (472.6     | )          | $ | 320.4 |   |
| Foreign currency translation adjustments                             |       | 268.0      |       | (288.9     | )          | 317.4      |       |
| Change in minimum pension liability, net of tax                      |       | 40.2       |       | (7.2       | )          | (27.5      | )          |
| Change in fair value of certain derivative  instruments, net  of tax |       | (49.3      | )          | 14.5       |       | (1.1       | )          |
| Total                                                                |       | $          | 351.4      |       | $          | (754.2     | )          | $ | 609.2 |   |

 

Seeaccompanying Notes to the Consolidated Financial Statements.

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

Dollars in millions
| **Years ended December 31,**                                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Operating  activities:**                                                                   |       |     |       |     |       |     |       |
| Net earnings (loss)                                                                          |       | $        | 92.5       |     | $          | (472.6   | )          | $ | 320.4 |   |
| Net earnings of discontinued operations                                                      |       |     |       | (63.0    | )          | (64.0    | )          |
| Non-cash charges (credits):                                                                  |       |     |       |     |       |     |       |
| Depreciation                                                                                 |       | 469.0    |       | 480.2    |       | 436.0    |       |
| Amortization of deferred costs                                                               |       | 27.3     |       | 27.8     |       | 23.8     |       |
| Amortization of deferred finance fees                                                        |       | 12.9     |       | 16.0     |       | 15.0     |       |
| Deferred tax provision (credit)                                                              |       | 10.8     |       | (26.0    | )          | (39.9    | )          |
| 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                                                        |       |     |       | 306.6    |       |     |       |
| Gains on asset sales                                                                         |       |     |       | (28.1    | )          | (51.6    | )          |
| Mark to market effect of natural gas hedge contracts                                         |       | 8.7      |       | (3.8     | )          | (4.9     | )          |
| Restructuring costs and writeoffs of certain assets                                          |       | 29.7     |       |     |       |     |       |
| Other                                                                                        |       | (0.5     | )          | 21.8     |       | (62.0    | )          |
| Change in non-current operating assets                                                       |       | (27.1    | )          | (29.0    | )          | (9.8     | )          |
| Reduction of non-current liabilities                                                         |       | (58.1    | )          | (69.5    | )          | (25.6    | )          |
| Change in components of working capital                                                      |       | (252.8   | )          | (32.4    | )          | 180.9    |       |
| Cash provided by continuing operating activities                                             |       | 311.6    |       | 622.0    |       | 718.3    |       |
| Cash provided by discontinued operating activities                                           |       |     |       |     |       | 65.2     |       |
| Total cash provided by operating activities                                                  |       | 311.6    |       | 622.0    |       | 783.5    |       |
| **Investing  activities:**                                                                   |       |     |       |     |       |     |       |
| Additions to property, plant and equipment -  continuing                                     |       | (320.3   | )          | (404.1   | )          | (436.7   | )          |
| Additions to property, plant and equipment -  discontinued                                   |       |     |       |     |       | (25.1    | )          |
| Acquisitions, net of cash acquired                                                           |       |     |       | (11.6    | )          | (630.3   | )          |
| Collections on receivables arising from consolidation  of receivables securitization program |       | 127.3    |       | 50.7     |       |     |       |
| Net cash proceeds from divestitures and other                                                |       | 15.1     |       | 167.0    |       | 1,430.9  |       |
| Cash provided by (utilized in) investing activities                                          |       | (177.9   | )          | (198.0   | )          | 338.8    |       |
| **Financing  activities:**                                                                   |       |     |       |     |       |     |       |
| Additions to long-term debt                                                                  |       | 1,206.5  |       | 555.1    |       | 2,125.1  |       |
| Repayments of long-term debt                                                                 |       | (1,341.8 | )          | (627.9   | )          | (2,611.3 | )          |
| Net change in payable to parent                                                              |       |     |       | (112.4   | )          | (274.1   | )          |
| Distribution to parent                                                                       |       | (174.8   | )          | (169.4   | )          | (167.7   | )          |
| Increase (decrease) in short-term loans                                                      |       | 158.9    |       | 11.6     |       | (23.2    | )          |
| Net payments for hedging activity                                                            |       | (6.8     | )          | (98.0    | )          | (25.9    | )          |
| Payment of finance fees and debt retirement costs                                            |       | (12.3    | )          | (1.0     | )          | (34.4    | )          |
| Cash utilized in financing activities                                                        |       | (170.3   | )          | (442.0   | )          | (1,011.5 | )          |
| Effect of exchange rate fluctuations on cash                                                 |       | 12.7     |       | (13.3    | )          | 3.7      |       |
| Increase  (decrease) in cash                                                                 |       | (23.9    | )          | (31.3    | )          | 114.5    |       |
| Cash at  beginning of year                                                                   |       | 246.6    |       | 277.9    |       | 163.4    |       |
| Cash at end of year                                                                          |       | $        | 222.7      |     | $          | 246.6    |       | $ | 277.9 |   |

 

See accompanying Notes tothe Consolidated Financial Statements.

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Owens-Illinois Group,Inc.

NOTESTO CONSOLIDATED FINANCIAL STATMENT

Tabulardata dollars in millions

**1.  Significant Accounting Policies**

**Basis ofConsolidated Statements**  The consolidated financial statements ofOwens-Illinois Group, Inc. (“Company”) include the accounts of itssubsidiaries.  Newly acquiredsubsidiaries have been included in the consolidated financial statements fromdates of acquisition. Results of operations for the blow-molded plasticcontainer business divested in 2004 have been presented as a discontinuedoperation. 

Certain amounts includedin the Consolidated Statement of Cash Flows for the year ended December 31,2005 have been reclassified to conform to the 2006 presentation.  These amounts, which relate to receipts fromcustomers in payment of the accounts receivable in the European accountsreceivable securitization program at the date of its consolidation, have beenreclassified from operating activities to investing activities.  See Note 5 for additional information.  While this reclassification had no effect ontotal cash flows, cash provided by operations and cash utilized in investingactivities both decreased by $50.7 million. Net earnings and share owners’ equity were not affected by thisreclassification.

The Company uses the equitymethod of accounting for investments in which it has a significant ownershipinterest, generally 20% to 50%.  Otherinvestments are accounted for at cost.

**Relationship with Owens-Illinois, Inc.**   TheCompany is a wholly-owned subsidiary of Owens-Illinois, Inc. (“OIInc.”).  Although OI Inc. does notconduct any operations, it has substantial obligations related to outstandingindebtedness, dividends for preferred stock and asbestos-relatedpayments. OI Inc. relies primarily on distributions from its direct andindirect subsidiaries to meet these obligations. 

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

**Natureof Operations**  TheCompany is a leading manufacturer of glass container and plastics packagingproducts operating in two product segments. The Company’s principal product lines in the Glass Containers productsegment are glass containers for the food and beverage industries.  Sales of the Glass Containers product segmentwere 90% of the Company’s 2006 consolidated sales.  The Company has glass container operationslocated in 21 countries, while the plastics packaging products operations arelocated in 5 countries.  The principalmarkets and operations for the Company’s glass products are in North America,Europe, South America, and Australia. The Company’s principal product lines in the Plastics Packaging productsegment include healthcare containers, closures and prescriptioncontainers.  Major markets for theCompany’s plastics packaging products include the United States health caremarket.

**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. 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 timedeposits with maturities of three months or less when purchased.  Outstanding checks in excess of funds ondeposit are included in accounts payable.

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**Fair Valuesof 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 frequently redeterminedinterest rates.  Fair values for theCompany’s significant fixed rate debt obligations are generally based onpublished market quotations.  

**DerivativeInstruments**  The Company uses currency swaps,interest rate swaps, options, and commodity futures contracts to manage risksgenerally associated with foreign exchange rate, interest rate and commoditymarket volatility.  Derivative financialinstruments are included on the balance sheet at fair value.  Whenever possible, derivative instruments aredesignated as and are effective as hedges, in accordance with accountingprinciples 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 value hedgesof debt and short-term forward exchange contracts are classified as a financingactivity.  Cash flows of currency swaps,interest rate swaps, and commodity futures contracts are classified asoperating activities. See Note 9 for additional information related to derivativeinstruments.

**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 representsthe excess of cost over fair value of assets of businesses acquired.  Goodwill is evaluated annually, as of October1, 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.  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 usingthe straight-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 molding machines)depreciated over 7-15 years.  Buildingsand building equipment are depreciated over periods ranging from 10 to 50years.  Maintenance and repairs areexpensed 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.  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**  In general, the Company plans to continue toreinvest the undistributed earnings of foreign subsidiaries and foreign corporatejoint ventures accounted for by the equity method.  Accordingly, taxes are provided only on thatamount of undistributed earnings in excess of planned reinvestments.

56

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

**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.

**NewAccounting Standards  **InJuly 2006, the Financial Accounting Standards Board issued Interpretation No.48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes”.  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 for IncomeTaxes”.  FIN 48 defines criteria that anindividual tax position must meet for any part of the benefit of that positionto be recognized in an enterprise’s financial statements and also includesrequirements for measuring the amount of the benefit to be recognized in thefinancial statements.  FIN 48 iseffective for fiscal years beginning after December 15, 2006, therefore theCompany will adopt its provisions effective as of January 1, 2007.  The Company has not yet determined the impactof adopting FIN 48.

In September 2006, theFinancial Accounting Standards Board issued Statement of Financial Accounting StandardsNo. 157 (“FAS No. 157”), “Fair Value Measurements”.  FAS No. 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles,and expands disclosures about fair value measurements.  FAS No. 157 applies under other accountingpronouncements that require or permit fair value measurements.  The statement does not require any new fairvalue measurements.  The statement is effectivefor fiscal years beginning after November 15, 2007.   Adoption of FAS No. 157 is not expected tohave a material impact on the Company’s results of operations or financialposition.

In February 2007, theFinancial Accounting Standards Board issued Statement of Financial AccountingStandards No. 159 (“FAS No. 159”), “Fair Value Option for Financial Assets andFinancial Liabilities — Including an amendment of FASB Statement No. 115”.  FAS No. 159 permits entities to choose tomeasure many financial instruments and certain other items at fair value.  The statement is effective for fiscal yearsbeginning after November 15, 2007.  Adoption of FAS No. 159 is not expected to have a material impact on theCompany’s results of operations or financial position.

**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," which requires that the cost resulting from all share-basedpayment transactions be recognized in the financial statements.  The statement requires a public entity tomeasure the cost of employee services received in exchange for an award ofequity instruments based on the grant-date fair value of the award.  That cost is recognized over the requiredservice period (usually the vesting period). No compensation cost is recognized for equity instruments for whichemployees do not render the required service. 

57

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The Company adopted theprovisions of FAS No. 123R effective January 1, 2006 using themodified-prospective method of adoption, which requires recognition ofcompensation cost in the financial statements beginning on the date ofadoption.  As a result of adoption,pretax earnings for 2006 were reduced by $10.2 million ($9.7 million after tax)for additional compensation expense related to stock options.  The additional compensation expense included$1.0 million for accelerated vesting of options held by the former CEO at thetime of his separation in November 2006 and $1.9 million for fully vestedoptions granted to the new CEO in December 2006.  The adoption of FAS No. 123R had no effect oncash flows.

Prior to the adoption ofFAS No.123R, the Company accounted for stock options under the disclosure-onlyprovisions (intrinsic value method) of FAS No. 123, “Accounting for Stock-BasedCompensation.”  If the Company had elected to recognize compensation costbased on the fair value of the options granted at grant date as allowed by FASNo. 123, pro forma net earnings and earning per share would have been asfollows for the period indicated: 
|                                                                                                                                                                                        | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net earnings  (loss):                                                                                                                                                                  |       |     |       |     |       |
| As reported                                                                                                                                                                            |       | $        | (472.6     | )        | $          | 320.4 |   |
| Compensation cost determined under fair value based  method for stock option awards, net of $4.3 million and $4.2 million of  related tax effects for the 2005 and 2004, respectively. |       | (7.0     | )          | (6.8     | )          |
| Additional valuation allowance on deferred tax  assets                                                                                                                                 |       | (4.3     | )          |     |       |
| Pro forma                                                                                                                                                                              |       | $        | (483.9     | )        | $          | 313.6 |   |

 

The fair value of each option grant is estimated onthe date of grant using the Black-Scholes option pricing model with thefollowing assumptions:
| ** **                                          | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Range of  expected lives of options (years)         |       | 3.50-4.75  |       | 4.75-5.00  |       | 5.00       |       |
| Range of  expected stock price volatilities         |       | 32.7%-50.5 | %          | 50.0%-74.1 | %          | 72.3%-74.0 | %          |
| Weighted average  expected stock price volatilities |       | 44.9       | %          | 73.9       | %          | 73.9       | %          |
| Range of  risk-free interest rates                  |       | 4.1%-5.1   | %          | 4.2%-4.3   | %          | 2.7%-3.7   | %          |
| Expected dividend yield                             |       | 0.0        | %          | 0.0        | %          | 0.0        | %          |

 

The expected life of options is based on the assumptionthat, on average, options will be exercised at the mid-point between thevesting date and the expiration date. The expected stock price volatility is determined by reference tohistorical prices over a period equal to the expected life.

The fair value of other equity awards, consisting ofrestricted shares and performance vested restricted share units, is equal tothe quoted market value at the time of grant.

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**2.  Changes in Components of Working CapitalRelated to Operations  **Changesin the components of working capital related to operations (net of the effectsrelated to acquisitions and divestitures) were as follows (the 2005 receivablesamount has been adjusted to conform to the 2006 presentation in relation to theEuropean accounts receivable securitization program):
| ** **                                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Decrease  (increase) in current assets:      |       |     |       |     |       |     |       |
| Short-term investments                       |       | $        | 22.5       |     | $          | (23.7    | )          | $ | (0.6 | ) |
| Receivables                                  |       | (162.8   | )          | (75.2    | )          | 61.5     |       |
| Inventories                                  |       | (31.2    | )          | 73.0     |       | 106.7    |       |
| Prepaid expenses                             |       | (2.6     | )          | (4.0     | )          | 36.4     |       |
| Increase  (decrease) in current liabilities: |       |     |       |     |       |     |       |
| Accounts payable                             |       | 51.9     |       | 47.8     |       | 75.3     |       |
| Accrued liabilities                          |       | (82.1    | )          | (18.4    | )          | (107.7   | )          |
| Salaries and wages                           |       | (24.4    | )          | (7.5     | )          | 9.9      |       |
| U.S. and foreign income taxes                |       | (24.1    | )          | (24.4    | )          | (36.5    | )          |
|                                         |       | $        | (252.8     | )        | $          | (32.4    | )          | $ | 145.0 |   |
| Continuing  operations                       |       | (252.8   | )          | (32.4    | )          | 180.9    |       |
| Discontinued  operations                     |       |     |       |     |       | (35.9    | )          |
|                                         |       | $        | (252.8     | )        | $          | (32.4    | )          | $ | 145.0 |   |

 

**3. Inventories**  Major classes of inventory are as follows:
| ** **          | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
| Finished goods      |       | $        | 857.8      |     | $          | 779.6 |   |
| Work in process     |       | 7.7      |       | 3.5      |       |
| Raw materials       |       | 104.6    |       | 91.1     |       |
| Operating  supplies |       | 68.9     |       | 66.2     |       |
|                |       | $        | 1,039.0    |     | $          | 940.4 |   |

 

If the inventories which are valued on the LIFO methodhad been valued at standard costs, which approximate current costs,consolidated inventories would be higher than reported by $34.4 million and$40.6 million at December 31, 2006 and 2005, respectively.

Inventories which are valued at the lower of standardcosts (which approximate average costs) or market at December 31, 2006 and 2005were approximately $861.9 million and $780.3 million, respectively.

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**4. Equity Investments  **Summarizedinformation pertaining to the Company’s equity associates follows:
| ** **          | ** ** | **2006** | ** ** | **2005** | ** ** | ** ** | ** ** |
|---------------------|------------|----------|------------|----------|------------|------------|------------|
| For the year:       |       |     |       |     |       |       |       |
| Equity in earnings: |       |     |       |     |       |       |       |
| Foreign             |       | $        | 29.2       |     | $          | 27.6       |       |   |   |
| Domestic            |       | 15.9     |       | 17.6     |       |       |       |
| Total               |       | $        | 45.1       |     | $          | 45.2       |       |   |   |

 
| ** **          | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------|------------|----------|------------|----------|------------|----------|------------|
| For the year:       |       |     |       |     |       |     |       |
| Equity in earnings: |       |     |       |     |       |     |       |
| Foreign             |       | $        | 4.3        |     | $          | 9.0      |       | $ | 17.8 |   |
| Domestic            |       | 21.4     |       | 13.6     |       | 10.0     |       |
| Total               |       | $        | 25.7       |     | $          | 22.6     |       | $ | 27.8 |   |
|                |       |     |       |     |       |     |       |
| Dividends received  |       | $        | 45.0       |     | $          | 11.0     |       | $ | 12.8 |   |

 

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**5. Long-Term Debt**  The following table summarizes the long-termdebt of the Company at December 31, 2006 and 2005:
| ** **                                                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Secured Credit  Agreement:                                                           |       |     |       |     |       |
| Revolving Credit Facility:                                                           |       |     |       |     |       |
| Revolving Loans                                                                      |       | $        | 45.2       |     | $          | — |   |
| Term Loans:                                                                          |       |     |       |     |       |
| Term Loan A (292.5 million AUD)                                                      |       | 231.5    |       |     |       |
| Term Loan B                                                                          |       | 195.5    |       |     |       |
| Term Loan C (134.6 million CAD)                                                      |       | 115.9    |       |     |       |
| Term Loan D (€195.5 million)                                                    |       | 257.4    |       |     |       |
| Third Amended  and Restated Secured Credit Agreement:                                |       |     |       |     |       |
| Revolving Credit Facility:                                                           |       |     |       |     |       |
| Revolving Loans                                                                      |       |     |       |     |       |
| Term Loans:                                                                          |       |     |       |     |       |
| A1 Term Loan                                                                         |       |     |       | 223.9    |       |
| B1 Term Loan                                                                         |       |     |       | 220.8    |       |
| C1 Term Loan                                                                         |       |     |       | 185.6    |       |
| C2 Term Loan                                                                         |       |     |       | 54.9     |       |
| Accounts  receivable securitization (included in short-term loans at Dec. 31, 2006): |       |     |       |     |       |
| European program                                                                     |       |     |       | 231.8    |       |
| Asia Pacific program                                                                 |       |     |       | 80.6     |       |
| Senior Secured  Notes:                                                               |       |     |       |     |       |
| 8.875%, due 2009                                                                     |       | 850.0    |       | 1,000.0  |       |
| 7.75%, due 2011                                                                      |       | 450.0    |       | 450.0    |       |
| 8.75%, due 2012                                                                      |       | 625.0    |       | 625.0    |       |
| Senior Notes:                                                                        |       |     |       |     |       |
| 8.25%, due 2013                                                                      |       | 440.8    |       | 436.6    |       |
| 6.75%, due 2014                                                                      |       | 400.0    |       | 400.0    |       |
| 6.75%, due 2014 (€225 million)                                                  |       | 296.2    |       | 267.0    |       |
| Senior  Subordinated Notes:                                                          |       |     |       |     |       |
| 9.25%, due 2009                                                                      |       |     |       | 0.5      |       |
| Payable to OI  Inc.                                                                  |       | 1,038.1  |       | 1,032.7  |       |
| Other                                                                                |       | 105.5    |       | 64.6     |       |
| Total long-term  debt                                                                |       | 5,051.1  |       | 5,274.0  |       |
| Less amounts due within one year                                                     |       | 324.4    |       | 252.0    |       |
| Long-term debt                                                                       |       | $        | 4,726.7    |     | $          | 5,022.0 |   |

 

OnJune 14, 2006, the Company’s subsidiary borrowers entered into the SecuredCredit Agreement (the “Agreement”). Proceeds from the Agreement were used to repay all outstanding amountsunder the previous credit agreement. At December 31, 2006, the Agreementincluded a $900.0 million revolving credit facility, a 292.5 million Australiandollar term loan, and a 134.6 million Canadian dollar term loan, each of whichhas a final maturity date of June 15, 2012. It also included a $195.5 millionterm loan and a €195.5 million term loan each of which have a final maturitydate of June 14, 2013. The Agreement also permits the Company, at its option,to refinance certain of its outstanding notes and debentures prior to their scheduledmaturity. The Company recorded $10.2 million of additional interest charges forthe write-off of unamortized finance fees related to the early repayment of theprevious credit agreement. 

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AtDecember 31, 2006 the Company’s subsidiary borrowers had unused credit of$765.6 million available under the Agreement.

Theinterest rate on borrowings under the Revolving Credit Facility is, at theCompany’s option, the Base Rate or the Adjusted Eurodollar rate.  The interest rate on borrowings under theRevolving Credit Facility also includes a margin linked to the Company’sConsolidated Leverage Ratio, as defined in the Agreement.  The margin is limited to ranges of 1.125% to2.0% for Eurodollar loans and 0.125% to 1.0% for Base Rate loans.  The weighted average interest rate onborrowings outstanding under the Agreement at December 31, 2006 was 6.52%.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%.

Borrowingsunder the Agreement are secured by substantially all of the assets of theCompany’s domestic subsidiaries and certain foreign subsidiaries, which have abook value of approximately $3.4 billion. Borrowings are also secured by a pledge of intercompany debt and equityin most of the Company’s domestic subsidiaries and stock of certain foreignsubsidiaries.  All borrowings under theagreement are guaranteed by substantially all domestic subsidiaries of theCompany for the term of the Agreement. 

The Agreement contains covenants and provisions that,among other things, restrict the ability of the Company and its subsidiaries todispose of assets, incur additional indebtedness, prepay other indebtedness oramend certain debt instruments, pay dividends, create liens on assets, enterinto contingent obligations, enter into sale and leaseback transactions, makeinvestments, loans or advances, make acquisitions, engage in mergers orconsolidations, 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, including minimum interest coverageratios, maximum leverage ratios and specified capital expenditure tests.

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

Amountspayable to OI Inc. above equal OI Inc.’s total indebtedness.  Interest costs on amounts payable to OI Inc.are charged to the Company in the same amount as incurred by OI Inc. TheCompany and a principal subsidiary of the Company guarantee the senior notesand debentures of OI Inc. on a subordinated basis.  The fair value of the OI Inc. debt beingguaranteed by the Company at December 31, 2006 was $1,057.5 million.

During the fourth quarter of 2005, theCompany expanded the capacity of its European accounts receivablesecuritization program from €200 million to €320 million to include operationsin Italy and the United Kingdom. The accounts receivable securitization programprovides lower costs of financing than traditional bank debt. The terms of thisexpansion resulted in changing from off-balance sheet to on-balance sheetaccounting for the program by consolidating both the accounts receivable in theprogram and the secured indebtedness of the same amount. Cash inflows relatedto receipts from customers in payment of the accounts receivable consolidatedat December 13, 2005 have been classified as investing cash inflows in theaccompanying Consolidated Statement of Cash Flows.

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During October of 2006, the Companyentered into a new €300 million European accounts receivable securitizationprogram.  The new program replaces theprevious European program, described in the preceding paragraph, which was setto terminate in October 2006.  

At December 31, 2006, the European programhad a balance of $195.0 million, and the Asia Pacific program had a balance of$84.4 million recorded in short term loans. The interest rate on the accounts receivable securitization program is alocal short term variable rate plus a margin over the variable rate of 0.70%for the European program and 0.85% for the Asia Pacific program.  The weighted average interest rate onborrowings under the European program was 4.81% at December 31, 2006.  The weighted average interest rate onborrowings under the Asia Pacific program was 7.43% at December 31, 2006.  These programs have maturity dates rangingfrom January of 2008 through October of 2011. 

Annualmaturities for all of the Company’s long-term debt through 2011 are as follows:2007, $324.4 million; 2008, $260.1 million; 2009, $884.0 million; 2010, $304.8million; and 2011, $621.1 million.  

Interestpaid in cash, including note repurchase premiums in 2006 and 2004, aggregated$461.0 million for 2006, $450.9 million for 2005, and $548.8 million for 2004. 

Fairvalues at December 31, 2006, of the Company’s significant fixed rate debtobligations were as follows:
| ** **                            | ** ** | **Principal Amount** | ** ** | **Indicated** | ** ** | **Fair Value**   | ** ** | **Hedge Value**  | ** ** |
|---------------------------------------|------------|---------------------------|------------|---------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **(millions of**     | ** ** | **Market**    | ** ** | **(millions of** | ** ** | **(millions of** | ** ** |
| ** **                            | ** ** | **dollars)**              | ** ** | **Price**     | ** ** | **dollars)**          | ** ** | **dollars)**          | ** ** |
| Senior Secured  Notes:                |       |                      |       |          |       |                  |       |                  |       |
| 8.875%, due 2009                      |       | $                         | 850.0      |          | 102.52     |                  | $          | 871.5                 |       |   |   |
| 7.75%, due 2011                       |       | 450.0                     |       | 103.50        |       | 465.8                 |       |                  |       |
| 8.75%, due 2012                       |       | 625.0                     |       | 106.25        |       | 664.1                 |       |                  |       |
| Senior Notes:                         |       |                      |       |          |       |                  |       |                  |       |
| 8.25%, due 2013                       |       | 450.0                     |       | 103.25        |       | 464.6                 |       | 440.8                 |       |
| 6.75%, due 2014                       |       | 400.0                     |       | 97.75         |       | 391.0                 |       |                  |       |
| 6.75%, due 2014  (€225  million) |       | 296.2                     |       | 99.75         |       | 295.5                 |       |                  |       |
|                                       |            |                           |            |               |            |                       |            |                       |            |  |  |

 

**6. Operating Leases**  Rent expense attributable to all warehouse,office buildings and equipment operating leases was $89.6 million in 2006,$81.9 million in 2005, and $89.8 million in 2004.  Minimum future rentals under operating leasesare as follows:  2007, $49.2 million;2008, $36.6 million; 2009, $25.0 million; 2010, $18.8 million; and 2011, $8.1million; and 2012 and thereafter, $8.3 million.

**7.  Foreign Currency Transactions**  Aggregate foreign currency exchange gains(losses) included in other costs and expenses were $(1.6) million in 2006, $2.8million in 2005, and $(9.5) million in 2004.

**8. Derivative Instruments  **AtDecember 31, 2006, the Company had the following derivative instruments relatedto its various hedging programs:

*Hedges of Debt*

Certain of the Company’s subsidiaries have enteredinto short term forward exchange contracts which effectively swap intercompanyloans to other subsidiaries that are denominated in the functional currency ofthe borrowers.  These contracts swap theprincipal amount of loans and in some cases they swap the related interest.

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The Company recognizes the above derivatives on thebalance sheet at fair value. Accordingly, the changes in the value of the swaps are recognized incurrent earnings and are expected to substantially offset any exchange rategains or losses on the related nonfunctional currency loans.  For the year ended December 31, 2006, theamount not offset was not material.  

*Interest Rate Swaps Designated asFair Value Hedges*

In the fourth quarter of 2003 and the first quarter of2004, the Company entered into a series of interest rate swap agreements with atotal notional amount of $1.05 billion that mature from 2007 through 2013.  The swaps were executed in order to:(i) convert a portion of the senior notes and senior debentures fixed-ratedebt into floating-rate debt; (ii) maintain a capital structure containingappropriate amounts of fixed and floating-rate debt; and (iii) reduce netinterest payments and expense in the near-term.

The Company’s fixed-to-variable interest rate swapsare accounted for as fair value hedges. Because the relevant terms of the swap agreements match thecorresponding terms of the notes, there is no hedge ineffectiveness.Accordingly, the Company recorded the net of the fair market values of theswaps as a long-term liability along with a corresponding net decrease in thecarrying value of the hedged debt.  

Under the swaps, the Company receives fixed rateinterest amounts (equal to interest on the corresponding hedged note) and paysinterest 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 selected information relates to fairvalue swaps at December 31, 2006 (based on a projected U.S. LIBOR rate of5.1515% based on rates at December 31, 2006):
| ** **                                                               | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | **Asset**       | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|-----------------|------------|
| ** **                                                               | ** ** | **Amount** | ** ** | **Receive** | ** ** | **Average** | ** ** | **(Liability)** | ** ** |
| ** **                                                               | ** ** | **Hedged** | ** ** | **Rate**    | ** ** | **Spread**  | ** ** | **Recorded**    | ** ** |
|                                                                     |       |       |       |        |       |        |       |            |       |
| OI Inc. public  notes swapped by the Company through intercompany loans: |       |       |       |        |       |        |       |            |       |
| Senior Notes due 2007                                                    |       | $          | 300.0      |        | 8.10       | %           | 4.5        | %               | $          | (1.8 | ) |
| Senior Notes due 2008                                                    |       | 250.0      |       | 7.35        | %          | 3.5         | %          | (4.3            | )          |
| Senior Debentures due 2010                                               |       | 250.0      |       | 7.50        | %          | 3.2         | %          | (5.8            | )          |
| Notes issued by  a subsidiary of the Company:                            |       |       |       |        |       |        |       |            |       |
| Senior Notes due 2013                                                    |       | 250.0      |       | 8.25        | %          | 3.7         | %          | (9.2            | )          |
| Total                                                                    |       | $          | 1,050.0    |        |       |        |       |            | $          | (21.1 | ) |

 

*Commodity Hedges*

The Company enters into commodity futures contractsrelated to forecasted natural gas requirements, the objectives of which are tolimit the effects of fluctuations in the future market price paid for naturalgas and the related volatility in cash flows.  The Company continually evaluates the naturalgas market with respect to its forecasted usage requirements over the nexttwelve to twenty-four months and periodically enters into commodity futurescontracts in order to hedge a portion of its usage requirements over thatperiod.  At December 31, 2006, theCompany had entered into commodity futures contracts for approximately 57%(approximately 13,450,000 MM BTUs) for the full year of 2007 and approximately9% (approximately 2,160,000 MM BTUs) for the full year of 2008.    

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The Company accounts for the above futures contractson the balance sheet at fair value.  Theeffective portion of changes in the fair value of a derivative that isdesignated as, and meets the required criteria for, a cash flow hedge is recordedin OCI and reclassified into earnings in the same period or periods duringwhich 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.

The above futures contracts are accounted for as cashflow hedges at December 31, 2006.  

At December 31, 2006, an unrecognized loss of $32.8million (pretax and after tax), related to the domestic commodity futurescontracts, was included in OCI, which will be reclassified into earnings overthe next twelve months.  Theineffectiveness related to these natural gas hedges for the year ended December31, 2006 was not material.  

*Other Hedges*

The Company’s subsidiaries may enter into short-termforward exchange or option agreements to purchase foreign currencies at setrates in the future.  These agreementsare used to limit exposure to fluctuations in foreign currency exchange ratesfor significant planned purchases of fixed assets or commodities that aredenominated 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 functionalcurrencies.  The Company records theseshort-term forward exchange agreements on the balance sheet at fair value andchanges in the 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 if theinstrument has a positive fair value and maturity within one year, (2)deposits, receivables, and other assets if the instrument has a positive fairvalue and maturity after one year, (3) accounts payable and other accruedliabilities if the instrument has a negative fair value and maturity within oneyear, and (4) other liabilities if the instrument has a negative fair value andmaturity after one year.

**9.  Accumulated Other Comprehensive Income (Loss)**   The components ofcomprehensive income (loss) are: (a) net earnings (loss); (b) change in fairvalue of certain derivative instruments; (c) adjustment of minimum pension liabilities;(d) adjustment to adopt FAS No. 158; and, (e) foreign currency translationadjustments. The net effect of exchange rate fluctuations generally reflectschanges in the relative strength of the U.S. dollar against major foreigncurrencies between the beginning and end of the year.

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Thefollowing table lists the beginning balance, yearly activity and ending balanceof each component of accumulated other comprehensive income (loss): 
| ** **                | ** ** | ** **                  | ** ** | ** **            | ** ** | **Change in**         | ** ** | **Change in**         | ** ** | **Adjustment**             | ** ** | ** **             | ** ** |
|---------------------------|------------|-----------------------------|------------|-----------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|------------------------|------------|
| ** **                | ** ** | ** **                  | ** ** | ** **            | ** ** | **Minimum**                | ** ** | **Certain**                | ** ** | **to initially**      | ** ** | **Total**              | ** ** |
| ** **                | ** ** | **Net Effect of** | ** ** | **Deferred Tax** | ** ** | **Pension**                | ** ** | **Derivative**             | ** ** | **apply FAS**         | ** ** | **Accumulated**        | ** ** |
| ** **                | ** ** | **Exchange Rate**      | ** ** | **Effect for**   | ** ** | **Liability**              | ** ** | **Instruments**            | ** ** | **No. 158**           | ** ** | **Comprehensive**      | ** ** |
| ** **                | ** ** | **Fluctuations**            | ** ** | **Translation**       | ** ** | **(net of tax)** | ** ** | **(net of tax)** | ** ** | **(net of tax)** | ** ** | **Income (Loss)** | ** ** |
| Balance on Jan. 1, 2004   |       | $                           | (154.7     | )                     | $          | 21.4                       |       | $                          | (110.8     | )                          | $          | 1.0                    |       | $ | — |   | $ | (243.1 | ) |
| 2004 Change               |       | 326.1                       |       | (8.7                  | )          | (44.6                      | )          | (1.6                       | )          |                       |       | 271.2                  |       |
| Translation effect        |       |                        |       |                  |       | 9.0                        |       |                       |       |                       |       | 9.0                    |       |
| Tax effect                |       |                        |       |                  |       | 8.1                        |       | 0.5                        |       |                       |       | 8.6                    |       |
| Balance on Dec. 31,  2004 |       | 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 | ) |

 

The2004 change in exchange rate fluctuations includes $52.4 million related to thesales of the blow-molded plastics business and the 20% investment in ConsolGlass.

**10.  IncomeTaxes**   Deferred incometaxes reflect:  (1) the net tax effectsof temporary differences between the carrying amounts of assets and liabilitiesfor financial reporting purposes and the amounts used for income tax purposesand (2) carryovers and credits for income tax purposes.

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Significantcomponents of the Company’s deferred tax assets and liabilities at December 31,2006 and 2005 are as follows:
| ** **                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
|                             |       |     |       |     |       |
| Deferred tax assets:             |       |     |       |     |       |
| Accrued  postretirement benefits |       | $        | 110.8      |     | $          | 89.3 |   |
| Tax loss and  credit carryovers  |       | 782.1    |       | 639.2    |       |
| Capital loss  carryovers         |       | 395.5    |       | 391.3    |       |
| Alternative  minimum tax credits |       | 21.2     |       | 21.2     |       |
| Accrued  liabilities             |       | 191.1    |       | 203.1    |       |
| Other                            |       | 54.7     |       | 31.3     |       |
| Total deferred  tax assets       |       | 1,555.4  |       | 1,375.4  |       |
|                             |       |     |       |     |       |
| Deferred tax  liabilities:       |       |     |       |     |       |
| Property, plant  and equipment   |       | 296.8    |       | 251.7    |       |
| Prepaid pension  costs           |       | 101.3    |       | 293.5    |       |
| Inventory                        |       | 23.2     |       | 29.3     |       |
| Other                            |       | 73.2     |       | 90.3     |       |
| Total deferred  tax liabilities  |       | 494.5    |       | 664.8    |       |
| Valuation  allowance             |       | (1,041.1 | )          | (1,043.9 | )          |
| Net deferred taxes               |       | $        | 19.8       |     | $          | (333.3 | ) |

 

Deferredtaxes are included in the Consolidated Balance Sheets at December 31, 2006 and2005 as follows:
| ** **                               | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
|                                     |       |     |       |     |       |
| Prepaid expenses                         |       | $        | 4.6        |     | $          | 5.9 |   |
| Deposits,  receivables, and other assets |       | 127.4    |       | 101.9    |       |
| Deferred taxes                           |       | (112.2   | )          | (441.1   | )          |
| Net deferred taxes                       |       | $        | 19.8       |     | $          | (333.3 | ) |

 

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Theprovision (benefit) for income taxes consists of the following:
| ** **                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current:                           |       |     |       |     |       |     |       |
| U.S. Federal                       |       | $        | —     |     | $          | —   |       | $ | — |   |
| State                              |       | 2.0      |       | 1.6      |       | 3.0      |       |
| Foreign                            |       | 113.7    |       | 133.9    |       | 101.6    |       |
|                               |       | 115.7    |       | 135.5    |       | 104.6    |       |
| Deferred:                          |       |     |       |     |       |     |       |
| U.S. Federal                       |       | 9.2      |       | 214.0    |       | (29.2    | )          |
| State                              |       | (14.6    | )          | 11.8     |       | 6.1      |       |
| Foreign                            |       | 16.2     |       | (12.4    | )          | (20.5    | )          |
|                               |       | 10.8     |       | 213.4    |       | (43.6    | )          |
| Total:                             |       |     |       |     |       |     |       |
| U.S. Federal                       |       | 9.2      |       | 214.0    |       | (29.2    | )          |
| State                              |       | (12.6    | )          | 13.4     |       | 9.1      |       |
| Foreign                            |       | 129.9    |       | 121.5    |       | 81.1     |       |
|                               |       | $        | 126.5      |     | $          | 348.9    |       | $ | 61.0 |   |
|                               |       |     |       |     |       |     |       |
| Total for  continuing operations   |       | $        | 126.5      |     | $          | 416.1    |       | $ | 73.6 |   |
| Total for  discontinued operations |       | —   |       | (67.2    | )          | (12.6    | )          |
|                               |       | $        | 126.5      |     | $          | 348.9    |       | $ | 61.0 |   |

 

Theprovision (benefit) for income taxes was calculated based on the followingcomponents of earnings (loss) before income taxes:
| **Continuing operations** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Domestic                       |       | $        | (193.8     | )        | $          | (52.7    | )          | $ | (51.2 | ) |
| Foreign                        |       | 456.4    |       | (30.9    | )          | 414.1    |       |
|                           |       | $        | 262.6      |     | $          | (83.6    | )          | $ | 362.9 |   |

 
| **Discontinued operations** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Domestic                         |       | $        | —     |     | $          | (4.2     | )          | $ | 45.2 |   |
| Foreign                          |       |     |       |     |       | 6.2      |       |
|                             |       | $        | —     |     | $          | (4.2     | )          | $ | 51.4 |   |

 

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Incometaxes paid (received) in cash were as follows:
| ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Domestic   |       | $        | (1.2       | )        | $          | 12.2     |       | $ | 1.9 |   |
| Foreign    |       | 126.8    |       | 112.9    |       | 98.8     |       |
|       |       | $        | 125.6      |     | $          | 125.1    |       | $ | 100.7 |   |

 

Areconciliation of the provision (benefit) for income taxes based on thestatutory U.S. Federal tax rate of 35% to the provision for income taxes is asfollows:
| ** **                                                                                                        | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Tax provision  (benefit) on pretax earnings (loss) from continuing operations at statutory  U.S. Federal tax rate |       | $        | 91.9       |     | $          | (29.3    | )          | $ | 127.0 |   |
| Increase  (decrease) in provision for income taxes due to:                                                        |       |     |       |     |       |     |       |
| Goodwill impairment                                                                                               |       |     |       | 172.9    |       |     |       |
| Valuation allowance - U.S.                                                                                        |       | 67.3     |       | 306.6    |       |     |       |
| Reversal of non-U.S. tax valuation allowance                                                                      |       | (34.7    | )          |     |       |     |       |
| Restructuring charges                                                                                             |       | 21.2     |       |     |       |     |       |
| State taxes, net of federal benefit                                                                               |       | (9.4     | )          | 6.7      |       | 3.1      |       |
| Rate differences on non-U.S. earnings                                                                             |       | (12.3    | )          | (28.2    | )          | (25.0    | )          |
| Australian tax consolidation                                                                                      |       |     |       | (2.8     | )          | (33.1    | )          |
| Adjustment for non-U.S. tax law changes                                                                           |       | (1.6     | )          | (7.1     | )          |     |       |
| Other items                                                                                                       |       | 4.1      |       | (2.7     | )          | 1.6      |       |
| Provision for income  taxes                                                                                       |       | $        | 126.5      |     | $          | 416.1    |       | $ | 73.6 |   |

 

AtDecember 31, 2006, the Company has unused net operating losses, capital losses,and research tax credits expiring from 2007 to 2027.

TheCompany also has unused alternative minimum tax credits which do not expire andwhich will be available to offset future U.S. Federal income tax.

AtDecember 31, 2006, the Company’s equity in the undistributed earnings offoreign subsidiaries for which income taxes had not been provided approximated$1,755.2 million.  It is not practicableto estimate the U.S. and foreign tax which would be payable should these earningsbe distributed.

During the fourth quarterof 2005, the Company recorded an additional valuation allowance of $306.6million because of the near-term effects on U. S. profitability of continuedasbestos-related payments, significant interest expense, rising energy costsand other cost increases. These changes in circumstances would have increasedthe beginning-of-year valuation allowance by approximately $170 million.

Valuation allowancesapproximating $71 million were established in allocation of the costs ofacquisitions.  Any future reductions ofthese 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

69

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was no longer requiredbased on the Company’s reassessment of the potential liabilities due to severalfactors, including statute expiration in September 2005.

**11.  StockOptions and Other Stock Based Compensation**   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 Option Planfor Key Employees of Owens-Illinois, Inc.; (2) the Stock Option Plan for Directorsof Owens-Illinois, Inc.; (3) the 1997 Equity Participation Plan ofOwens-Illinois, Inc.; (4) the 2004 Equity Incentive Plan for Directors ofOwens-Illinois, Inc.; and (5) the 2005 Equity Incentive Plan of Owens-Illinois,Inc.  Total compensation cost for allgrants and accelerated vesting of options, shares and units under all of theseplans was $21.7 million ($20.4 million after tax) for the year ended December31, 2006.  The cost in 2006 included $3.1million for accelerated vesting of options, shares and units held by the formerCEO at the time of his separation in November 2006 and $1.9 million for fullyvested options granted to the new CEO in December 2006.  Total compensation cost for grants of sharesand units was $6.8 million ($4.2 million after tax) in 2005 and $3.9 million($2.4 million after tax) in 2004.

*Stock Options*

Foroptions granted prior to March 22, 2005, no options may be exercised in wholeor in part during the first year after the date granted. In general, subject toaccelerated exercisability provisions related to the performance of OI Inc.’scommon stock or change of control, 50% of the options become exercisable on thefifth anniversary of the date of the option grant, with the remaining 50%becoming exercisable on the sixth anniversary date of the option grant.** **In general, options expire 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 whole orin 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 ratably overfive 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 range fromone to four years.

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Stockoption information at December 31, 2006 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, 2005                |       | 6,900              |       | $                    | 22.05      |            |       |          |       |   |
| Granted                                              |       | 1,481              |       | 18.83                |       |            |       |          |       |
| Exercised                                            |       | (634               | )          | 11.94                |       |            |       |          |       |
| Forfeited or expired                                 |       | (1,217             | )          | 30.33                |       |            |       |          |       |
| Options  outstanding at Dec. 31, 2006                |       | 6,530              |       | 20.75                |       | 4.2             |       | $             | 16.3       |   |
| Options vested  or expected to vest at Dec. 31, 2006 |       | 6,445              |       | $                    | 20.75      |            | 4.2        |          | $          | 16.1 |   |
| Options  exercisable at Dec. 31, 2006                |       | 4,972              |       | $                    | 20.85      |            | 3.6        |          | $          | 16.1 |   |
|                                                 |       |               |       |                 |       |            |       |          |       |
| Shares available  for option grant at Dec. 31, 2006: |       | 4,660              |       |                 |       |            |       |          |       |

 

Certainadditional information related to stock options is as follows for the periodsindicated:
|                                                                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Weighted average  grant-date fair value of options granted  (per share) |       | $        | 7.91       |     | $          | 15.00    |       | $ | 8.30 |   |
| Aggregate  intrinsic value of options exercised                         |       | $        | 3.7        |     | $          | 19.4     |       | $ | 16.1 |   |
| Aggregate cash received from  options exercised                         |       | $        | 7.6        |     | $          | 20.5     |       | $ | 23.0 |   |

 

*Restricted Shares*

Sharesgranted to employees prior to March 22, 2005, generally vest after three yearsor upon retirement, whichever is later. Shares granted after March 21, 2005, vest 25% per year beginning on thefirst 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 over thevesting period.  The fair value ofrestricted shares granted after March 21, 2005, is amortized over the vestingperiods which range from one to four years.

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Restrictedshare activity is as follows:
|                               | ** ** | ** **         | ** ** | **Weighted**         | ** ** |
|-------------------------------|------------|--------------------|------------|----------------------|------------|
| ** **                    | ** ** | **Number of** | ** ** | **Average**          | ** ** |
| ** **                    | ** ** | **Restricted**     | ** ** | **Grant-Date**       | ** ** |
| ** **                    | ** ** | **Shares**         | ** ** | **Fair Value**  | ** ** |
| ** **                    | ** ** | **(thousands)**    | ** ** | **(per share)** | ** ** |
|                          |       |               |       |                 |       |
| Nonvested at  January 1, 2006 |       | 1,045              |       | $                    | 15.41      |   |
| Granted                       |       | 251                |       | 18.74                |       |
| Vested                        |       | (423               | )          | 14.21                |       |
| Forfeited                     |       | (12                | )          | 14.39                |       |
| Nonvested at  Dec. 31, 2006   |       | 861                |       | 16.98                |       |
| Awards granted  during 2005   |       |               |       | $                    | 24.34      |   |
| Awards granted during  2004   |       |               |       | $                    | 13.73      |   |

 
| ** **                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |     |       |
| Total fair value of  shares vested |       | $        | 7.7        |     | $          | 5.1      |       | $ | 1.6 |   |
|                                    |            |          |            |          |            |          |            |  |  |  |

 

*Performance Vested Restricted Share Units*

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

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

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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, 2006      |       | 228                   |       | $                    | 24.22      |   |
| Granted                            |       | 457                   |       | 18.24                |       |
| Vested                             |       |                  |       |                 |       |
| Forfeited                          |       | (8                    | )          | 21.05                |       |
| Nonvested at  Dec. 31, 2006        |       | 677                   |       | 20.22                |       |
| Awards granted  during 2005        |       |                  |       | $                    | 24.22      |   |
| Awards granted during  2004 (none) |       |                  |       |                 |       |

 

Asof December 31, 2006, there was $19.7 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.  PensionBenefit Plans**  Netexpense to results of operations for all of the Company’s pension plans andcertain deferred compensation arrangements amounted to $42.2 million in 2006,$15.4 million in 2005, and $27.0 million in 2004.

TheCompany has defined benefit pension plans covering substantially all employeeslocated in the United States, the United Kingdom, the Netherlands, Canada,Australia, Germany and France.  Benefitsgenerally are based on compensation for salaried employees and on length ofservice for hourly employees.  TheCompany’s policy is to fund pension plans such that sufficient assets will beavailable to meet future benefit requirements. The Company’s defined benefit pension plans use a December 31measurement date.  The following tablesrelate to the Company’s principal defined benefit pension plans.

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Thechanges in the pension benefit obligations for the year were as follows:
| ** **                                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|----------|------------|
| Obligations at  beginning of year                            |       | $        | 3,823.6    |     | $          | 3,754.5 |   |
| Change in benefit  obligations:                              |       |     |       |     |       |
| Service cost                                                 |       | 60.8     |       | 51.7     |       |
| Interest cost                                                |       | 204.3    |       | 199.7    |       |
| Actuarial loss,  including effect of changing discount rates |       | (101.3   | )          | 179.5    |       |
| Curtailments                                                 |       | (3.6     | )          |     |       |
| Participant  contributions                                   |       | 10.0     |       | 9.4      |       |
| Benefit payments                                             |       | (251.2   | )          | (250.3   | )          |
| Plan amendments                                              |       | (7.2     | )          | 2.8      |       |
| Foreign currency  translation                                |       | 137.2    |       | (123.7   | )          |
| Other                                                        |       | 6.6      |       |     |       |
| Net increase in  benefit obligations                         |       | 55.6     |       | 69.1     |       |
| Obligations at end of year                                   |       | $        | 3,879.2    |     | $          | 3,823.6 |   |

 

Thechanges in the fair value of the pension plans’ assets for the year were asfollows:
| ** **                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Fair value at beginning  of year      |       | $        | 3,631.4    |     | $          | 3,510.1 |   |
| Change in fair value:                 |       |     |       |     |       |
| Actual gain on  plan assets           |       | 484.3    |       | 403.9    |       |
| Benefit payments                      |       | (251.2   | )          | (250.3   | )          |
| Employer  contributions               |       | 69.5     |       | 43.7     |       |
| Participant  contributions            |       | 10.0     |       | 9.4      |       |
| Foreign currency  translation         |       | 102.5    |       | (85.4    | )          |
| Other                                 |       | (3.0     | )          |     |       |
| Net increase in  fair value of assets |       | 412.1    |       | 121.3    |       |
| Fair value at end of year             |       | $        | 4,043.5    |     | $          | 3,631.4 |   |

 

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Thefunded status of the pension plans at year end was as follows:
| ** **                                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Plan assets at fair  value                                          |       | $        | 4,043.5    |     | $          | 3,631.4 |   |
| Projected benefit obligations                                       |       | 3,879.2  |       | 3,823.6  |       |
| Plan assets  greater than (less than) projected benefit obligations |       | 164.3    |       | (192.2   | )          |
| Items not yet  recognized in pension expense:                       |       |     |       |     |       |
| Actuarial loss                                                      |       | 764.6    |       | 1,073.7  |       |
| Prior service  cost                                                 |       | (15.4    | )          | 6.9      |       |
|                                                                |       | 749.2    |       | 1,080.6  |       |
| Net amount recognized                                               |       | $        | 913.5      |     | $          | 888.4 |   |

 

Thenet amount recognized is included in the Consolidated Balance Sheets atDecember 31, 2006 and 2005 as follows:
| ** **                                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Prepaid pension                                                       |       | $        | 488.5      |     | $          | 988.1 |   |
| Current pension  liability, included with Other accrued liabilities   |       | (9.1     | )          |     |       |
| Noncurrent  pension liability, included with Pension benefits         |       | (315.1   | )          | (163.2   | )          |
| Additional  minimum pension liability, included with Pension benefits |       |     |       | (143.7   | )          |
| Intangible  asset, included with Deposits and other assets            |       |     |       | 9.4      |       |
| Accumulated  other comprehensive income                               |       | 749.2    |       | 197.8    |       |
| Net amount recognized                                                 |       | $        | 913.5      |     | $          | 888.4 |   |

 

The accumulated benefitobligation for all defined benefit pension plans was $3,598.4 million and $3,495.4million at December 31, 2006 and 2005, respectively.

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Thecomponents of the net pension expense for the year were as follows:
| ** **                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Service cost                       |       | $        | 60.8       |     | $          | 51.7     |       | $ | 56.9 |   |
| Interest cost                      |       | 204.3    |       | 199.7    |       | 197.0    |       |
| Expected asset  return             |       | (298.4   | )          | (296.6   | )          | (289.5   | )          |
| Other                              |       | 9.2      |       |     |       |     |       |
| Amortization:                      |       |     |       |     |       |     |       |
| Prior service cost                 |       | (0.6     | )          | (0.3     | )          | 6.0      |       |
| Loss                               |       | 61.5     |       | 49.5     |       | 38.3     |       |
| Net amortization                   |       | 60.9     |       | 49.2     |       | 44.3     |       |
| Net expense  (credit)              |       | $        | 36.8       |     | $          | 4.0      |       | $ | 8.7 |   |
| Total for  continuing operations   |       | $        | 36.8       |     | $          | 4.0      |       | $ | 6.3 |   |
| Total for  discontinued operations |       |     |       |     |       | 2.4      |       |
|                               |       | $        | 36.8       |     | $          | 4.0      |       | $ | 8.7 |   |

 

Amountsthat will be amortized from accumulated other comprehensive income into netpension expense during 2007:
| Amortization:      |   |   |   |
|--------------------|--------|--------|--------|
| Loss               |   | $      | 46.0   |   |
| Prior service cost |   | (0.8   | )      |
| Net amortization   |   | $      | 45.2   |   |

 

Thefollowing selected information is for plans with projected benefit obligationsin excess of the fair value of plan assets at year end:
| ** **                     | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Projected  benefit obligations |       | $        | 1,080.6    |     | $          | 1,353.2 |   |
| Fair value of plan  assets     |       | 742.6    |       | 961.2    |       |
|                                |            |          |            |          |            |  |  |

 

Thefollowing information is for plans with accumulated benefit obligations inexcess of the fair value of plan assets at year end:
| ** **                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Accumulated  benefit obligations |       | $        | 972.6      |     | $          | 876.3 |   |
| Fair value of plan  assets       |       | 742.6    |       | 621.5    |       |
|                                  |            |          |            |          |            |  |  |

 

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Theweighted average assumptions used to determine benefit obligations were asfollows:
| ** **                     | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Discount rate                  |       | 5.49     | %          | 5.30     | %          |
| Rate of compensation  increase |       | 4.34     | %          | 4.54     | %          |

 

Theweighted average assumptions used to determine net periodic pension costs wereas follows:
| ** **                                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Discount rate                                |       | 5.30     | %          | 5.52     | %          | 6.10     | %          |
| Rate of  compensation increase               |       | 4.54     | %          | 4.40     | %          | 4.71     | %          |
| Expected long-term rate  of return on assets |       | 8.08     | %          | 8.10     | %          | 8.35     | %          |

 

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

Asof December 31, 2006, the Company adjusted the minimum pension liability forthe pension plan in the United Kingdom from the minimum liabilities recorded in2002, 2003, 2004 and 2005.  Pursuant tothis requirement, the Company decreased the minimum pension liability by $38.5million and decreased accumulated other comprehensive loss by $38.5 million.

Asof December 31, 2006, the Company adjusted the minimum pension liability forthe pension plan in Canada from the minimum liabilities recorded in 2002, 2003and 2004.  Pursuant to this requirement,the Company decreased the minimum pension liability by $9.7 million anddecreased accumulated other comprehensive loss by $9.7 million.

Asof December 31, 2006, the Company adjusted the minimum pension liability forthe pension plan in 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.

TheCompany adopted the provisions of Financial Accounting Standards No. 158 (“FAS No.158”), “Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans” 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 owner’s equity.  

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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                                                          |       | $                                                     | (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                                                | )          |
|                                                                          |            |                                                       |            |  |

 

For2006, the Company’s weighted average expected long-term rate of return onassets was 8.08%.   In developing thisassumption, the Company evaluated input from its third party pension plan assetmanagers, including their review of asset class return expectations andlong-term inflation assumptions.  TheCompany also considered its historical 10-year average return (through December31, 2005), which was in line with the expected long-term rate of returnassumption for 2006.   

Theweighted average actual asset allocations and weighted average targetallocation ranges by asset category for the Company’s pension plan assets wereas follows:
| ** **              | ** ** | ** **                 | ** ** | ** **     | ** ** | **Target** | ** ** |
|-------------------------|------------|----------------------------|------------|----------------|------------|------------|------------|
| ** **              | ** ** | **Actual Allocation** | ** ** | **Allocation** | ** ** |
| **Asset Category** | ** ** | **2006**                   | ** ** | **2005**       | ** ** | **Ranges** | ** ** |
| Equity securites        |       | 64                         | %          | 64             | %          | 59-69      | %          |
| Debt securities         |       | 29                         | %          | 29             | %          | 24-34      | %          |
| Real estate             |       | 6                          | %          | 7              | %          | 1-11       | %          |
| Other                   |       | 1                          | %          |           |       | 0-6        | %          |
| Total                   |       | 100                        | %          | 100            | %          |       |       |

 

Itis the Company’s policy to invest pension plan assets in a diversifiedportfolio consisting of an array of asset classes within the above target assetallocation ranges.  The investment riskof the assets is limited by appropriate diversification both within and betweenasset classes.  The assets for both theU.S. and non-U.S. plans are primarily invested in a broad mix of domestic andinternational equities, domestic and international bonds, and real estate,subject to the target asset allocation ranges. The assets are managed with a view to ensuring that sufficient liquiditywill be available to meet expected cash flow requirements.

TheCompany expects to contribute $55.3 million to its non-U.S. defined benefitpension plans in 2007.

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Thefollowing estimated future benefit payments, which reflect expected futureservice, as appropriate, are expected to be paid in the years indicated:
| Year(s)     | ** ** | **Amount** | ** ** |
|-------------|------------|------------|------------|
| 2007        |       | $          | 241.5      |   |
| 2008        |       | 242.6      |       |
| 2009        |       | 247.8      |       |
| 2010        |       | 247.1      |       |
| 2011        |       | 254.5      |       |
| 2012 - 2016 |       | 1,320.0    |       |
|             |            |            |            |  |

 

TheCompany also sponsors several defined contribution plans for all salaried andhourly U.S. employees.   Participation isvoluntary and participants’ contributions are based on their compensation.  The Company matches contributions ofparticipants, up to various limits, in substantially all plans.  Company contributions to these plans amountedto $8.2 million in 2006, $7.7 million in 2005, and $7.1 million in 2004.

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

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Thechanges in the postretirement benefit obligations for the year were as follows:
| ** **                                                              | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Obligations at  beginning of year                                       |       | $        | 329.1      |     | $          | 340.9 |   |
| Change in  benefit obligations:                                         |       |     |       |     |       |
| Service cost                                                            |       | 4.3      |       | 4.5      |       |
| Interest cost                                                           |       | 16.8     |       | 18.5     |       |
| Actuarial gain (loss), including the effect of  changing discount rates |       | 12.4     |       | (1.6     | )          |
| Curtailments                                                            |       | (22.4    | )          |     |       |
| Benefit payments                                                        |       | (24.9    | )          | (32.6    | )          |
| Foreign currency translation                                            |       | 2.1      |       | (0.6     | )          |
| Other                                                                   |       | 0.2      |       |     |       |
| Net change in benefit obligations                                       |       | (11.5    | )          | (11.8    | )          |
| Obligations at end of  year                                             |       | $        | 317.6      |     | $          | 329.1 |   |

 

The funded status of thepostretirement benefit plans at year end was as follows:
| ** **                                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|
| Postretirement  benefit obligations                           |       | $        | 317.6      |     | $          | 329.1 |   |
| Items not yet  recognized in net postretirement benefit cost: |       |     |       |     |       |
| Prior service credit                                          |       | 36.6     |       | 40.9     |       |
| Actuarial loss                                                |       | (96.4    | )          | (92.9    | )          |
|                                                          |       | (59.8    | )          | (52.0    | )          |
| Net amount recognized                                         |       | $        | 257.8      |     | $          | 277.1 |   |

 

Thenet amount recognized is included in the Consolidated Balance Sheets atDecember 31, 2006 and 2005 as follows:
| ** **                                                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Current  nonpension postretirement benefit, included with Other accrued liabilities |       | $        | 24.5       |     | $          | — |   |
| Nonpension  postretirement benefits                                                 |       | 293.1    |       | 277.1    |       |
| Accumulated  other comprehensive income                                             |       | (59.8    | )          |     |       |
| Net amount recognized                                                               |       | $        | 257.8      |     | $          | 277.1 |   |

 

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Thecomponents of the net postretirement benefit cost for the year were as follows:
| ** **                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Service cost                       |       | $        | 4.3        |     | $          | 4.5      |       | $ | 4.3 |   |
| Interest cost                      |       | 16.8     |       | 18.5     |       | 21.0     |       |
| Curtailment gain                   |       | (15.9    | )          |     |       |     |       |
| Other                              |       | 0.9      |       |     |       |     |       |
| Amortization:                      |       |     |       |     |       |     |       |
| Prior service credit               |       | (4.3     | )          | (4.3     | )          | (6.8     | )          |
| Loss                               |       | 3.9      |       | 5.5      |       | 4.7      |       |
| Net amortization                   |       | (0.4     | )          | 1.2      |       | (2.1     | )          |
| Net  postretirement benefit cost   |       | $        | 5.7        |     | $          | 24.2     |       | $ | 23.2 |   |
| Total for  continuing operations   |       | 5.7      |       | 24.2     |       | 21.3     |       |
| Total for  discontinued operations |       |     |       |     |       | 1.9      |       |
|                               |       | $        | 5.7        |     | $          | 24.2     |       | $ | 23.2 |   |

 

Amountsthat will be amortized from accumulated other comprehensive income into netpostretirement benefit cost during 2007:
| Amortization:      |   |   |   |
|--------------------|--------|--------|--------|
| Loss               |   | $      | 6.4    |   |
| Prior service cost |   | (4.3   | )      |
| Net amortization   |   | $      | 2.1    |   |

 

Theweighted average discount rate used to determine the accumulated postretirementbenefit obligation was 5.56% and 5.45% at December 31, 2006 and 2005,respectively.

Theweighted average discount rate used to determine net postretirement benefitcost was 5.45%, 5.67%, and 6.21% at December 31, 2006, 2005, and 2004, respectively.

Theweighted average assumed health care cost trend rates at December 31 were asfollows:
| ** **                                                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Health care cost  trend rate assumed for next year                             |       | 8.92     | %          | 8.31     | %          |
| Rate to which  the cost trend rate is assumed to decline (ultimate trend rate) |       | 5.73     | %          | 5.64     | %          |
| Year that the rate  reaches the ultimate trend rate                            |       | 2009     |       | 2009     |       |

 

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Assumedhealth care cost trend rates affect the amounts reported for the postretirementbenefit plans.  A one-percentage-pointchange in assumed health care cost trend rates would have the followingeffects:
| ** **                                                | ** ** | **1-Percentage-**       | ** ** | **1-Percentage-**       | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                | ** ** | **Point Increase** | ** ** | **Point Decrease** | ** ** |
| Effect on total  of service and interest cost             |       | $                       | 0.9        |                    | $          | (0.7 | ) |
| Effect on accumulated  postretirement benefit obligations |       | 10.5                    |       | (8.9                    | )          |
|                                                           |            |                         |            |                         |            |  |  |

 

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

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

| Year(s)     | ** ** | **Amount** | ** ** |
|-------------|------------|------------|------------|
| 2007        |       | $          | 24.5       |   |
| 2008        |       | 24.0       |       |
| 2009        |       | 23.6       |       |
| 2010        |       | 23.3       |       |
| 2011        |       | 23.1       |       |
| 2012 - 2016 |       | 111.8      |       |
|             |            |            |            |  |

 

Benefitsprovided by the Company for certain hourly retirees are determined bycollective bargaining.  Most otherdomestic hourly retirees receive health and life insurance benefits from amulti-employer trust established by collective bargaining.  Payments to the trust as required by thebargaining agreements are based upon specified amounts per hour worked and were$7.4 million in 2006, $6.6 million in 2005, and $7.6 million in 2004.  Postretirement health and life benefits forretirees of foreign subsidiaries are generally provided through the nationalhealth care programs of the countries in which the subsidiaries are located.

FASNo. 158 requires employers to adjust the assets and liabilities related todefined benefit plans so that the amounts reflected on the balance sheetrepresent 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 otherpostretirement benefit plans, the fair value of plan assets is compared to theAccumulated Postretirement Benefit Obligation (“APBO”).   In the Company’s case, the requiredadjustments resulted in a non-cash charge to the Accumulated OtherComprehensive Income component of share owner’s equity.

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Thefollowing table shows the impact on the balance sheet of applying FAS No. 158at 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.  OtherRevenue** Other revenue in 2006 includes a gain of $15.9million ($11.2 million after tax) related to curtailment of certainpostretirement benefits in The Netherlands.

Other revenue in 2005 includes $28.1 million (pretaxand after tax) for the sale of the Company’s Corsico, Italy glass containerfacility.

Otherrevenue in 2004 includes a gain of $20.6 million ($14.5 million after tax) forthe sale of certain real property and a gain of $31.0 million ($13.1 millionafter tax) for a restructuring in the Italian Specialty Glass business.

**15.  Other Costs and Expenses**  Other costs and expenses for the year endedDecember 31, 2006 included the following:

·                  During the third quarter of 2006, the Company recorded a charge of $29.7million ($27.7 million after tax), principally related to the closing of itsGodfrey, Illinois machine parts manufacturing operation.  See Note 18 for additional details.

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

·                  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 20 for more information.

·                  Manufacturing costs for the first quarter of2005 included a favorable adjustment of approximately $10.0 million to theCompany’s accruals for self insured risks.

·                  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 theestimated amounts recorded in 2004 and the final amounts related to 2004accounted for a benefit of approximately $6.5 million.

**16.  Restructuring Accruals  **In September 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

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Companyalso closed 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 the third quarter of 2006.

Theclosing of these facilities will result 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.

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    |   |

 

Duringthe second quarter of 2005, the Company concluded its evaluation of acquiredcapacity in connection with the BSN Acquisition (see Note 22) and announced thepermanent closing of its Düsseldorf, Germany glass container factory, and theshutdown of a furnace at its Reims, France glass container facility, both in2005.  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.

Thesesecond quarter actions resulted in the elimination of approximately 400 jobsand a corresponding reduction in the Company’s workforce.  The Company expects to reduce fixed cashcosts by approximately €35 million per year by closing the Düsseldorf factory,shutting down the furnace at Reims and moving most of the production to otherlocations.  The Company anticipates thatit will pay a total of approximately €110.9 million in cash related to severance,benefits, plant clean-up, and other plant closing costs related torestructuring accruals.  In addition, theCompany expects to pay a total of approximately €65 million for other Europeanreorganization and integration activities, approximately 60% of which will beexpensed. Approximately 70% of these payments were made by the end of 2006 andthe Company expects that most of the balance will be paid by the end of 2007.

TheEuropean restructuring accrual recorded in the second quarter of 2005 was in additionto the initial estimated accrual of €63.8 million recorded in 2004. Selectedinformation related to the restructuring accrual is as follows, with 2006activity translated from Euros into dollars at the December 31, 2006 exchangerate:
| Total European restructuring  accrual (€110.9 million)       |   | $     | 134.1  |   |
|-------------------------------------------------------------------|--------|-------|--------|--------|
| Net cash paid,  principally severance and related benefits        |   | (41.0 | )      |
| Other,  principally 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 translation                                   |   | (1.5  | )      |
| Remaining  European restructuring accrual as of December 31, 2006 |   | $     | 38.1   |   |

 

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**17.  AdditionalInterest Charges from Early Extinguishment of Debt**      During 2006, the Company recordedadditional interest charges of $17.5 million ($17.1 million after tax) for noterepurchase premiums and the write-off of unamortized finance fees related to debtthat was repaid prior to its maturity. During 2005, the Company recorded additional interest charges of $1.4million ($1.0 million after tax) for the write-off of unamortized finance feesrelated to the reduction of available credit under the Company’s bank creditagreement.  During 2004, the Companyrecorded additional interest charges of $28.3 million ($18.5 million after tax)for note repurchase premiums and related write-off of unamortized finance feesand $7.1 million ($2.5 million after tax) for the write-off of unamortizedfinance fees related to the reduction of available credit under the Company’sbank credit agreement.

**18.  Contingencies**   OIInc. is one of a number of defendants in a substantial number of lawsuits filedin 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 formerbusiness units commercially produced and sold approximately $40 million of ahigh-temperature, calcium-silicate based pipe and block insulation materialcontaining asbestos.  OI Inc. exited thepipe and block insulation business in April 1958.  The traditional asbestos personal injurylawsuits and claims relating to such production and sale of asbestos materialtypically allege various theories of liability, including negligence, grossnegligence and strict liability and seek compensatory and in some cases,punitive damages in various amounts (herein referred to as “asbestos claims”).

Thefollowing table shows the approximate number of plaintiffs and claimantsinvolved in asbestos claims pending at the beginning of, disposed of and filedduring, and pending at the end of, each of the years listed (eliminatingduplicate filings):
| ** **                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Pending at  beginning of year |       | 32,000   |       | 35,000   |       | 29,000   |       |
| Disposed                      |       | 21,000   |       | 12,000   |       | 9,000    |       |
| Filed                         |       | 7,000    |       | 9,000    |       | 15,000   |       |
| Pending at end of year        |       | 18,000   |       | 32,000   |       | 35,000   |       |

 

Basedon an analysis of the claims and lawsuits pending as of December 31, 2006, approximately91% of plaintiffs and claimants either do not specify the monetary damagessought, or in the case of court filings, claim an amount sufficient to invokethe jurisdictional minimum of the trial court. Approximately 8% of plaintiffs specifically plead damages of $15 millionor less, and 1% of plaintiffs specifically plead damages greater than $15million but less than $100 million. Fewer than 1% of plaintiffs specifically plead damages $100 million orgreater but less than $123 million.

Asindicated by the foregoing summary, current pleading practice permitsconsiderable variation in the assertion of monetary damages.  This variability, together with the actualexperience discussed further below of litigating or resolving throughsettlement hundreds of thousands of asbestos claims and lawsuits over anextended period, demonstrates that the monetary relief which may be specifiedin a lawsuit or claim bears little relevance to its merits or dispositionvalue.  Rather, the amount potentiallyrecoverable for a specific claimant is determined by other factors such as theclaimant’s severity of disease, product identification evidence againstspecific defendants, the defenses available to those defendants, the specificjurisdiction in which the claim is made, the claimant’s history of smoking orexposure to other possible disease-causative factors, and the various othermatters discussed further below.

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Inaddition to the pending claims set forth above, OI Inc. has claims-handlingagreements in place with many plaintiffs’counsel throughout the country.  Theseagreements require evaluation and negotiation regarding whether particularclaimants qualify under the criteria established by such agreements. Thecriteria for such claims include verification of a compensable illness and areasonable probability of exposure to a product manufactured by OI Inc.’sformer business unit during its manufacturing period ending in 1958.  Some plaintiffs’ counsel have historicallywithheld claims under these agreements for later presentation while focusingtheir attention on active litigation in the tort system.  OI Inc. believes that as of December 31, 2006there are approximately 18,000 claims against other defendants and which are likelyto be asserted some time in the future against the Company. These claims arenot included in the totals set forth above. OI Inc. further believes that the bankruptcies of additionalco-defendants, as discussed below, resulted in an acceleration of thepresentation and disposition of a number of these previously withheldpreexisting claims under such agreements, which claims would otherwise havebeen presented and disposed of over the next several years.  This acceleration resulted in a significantincrease in the dispositions and cash payments during the period 2001-2002;however, the resolution of the accumulated yet previously unpresented casescontinues to affect the annual dispositions and cash payments.

OIInc. is also a defendant in other asbestos-related lawsuits or claims involvingmaritime workers, medical monitoring claimants, co-defendants and propertydamage claimants.  Based upon its pastexperience, OI Inc. believes that these categories of lawsuits and claims willnot involve any material liability and they are not included in the above description of pending matters or inthe following description of disposed matters.

Sincereceiving its first asbestos claim, OI Inc. as of December 31, 2006, hasdisposed of the asbestos claims of approximately 347,000 plaintiffs andclaimants at an average indemnity payment per claim of approximately$6,425.  Certain of these dispositionshave included deferred amounts payable over a number of years.  Deferred amounts payable totaledapproximately $82.6 million at December 31, 2006 ($91 million at December 31,2005) and are included in the foregoing average indemnity payment perclaim.  OI Inc.’s indemnity payments forthese claims have varied on a per claim basis, and are expected to continue tovary considerably over time.  Asdiscussed above, a part of OI Inc.’s objective is to achieve, where possible,resolution of asbestos claims pursuant to claims-handling agreements.  Under such agreements, qualification bymeeting certain illness and exposure criteria has tended to reduce the numberof claims presented to OI Inc. thatwould ultimately be dismissed or rejected due to the absence of impairment orproduct exposure evidence.  OI Inc.expects that as a result, although aggregate spending may be lower, there maybe an increase in the per claim average indemnity payment involved in suchresolution.

OIInc. believes that its ultimate asbestos-related liability (i.e., its indemnitypayments or other claim disposition costs plus related legal fees) cannot beestimated with certainty. Beginning with the initial liability of $975 millionestablished in 1993, OI Inc. has accrued a total of approximately $3.11 billionthrough 2006, before insurance recoveries, for its asbestos-relatedliability.  OI Inc.’s ability toreasonably estimate its liability has been significantly affected by thevolatility of asbestos-related litigation in the United States, the expandinglist of non-traditional defendants that have been sued in this litigation andfound liable for substantial damage awards, the continued use of litigationscreenings to generate new lawsuits, the large number of claims asserted orfiled by parties who claim prior exposure to asbestos materials but have nopresent physical impairment as a result of such exposure, and the growingnumber of co-defendants that have filed for bankruptcy.

OIInc. has continued to monitor trends which may affect its ultimate liabilityand has continued to analyze the developments and variables affecting or likelyto affect the resolution of pending and future asbestos claims against OIInc.  The material components of OI Inc.’saccrued liability are based on

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amountsestimated by OI Inc. in connection with its annual comprehensive review andconsist of the following: (i) the reasonably probable contingent liability forasbestos claims already asserted against OI Inc., (ii) the contingent liabilityfor preexisting but unasserted asbestos claims for prior periods arising underits administrative claims-handling agreements with various plaintiffs’ counsel,(iii) the contingent liability for asbestos claims not yet asserted against OIInc., but which OI Inc. believes it is reasonably probable will be asserted inthe next several years, to the degree that an estimation as to future claims ispossible, and (iv) the legal defense costs likely to be incurred in connectionwith the foregoing types of claims.

Thesignificant assumptions underlying the material components of OI Inc.’s accrualare:

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

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

c)  the extent of decrease orincrease in the inventory of pending serious disease cases;

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

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

f)   the extent to whichadditional defendants with substantial resources and assets are required toparticipate significantly in the resolution of future asbestos lawsuits andclaims;

g)  the number and timing ofco-defendant bankruptcies; and

h)  the extent to which theresolution of co-defendant bankruptcies divert resources to unimpairedclaimants.

OIInc. conducts a comprehensive review of its asbestos-related liabilities andcosts annually in connection with finalizing and reporting its annual resultsof operations, unless significant changes in trends or new developments warrantan earlier review.  If the results of anannual comprehensive review indicate that the existing amount of the accruedliability is insufficient to cover its estimated future asbestos-related costs,then OI Inc. will record an appropriate charge to increase the accruedliability.  OI Inc. believes that anestimation of the reasonably probable amount of the contingent liability forclaims not yet asserted against OI Inc. is not possible beyond a period ofseveral years.  Therefore, while theresults of future annual comprehensive reviews cannot be determined, OI Inc.expects the addition of one year to the estimation period will result in anannual charge.

The ultimate amount of distributions which may be required to be made by the Company and other subsidiaries of OI Inc. to fund OI Inc.’s asbestos-related payments cannot be estimated with certainty.  OI Inc.’s reported results of operations for 2006 were materially affected by the $120.0 million fourth quarter charge and asbestos-related payments continue to be substantial.  Any future additional charge would likewise materially affect OI Inc.’s results of operations for the period in which it is recorded. Also, the continued use of significant amounts of cash for asbestos-related costs has affected and will continue to affect the Company’s and OI Inc.’s cost of borrowing and their ability to pursue global or domestic acquisitions. However, the Company believes that its operating cash flows and other sources of liquidity

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will be sufficient to fund OI Inc.’s asbestos-related payments and to fund the Company’s working capital and capital expenditure requirements on a short-term and long-term basis.

Other litigation is pending against the Company, inmany cases involving ordinary and routine claims incidental to the business ofthe Company and in others presenting allegations that are nonroutine andinvolve compensatory, punitive or treble damage claims as well as other typesof relief.  In accordance with FAS No. 5,“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 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 suchmatters and experience to date, that such ultimate liability will not have amaterial adverse effect on its results of operations, cash flows or financialcondition.

**19.  Segment Information**   TheCompany operates in the rigid packaging industry.  The Company has two reportable productsegments within the rigid packaging industry: (1) Glass Containers and (2) Plastics Packaging.  The Glass Containers segment includesoperations in Europe, the Americas, and the Asia Pacific region.  The Plastics Packaging segment consists ofhealthcare containers, prescription containers, and closures.

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

Segment Operating Profit for product segmentsincludes an allocation of some corporate expenses based on both a percentage ofsales and direct billings based on the costs of specific servicesprovided.  For the Company’s U.S. pensionplans, net periodic pension cost has been allocated to product segments.   The information below is presented on acontinuing operations basis, and therefore, the 2004 amounts exclude amountsrelated to the discontinued operations.  See Note 21 for more information.

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Financialinformation regarding the Company’s product segments is as follows: 
| ** **                                                       | ** ** | ** **     | ** ** | ** **    | ** ** | ** **   | ** ** | **Eliminations** | ** ** | ** **       | ** ** |
|------------------------------------------------------------------|------------|----------------|------------|---------------|------------|--------------|------------|------------------|------------|------------------|------------|
| ** **                                                       | ** ** | ** **     | ** ** | ** **    | ** ** | ** **   | ** ** | **and**          | ** ** | ** **       | ** ** |
| ** **                                                       | ** ** | ** **     | ** ** | ** **    | ** ** | **Total**    | ** ** | **Other**        | ** ** | ** **       | ** ** |
| ** **                                                       | ** ** | **Glass**      | ** ** | **Plastics**  | ** ** | **Product**  | ** ** | **Retained**     | ** ** | **Consolidated** | ** ** |
| ** **                                                       | ** ** | **Containers** | ** ** | **Packaging** | ** ** | **Segments** | ** ** | **Costs**        | ** ** | **Totals**       | ** ** |
| Net sales:                                                       |       |           |       |          |       |         |       |             |       |             |       |
| 2006                                                             |       | $              | 6,650.4    |          | $          | 771.6        |       | $                | 7,422.0    |             |       |   | $ | 7,422.0 |   |
| 2005                                                             |       | 6,266.9        |       | 812.1         |       | 7,079.0      |       |             |       | 7,079.0          |       |
| 2004                                                             |       | 5,366.1        |       | 762.3         |       | 6,128.4      |       |             |       | 6,128.4          |       |
| Segment  Operating Profit:                                       |       |           |       |          |       |         |       |             |       |             |       |
| 2006                                                             |       | $              | 751.3      |          | $          | 114.5        |       | $                | 865.8      |             | $          | (91.2 | ) | $ | 774.6 |   |
| 2005                                                             |       | 790.8          |       | 127.2         |       | 918.0        |       | (89.4            | )          | 828.6            |       |
| 2004                                                             |       | 759.6          |       | 115.0         |       | 874.6        |       | (102.2           | )          | 772.4            |       |
| Items excluded  from Segment Operating Profit:                   |       |           |       |          |       |         |       |             |       |             |       |
| 2006:                                                            |       |           |       |          |       |         |       |             |       |             |       |
| Charge for closing the Godfrey, Illinois plant                   |       | $              | (29.7      | )             |       |         | $          | (29.7            | )          |             |       | $ | (29.7 | ) |
| Mark to market effect of certain commodity futures  contracts    |       | (8.7           | )          |          |       | (8.7         | )          |             |       | (8.7             | )          |
| CEO and other transition charges                                 |       | (6.0           | )          |          |       | (6.0         | )          | (14.8            | )          | (20.8            | )          |
| Curtailment of postretirement benefits in The  Netherlands       |       | 15.9           |       |          |       | 15.9         |       |             |       | 15.9             |       |
| 2005:                                                            |       |           |       |          |       |         |       |             |       |             |       |
| Gain on the sale of the Corsico, Italy glass container  facility |       | 28.1           |       |          |       | 28.1         |       |             |       | 28.1             |       |
| Mark to market effect of certain commodity futures  contracts    |       | 3.8            |       |          |       | 3.8          |       |             |       | 3.8              |       |
| Goodwill impairment                                              |       | (494.0         | )          |          |       | (494.0       | )          |             |       | (494.0           | )          |
| 2004:                                                            |       |           |       |          |       |         |       |             |       |             |       |
| Gain on the sale of certain real property                        |       | 20.6           |       |          |       | 20.6         |       |             |       | 20.6             |       |
| Italian Specialty Glass gain                                     |       | 31.0           |       |          |       | 31.0         |       |             |       | 31.0             |       |
| Mark to market effect of certain commodity futures  contracts    |       | 4.9            |       |          |       | 4.9          |       |             |       | 4.9              |       |
| Restructuring of  a life insurance program                       |       |           |       |          |       |         |       | (6.4             | )          | (6.4             | )          |
|                                                                  |            |                |            |               |            |              |            |                  |            |                  |            |  |  |  |  |  |

 

89

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| ** **                              | ** ** | ** **     | ** ** | ** **    | ** ** | ** **   | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------------------|------------|----------------|------------|---------------|------------|--------------|------------|------------------|------------|------------------|------------|
| ** **                              | ** ** | ** **     | ** ** | ** **    | ** ** | ** **   | ** ** | **Eliminations** | ** ** | ** **       | ** ** |
| ** **                              | ** ** | ** **     | ** ** | ** **    | ** ** | **Total**    | ** ** | **and**          | ** ** | ** **       | ** ** |
| ** **                              | ** ** | **Glass**      | ** ** | **Plastics**  | ** ** | **Product**  | ** ** | **Other**        | ** ** | **Consolidated** | ** ** |
| ** **                              | ** ** | **Containers** | ** ** | **Packaging** | ** ** | **Segments** | ** ** | **Retained**     | ** ** | **Totals**       | ** ** |
| Depreciation and  amortization expense: |       |           |       |          |       |         |       |             |       |             |       |
| 2006                                    |       | $              | 455.4      |          | $          | 46.2         |       | $                | 501.6      |             | $          | 7.6 |   | $ | 509.2 |   |
| 2005                                    |       | 465.3          |       | 49.5          |       | 514.8        |       | 9.2              |       | 524.0            |       |
| 2004                                    |       | 407.5          |       | 55.4          |       | 462.9        |       | 11.9             |       | 474.8            |       |
| Total assets:                           |       |           |       |          |       |         |       |             |       |             |       |
| 2006                                    |       | $              | 8,021.6    |          | $          | 705.6        |       | $                | 8,727.2    |             | $          | 593.5 |   | $ | 9,320.7 |   |
| 2005                                    |       | 7,575.7        |       | 754.0         |       | 8,329.7      |       | 1,190.9          |       | 9,520.6          |       |
| 2004                                    |       | 8,579.4        |       | 789.3         |       | 9,368.7      |       | 1,181.4          |       | 10,550.1         |       |
| Capital  expenditures (1):              |       |           |       |          |       |         |       |             |       |             |       |
| 2006                                    |       |           |       |          |       |         |       |             |       |             |       |
| Continuing                              |       | $              | 270.7      |          | $          | 35.3         |       | $                | 306.0      |             | $          | 14.3 |   | $ | 320.3 |   |
| 2005                                    |       |           |       |          |       |         |       |             |       |             |       |
| Continuing                              |       | 366.2          |       | 31.1          |       | 397.3        |       | 6.8              |       | 404.1            |       |
| 2004                                    |       |           |       |          |       |         |       |             |       |             |       |
| Continuing                              |       | 405.7          |       | 30.4          |       | 436.1        |       | 0.6              |       | 436.7            |       |
| Discontinued                            |       |           |       | 25.1          |       | 25.1         |       |             |       | 25.1             |       |

 

----

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

90

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Financialinformation regarding the Company’s geographic segments is as follows:
| ** **                                                       | ** ** | ** **  | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | **Total**      | ** ** |
|------------------------------------------------------------------|------------|-------------|------------|------------|------------|-------------|------------|-------------|------------|----------------|------------|
| ** **                                                       | ** ** | **North**   | ** ** | ** ** | ** ** | **Asia**    | ** ** | **South**   | ** ** | **Geographic** | ** ** |
| ** **                                                       | ** ** | **America** | ** ** | **Europe** | ** ** | **Pacific** | ** ** | **America** | ** ** | **Segments**   | ** ** |
| Net sales:                                                       |       |        |       |       |       |        |       |        |       |           |       |
| 2006                                                             |       | $           | 2,917.0    |       | $          | 2,865.9     |       | $           | 833.8      |           | $          | 805.3 |   | $ | 7,422.0 |   |
| 2005                                                             |       | 2,701.4     |       | 2,840.0    |       | 844.7       |       | 692.9       |       | 7,079.0        |       |
| 2004                                                             |       | 2,551.6     |       | 2,138.8    |       | 870.9       |       | 567.1       |       | 6,128.4        |       |
| Segment  Operating Profit:                                       |       |        |       |       |       |        |       |        |       |           |       |
| 2006                                                             |       | $           | 318.5      |       | $          | 244.9       |       | $           | 102.4      |           | $          | 200.0 |   | $ | 865.8 |   |
| 2005                                                             |       | 345.0       |       | 279.4      |       | 136.3       |       | 157.3       |       | 918.0          |       |
| 2004                                                             |       | 365.1       |       | 242.3      |       | 142.1       |       | 125.1       |       | 874.6          |       |
| Items excluded  from Segment Operating Profit:                   |       |        |       |       |       |        |       |        |       |           |       |
| 2006:                                                            |       |        |       |       |       |        |       |        |       |           |       |
| Charge for closing the Godfrey, Illinois plant                   |       | $           | (29.7      | )          |       |        |       |        |       |           | $          | (29.7 | ) |
| Mark to market effect of certain commodity futures  contracts    |       | (8.7        | )          |       |       |        |       |        |       | (8.7           | )          |
| Curtailment of postretirement benefits in The Netherlands        |       |        |       | $          | 15.9       |        |       |        |       |           | 15.9       |   |
| CEO and other transition charges                                 |       |        |       | (6.0       | )          |        |       |        |       | (6.0           | )          |
| 2005:                                                            |       |        |       |       |       |        |       |        |       |           |       |
| Gain on the sale of the Corsico, Italy glass  container facility |       |        |       | 28.1       |       |        |       |        |       | 28.1           |       |
| Mark to market effect of certain commodity futures  contracts    |       | 3.8         |       |       |       |        |       |        |       | 3.8            |       |
| Goodwill impairment                                              |       |        |       |       |       | $           | (494.0     | )           |       |           | (494.0     | ) |
| 2004:                                                            |       |        |       |       |       |        |       |        |       |           |       |
| Gain on the sale of certain real property                        |       |        |       | 20.6       |       |        |       |        |       | 20.6           |       |
| Italian Specialty Glass gain                                     |       |        |       | 31.0       |       |        |       |        |       | 31.0           |       |
| Mark to market  effect of certain commodity futures contracts    |       | 4.9         |       |       |       |        |       |        |       | 4.9            |       |

 

91

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TheCompany’s net property, plant and equipment by geographic segment are asfollows:
|            | ** ** | **United** | ** ** | ** **  | ** ** | ** ** | ** ** |
|------------|------------|------------|------------|-------------|------------|------------|------------|
| ** ** | ** ** | **States** | ** ** | **Foreign** | ** ** | **Total**  | ** ** |
| 2006       |       | $          | 1,013.4    |        | $          | 2,180.3    |       | $ | 3,193.7 |   |
| 2005       |       | 1,025.5    |       | 2,127.0     |       | 3,152.5    |       |
| 2004       |       | 988.1      |       | 2,509.6     |       | 3,497.7    |       |
|            |            |            |            |             |            |            |            |  |  |  |

 

TheCompany’s net sales by geographic segment are as follows:
|            | ** ** | **United** | ** ** | ** **  | ** ** | ** ** | ** ** |
|------------|------------|------------|------------|-------------|------------|------------|------------|
| ** ** | ** ** | **States** | ** ** | **Foreign** | ** ** | **Total**  | ** ** |
| 2006       |       | $          | 2,504.3    |        | $          | 4,917.7    |       | $ | 7,422.0 |   |
| 2005       |       | 2,330.7    |       | 4,748.3     |       | 7,079.0    |       |
| 2004       |       | 2,194.5    |       | 3,933.9     |       | 6,128.4    |       |
|            |            |            |            |             |            |            |            |  |  |  |

 

Operationsin individual countries outside the United States that accounted for more than10% of  consolidated net sales fromcontinuing operations were in Italy (2004 – 10.7%), France (2006 - 17.3%, 2005 –13.8%), and Australia (2004 – 10.6%).

Reconciliationsto consolidated totals are as follows:
| ** **                                                                                                                                                                                   | ** ** | **2006** | ** **  | **2005**     | ** ** | **2004**    | ** **   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|-------------|--------------|------------|-------------|--------------|
| Revenues:                                                                                                                                                                                    |       |     |        |         |       |        |         |
| Net sales for reportable segments                                                                                                                                                            |       | $        | 7,422.0     |         | $          | 7,079.0     |         | $ | 6,128.4 |   |
| Royalties and net technical assistance                                                                                                                                                       |       | 17.8     |        | 16.9         |       | 21.1        |         |
| Equity earnings                                                                                                                                                                              |       | 25.7     |        | 22.6         |       | 27.8        |         |
| Interest income                                                                                                                                                                              |       | 19.5     |        | 16.6         |       | 15.3        |         |
| Other revenue                                                                                                                                                                                |       | 38.5     |        | 54.6         |       | 70.8        |         |
| Total                                                                                                                                                                                        |       | $        | 7,523.5     |         | $          | 7,189.7     |         | $ | 6,263.4 |   |
| Reconciliation  of Segment Operating Profit to earnings (loss) from continuing operations before  income taxes, and minority share owners’ interest in earnings of  subsidiaries:  |       |     |        |         |       |        |         |
| Segment Operating Profit for reportable segments                                                                                                                                        |       | $        | 865.8  |    | $          | 918.0  |    | $ | 874.6  |   |
| Items excluded from Segment Operating Profit                                                                                                                                                 |       | (28.5    | )           | (462.1       | )          | 56.5        |         |
| Eliminations and other retained items, excluding certain  items below                                                                                                                        |       | (91.2    | )           | (89.4        | )          | (102.2      | )            |
| Items excluded from eliminations and other retained  items                                                                                                                                   |       | (14.8    | )           |         |       | (6.4        | )            |
| Interest expense                                                                                                                                                                             |       | (488.2   | )           | (466.7       | )          | (474.9      | )            |
| Interest income                                                                                                                                                                              |       | 19.5     |        | 16.6         |       | 15.3        |         |
| Total                                                                                                                                                                                        |       | $        | 262.6       |         | $          | (83.6       | )            | $ | 362.9 |   |

 

92

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**20.**  **Goodwill**   The changes in the carrying amount ofgoodwill for the years ended December 31, 2004, 2005 and 2006 are as follows:
| ** **                                                                                   | ** ** | **Glass**      | ** ** | **Plastics**  | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------|------------|---------------|------------|------------|------------|
| ** **                                                                                   | ** ** | **Containers** | ** ** | **Packaging** | ** ** | **Total**  | ** ** |
| Balance as of  January 1, 2004                                                               |       | $              | 1,911.1    |          | $          | 369.1      |       | $ | 2,280.2 |   |
| Goodwill  acquired during the year                                                           |       | 696.0          |       |          |       | 696.0      |       |
| Translation  effects                                                                         |       | 165.6          |       |          |       | 165.6      |       |
| Sale of  discontinued operations                                                             |       |           |       | (151.1        | )          | (151.1     | )          |
| Other changes,  principally adjustments to acquisition-related deferred tax assets           |       | 18.4           |       |          |       | 18.4       |       |
| Balance as of  December 31, 2004                                                             |       | 2,791.1        |       | 218.0         |       | 3,009.1    |       |
| Translation  effects                                                                         |       | (160.9         | )          |          |       | (160.9     | )          |
| Write-down of  goodwill                                                                      |       | (494.0         | )          |          |       | (494.0     | )          |
| Other changes,  principally adjustments to finalize acquisition purchase price               |       | 15.0           |       |          |       | 15.0       |       |
| Balance as of  December 31, 2005                                                             |       | 2,151.2        |       | 218.0         |       | 2,369.2    |       |
| Translation  effects                                                                         |       | 133.6          |       |          |       | 133.6      |       |
| Other changes,  principally adjustments to reverse foreign deferred tax valuation allowances |       | (38.1          | )          |          |       | (38.1      | )          |
| Balance as of December  31, 2006                                                             |       | $              | 2,246.7    |          | $          | 218.0      |       | $ | 2,464.7 |   |

 

Duringthe fourth quarter of 2004, the Company completed its annual impairment testingand determined that no impairment existed.

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 the valuation of theunit’s identifiable assets, the Company recorded an impairment charge of $494.0million to reduce the reported value of its goodwill.

Duringthe fourth quarter of 2006, the Company completed its annual impairment testingand determined that no impairment existed.

**21. Discontinued Operations **On October 7, 2004, the Company announced that it had completed thesale of its blow-molded plastic container operations in North America, SouthAmerica and Europe, to Graham Packaging Company.

Cashproceeds of approximately $1.2 billion were used to repay term loans under theCompany’s bank credit facility, which was amended to permit the sale.  The sale agreement included a post-closingpurchase price adjustment based on changes in certain working capitalcomponents and certain other assets and liabilities of the business.  This adjustment was finalized in April 2005,and Graham was paid approximately $39 million. The adjustment did not impact results of operations.

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Includedin the sale were 24 plastics manufacturing plants in the U.S., two in Mexico,three in Europe and two in South America, serving consumer products companiesin the food, beverage, household, chemical and personal care industries.  The blow-molded plastic container operationswere part of the consumer products business unit of the plastics packagingsegment.

Asrequired by FAS No. 144, the Company has presented the results of operationsfor the blow-molded plastic container business in the Consolidated Results ofOperations for 2004 as a discontinued operation.  Interest expense was allocated todiscontinued operations based on debt that was required to be repaid from theproceeds.

The following summarizes the revenues and expenses of the discontinuedoperations as reported in the condensed consolidated results of operations forthe period indicated:

|                                           | ** ** | **Year ended**   | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **December 31,** | ** ** |
| ** **                                | ** ** | **2004**              | ** ** |
| **Revenues:**                             |       |                  |       |
|                                      |       |                  |       |
| Net sales                                 |       | $                     | 875.3      |   |
| Other revenue                             |       | 7.7                   |       |
|                                      |       | 883.0                 |       |
| **Costs and expenses:**                   |       |                  |       |
| ** **                                |       |                  |       |
| Manufacturing, shipping  and delivery     |       | 754.6                 |       |
| Research, development  and engineering    |       | 16.0                  |       |
| Selling and  administrative               |       | 23.7                  |       |
| Interest                                  |       | 45.1                  |       |
| Other                                     |       | 22.9                  |       |
|                                      |       | 862.3                 |       |
| Earnings before items  below              |       | 20.7                  |       |
| Provision for income  taxes               |       | 27.1                  |       |
| Gain on sale of  discontinued operations  |       | 70.4                  |       |
| Net earnings from discontinued operations |       | $                     | 64.0       |   |

 

The sale of theblow-molded plastic business resulted in a substantial capital loss, primarilyrelated to previous goodwill write downs that were not deductible whenrecorded.  The 2004 gain on the sale ofdiscontinued operations of $70.4 million includes a credit for income taxes of$39.7 million, representing the tax benefit from offsetting a portion of theloss against otherwise taxable capital gains.

Discontinued operations of $63.0 million for 2005includes $61.8 million for a benefit from the reversal of an accrual forpotential tax liabilities related to a previous divestiture.  The accrual is no longer required based onthe Company’s reassessment of the potential liabilities due to several factors,including statute expiration in September 2005. The balance of $1.2 million relates to an adjustment of the 2004 gain onthe sale of the blow-molded plastic container operations principally fromfinalizing certain tax allocations.

**22.**  **Acquisition of BSNGlasspack, S.A.  **On June 21, 2004, the Company completed theacquisition of BSN Glasspack, S.A. (“BSN”) from Glasspack Participations (the “BSNAcquisition”).  Total consideration forthe BSN Acquisition was approximately $1.3 billion, including the assumption ofapproximately $650 million of debt, a portion of which was refinanced inconnection with the BSN Acquisition.  BSNwas the second largest glass container manufacturer in Europe withmanufacturing

94

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facilities in France, Spain, Germany and theNetherlands.  The BSN Acquisition wasfinanced with borrowings under the Company’s Second Amended and RestatedSecured Credit Agreement.  In order tosecure the European Commission’s approval, the Company committed to divest theBarcelona, Spain, and Corsico, Italy glass plants.  The Company completed the sale of theseplants in January 2005 and received cash proceeds of approximately €138.2million.

Had the BSN Acquisition and the related financingoccurred at the beginning of 2004, pro forma consolidated net sales and netearnings would have been as follows:
| ** **                           | ** ** | **Year ended December 31, 2004** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|
| ** **                           | ** ** | **As**                                               | ** ** | **BSN** | ** ** | **Financing** | ** ** | **Pro Forma** | ** ** |
| ** **                           | ** ** | **Reported**                                         | ** ** | **Adjustments** | ** ** | **Adjustments** | ** ** | **As Adjusted** | ** ** |
| Net sales                            |       | $                                                    | 6,128.4    |   | $ | 752.5 |   |   |   | $ | 6,880.9 |   |
| Earnings from  continuing operations |       | $                                                    | 256.4      |   | $ | 17.6 |   | $ | (6.4 | ) | $ | 267.6 |   |
|                                      |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |

 

The 2004 earningsincluded the step-up effect of the finished goods inventory acquired in theAcquisition that reduced gross profit by approximately $31.1 million.  The 2004 earnings include estimatedamortization related to the $48.1 million of intangible assets recorded forcustomer relationships.   At averageexchange rates for each respective year, the pro forma amortization of theintangible asset was $4.0 million (net of tax) for 2004.

**23.**  **Financial Information forSubsidiary Guarantors and Non-Guarantors  **The following presents condensed consolidating financialinformation for the Company, segregating: (1) Owens-Illinois Group, Inc. (the “Parent”); (2) Owens-Brockway GlassContainer Inc. (the “Issuer”); (3) those domestic subsidiaries that guaranteethe 8 7/8%, 8 3⁄4% and 7 3⁄4% Senior Secured Notes of the Issuer and 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”).  The Guarantor Subsidiaries are 100% owneddirect and indirect subsidiaries of the Parent 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 have been made to conform all of the financialinformation to the financial presentation on a consolidated basis.  The principal eliminations relate toinvestments in subsidiaries and inter-company balances and transactions.

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| ** **                                               | ** ** | **December 31, 2006** | ** ** |
|----------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                               | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                               | ** ** | ** **                      | ** ** | ** ** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Balance Sheet**                                        | ** ** | **Parent**                      | ** ** | **Issuer** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Current assets:                                          |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Accounts receivable                                      |       | $                               | —     |   | $ | 78.3 |   | $ | 53.1 |   | $ | 966.4 |   | $ | — |   | $ | 1,097.8 |   |
| Inventories                                              |       |                            |       | 150.9 |   | 45.0 |   | 843.1 |   |   |   | 1,039.0 |   |
| Other current assets                                     |       |                            |       | 17.7 |   | 8.1 |   | 270.1 |   |   |   | 295.9 |   |
| 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 |   | 223.4 |   | 1,679.2 |   |   |   | 2,464.7 |   |
| Other  non-current assets                                |       |                            |       | 188.1 |   | 543.8 |   | 504.0 |   | (6.3 | ) | 1,229.6 |   |
| Total other assets                                       |       | 2,094.3                         |       | 4,117.3 |   | 769.5 |   | 2,183.2 |   | (5,470.0 | ) | 3,694.3 |   |
| Property, plant  and equipment, net                      |       |                            |       | 667.3 |   | 346.1 |   | 2,180.3 |   |   |   | 3,193.7 |   |
| 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 |   | $ | 118.4 |   | $ | 978.7 |   | $ | (0.8 | ) | $ | 1,479.5 |   |
| Short-term loans and long-term debt due within one  year |       | 300.0                           |       | (1.7 | ) |   |   | 438.9 |   |   |   | 737.2 |   |
| Total current  liabilities                               |       | 300.0                           |       | 381.5 |   | 118.4 |   | 1,417.6 |   | (0.8 | ) | 2,216.7 |   |
| Long-term debt                                           |       | 750.0                           |       | 3,291.3 |   | 20.1 |   | 665.3 |   |   |   | 4,726.7 |   |
| Other  non-current liabilities and minority interests    |       |                            |       | 75.9 |   | 271.8 |   | 978.3 |   | 7.0 |   | 1,333.0 |   |
| 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 |   |

 

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| ** **                                               | ** ** | **December 31, 2005** | ** ** |
|----------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                               | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                               | ** ** | ** **                      | ** ** | ** ** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Balance Sheet**                                   | ** ** | **Parent**                      | ** ** | **Issuer** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Current assets:                                          |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Accounts receivable                                      |       | $                               | —     |   | $ | 82.2 |   | $ | 66.8 |   | $ | 857.2 |   | $ | — |   | $ | 1,006.2 |   |
| Inventories                                              |       |                            |       | 129.7 |   | 50.0 |   | 760.7 |   |   |   | 940.4 |   |
| Other current assets                                     |       |                            |       | 5.5 |   | 59.3 |   | 270.9 |   |   |   | 335.7 |   |
| Total current assets                                     |       | —                          |       | 217.4 |   | 176.1 |   | 1,888.8 |   | — |   | 2,282.3 |   |
| Investments in  and advances to subsidiaries             |       | 2,247.7                         |       | 3,222.6 |   | (46.6 | ) |   |   | (5,423.7 | ) | — |   |
| Goodwill                                                 |       |                            |       | 562.0 |   | 223.4 |   | 1,583.8 |   |   |   | 2,369.2 |   |
| Other  non-current assets                                |       |                            |       | 212.8 |   | 1,087.4 |   | 423.1 |   | (6.7 | ) | 1,716.6 |   |
| Total other  assets                                      |       | 2,247.7                         |       | 3,997.4 |   | 1,264.2 |   | 2,006.9 |   | (5,430.4 | ) | 4,085.8 |   |
| Property, plant  and equipment, net                      |       |                            |       | 695.7 |   | 329.8 |   | 2,127.0 |   |   |   | 3,152.5 |   |
| Total assets                                             |       | $                               | 2,247.7    |   | $ | 4,910.5 |   | $ | 1,770.1 |   | $ | 6,022.7 |   | $ | (5,430.4 | ) | $ | 9,520.6 |   |
| Current  liabilities :                                   |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable and accrued liabilities                 |       | $                               | —     |   | $ | 334.9 |   | $ | 120.2 |   | $ | 932.2 |   | $ | (1.7 | ) | $ | 1,385.6 |   |
| Short-term loans and long-term debt due within one  year |       |                            |       |   |   |   |   | 278.3 |   |   |   | 278.3 |   |
| Total current  liabilities                               |       | —                          |       | 334.9 |   | 120.2 |   | 1,210.5 |   | (1.7 | ) | 1,663.9 |   |
| Long-term debt                                           |       | 1,050.0                         |       | 3,382.0 |   | 6.8 |   | 583.2 |   |   |   | 5,022.0 |   |
| Other  non-current liabilities and minority interests    |       |                            |       | 95.0 |   | 494.0 |   | 1,042.1 |   | 5.9 |   | 1,637.0 |   |
| Investments by  and advances from parent                 |       |                            |       | 1,098.6 |   | 1,149.1 |   | 3,186.9 |   | (5,434.6 | ) | — |   |
| Share owner’s  equity                               |       | 1,197.7                         |       |   |   |   |   |   |   |   |   | 1,197.7 |   |
| Total liabilities and  share owner’s equity         |       | $                               | 2,247.7    |   | $ | 4,910.5 |   | $ | 1,770.1 |   | $ | 6,022.7 |   | $ | (5,430.4 | ) | $ | 9,520.6 |   |

 

97

----

 
| ** **                                                         | ** ** | **Year ended December 31, 2006** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                         | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | ** **                                           | ** ** | ** ** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Results of Operations**                                | ** ** | **Parent**                                           | ** ** | **Issuer** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales                                                          |       | $                                                    | —     |   | $ | 1,849.3 |   | $ | 707.4 |   | $ | 4,966.3 |   | $ | (101.0 | ) | $ | 7,422.0 |   |
| Interest                                                           |       |                                                 |       | — |   | 1.0 |   | 18.5 |   |   |   | 19.5 |   |
| Equity earnings  from subsidiaries                                 |       | 92.5                                                 |       | 265.7 |   | 27.0 |   |   |   | (385.2 | ) | — |   |
| Other equity  earnings                                             |       |                                                 |       | 10.5 |   | 6.1 |   | 9.1 |   |   |   | 25.7 |   |
| Other revenue                                                      |       |                                                 |       | 81.9 |   | 13.7 |   | 32.7 |   | (72.0 | ) | 56.3 |   |
| Total revenue                                                      |       | 92.5                                                 |       | 2,207.4 |   | 755.2 |   | 5,026.6 |   | (558.2 | ) | 7,523.5 |   |
| Manufacturing,  shipping, and delivery                             |       |                                                 |       | 1,632.4 |   | 535.4 |   | 4,060.9 |   | (144.7 | ) | 6,084.0 |   |
| Research,  engineering, selling, administrative, and other         |       |                                                 |       | 133.2 |   | 173.4 |   | 382.1 |   |   |   | 688.7 |   |
| Net intercompany  interest                                         |       | (82.4                                                | )          | (32.4 | ) | 84.3 |   | 30.5 |   |   |   | — |   |
| Other interest  expense                                            |       | 82.4                                                 |       | 314.3 |   | 1.2 |   | 90.3 |   |   |   | 488.2 |   |
| Total costs and expense                                            |       | —                                               |       | 2,047.5 |   | 794.3 |   | 4,563.8 |   | (144.7 | ) | 7,260.9 |   |
| Earnings (loss)  before items below                                |       | 92.5                                                 |       | 159.9 |   | (39.1 | ) | 462.8 |   | (413.5 | ) | 262.6 |   |
| Provision  (credit) for income taxes                               |       |                                                 |       | 8.9 |   | (10.5 | ) | 128.1 |   |   |   | 126.5 |   |
| Minority share  owners’ interests in earnings of subsidiaries |       |                                                 |       |   |   |   |   | 42.0 |   | 1.6 |   | 43.6 |   |
| Net earnings (loss)                                                |       | $                                                    | 92.5       |   | $ | 151.0 |   | $ | (28.6 | ) | $ | 292.7 |   | $ | (415.1 | ) | $ | 92.5 |   |

 

98

----

 
| ** **                                                         | ** ** | **Year ended December 31, 2005** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                         | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | ** **                                           | ** ** | ** ** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Results of Operations**                                | ** ** | **Parent**                                           | ** ** | **Issuer** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales                                                          |       | $                                                    | —     |   | $ | 1,661.9 |   | $ | 700.5 |   | $ | 4,794.9 |   | $ | (78.3 | ) | $ | 7,079.0 |   |
| Interest                                                           |       |                                                 |       |   |   | 2.3 |   | 14.3 |   |   |   | 16.6 |   |
| Equity earnings  from subsidiaries                                 |       | (535.6                                               | )          | (192.9 | ) | 4.3 |   |   |   | 724.2 |   | — |   |
| Other equity  earnings                                             |       |                                                 |       | 8.9 |   | 4.0 |   | 9.7 |   |   |   | 22.6 |   |
| Other revenue                                                      |       |                                                 |       | 52.7 |   | 7.6 |   | 55.8 |   | (44.6 | ) | 71.5 |   |
| Total revenue                                                      |       | (535.6                                               | )          | 1,530.6 |   | 718.7 |   | 4,874.7 |   | 601.3 |   | 7,189.7 |   |
| Manufacturing,  shipping, and delivery                             |       |                                                 |       | 1,395.7 |   | 531.2 |   | 3,910.2 |   | (117.6 | ) | 5,719.5 |   |
| Research,  engineering, selling, administrative, and other         |       |                                                 |       | 96.2 |   | 147.3 |   | 843.6 |   |   |   | 1,087.1 |   |
| Net intercompany  interest                                         |       | (85.0                                                | )          | (28.7 | ) | 57.0 |   | 56.7 |   |   |   | — |   |
| Other interest  expense                                            |       | 85.0                                                 |       | 286.7 |   | 2.0 |   | 93.0 |   |   |   | 466.7 |   |
| Total costs and expense                                            |       | —                                               |       | 1,749.9 |   | 737.5 |   | 4,903.5 |   | (117.6 | ) | 7,273.3 |   |
| Earnings (loss)  from continuing operations before items below     |       | (535.6                                               | )          | (219.3 | ) | (18.8 | ) | (28.8 | ) | 718.9 |   | (83.6 | ) |
| Provision  (benefit) for income taxes                              |       |                                                 |       | 3.1 |   | 289.4 |   | 125.3 |   | (1.7 | ) | 416.1 |   |
| Minority share  owners’ interests in earnings of subsidiaries |       |                                                 |       |   |   |   |   | 34.5 |   | 1.4 |   | 35.9 |   |
| Earnings from  continuing operations                               |       | (535.6                                               | )          | (222.4 | ) | (308.2 | ) | (188.6 | ) | 719.2 |   | (535.6 | ) |
| Net earnings  from discontinued operations                         |       | 63.0                                                 |       |   |   | 63.0 |   |   |   | (63.0 | ) | 63.0 |   |
| Net earnings                                                       |       | $                                                    | (472.6     | ) | $ | (222.4 | ) | $ | (245.2 | ) | $ | (188.6 | ) | $ | 656.2 |   | $ | (472.6 | ) |

 

99

----

 
| ** **                                                         | ** ** | **Year ended December 31, 2004** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                         | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | ** **                                           | ** ** | ** ** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Results of Operations**                                | ** ** | **Parent**                                           | ** ** | **Issuer** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Net sales                                                          |       | $                                                    | —     |   | $ | 1,620.4 |   | $ | 615.7 |   | $ | 3,970.6 |   | $ | (78.3 | ) | $ | 6,128.4 |   |
| Interest                                                           |       |                                                 |       | 0.1 |   | 1.5 |   | 13.7 |   |   |   | 15.3 |   |
| Equity earnings  from subsidiaries                                 |       | 256.4                                                |       | 301.1 |   | 10.1 |   |   |   | (567.6 | ) | — |   |
| Other equity  earnings                                             |       |                                                 |       | 10.9 |   | 10.3 |   | 6.6 |   |   |   | 27.8 |   |
| Other revenue                                                      |       |                                                 |       | 56.6 |   | 33.8 |   | 68.5 |   | (67.0 | ) | 91.9 |   |
| Total revenue                                                      |       | 256.4                                                |       | 1,989.1 |   | 671.4 |   | 4,059.4 |   | (712.9 | ) | 6,263.4 |   |
| Manufacturing,  shipping, and delivery                             |       |                                                 |       | 1,341.4 |   | 472.3 |   | 3,220.1 |   | (115.4 | ) | 4,918.4 |   |
| Research,  engineering, selling, administrative, and other         |       |                                                 |       | 101.6 |   | 150.3 |   | 255.1 |   | 0.2 |   | 507.2 |   |
| Net intercompany  interest                                         |       | (68.6                                                | )          | (36.9 | ) | 79.9 |   | 25.6 |   |   |   | — |   |
| Other interest  expense                                            |       | 68.6                                                 |       | 248.6 |   | 2.3 |   | 155.4 |   |   |   | 474.9 |   |
| Total costs and expense                                            |       | —                                               |       | 1,654.7 |   | 704.8 |   | 3,656.2 |   | (115.2 | ) | 5,900.5 |   |
| Earnings (loss)  from continuing operations before items below     |       | 256.4                                                |       | 334.4 |   | (33.4 | ) | 403.2 |   | (597.7 | ) | 362.9 |   |
| Provision  (benefit) for income taxes                              |       |                                                 |       | 46.8 |   | (34.2 | ) | 60.7 |   | 0.3 |   | 73.6 |   |
| Minority share  owners’ interests in earnings of subsidiaries |       |                                                 |       |   |   |   |   | 31.3 |   | 1.6 |   | 32.9 |   |
| Earnings from  continuing operations                               |       | 256.4                                                |       | 287.6 |   | 0.8 |   | 311.2 |   | (599.6 | ) | 256.4 |   |
| Net earnings from discontinued operations                          |       | 64.0                                                 |       |   |   | 61.8 |   | 2.2 |   | (64.0 | ) | 64.0 |   |
| Net earnings                                                       |       | $                                                    | 320.4      |   | $ | 287.6 |   | $ | 62.6 |   | $ | 313.4 |   | $ | (663.6 | ) | $ | 320.4 |   |

 

100

----

 
| ** **                                                                                   | ** ** | **Year ended December 31, 2006** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                   | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                   | ** ** | ** **                                           | ** ** | ** ** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cash Flows**                                                                          | ** ** | **Parent**                                           | ** ** | **Issuer** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Cash provided by  (used in) operating activities                                             |       | $                                                    | —     |   | $ | 26.3 |   | $ | 18.3 |   | $ | 365.2 |   | $ | (98.2 | ) | $ | 311.6 |   |
| Investing  Activities:                                                                       |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Additions to property, plant, and equipment                                                  |       |                                                 |       | (52.3 | ) | (48.1 | ) | (219.9 | ) |   |   | (320.3 | ) |
| 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                                                                          |       | —                                               |       | 0.0 |   | (20.8 | ) | (3.1 | ) | — |   | (23.9 | ) |
| Cash at  beginning of period                                                                 |       | —                                               |       | — |   | 30.6 |   | 216.0 |   | — |   | 246.6 |   |
| Cash at end of period                                                                        |       | $                                                    | —     |   | $ | 0.0 |   | $ | 9.8 |   | $ | 212.9 |   | — |   | $ | 222.7 |   |
|                                                                                              |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

101

----

 
| ** **                                                                                   | ** ** | **Year ended December 31, 2005** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                   | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                   | ** ** | ** **                                           | ** ** | ** ** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cash Flows**                                                                          | ** ** | **Parent**                                           | ** ** | **Issuer** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| 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                                                  |       |                                                 |       | (131.3 | ) | (36.3 | ) | (236.5 | ) |   |   | (404.1 | ) |
| 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                                                                          |       | —                                               |       | 0.0 |   | (1.6 | ) | (29.7 | ) | — |   | (31.3 | ) |
| Cash at  beginning of period                                                                 |       | —                                               |       | — |   | 32.2 |   | 245.7 |   | — |   | 277.9 |   |
| Cash at end of period                                                                        |       | $                                                    | —     |   | $ | 0.0 |   | $ | 30.6 |   | $ | 216.0 |   | — |   | $ | 246.6 |   |
|                                                                                              |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

102

----

 
| ** **                                       | ** ** | **Year ended December 31, 2004** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                       | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | ** **                                           | ** ** | ** ** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cash Flows**                              | ** ** | **Parent**                                           | ** ** | **Issuer** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Cash provided by  operating activities           |       | $                                                    | —     |   | $ | 156.0 |   | $ | 30.4 |   | $ | 662.3 |   | $ | (65.2 | ) | $ | 783.5 |   |
| Investing  Activities:                           |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Additions to property, plant, and equipment      |       |                                                 |       | (130.7 | ) | (48.7 | ) | (282.4 | ) |   |   | (461.8 | ) |
| Acquisitions, net of cash acquired               |       |                                                 |       |   |   |   |   | (630.3 | ) |   |   | (630.3 | ) |
| Proceeds from sales                              |       |                                                 |       | 2.8 |   | 1,182.5 |   | 245.6 |   |   |   | 1,430.9 |   |
| Cash provided by (used in) investing activities  |       | —                                               |       | (127.9 | ) | 1,133.8 |   | (667.1 | ) | — |   | 338.8 |   |
| Financing  Activities:                           |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net change in payable to OI Inc.                 |       | (274.1                                               | )          |   |   |   |   |   |   |   |   | (274.1 | ) |
| Net distribution to OI Inc.                      |       | (167.7                                               | )          |   |   |   |   |   |   |   |   | (167.7 | ) |
| Change in intercompany transactions              |       | 441.8                                                |       | (125.9 | ) | (1,149.0 | ) | 768.6 |   | 64.5 |   | — |   |
| Change in short term debt                        |       |                                                 |       |   |   |   |   | (23.2 | ) |   |   | (23.2 | ) |
| Payments of long term debt                       |       |                                                 |       | (1,320.4 | ) | (0.3 | ) | (1,290.6 | ) |   |   | (2,611.3 | ) |
| Borrowings of long term debt                     |       |                                                 |       | 1,443.7 |   | 10.5 |   | 670.9 |   |   |   | 2,125.1 |   |
| Net payments for debt-related hedging activity   |       |                                                 |       |   |   |   |   | (25.9 | ) |   |   | (25.9 | ) |
| Payment of finance fees                          |       |                                                 |       | (25.7 | ) |   |   | (8.7 | ) |   |   | (34.4 | ) |
| Cash provided by  (used in) financing activities |       | —                                               |       | (28.3 | ) | (1,138.8 | ) | 91.1 |   | 64.5 |   | (1,011.5 | ) |
| Effect of  exchange rate change on cash          |       |                                                 |       |   |   |   |   | 3.7 |   |   |   | 3.7 |   |
| Net change in  cash                              |       | —                                               |       | (0.2 | ) | 25.4 |   | 90.0 |   | (0.7 | ) | 114.5 |   |
| Cash at  beginning of period                     |       | —                                               |       | 0.2 |   | 6.8 |   | 155.7 |   | 0.7 |   | 163.4 |   |
| Cash at end of period                            |       | $                                                    | —     |   | $ | (0.0 | ) | $ | 32.2 |   | $ | 245.7 |   | (0.0 | ) | $ | 277.9 |   |
|                                                  |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

103

----

**Selected Quarterly Financial Data (unaudited)**  The following tables present selectedfinancial data by quarter for the years ended December 31, 2006 and 2005:
| ** **       | ** ** | **2006**    | ** ** |
|------------------|------------|-------------|------------|
| ** **       | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Year** | ** ** |
| ** **       | ** ** | **First**   | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** | **to** | ** ** |
| ** **       | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Date** | ** ** |
| Net sales        |       | $           | 1,688.3    |   | $ | 1,945.5 |   | $ | 1,911.7 |   | $ | 1,876.5 |   | $ | 7,422.0 |   |
| Gross profit     |       | $           | 303.3      |   | $ | 359.9 |   | $ | 356.5 |   | $ | 318.3 |   | $ | 1,338.0 |   |
| Net earnings (a) |       | $           | 24.3       |   | $ | 42.6 |   | $ | 8.4 |   | $ | 17.2 |   | $ | 92.5 |   |

 

(a)                                  Amountfor the first quarter includes a loss of $3.5 million ($3.3 million after tax)from the mark    to market effect ofnatural gas hedge contracts.

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

Amount for the second quarter includes a charge of$10.2 million ($9.8 million after tax) for the write-off of finance feesrelated to debt that was repaid prior to its maturity.

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

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

Amount for the third quarter includes a charge of$29.7 million ($27.7 million after tax), principally for the closing of theGodfrey, Illinois machine parts manufacturing operation.

Amount for the fourth quarter includes a gain of $15.9million ($11.2 million after tax) for the curtailment of postretirementbenefits in The Netherlands.

Amount for the fourth quarter includes chargestotaling $22.8 ($22.6 million after tax) for the following: (1) $20.8 million($20.7 million after tax) for CEO transition costs; and (2) $2.0 million ($1.9million after tax) from the mark to market effect of natural gas hedgecontracts.

Amount for the fourth quarter includes a benefit of$5.7 million from the reversal of a non-U.S. deferred tax asset valuationallowance partially offset by charges related to international taxrestructuring.

104

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| ** **                                      | ** ** | **2005**    | ** ** |
|-------------------------------------------------|------------|-------------|------------|
| ** **                                      | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Year** | ** ** |
| ** **                                      | ** ** | **First**   | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** | **to** | ** ** |
| ** **                                      | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Date** | ** ** |
| Net sales                                       |       | $           | 1,663.3    |   | $ | 1,852.7 |   | $ | 1,807.5 |   | $ | 1,755.5 |   | $ | 7,079.0 |   |
| Gross profit                                    |       | $           | 374.8      |   | $ | 377.8 |   | $ | 334.0 |   | $ | 272.9 |   | $ | 1,359.5 |   |
| Earnings (loss)  from continuing operations (b) |       | 117.5       |       | 86.2 |   | 56.6 |   | (795.9 | ) | (535.6 | ) |
| Net earnings of discontinued  operations (c)    |       |        |       |   |   | 63.0 |   |   |   | 63.0 |   |
| Net earnings (loss)                             |       | $           | 117.5      |   | $ | 86.2 |   | $ | 119.6 |   | $ | (795.9 | ) | $ | (472.6 | ) |

 

(b)                                 Amountfor the first quarter includes a gain of $28.4 million ($17.0 million aftertax) from the mark to market effect of natural gas hedge contracts.

Amount for the first quarter includes a gain of $28.1 million(pretax and after tax) from the sale of the Company’s glass container facilityin Corsico, Italy.

Amount for the second quarter includes a loss of $7.0million ($4.0 million after tax) from the mark to market effect of natural gashedge contracts.

Amount for the third quarter includes a loss of $8.2million ($4.9 million after tax) from the mark to market effect of natural gashedge contracts.

Amount for the third quarter includes a benefit of$5.3 million from the reversal of an accrual for potential tax liabilitiesrelated to a previous divestiture.  Theaccrual is no longer required based on the Company’s reassessment of thepotential liabilities.

Amount for the fourth quarter includes chargestotaling $810.0 ($499.8 million after tax) for the following: (1) $494.0million (pretax and after tax) to write down goodwill in the Asia-Pacific Glassunit; (2) $306.6 million to record a valuation allowance related to accumulateddeferred tax assets in the U.S.; and (3) $9.4 million ($5.8 million after tax)from the mark to market effect of natural gas hedge contracts.

(c)                                  Amountfor the third quarter consists principally of a benefit from the reversal of anaccrual for potential tax liabilities related to a previous divestiture. Theaccrual is no longer required based on the Company’s reassessment of thepotential liabilities.

**ITEM 9.                  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON**

## **acCOUNTING ANDFINANCIAL DISCLOSURE**

None.

105

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## **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 and thatsuch information is accumulated and communicated to the Company’s management,including its Chief Executive Officer and Chief Financial Officer, asappropriate, 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 and procedureswith respect to such entities are necessarily substantially more limited thanthose maintained with respect to its consolidated subsidiaries.

Asrequired by Rule 13a-15(b) of the Exchange Act, the Company carried out anevaluation, under the supervision and with the participation of management,including its Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures as of the end of the period covered by this report.  Based on the foregoing, the Company’s ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures were effective at the reasonable assurancelevel as of December 31, 2006.

Managementconcluded that the Company’s system of internal control over financialreporting was effective as of December 31, 2006.  There has been no changein the Company’s internal controls over financial reporting during the Company’smost recent fiscal quarter that has materially affected, or is reasonablylikely to materially affect, the Company’s internal controls over financialreporting. The Company has undertaken 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’sReport on Internal Control over Financial Reporting**

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

Managementassessed the effectiveness of the Company’s internal control over financialreporting as of December 31, 2006.  Inmaking this assessment management used the criteria for effective internalcontrol over financial reporting as described in “Internal Control — IntegratedFramework” issued by the Committee of Sponsoring Organizations of the TreadwayCommission (the COSO framework).

Basedon this assessment, using the criteria above, management concluded that theCompany’s system of internal control over financial reporting was effective asof December 31, 2006.

106

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TheCompany’s independent registered public accounting firm, Ernst & Young LLP,that audited the Company’s consolidated financial statements, has issued anattestation report on management’s assessment of the Company’s internal controlover financial reporting which is included below.

107

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

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

**Owens-Illinois Group, Inc.**

We have audited management’s assessment,included in the accompanying Management’s Report on Internal Control overFinancial Reporting, that Owens-Illinois Group, Inc. maintained effectiveinternal control over financial reporting as of December 31, 2006, based on criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria).  Owens-Illinois Group, Inc.’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the company’s internalcontrol over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company’s internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples. A company’s internal control over financial reporting includesthose policies and procedures that (1) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the company are being made only in accordancewith authorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.

In our opinion, management’s assessment that Owens-Illinois Group, Inc.maintained effective internal control over financial reporting as of December31, 2006, is fairly stated, in all material respects, based on the COSOcriteria. Also, in our opinion, Owens-Illinois Group, Inc. maintained, in allmaterial respects, effective internal control over financial reporting as ofDecember 31, 2006, based on****the COSO criteria**.**

We also have audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the consolidated balancesheets of Owens-Illinois Group, Inc. and subsidiaries as of December 31, 2006and 2005 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, 2006 and our report dated March 1, 2007 expressed an unqualified opinion thereon.

Ernst& Young LLP

Toledo, Ohio

March1, 2007

108

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## **ITEM 9B.               Other information**

None.

# **PART III**

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

Informationwith respect to principal accountant fees and services is included in the ProxyStatement in the section entitled “Independent Registered Public AccountingFirm” and such information is incorporated herein by reference.

**PART IV**

## **ITEM 15. EXHIBITS AND FINANCIAL STATEMENTSCHEDULES**

**FINANCIAL STATEMENTS ANDFINANCIAL 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, 2006 and  2005 |       |       |
|                                                       |       |       |
| For the years  ended December 31, 2006, 2005, and 2004     |       |       |
|                                                       |       |       |
| Consolidated Results of Operations                         |       |       |
| Consolidated Share Owners’ Equity                     |       |       |
| Consolidated  Cash Flows                                   |       |       |
|                                                       |       |       |
| Notes to the Consolidated Financial Statements             |       |       |
|                                                       |       |       |
| Exhibit  Index                                             |       |       |

 
|                                                                                                                                                                   | Financial Statement Schedule | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------|------------|------------|------------|------------|
|                                                                                                                                                              |                         |       |
| For the years  ended December 31, 2006, 2005, and 2004:                                                                                                           |                         |       |
|                                                                                                                                                              |                         |       |
| II - Valuation and Qualifying Accounts (Consolidated)                                                                                                             |                         |       |
|                                                                                                                                                              |                         |       |
| All other  schedules have been omitted since the required information is not present or not  present in amounts sufficient to require submission of the schedule. |                         |       |
|                                                                                                                                                              |                         |       |
| (ii)  Separate Financial Statements of Affiliates Whose Securities Are Pledged As  Collateral                                                                     |                         |       |

 

109

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**EXHIBITINDEX**
| S-K Item 601 No. | ** ** | ** ** | **Document**                                                                                                                                                                                                                                                                                                                                                                                              |
|------------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |       |                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.1              | —     |       | Certificate of Incorporation of OII Group, Inc.,  dated as of March 10, 1987 (filed as Exhibit 3.95 to Owens-Illinois Group,  Inc.’s Form S-4, File No. 333-85690, and incorporated herein by reference).                                                                                                                                                                                            |
| 3.2              | —     |       | Certificate of Amendment of Certificate of  Incorporation of OII Group, Inc., dated as of March 24, 1987 (filed as  Exhibit 3.96 to Owens-Illinois Group, Inc.’s Form S-4, File No. 333-85690,  and incorporated herein by reference).                                                                                                                                                               |
| 3.3              | —     |       | Certificate of Ownership Merging OIB Consumers Glass  Inc. into Owens-Illinois Group, Inc., dated as of June 29, 1990 (filed as  Exhibit 3.97 to Owens-Illinois Group, Inc.’s Form S-4, File No. 333-85690,  and incorporated herein by reference).                                                                                                                                                  |
| 3.4              | —     |       | Certificate of Ownership and Merger Merging OIB  Finance FTS Inc. into Owens-Illinois Group, Inc., dated as of December 30,  1991 (filed as Exhibit 3.98 to Owens-Illinois Group, Inc.’s Form S-4, File  No. 333-85690, and incorporated herein by reference).                                                                                                                                       |
| 3.5              | —     |       | Form of Bylaws for Owens-Illinois Group, Inc. (filed  as Exhibit 3.117 to Owens-Illinois Group, Inc.’s Form S-4, File No.  333-85690, and incorporated herein by reference).                                                                                                                                                                                                                         |
| 4.1              | —     |       | Indenture dated as of May 15, 1997, between  Owens-Illinois, Inc. and The Bank of New York, as Trustee (filed as Exhibit  4.1 to Owens-Illinois, Inc.’s Form 8-K dated May 16, 1997, File No. 1-9576,  and incorporated herein by reference).                                                                                                                                                        |
| 4.2              | —     |       | Officers’ Certificate, dated May 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).                                                                    |

 

110

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| S-K Item 601 No. | ** ** | ** ** | **Document**                                                                                                                                                                                                                                                                                                                                                                        |
|------------------|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |       |                                                                                                                                                                                                                                                                                                                                                                                |
| 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 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).          |
| 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             | —     |       | 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).                                                                         |
| 4.12             | —     |       | 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).                                                 |
| 4.13             | —     |       | 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).          |
| 4.14             | —     |       | 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).                                                |
| 4.15             | —     |       | 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).                                           |
| 4.16             | —     |       | 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). |
| 4.17             | —     |       | 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).                     |

 

111

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| S-K Item 601 No. | ** ** | ** ** | **Document**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|------------------|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.18             | —     |       | Indenture, dated as of December 1, 2004, by and  among Owens-Brockway Glass Container Inc., the guarantors party thereto and  Law Debenture Trust Company of New York, as trustee (filed as Exhibit 4.26 to  Owens-Illinois Group, Inc.’s Form S-4, File No. 333-123960, and incorporated  herein by reference).                                                                                                                                                                                |
| 4.19             | —     |       | 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).                                                                         |
| 4.20             | —     |       | 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). |
| 4.21             | —     |       | 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).                                                                                |
| 4.22             | —     |       | Second Amended and Restated Security Agreement,  dated as of June 14, 2006, between Owens-Illinois Group, Inc., each of the  direct and indirect subsidiaries of Owens-Illinois Group, Inc. signatory  thereto, and Deutsche Bank Trust Company Americas, as Collateral Agent (as defined  therein) (filed as exhibit 4.4 to Owens-Illinois Group, Inc.’s Form 8-K dated  June 14, 2006, File No. 33-13061, and incorporated herein by reference).                                              |
| 10.1*            | —     |       | Amended and Restated Owens-Illinois Supplemental  Retirement Benefit Plan (filed as Exhibit 10.1 to Owens-Illinois, Inc.’s Form  10-Q for the quarter ended June 30, 1998, File No. 1-9576, and incorporated  herein by reference).                                                                                                                                                                                                                                                             |
| 10.2*            | —     |       | First Amendment to Amended and Restated  Owens-Illinois Supplemental Retirement Benefit Plan (filed as Exhibit 10.3 to  Owens-Illinois, Inc.’s Form 10-K for the year ended December 31, 2000, File  No. 1-9576, and incorporated herein by reference).                                                                                                                                                                                                                                         |
| 10.3*            | —     |       | Second Amendment to Amended and Restated  Owens-Illinois Supplemental Retirement Benefit Plan (filed as Exhibit 10.1 to  Owens-Illinois, Inc.’s Form 10-Q for the quarter ended March 31, 2002, File  No. 1-9576, and incorporated herein by reference).                                                                                                                                                                                                                                   |
| 10.4*            | —     |       | Third Amendment to Amended and Restated  Owens-Illinois Supplemental Retirement Benefit Plan (filed as Exhibit 10.1 to  Owens-Illinois, Inc.’s Form 10-Q for the quarter ended March 31, 2003, File  No. 1-9576, and incorporated herein by reference).                                                                                                                                                                                                                                    |
| 10.5*            | —     |       | Form of Employment Agreement between Owens-Illinois,  Inc. and various Employees (filed as Exhibit 10(m) to Owens-Illinois, Inc.’s  Form 10-K for the year ended December 31, 1987, File No. 1-9576, and  incorporated herein by reference).                                                                                                                                                                                                                                                    |
| 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).                                                                                                                                                                                                                                            |

 

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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).                                                                                                 |
| 10.19*           | —     |       | Employment agreement between Owens-Illinois, Inc.  and Steven R. McCracken dated March 31, 2004 (filed as Exhibit 10.1 to  Owens-Illinois, Inc.’s Form 10-Q for the quarter ended March 31, 2004, File  No. 1-9576, and incorporated herein by reference).                                                           |
| 10.20*           | —     |       | Amendment dated March 10, 2005 to the employment  agreement between Owens-Illinois, Inc. and Steven R. McCracken dated March  31, 2004 (filed as  Exhibit 10.27 to Owens-Illinois, Inc.’s Form 10-K for the year ended December  31, 2004, File No. 1-9576, and incorporated herein by reference).                   |

 

113

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| S-K Item 601 No. | ** ** | ** ** | **Document**                                                                                                                                                                                                                                                                                                                                                 |
|------------------|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.21*           | —     |       | Restricted Stock Agreement under the Amended and  Restated 1997 Equity Participation Plan of Owens-Illinois, Inc. between  Owens-Illinois, Inc. and Steven R. McCracken dated March 31, 2004 (filed as  Exhibit 10.2 to Owens-Illinois, Inc.’s Form 10-Q for the quarter ended March  31, 2004, File No. 1-9576, and incorporated herein by reference). |
| 10.22*           | —     |       | Non-Qualified Stock Option Agreement under the  Amended and Restated 1997 Equity Participation Plan of Owens-Illinois, Inc.  between Owens-Illinois, Inc. and Steven R. McCracken dated March 31, 2004  (filed as Exhibit 10.3 to Owens-Illinois,                                                                                                            |
|             |       |       | Inc.’s Form 10-Q for the quarter ended March 31,  2004, File No. 1-9576, and incorporated herein by reference).                                                                                                                                                                                                                                         |
| 10.23*           | —     |       | 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).                                                                                                                             |
| 10.24*           | —     |       | 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).                                                                                                                                                     |
| 10.25*           | —     |       | 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).                                                                                                                                          |
| 10.26*           | —     |       | 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).                                                                                                                   |
| 10.27*           | —     |       | 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).                                                                                                          |
| 10.28*           | —     |       | 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).                                                                                                                                             |
| 10.29*           | —     |       | 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).                                                                                                                                                  |
| 10.30*           | —     |       | 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).                                                                              |
| 10.31*           | —     |       | 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).                                                                                        |
| 10.32*           | —     |       | 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).                                                                                           |
| 10.33*           | —     |       | 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).                                                                                   |

 

114

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| S-K Item 601 No. | ** ** | ** ** | **Document**                                                                                                                                                                                                                                                                                          |
|------------------|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.34*           | —     |       | Amendment dated August 3, 2006 to the employment  agreement between Owens-Illinois, Inc. and Steven R. McCracken dated March  31, 2004 (filed as  Exhibit 10.1 to Owens-Illinois, Inc.’s Form 10-Q for the quarter ended June  30, 2006, File No. 1-9576, and incorporated herein by reference). |
| 10.35*           | —     |       | Separation agreement between Owens-Illinois, Inc.  and Steven R. McCracken (filed as Exhibit 10.1 to Owens-Illinois, Inc.’s Form  8-K dated November 8, 2006, File No. 1-9576, and incorporated herein by  reference).                                                                           |
| 10.36*           | —     |       | 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).                                                                             |
| 10.37*           | —     |       | 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).                                                                                          |
| 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).                                                                                                                                                                             |
| 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).

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

1)              Financial statementsof Owens-Brockway Packaging, Inc. and subsidiaries including consolidatedbalance sheets as of December 31, 2006 and 2005, and the related statements ofoperations, net parent investment, and cash flows for the years ended December31, 2006, 2005 and 2004.

2)              Financial statementsof Owens-Brockway Glass Container Inc. and subsidiaries including consolidatedbalance sheets as of December 31, 2006 and 2005, and the related statements ofoperations, net parent investment, and cash flows for the years ended December31, 2006, 2005 and 2004.

3)              Financial statementsof OI Plastic Products FTS, Inc. and subsidiaries including consolidatedbalance sheets as of December 31, 2006 and 2005, and the related statements ofoperations, net parent investment, and cash flows for the years ended December31, 2006, 2005 and 2004.

115

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

** **

The Board of Directorsand Share Owner of

Owens-Brockway Packaging,Inc.

 

We have audited theaccompanying consolidated balance sheets of Owens-Brockway Packaging, Inc. andsubsidiaries as of December 31, 2006 and 2005, and the related consolidatedstatements of results of operations, net Parent investment, and cash flows foreach of the three years in the period ended December 31, 2006.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

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

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the consolidated financial position ofOwens-Brockway Packaging, Inc. and subsidiaries at December 31, 2006 and 2005, andthe consolidated results of its operations and its cash flows for each of thethree years in the period ended December 31, 2006, in conformity with U.S.generally accepted accounting principles. 

 

As discussed in Notes 1, 13 and 14 to the consolidated financialstatements, the Company changed its method of accounting for stock-basedcompensation, defined benefit pension plans and other postretirement plans,respectively, in 2006.

 

 

Ernst & Young LLP

 

 

Toledo, Ohio

March 1, 2007

 

116

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

Dollars inmillions

 
| **Years ended December 31,**                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                          |       |     |       |     |       |     |       |
| Revenues:                                                     |       |     |       |     |       |     |       |
| Net sales                                                     |       | $        | 6,692.4    |     | $          | 6,356.4  |       | $ | 5,522.3 |   |
| Other revenue                                                 |       | 86.5     |       | 103.8    |       | 131.6    |       |
|                                                          |       | 6,778.9  |       | 6,460.2  |       | 5,653.9  |       |
| Costs and  expenses:                                          |       |     |       |     |       |     |       |
| Manufacturing, shipping, and delivery                         |       | 5,529.6  |       | 5,169.2  |       | 4,455.3  |       |
| Research and development                                      |       | 16.4     |       | 15.3     |       | 15.2     |       |
| Engineering                                                   |       | 32.6     |       | 36.1     |       | 34.1     |       |
| Selling and administrative                                    |       | 410.2    |       | 361.9    |       | 267.2    |       |
| Net intercompany interest                                     |       | (3.0     | )          | 28.7     |       | 0.6      |       |
| Other interest expense                                        |       | 404.6    |       | 379.5    |       | 403.7    |       |
| Other                                                         |       | 55.0     |       | 525.4    |       | 48.1     |       |
|                                                          |       | 6,445.4  |       | 6,516.1  |       | 5,224.2  |       |
| Earnings (loss)  before items below                           |       | 333.5    |       | (55.9    | )          | 429.7    |       |
| Provision for  income taxes                                   |       | 138.8    |       | 130.6    |       | 109.1    |       |
| Minority share  owners' interests in earnings of subsidiaries |       | 43.7     |       | 35.9     |       | 33.0     |       |
| Net earnings (loss)                                           |       | $        | 151.0      |     | $          | (222.4   | )          | $ | 287.6 |   |

 

See accompanyingNotes to the Consolidated Financial Statements.

117

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

 

Dollars in millions

 
| **December 31,**                                                                                                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                                                                    |       |     |       |     |       |
| **Assets**                                                                                                                                    |       |     |       |     |       |
| **Current  assets:**                                                                                                                          |       |     |       |     |       |
| Cash, including time deposits of $124.5 ($104.0 in  2005)                                                                                     |       | $        | 241.8      |     | $          | 243.9 |   |
| Receivables including amount from related parties of  $1.7 ($0.8 in 2005), less allowances of $29.1 ($25.7 in 2005) for losses and  discounts |       | 1,044.9  |       | 939.9    |       |
| Inventories                                                                                                                                   |       | 993.3    |       | 889.2    |       |
| Prepaid expenses                                                                                                                              |       | 42.9     |       | 31.3     |       |
| Total current assets                                                                                                                          |       | 2,322.9  |       | 2,104.3  |       |
|                                                                                                                                          |       |     |       |     |       |
| **Other  assets:**                                                                                                                            |       |     |       |     |       |
| Equity investments                                                                                                                            |       | 95.3     |       | 102.2    |       |
| Repair parts inventories                                                                                                                      |       | 135.9    |       | 162.7    |       |
| Prepaid pension                                                                                                                               |       | 31.7     |       | 17.1     |       |
| Deposits, receivables, and other assets                                                                                                       |       | 449.4    |       | 397.2    |       |
| Goodwill                                                                                                                                      |       | 2,255.2  |       | 2,159.7  |       |
| Total other assets                                                                                                                            |       | 2,967.5  |       | 2,838.9  |       |
|                                                                                                                                          |       |     |       |     |       |
| **Property,  plant, and equipment:**                                                                                                          |       |     |       |     |       |
| Land, at cost                                                                                                                                 |       | 242.9    |       | 229.5    |       |
| Buildings and equipment, at cost:                                                                                                             |       |     |       |     |       |
| Buildings and building equipment                                                                                                              |       | 976.1    |       | 905.6    |       |
| Factory machinery and equipment                                                                                                               |       | 4,346.5  |       | 4,070.2  |       |
| Transportation, office, and miscellaneous equipment                                                                                           |       | 100.4    |       | 98.2     |       |
| Construction in progress                                                                                                                      |       | 120.8    |       | 89.1     |       |
|                                                                                                                                          |       | 5,786.7  |       | 5,392.6  |       |
| Less accumulated depreciation                                                                                                                 |       | 2,945.5  |       | 2,576.3  |       |
| Net property, plant, and equipment                                                                                                            |       | 2,841.2  |       | 2,816.3  |       |
| Total assets                                                                                                                                  |       | $        | 8,131.6    |     | $          | 7,759.5 |   |

 

118

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Dollars in millions

 
| **December 31,**                                                              | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                    |       |     |       |     |       |
| **Liabilities and Net Parent Investment**                                     |       |     |       |     |       |
| **Current liabilities:**                                                      |       |     |       |     |       |
| Short-term loans                                                              |       | $412.8   |       | $26.3    |       |
| Accounts payable  including amount to related parties of $23.8 ($2.2 in 2005) |       | 883.3    |       | 765.6    |       |
| Salaries and wages                                                            |       | 139.8    |       | 141.1    |       |
| U.S. and foreign income  taxes                                                |       | 138.4    |       | 107.8    |       |
| Other accrued  liabilities                                                    |       | 224.5    |       | 253.3    |       |
| Long-term debt due  within one year                                           |       | 24.4     |       | 252.0    |       |
| Total current  liabilities                                                    |       | 1,823.2  |       | 1,546.1  |       |
|                                                                          |       |     |       |     |       |
| **External long-term debt**                                                   |       | 3,956.6  |       | 3,958.6  |       |
| ** **                                                                    |       |     |       |     |       |
| **Deferred taxes**                                                            |       | 153.8    |       | 232.9    |       |
| ** **                                                                    |       |     |       |     |       |
| **Other liabilities**                                                         |       | 708.1    |       | 741.3    |       |
| ** **                                                                    |       |     |       |     |       |
| **Minority share owners' interests**                                          |       | 207.2    |       | 182.0    |       |
| ** **                                                                    |       |     |       |     |       |
| **Net Parent investment:**                                                    |       |     |       |     |       |
| Investment by and  advances from Parent                                       |       | 1,287.2  |       | 1,313.9  |       |
| Accumulated other comprehensive  loss                                         |       | (4.5     | )          | (215.3   | )          |
| Total net Parent  investment                                                  |       | 1,282.7  |       | 1,098.6  |       |
| Total liabilities and net Parent investment                                   |       | $8,131.6 |       | $7,759.5 |       |

 

See accompanying Notes tothe Consolidated Financial Statements.

119

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**CONSOLIDATED NET PARENT INVESTMENT  **Owens-Brockway Packaging, Inc.

 

Dollars inmillions

 
| **Years ended December 31,**                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                |       |     |       |     |       |     |       |
| **Investment  by and advances to Parent**                           |       |     |       |     |       |     |       |
| Balance at beginning of year                                        |       | $        | 1,313.9    |     | $          | 2,020.6  |       | $ | 997.0 |   |
| Net intercompany transactions                                       |       | (177.7   | )          | (484.3   | )          | 736.0    |       |
| Net earnings                                                        |       | 151.0    |       | (222.4   | )          | 287.6    |       |
| Balance at end of year                                              |       | 1,287.2  |       | 1,313.9  |       | 2,020.6  |       |
|                                                                |       |     |       |     |       |     |       |
| **Accumulated  other comprehensive loss**                           |       |     |       |     |       |     |       |
| Balance at beginning of year                                        |       | (215.3   | )          | 67.9     |       | (198.3   | )          |
| Foreign currency translation adjustments                            |       | 284.9    |       | (290.5   | )          | 294.8    |       |
| Change in minimum pension liability, net of tax                     |       | 22.6     |       | (7.2     | )          | (27.5    | )          |
| Adjustment to initially apply FAS No. 158, net of  tax              |       | (47.4    | )          |     |       |     |       |
| Change in fair value of certain derivative  instruments, net of tax |       | (49.3    | )          | 14.5     |       | (1.1     | )          |
| Balance at end of year                                              |       | (4.5     | )          | (215.3   | )          | 67.9     |       |
| Total net Parent  investment                                        |       | $        | 1,282.7    |     | $          | 1,098.6  |       | $ | 2,088.5 |   |
|                                                                |       |     |       |     |       |     |       |
| **Total  comprehensive income (loss)**                              |       |     |       |     |       |     |       |
| Net earnings (loss)                                                 |       | $        | 151.0      |     | $          | (222.4   | )          | $ | 287.6 |   |
| Foreign currency translation adjustments                            |       | 284.9    |       | (290.5   | )          | 294.8    |       |
| Change in minimum pension liability, net of tax                     |       | 22.6     |       | (7.2     | )          | (27.5    | )          |
| Change in fair value of certain derivative  instruments, net of tax |       | (49.3    | )          | 14.5     |       | (1.1     | )          |
| Total  comprehensive income (loss)                                  |       | $        | 409.2      |     | $          | (505.6   | )          | $ | 553.8 |   |

 

See accompanying Notes to the Consolidated FinancialStatements

 

120

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**CONSOLIDATED CASHFLOWS ** Owens-Brockway Packaging, Inc.

 

Dollars inmillions

 
| **Years ended December 31,**                                                           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                                                                            |       |     |       |     |       |     |       |
| **Operating activities:**                                                                             |       |     |       |     |       |     |       |
| Net earnings  (loss)                                                                                  |       | $        | 151.0      |     | $          | (222.4   | )          | $ | 287.6 |   |
| Non-cash charges  (credits):                                                                          |       |     |       |     |       |     |       |
| Depreciation                                                                                          |       | 426.5    |       | 431.3    |       | 384.0    |       |
| Amortization of  deferred costs                                                                       |       | 32.6     |       | 35.4     |       | 35.2     |       |
| Deferred tax  provision (credit)                                                                      |       | 25.4     |       | (3.1     | )          | 11.4     |       |
| 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    | )          |     |       |     |       |
| Restructuring  costs and writeoffs of certain assets                                                  |       | 27.5     |       |     |       |     |       |
| Gains on asset  sales                                                                                 |       |     |       | (28.1    | )          | (51.6    | )          |
| Other                                                                                                 |       | 20.7     |       | (6.4     | )          | (70.0    | )          |
| Change in  non-current operating assets                                                               |       | (10.1    | )          | (14.6    | )          | 12.9     |       |
| Change in  non-current liabilities                                                                    |       | (52.1    | )          | (58.7    | )          | (10.1    | )          |
| Change in  components of working capital                                                              |       | (221.7   | )          | 80.9     |       | 181.6    |       |
| Cash provided by  operating activities                                                                |       | 378.2    |       | 708.3    |       | 781.0    |       |
| **Investing activities:**                                                                             |       |     |       |     |       |     |       |
| Additions to  property, plant and equipment                                                           |       | (271.5   | )          | (366.2   | )          | (407.6   | )          |
| Acquisitions,  net of cash acquired                                                                   |       |     |       | (11.6    | )          | (630.3   | )          |
| Collections on  accounts receivable arising from consolidation of receivables securitization  program |       | 127.3    |       | 50.7     |       |     |       |
| Net cash  proceeds from divestitures and other                                                        |       | 13.6     |       | 205.7    |       | 257.8    |       |
| Cash utilized in  investing activities                                                                |       | (130.6   | )          | (121.4   | )          | (780.1   | )          |
| **Financing activities:**                                                                             |       |     |       |     |       |     |       |
| Additions to  long-term debt                                                                          |       | 1,206.5  |       | 537.5    |       | 2,114.6  |       |
| Repayments of  long-term debt                                                                         |       | (1,341.7 | )          | (617.1   | )          | (2,611.1 | )          |
| Increase  (decrease) in short-term loans                                                              |       | 158.9    |       | 11.5     |       | (23.2    | )          |
| Net change in  intercompany debt                                                                      |       | (266.9   | )          | (414.2   | )          | 675.8    |       |
| Net payments for  hedging activity                                                                    |       | (6.8     | )          | (98.0    | )          | (25.9    | )          |
| Payment of  finance fees                                                                              |       | (12.3    | )          | (1.0     | )          | (34.4    | )          |
| Cash provided by  (utilized in) financing activities                                                  |       | (262.3   | )          | (581.3   | )          | 95.8     |       |
| Effect of  exchange rate fluctuations on cash                                                         |       | 12.6     |       | (13.3    | )          | 4.3      |       |
| Increase (decrease) in  cash                                                                          |       | (2.1     | )          | (7.7     | )          | 101.0    |       |
| Cash at beginning of  year                                                                            |       | 243.9    |       | 251.6    |       | 150.6    |       |
| Cash at end of year                                                                                   |       | $        | 241.8      |     | $          | 243.9    |       | $ | 251.6 |   |

 

See Accompanying Notes to Consolidated FinancialStatements.

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Owens-Brockway Packaging, Inc.

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

Tabular data dollars in millions****

**1. Significant Accounting Policies**

** **

**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 ofacquisition.  

 

Certain amounts includedin the Consolidated Statement of Cash Flows for the year ended December 31,2005 have been reclassified to conform to the 2006 presentation.  These amounts, which relate to receipts fromcustomers in payment of the accounts receivable in the European accountsreceivable securitization program at the date of its consolidation, have beenreclassified from operating activities to investing activities.  See Note 5 for additional information.  While this reclassification had no effect ontotal cash flows, cash provided by operations and cash utilized in investingactivities both decreased by $50.7 million. Net earnings and net parent investment were not affected by thisreclassification.

 

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.

** **

**Relationship with Owens-Illinois Group, Inc.****and Owens-Illinois, Inc.  **The Company is a wholly-ownedsubsidiary of Owens-Illinois Group, Inc. ("OI Group”) andan indirect subsidiary 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 certain state income tax purposes, thetaxable income of the Company is included in the consolidated tax returns ofOI Inc. and income taxes are allocated to the Company on a basisconsistent 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.  

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**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 value hedgesof debt and short-term forward exchange contracts are classified as a financingactivity.  Cash flows of currency swaps,interest rate swaps, and commodity futures contracts are classified asoperating activities. See Note 9 for additional information related toderivative instruments.

 

**InventoryValuation**   The 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 or morefrequently 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 usingthe straight-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 molding machines)depreciated over 7-15 years.  Buildingsand building equipment are depreciated over periods ranging from 10 to 50years.  Maintenance and repairs areexpensed 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.  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 most subsidiaries and associates aretranslated at current exchange rates and any related translation adjustmentsare recorded directly in net Parent investment. 

** **

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**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.

** **

**NewAccounting Standards  **InJuly 2006, the Financial Accounting Standards Board issued Interpretation No.48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes”.  This interpretation was issued to clarify theaccounting for uncertainty in income taxes recognized in an enterprise’s financialstatements in accordance with FAS No. 109, “Accounting for Income Taxes”.  FIN 48 defines criteria that an individualtax position must meet for any part of the benefit of that position to berecognized in an enterprise’s financial statements and also includesrequirements for measuring the amount of the benefit to be recognized in thefinancial statements.  FIN 48 iseffective for fiscal years beginning after December 15, 2006, therefore theCompany will adopt its provisions effective as of January 1, 2007.  The Company has not yet determined the impactof adopting FIN 48.

 

In September 2006, theFinancial Accounting Standards Board issued Statement of Financial AccountingStandards No. 157 (“FAS No. 157”), “Fair Value Measurements”.  FAS No. 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles,and expands disclosures about fair value measurements.  FAS No. 157 applies under other accountingpronouncements that require or permit fair value measurements.  The statement does not require any new fairvalue measurements.  The statement iseffective for fiscal years beginning after November 15, 2007.   Adoption of FAS No. 157 is not expected tohave a material impact on the Company’s results of operations or financialposition.

 

In February 2007, theFinancial Accounting Standards Board issued Statement of Financial AccountingStandards No. 159 (“FAS No. 159”), “Fair Value Option for Financial Assets andFinancial Liabilities – Including an amendment of FASB Statement No. 115”.  FAS No. 159 permits entities to choose tomeasure many financial instruments and certain other items at fair value.  The statement is effective for fiscal yearsbeginning after November 15, 2007.  Adoption of FAS No. 159 is not expected to have a material impact on theCompany’s results of operations or financial position.

** **

**Participation in OI Inc. Stock Option Plans and Other Stock BasedCompensation**  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*

 

For options granted prior to March 22, 2005,no options may be exercised in whole or in part during the first year after thedate granted. In general, subject to accelerated exercisability provisionsrelated to the performance of OI Inc.’s common stock or change of control, 50%of the options become exercisable on the fifth anniversary of the date of theoption grant, with the remaining 50% becoming exercisable on the sixthanniversary date of the option grant.** **In general, options expire following termination of employment or the dayafter the tenth anniversary date of the option grant. 

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For options granted after March 21, 2005, nooptions may be exercised in whole or in part during the first year after thedate granted.  In general, subject tochange in control, these options become exercisable 25% per year beginning onthe first anniversary.  In general,options expire following termination of employment or the seventh anniversaryof the option grant. 

 

The fair value of options granted beforeMarch 22, 2005, is amortized ratably over five years or a shorter period if thegrant becomes subject to accelerated exercisability provisions related to theperformance of OI Inc.’s common stock. The fair value of options granted after March 21, 2005, is amortizedover the vesting periods which range from one to four years.

 

*RestrictedShares*

** **

Shares granted to employees prior to March22, 2005, generally vest after three years or upon retirement, whichever islater.  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 vest on the third anniversary of the sharegrant or the end of the director’s then current term on the board, whichever islater.

 

The fair value of the shares is equal to themarket price of the shares on the date of the grant.  The fair value of restricted shares grantedbefore March 22, 2005, is amortized ratably over the vesting period.  The fair value of restricted shares grantedafter March 21, 2005, is amortized over the vesting periods which range fromone to four years.

 

*PerformanceVested Restricted Share Units*

 

Restricted share units vest on January 1 ofthe third year following the year in which they are granted.  Holders of vested units receive 0.5 to 1.5shares of OI Inc.’s common stock for each unit, depending upon the attainmentof consolidated performance goals established by the Compensation Committee ofOI Inc.’s Board of Directors.  If minimumgoals are not met, no shares will be issued. Granted but unvested restricted share units are forfeited upontermination of employment, unless certain retirement criteria are met.

 

The fair value of each restricted share unitis equal to the product of the fair value of OI Inc.’s common stock on the dateof grant and the estimated number of shares into which the restricted shareunit will be converted.  The fair valueof restricted share units is amortized ratably over the vesting period.  Should the estimated number of shares intowhich the restricted share unit will be converted change, an adjustment will berecorded to recognize the accumulated difference in amortization between therevised and previous estimates.

 

*Accounting*

* *

Prior to January1, 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 options was not recognized in the ConsolidatedResults of Operations since all stock options granted had an exercise priceequal to the market value of the underlying common stock on the date of thegrant.  Prior to January 1, 2006, compensationcost was recognized for restricted shares and restricted share units.  Effective January 1, 2006, OI Inc. adoptedthe fair value recognition 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 for allshare-based payments granted 

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through December31, 2005, but for which the requisite service period had not been completed asof December 31, 2005, based on the grant date fair value estimated inaccordance with the original provisions of FAS No.123, and (2) compensationcost for share-based payments granted subsequent to December 31, 2005, based onthe grant date fair value estimated in accordance with the provisions of FASNo. 123R.

 

As discussed inNote 12, costs incurred under these plans by OI Inc. related to stock-basedcompensation awards granted directly to the Company's employees are included inthe allocable costs charged to the Company and other operating subsidiaries ofOI Inc. on an intercompany basis.

** **

**2.  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 (the 2005 receivables amount has been adjusted toconform to the 2006 presentation in relation to the European accountsreceivable securitization program): 

 
| ** **                                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                         |       |     |       |     |       |     |       |
| Decrease  (increase) in current assets:      |       |     |       |     |       |     |       |
| Receivables                                  |       | $        | (173.9     | )        | $          | (68.9    | )          | $ | 75.7 |   |
| Inventories                                  |       | (36.8    | )          | 58.1     |       | 83.8     |       |
| Prepaid expenses                             |       | 2.4      |       | (4.7     | )          | 32.4     |       |
| Increase  (decrease) in current liabilities: |       |     |       |     |       |     |       |
| Accounts payable and accrued liabilities     |       | (28.1    | )          | 32.4     |       | 36.1     |       |
| Salaries and wages                           |       | (13.8    | )          | (2.8     | )          | (0.9     | )          |
| U.S. and foreign income taxes                |       | 28.5     |       | 66.8     |       | (45.5    | )          |
|                                         |       | $(221.7  | )          | $        | 80.9       |     | $          | 181.6 |   |
|                                              |            |          |            |          |            |          |            |  |  |  |

 

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

 
| ** **          | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
|                |       |     |       |     |       |
| Finished goods      |       | $        | 825.0      |     | $          | 748.5 |   |
| Work in process     |       | 7.7      |       | 3.5      |       |
| Raw materials       |       | 93.8     |       | 74.9     |       |
| Operating  supplies |       | 66.8     |       | 62.3     |       |
|                |       | $993.3   |       | $        | 889.2      |   |
|                     |            |          |            |          |            |  |  |

 

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 $20.8 million and $20.9 million, at December 31, 2006 and 2005,respectively.

 

Inventories which arevalued at the lower of standard costs (which approximate average costs), ormarket at December 31, 2006 and 2005 were approximately $859.3 million and $775.6million, respectively.

** **

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

 
| ** **                        | ** ** | **2006** | ** ** | **2005** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|------------|------------|
| At end of year:                   |       |     |       |     |       |       |       |
| Equity in undistributed earnings: |       |     |       |     |       |       |       |
| Foreign                           |       | $        | 20.3       |     | $          | 19.5       |       |   |   |
| Domestic                          |       | 15.9     |       | 17.6     |       |       |       |
| Total                             |       | $        | 36.2       |     | $          | 37.1       |       |   |   |
| ** **                        | ** ** | **2006** | ** ** | **2005** | ** ** | **2004**   | ** ** |
| For the year:                     |       |     |       |     |       |       |       |
| Equity in earnings:               |       |     |       |     |       |       |       |
| Foreign                           |       | $        | 2.1        |     | $          | 6.8        |       | $ | 15.2 |   |
| Domestic                          |       | 21.4     |       | 13.6     |       | 10.9       |       |
| Total                             |       | $        | 23.5       |     | $          | 20.4       |       | $ | 26.1 |   |
| Dividends  received               |       | $        | 43.5       |     | $          | 11.0       |       | $ | 12.8 |   |

 

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**5.  External Long-Term Debt**   The following table summarizes the externallong-term debt of the Company at December 31, 2006 and 2005:

 
| ** **                                                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                 |       |     |       |     |       |
| Secured Credit  Agreement:                                                           |       |     |       |     |       |
| Revolving Credit Facility:                                                           |       |     |       |     |       |
| Revolving Loans                                                                      |       | $        | 45.2       |     | $          | — |   |
| Term Loans:                                                                          |       |     |       |     |       |
| Term Loan A (292.5 million AUD)                                                      |       | 231.5    |       |     |       |
| Term Loan B                                                                          |       | 195.5    |       |     |       |
| Term Loan C (134.6 million CAD)                                                      |       | 115.9    |       |     |       |
| Term Loan D (€195.5 million)                                                    |       | 257.4    |       |     |       |
| Third Amended  and Restated Secured Credit Agreement:                                |       |     |       |     |       |
| Term Loans                                                                           |       |     |       |     |       |
| A1 Term Loan                                                                         |       |     |       | 223.9    |       |
| B1 Term Loan                                                                         |       |     |       | 220.8    |       |
| C1 Term Loan                                                                         |       |     |       | 185.6    |       |
| C2 Term Loan                                                                         |       |     |       | 54.9     |       |
| Accounts  receivable securitization (included in short-term loans at Dec. 31, 2006): |       |     |       |     |       |
| European program                                                                     |       |     |       | 231.8    |       |
| Asia Pacific program                                                                 |       |     |       | 80.6     |       |
| Senior Secured  Notes:                                                               |       |     |       |     |       |
| 8.875%, due 2009                                                                     |       | 850.0    |       | 1,000.0  |       |
| 7.75%, due 2011                                                                      |       | 450.0    |       | 450.0    |       |
| 8.75%, due 2012                                                                      |       | 625.0    |       | 625.0    |       |
| Senior Notes:                                                                        |       |     |       |     |       |
| 8.25%, due 2013                                                                      |       | 440.8    |       | 436.6    |       |
| 6.75%, due 2014                                                                      |       | 400.0    |       | 400.0    |       |
| 6.75%, due 2014 (€225 million)                                                  |       | 296.2    |       | 267.0    |       |
| Senior  Subordinated Notes:                                                          |       |     |       |     |       |
| 9.25%, due 2009                                                                      |       |     |       | 0.5      |       |
| Other                                                                                |       | 73.5     |       | 33.9     |       |
|                                                                                 |       | 3,981.0  |       | 4,210.6  |       |
| Less amounts due within one year                                                     |       | 24.4     |       | 252.0    |       |
|                                                                                 |       |     |       |     |       |
| External  long-term debt                                                             |       | $        | 3,956.6    |     | $          | 3,958.6 |   |

 

On June 14, 2006,the Company’s subsidiary borrowers entered into the Secured Credit Agreement(the “Agreement”).  Proceeds from theAgreement were used to repay all outstanding amounts under the previous creditagreement. At December 31, 2006, the Agreement included a $900.0 millionrevolving credit facility, a 292.5 million Australian dollar term loan, and a134.6 million Canadian dollar term loan, each of which has a final maturitydate of June 15, 2012. It also included a $195.5 million term loan and a €195.5million term loan each of which have a final maturity date of June 14, 2013.The Agreement also permits the Company, at its option, to refinance certain ofits outstanding notes and debentures prior to their scheduled maturity. TheCompany recorded $10.2 million of additional interest charges for the write-offof unamortized finance fees related to the early repayment of the previouscredit agreement. 

 

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At December 31,2006 the Company’s subsidiary borrowers had unused credit of $765.6 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, 2006was 6.52%. While no compensating balances are required by the Agreement, theBorrowers must pay a facility fee on the Revolving Credit Facility commitmentsranging 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 $2.4 billion. Borrowings are also secured by a pledge of intercompany debt and equityin most of the Company’s domestic subsidiaries and stock of certain foreignsubsidiaries.  All borrowings under theagreement are guaranteed by substantially all domestic subsidiaries of theCompany for the term of the Agreement.

 

The Agreementcontains covenants and provisions that, among other things, restrict theability 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, changethe business conducted, engage in certain transactions with affiliates andotherwise 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, including minimum interest coverage ratios,maximum leverage ratios and specified capital expenditure tests.

 

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

 

During thefourth quarter of 2005, the Company expanded the capacity of its Europeanaccounts receivable securitization program from €200 million to €320 million toinclude operations in Italy and the United Kingdom. The accounts receivablesecuritization program provides lower costs of financing than traditional bankdebt. The terms of this expansion resulted in changing from off-balance sheetto on-balance sheet accounting for the program by consolidating both theaccounts receivable in the program and the secured indebtedness of the sameamount. Cash inflows related to receipts from customers in payment of the accountsreceivable consolidated at December 13, 2005 have been classified as investingcash inflows in the accompanying Consolidated Statement of Cash Flows.

 

During October of 2006, the Companyentered into a new €300 million European accounts receivable securitizationprogram.  The new program replaces theprevious European program, described in the preceding paragraph, which was setto terminate in October 2006.  

 

At December 31, 2006, the Europeanprogram had a balance of $195.0 million, and the Asia Pacific program had abalance of $84.4 million recorded in short term loans.  The interest rate on the accounts receivablesecuritization program is a local short term variable rate plus a margin overthe variable rate of 

 

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0.70% for the European program and 0.85% for the Asia Pacificprogram.  The weighted average interestrate on borrowings under the European program was 4.81% at December 31,2006.  The weighted average interest rateon borrowings under the Asia Pacific program was 7.43% at December 31,2006.  These programs have maturity datesranging from January of 2008 through October of 2011.

Annual maturitiesfor all of the Company’s long-term debt through 2011 are as follows: 2007,$24.4 million; 2008, $9.1 million; 2009, $883.0 million; 2010, $53.7 million;and 2011, $620.1 million.

Interest paid incash, including note repurchase premiums, aggregated $380.0 million for 2006,$365.2 million for 2005, and $434.7 million for 2004.

Fair values at December31, 2006, of the Company’s significant fixed rate debt obligations were asfollows:
| ** **                           | ** ** | **Principal Amount** | ** ** | **Indicated** | ** ** | **Fair Value**   | ** ** | **Hedge Value**  | ** ** |
|--------------------------------------|------------|---------------------------|------------|---------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **(millions of**     | ** ** | **Market**    | ** ** | **(millions of** | ** ** | **(millions of** | ** ** |
| ** **                           | ** ** | **dollars)**              | ** ** | **Price**     | ** ** | **dollars)**          | ** ** | **dollars)**          | ** ** |
|                                 |       |                      |       |          |       |                  |       |                  |       |
| Senior Secured Notes:                |       |                      |       |          |       |                  |       |                  |       |
| 8.875%, due 2009                     |       | $                         | 850.0      |          | 102.52     |                  | $          | 871.4                 |       |   |   |
| 7.75%, due 2011                      |       | 450.0                     |       | 103.50        |       | 465.8                 |       |                  |       |
| 8.75%, due 2012                      |       | 625.0                     |       | 106.25        |       | 664.1                 |       |                  |       |
| Senior Notes:                        |       |                      |       |          |       |                  |       |                  |       |
| 8.25%, due 2013                      |       | 450.0                     |       | 103.25        |       | 464.6                 |       | $                     | 440.8      |   |
| 6.75%, due 2014                      |       | 400.0                     |       | 97.75         |       | 391.0                 |       |                  |       |
| 6.75%, due 2014 (€225  million) |       | 296.2                     |       | 99.75         |       | 295.5                 |       |                  |       |
|                                      |            |                           |            |               |            |                       |            |                       |            |  |  |  |

 

**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 $1,057.5 at December 31, 2006.

**7.  Operating Leases**   Rent expense attributable to all warehouse,office buildings, and equipment operating leases was $75.7 million in 2006,$66.5 million in 2005, and $66.3 million in 2004.  Minimum future rentals under operating leasesare as follows:  2007, $42.2 million;2008, $30.3 million; 2009, $22.9 million; 2010, $16.9 million; and 2011, $7.4million; and 2012 and thereafter, $8.2 million.

**8.  Foreign Currency Transactions**   Aggregate foreign currency exchange gains(losses) included in other costs and expenses were $(1.0) million in 2006, $2.8million in 2005, and $(1.4) million in 2004.

**9.  Derivative Instruments  **At December 31, 2006, theCompany had the following derivative instruments related to its various hedgingprograms:

*Hedges of Debt*

Certainof the Company’s subsidiaries have entered into short term forward exchangecontracts which effectively swap intercompany loans to other subsidiaries thatare denominated in the functional currency of the borrowers.  These contracts swap the principal amount ofloans and in some cases they swap the related interest.

TheCompany recognizes the above derivatives on the balance sheet at fairvalue.  Accordingly, the changes in thevalue of the swaps are recognized in current earnings and are expected to substantially

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offsetany exchange rate gains or losses on the related nonfunctional currencyloans.  For the year ended December 31,2006, the amount not offset was not material.

*Interest Rate Swaps Designated asFair Value Hedges*

Inthe fourth quarter of 2003 and the first quarter of 2004, the Company enteredinto a series of interest rate swap agreements with a total notional amount of$1.05 billion that mature from 2007 through 2013.  The swaps were executed in order to:(i) convert a portion of the senior notes and senior debentures fixed-ratedebt into floating-rate debt; (ii) maintain a capital structure containingappropriate amounts of fixed and floating-rate debt; and (iii) reduce netinterest payments and expense in the near-term.

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 liability along with a correspondingnet decrease 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 (see table below).  The interest rate differential on each swapis recognized as an adjustment of interest expense during each six-month periodover the term of the agreement.

Thefollowing selected information relates to fair value swaps at December 31, 2006(based on a projected U.S. LIBOR rate of 5.1515% based on rates at December 31,2006):
|                                                                          | ** ** | ** ** | ** ** | **Average** | ** ** | ** **  | ** ** | **Asset**       | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|-----------------|------------|
| ** **                                                               | ** ** | **Amount** | ** ** | **Receive** | ** ** | **Average** | ** ** | **(Liability)** | ** ** |
| ** **                                                               | ** ** | **Hedged** | ** ** | **Rate**    | ** ** | **Spread**  | ** ** | **Recorded**    | ** ** |
|                                                                     |       |       |       |        |       |        |       |            |       |
| OI Inc. public  notes swapped by the company through intercompany loans: |       |       |       |        |       |        |       |            |       |
|                                                                     |       |       |       |        |       |        |       |            |       |
| Senior Notes due 2007                                                    |       | $          | 300.0      |        | 8.10       | %           | 4.5        | %               | $          | (1.8 | ) |
| Senior Notes due 2008                                                    |       | 250.0      |       | 7.35        | %          | 3.5         | %          | (4.3            | )          |
| Senior Debentures due 2010                                               |       | 250.0      |       | 7.50        | %          | 3.2         | %          | (5.8            | )          |
|                                                                     |       |       |       |        |       |        |       |            |       |
| Notes issued by  OBGC:                                                   |       |       |       |        |       |        |       |            |       |
|                                                                     |       |       |       |        |       |        |       |            |       |
| Senior Notes due 2013                                                    |       | 250.0      |       | 8.25        | %          | 3.7         | %          | (9.4            | )          |
|                                                                     |       |       |       |        |       |        |       |            |       |
| Total                                                                    |       | $          | 1,050.0    |        |       |        |       |            | $          | (21.3 | ) |

 

*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 twenty-four monthsand periodically enters into commodity futures contracts in order to hedge aportion of its usage requirements over that period.  At December 31, 2006, the Company had enteredinto commodity futures contracts for approximately 57% (approximately13,450,000 MM BTUs) for the full year of 2007 and approximately 9%(approximately 2,160,000 MM BTUs) for the full 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 OCI and reclassified into earnings in the same period or periods 

131

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during which the underlying hedged item affectsearnings.  Any material portion of thechange in the fair value of a derivative designated as a cash flow hedge thatis deemed to be ineffective is recognized in current earnings.

The above futures contracts are accounted for ascash flow hedges at December 31, 2006.

At December 31, 2006, an unrecognized loss of $32.8million (pretax and after tax), related to the domestic commodity futurescontracts, was included in OCI, which will be reclassified into earnings overthe next twelve months.  Theineffectiveness related to these natural gas hedges for the year ended December31, 2006 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*

TheCompany records the fair values of derivative financial instruments on thebalance sheet as follows: (1) receivables if the instrument has a positive fairvalue and maturity within one year, (2) deposits, receivables, and other assetsif the instrument has a positive fair value and maturity after one year, (3)accounts payable and other accrued liabilities if the instrument has a negativefair value and maturity within one year, and (4) other liabilities if theinstrument has a negative fair value and maturity after one year.

**10.  Accumulated Other Comprehensive Income (Loss)**   The components ofcomprehensive income (loss) are: (a) net earnings (loss); (b) change in fairvalue of certain derivative instruments; (c) adjustment of minimum pensionliabilities; (d) adjustment to adopt FAS No. 158; and, (e) 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.

132

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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  (net of tax)** | ** ** | **Change in  Certain  Derivative  Instruments  (net of tax)** | ** ** | **Adjustment  to initially  apply FAS  No. 158  (net of tax)** | ** ** | **Total  Accumulated  Comprehensive  Income (Loss)** | ** ** |
|---------------------------|------------|---------------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
|                      |       |                                                          |       |                                                |       |                                                                    |       |                                                                         |       |                                                                                    |       |                                                      |       |
| Balance on Jan.  1, 2004  |       | $                                                             | (110.0     | )                                                   | $          | 21.5                                                                    |       | $                                                                            | (110.8     | )                                                                                       | $          | 1.0                                                       |       | $ | — |   | $ | (198.3 | ) |
|                      |       |                                                          |       |                                                |       |                                                                    |       |                                                                         |       |                                                                                    |       |                                                      |       |
| 2004 Change               |       | 303.5                                                         |       | (8.7                                                | )          | (44.6                                                                   | )          | (1.6                                                                         | )          |                                                                                    |       | 248.6                                                     |       |
| Translation  effect       |       |                                                          |       |                                                |       | 9.0                                                                     |       |                                                                         |       |                                                                                    |       | 9.0                                                       |       |
| Tax effect                |       |                                                          |       |                                                |       | 8.1                                                                     |       | 0.5                                                                          |       |                                                                                    |       | 8.6                                                       |       |
|                      |       |                                                          |       |                                                |       |                                                                    |       |                                                                         |       |                                                                                    |       |                                                      |       |
| Balance on Dec.  31, 2004 |       | 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 | ) |

 

**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, 2006 and 2005are as follows:
| ** **                             | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
|                                   |       |     |       |     |       |
| Deferred tax  assets:                  |       |     |       |     |       |
| Tax loss carryovers                    |       | $        | 289.5      |     | $          | 259.2 |   |
| Capital loss carryovers                |       | 34.4     |       | 30.3     |       |
| Accrued postretirement benefits        |       | 23.4     |       | 19.8     |       |
| Other, principally accrued liabilities |       | 239.0    |       | 212.7    |       |
|                                   |       |     |       |     |       |
| Total deferred tax assets              |       | 586.3    |       | 522.0    |       |
|                                   |       |     |       |     |       |
| Deferred tax  liabilities:             |       |     |       |     |       |
| Property, plant and equipment          |       | 242.9    |       | 204.2    |       |
| Inventory                              |       | 21.8     |       | 27.6     |       |
| Other                                  |       | 64.7     |       | 75.6     |       |
|                                   |       |     |       |     |       |
| Total deferred tax liabilities         |       | 329.4    |       | 307.4    |       |
| Valuation  allowance                   |       | (264.9   | )          | (349.7   | )          |
|                                   |       |     |       |     |       |
| Net deferred tax  liabilities          |       | $        | (8.0       | )        | $          | (135.1 | ) |

 

133

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Deferred taxes areincluded in the Consolidated Balance Sheets at December 31, 2006 and 2005 asfollows:
| ** **                               | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
|                                     |       |     |       |     |       |
| Prepaid expenses                         |       | $        | 15.7       |     | $          | 3.7 |   |
| Deposits,  receivables, and other assets |       | 130.1    |       | 94.1     |       |
| Deferred taxes                           |       | (153.8   | )          | (232.9   | )          |
|                                     |       |     |       |     |       |
| Net deferred tax  liabilities            |       | $        | (8.0       | )        | $          | (135.1 | ) |

 

The provision for incometaxes consists of the following:
| ** **   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------|------------|----------|------------|----------|------------|----------|------------|
|         |       |     |       |     |       |     |       |
| Current:     |       |     |       |     |       |     |       |
| U.S. Federal |       | $        | —     |     | $          | —   |       | $ | — |   |
| State        |       | 0.3      |       | 0.3      |       | 0.2      |       |
| Foreign      |       | 113.1    |       | 133.4    |       | 97.5     |       |
|         |       |     |       |     |       |     |       |
|         |       | 113.4    |       | 133.7    |       | 97.7     |       |
|         |       |     |       |     |       |     |       |
| Deferred:    |       |     |       |     |       |     |       |
| U.S. Federal |       | 12.9     |       | 1.7      |       | 18.5     |       |
| State        |       | (3.6     | )          | 8.0      |       | 13.1     |       |
| Foreign      |       | 16.1     |       | (12.8    | )          | (20.2    | )          |
|         |       |     |       |     |       |     |       |
|         |       | 25.4     |       | (3.1     | )          | 11.4     |       |
|         |       |     |       |     |       |     |       |
| Total:       |       |     |       |     |       |     |       |
| U.S. Federal |       | 12.9     |       | 1.7      |       | 18.5     |       |
| State        |       | (3.3     | )          | 8.3      |       | 13.3     |       |
| Foreign      |       | 129.2    |       | 120.6    |       | 77.3     |       |
|         |       |     |       |     |       |     |       |
|         |       | $        | 138.8      |     | $          | 130.6    |       | $ | 109.1 |   |

 

The provision for incometaxes was calculated based on the following components of earnings (loss)before income taxes:
| ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
|       |       |     |       |     |       |     |       |
| Domestic   |       | $        | (119.1     | )        | $          | (20.7    | )          | $ | 25.3 |   |
| Foreign    |       | 452.6    |       | (35.2    | )          | 404.4    |       |
|       |       |     |       |     |       |     |       |
|       |       | $        | 333.5      |     | $          | (55.9    | )          | $ | 429.7 |   |

 

134

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Income taxes paid(received) in cash were as follows:
| ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
|       |       |     |       |     |       |     |       |
| Domestic   |       | $        | (0.4       | )        | $          | —   |       | $ | 0.2 |   |
| Foreign    |       | 126.8    |       | 112.9    |       | 95.8     |       |
|       |       |     |       |     |       |     |       |
|       |       | $        | 126.4      |     | $          | 112.9    |       | $ | 96.0 |   |

 

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:
| ** **                                                                            | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                  |       |     |       |     |       |     |       |
| Tax provision  (benefit) on pretax earnings (loss) at statutory U.S. Federal tax rate |       | $        | 116.7      |     | $          | (19.6    | )          | $ | 150.4 |   |
| Increase  (decrease) in provision for income taxes due to:                            |       |     |       |     |       |     |       |
| Valuation allowance - U.S.                                                            |       | 46.5     |       | 7.0      |       |     |       |
| Reversal of non-U.S. tax valuation allowance                                          |       | (34.7    | )          |     |       |     |       |
| Restructuring charges                                                                 |       | 21.2     |       |     |       |     |       |
| Goodwill impairment                                                                   |       |     |       | 172.9    |       |     |       |
| State taxes, net of federal benefit                                                   |       | (0.3     | )          | 2.5      |       | 13.6     |       |
| Rate differences on non-U.S. earnings                                                 |       | (10.7    | )          | (22.5    | )          | (24.6    | )          |
| Australian tax consolidation                                                          |       |     |       | (2.8     | )          | (33.1    | )          |
| Adjustment for non-U.S. tax law changes                                               |       | (1.6     | )          | (7.1     | )          |     |       |
| Other items                                                                           |       | 1.7      |       | 0.2      |       | 2.8      |       |
|                                                                                  |       |     |       |     |       |     |       |
| Provision for  income taxes                                                           |       | $        | 138.8      |     | $          | 130.6    |       | $ | 109.1 |   |

 

The Company is includedin OI Inc.’s consolidated tax returns. OI Inc. has net operating losses, capital losses, alternative minimumtax credits, and research and development credits available to offset futureU.S. Federal income tax.

At December 31, 2006, theCompany’s equity in the undistributed earnings of foreign subsidiaries forwhich income taxes had not been provided approximated $1,747.4 million.  It is not practicable to estimate the U.S.and foreign tax which would 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 certain generalaccounting systems, auditing, income tax planning and compliance, and treasuryservices.

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

Managementbelieves that such transactions are on terms no less favorable to the Companythan those that could be obtained from unaffiliated third parties.

135

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The followinginformation summarizes the Company’s significant related party transactions:
| ** **                    | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------|------------|---------------------------------------------|------------|
| ** **                    | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|                          |       |                                        |       |   |   |   |   |
| Revenues:                     |       |                                        |       |   |   |   |   |
| Sales to affiliated companies |       | $                                           | 0.5        |   | $ | 0.7 |   | $ | 4.7 |   |
|                          |       |                                        |       |   |   |   |   |
| Expenses:                     |       |                                        |       |   |   |   |   |
| Administrative services       |       | 25.5                                        |       | 19.9 |   | 15.6 |   |
| Corporate management fee      |       | 27.1                                        |       | 23.4 |   | 18.0 |   |
| Total expenses                |       | $                                           | 52.6       |   | $ | 43.3 |   | $ | 33.6 |   |

 

The above expensesare recorded in the statement of operations as follows:
| ** **                                   | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                         |       |                                        |       |   |   |   |   |
| Cost of sales                                |       | $                                           | 22.6       |   | $ | 17.7 |   | $ | 13.7 |   |
| Selling, general, and adminstrative expenses |       | 30.0                                        |       | 25.6 |   | 19.9 |   |
|                                         |       |                                        |       |   |   |   |   |
| Total expenses                               |       | $                                           | 52.6       |   | $ | 43.3 |   | $ | 33.6 |   |

 

Intercompanyinterest is charged to the Company from OI Inc. based on intercompany debtbalances.  An interest rate is calculatedmonthly based on OI Inc’s total consolidated monthly external debt balance andthe related interest expense, including finance fee amortization and commitmentfees. The calculated rate (8.9% at December 31, 2006) is applied monthly to theintercompany debt balance to determine intercompany interest expense.

**13.  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 inthe plans; 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 $7.7 million in 2006, $21.5 millionin 2005, and $20.8 million in 2004.

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 $5.5 million in 2006, $5.2 million in2005, and $4.9 million in 2004.

The Company’ssubsidiaries in the United Kingdom, the Netherlands, Canada, Australia, Germanyand France also have pension plans covering substantially all employees.  The following tables relate to the Company’sprincipal defined benefit pension plans in the United Kingdom, the Netherlands,Canada, Australia, Germany and France (the International Pension Plans).

The International PensionPlans use a December 31 measurement date.

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The changes in the International Pension Plans benefit obligations forthe year were as follows:
| ** **                                                               | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                     |       |     |       |     |       |
| Obligations at  beginning of year                                        |       | $        | 1,447.7    |     | $          | 1,417.3 |   |
|                                                                     |       |     |       |     |       |
| Change in  benefit obligations:                                          |       |     |       |     |       |
| Service cost                                                             |       | 28.1     |       | 23.0     |       |
| Interest cost                                                            |       | 69.1     |       | 68.4     |       |
| Actuarial (gain) loss, including the effect of  change in discount rates |       | (73.8    | )          | 118.7    |       |
| Participant contributions                                                |       | 10.0     |       | 9.4      |       |
| Benefit payments                                                         |       | (70.7    | )          | (65.4    | )          |
| Plan amendments                                                          |       | (7.2     | )          |     |       |
| Foreign currency translation                                             |       | 137.2    |       | (123.7   | )          |
| Other                                                                    |       | 4.0      |       |     |       |
|                                                                     |       |     |       |     |       |
| Net increase in benefit obligations                                      |       | 96.7     |       | 30.4     |       |
|                                                                     |       |     |       |     |       |
| Obligations at  end of year                                              |       | $        | 1,544.4    |     | $          | 1,447.7 |   |

 

The changes in the fair value of the International Pension Plans’assets for the year were as follows:
| ** **                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
|                                 |       |     |       |     |       |
| Fair value at beginning  of year     |       | $        | 1,068.6    |     | $          | 1,008.5 |   |
|                                 |       |     |       |     |       |
| Change in fair  value:               |       |     |       |     |       |
| Actual gain on plan assets           |       | 77.0     |       | 162.1    |       |
| Benefit payments                     |       | (70.7    | )          | (65.4    | )          |
| Employer contributions               |       | 65.8     |       | 39.4     |       |
| Participant contributions            |       | 10.0     |       | 9.4      |       |
| Foreign currency translation         |       | 102.6    |       | (85.4    | )          |
|                                 |       |     |       |     |       |
| Net increase in fair value of assets |       | 184.7    |       | 60.1     |       |
|                                 |       |     |       |     |       |
| Fair value at  end of year           |       | $        | 1,253.3    |     | $          | 1,068.6 |   |

 

137

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The funded status of the International Pension Plans at year end was asfollows:
| ** **                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
|                                                |       |     |       |     |       |
| Plan assets at fair  value                          |       | $        | 1,253.3    |     | $          | 1,068.6 |   |
| Projected  benefit obligations                      |       | 1,544.4  |       | 1,447.7  |       |
|                                                |       |     |       |     |       |
| Plan assets less than projected benefit obligations |       | (291.1   | )          | (379.1   | )          |
|                                                |       |     |       |     |       |
| Items not yet  recognized in pension expense:       |       |     |       |     |       |
| Actuarial loss                                      |       | 244.2    |       | 282.5    |       |
| Prior service cost                                  |       | (9.2     | )          | 14.0     |       |
|                                                |       |     |       |     |       |
|                                                |       | 235.0    |       | 296.5    |       |
|                                                |       |     |       |     |       |
| Net amount recognized                               |       | $        | (56.1      | )        | $          | (82.6 | ) |

 

The net amount recognizedis included in the Consolidated Balance Sheets at December 31, 2006 and 2005 asfollows:
| ** **                                                             | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                   |       |     |       |     |       |
| Prepaid pension                                                        |       | $        | 31.7       |     | $          | 17.1 |   |
| Current pension  liability, included with Other accrued liabilities    |       | (7.7     | )          |     |       |
| Noncurrent  pension liability, included with Pension benefits          |       | (315.1   | )          | (163.2   | )          |
| Additional  minimum pension liability, included with Other liabilities |       |     |       | (143.7   | )          |
| Intangible  asset, included with Deposits and other assets             |       |     |       | 9.4      |       |
| Accumulated  other comprehensive income                                |       | 235.0    |       | 197.8    |       |
|                                                                   |       |     |       |     |       |
| Net amount recognized                                                  |       | $        | (56.1      | )        | $          | (82.6 | ) |

 

The accumulated benefitobligation for all defined benefit pension plans was $1,393.2 million and$1,288.3 million at December 31, 2006 and 2005, respectively.

138

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The components of theInternational Pension Plans’ net pension expense were as follows:
| ** **             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|
|                   |       |     |       |     |       |     |       |
| Service cost           |       | $        | 28.1       |     | $          | 23.0     |       | $ | 20.3 |   |
| Interest cost          |       | 69.1     |       | 68.4     |       | 57.0     |       |
| Expected asset  return |       | (81.5    | )          | (75.0    | )          | (62.5    | )          |
|                   |       |     |       |     |       |     |       |
| Amortization:          |       |     |       |     |       |     |       |
| Prior service cost     |       | 0.2      |       | 0.7      |       | 1.6      |       |
| Loss                   |       | 15.8     |       | 9.7      |       | 7.9      |       |
|                   |       |     |       |     |       |     |       |
| Net amortization       |       | 16.0     |       | 10.4     |       | 9.5      |       |
|                   |       |     |       |     |       |     |       |
| Net expense            |       | $        | 31.7       |     | $          | 26.8     |       | $ | 24.3 |   |

 

Amounts that will beamortized from accumulated other comprehensive income into net pension expenseduring 2007:
| Amortization:      |   |   |   |
|--------------------|--------|--------|--------|
| Loss               |   | $      | 11.1   |   |
| Prior service cost |   | (0.1   | )      |
|               |   |   |   |
| Net amortization   |   | $      | 11.0   |   |

 

The following informationis for plans with projected benefit obligations in excess of the fair value ofplan assets at year end:
| ** **                     | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
|                           |       |     |       |     |       |
| Projected  benefit obligations |       | $        | 1,065.4    |     | $          | 1,353.2 |   |
| Fair value of  plan assets     |       | 742.6    |       | 961.2    |       |
|                                |            |          |            |          |            |  |  |

 

The following information is for plans with accumulated benefitobligations in excess of the fair value of plan assets at year end:
| ** **                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
|                             |       |     |       |     |       |
| Accumulated  benefit obligations |       | $        | 1,065.4    |     | $          | 876.3 |   |
| Fair value of plan  assets       |       | 962.7    |       | 621.5    |       |
|                                  |            |          |            |          |            |  |  |

 

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The weighted averageassumptions used to determine benefit obligations were as follows:
| ** **                     | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
|                           |       |     |       |     |       |
| Discount rate                  |       | 4.92     | %          | 4.57     | %          |
| Rate of  compensation increase |       | 3.34     | %          | 3.78     | %          |

 

The weighted average assumptions used to determine net periodic pensioncosts were as follows:
| ** **                                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                         |       |     |       |     |       |     |       |
| Discount rate                                |       | 4.57     | %          | 5.15     | %          | 5.68     | %          |
| Rate of  compensation increase               |       | 3.78     | %          | 3.41     | %          | 3.86     | %          |
| Expected long-term rate  of return on assets |       | 7.15     | %          | 7.15     | %          | 7.35     | %          |

 

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 plan in theUnited Kingdom from the minimum liabilities recorded in 2002, 2003, 2004 and2005.  Pursuant to this requirement, theCompany decreased the minimum pension liability by $38.5 million and decreasedaccumulated other comprehensive loss by $38.5 million.

As of December 31, 2006,the Company adjusted the minimum pension liability for the pension plan inCanada 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 plan in Germanyfrom the minimum liabilities recorded in 2005. Pursuant to this requirement, the Company decreased the minimum pensionliability by $6.8 million 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 Postretirement Plans” as ofDecember 31, 2006.   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 pension plans, the fair value of planassets is compared to the Projected 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.

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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 2006, the Company’sweighted average expected long-term rate of return on assets was 7.15%.   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, 2005), which was inline with the expected long-term rate of return assumption for 2006.

The weighted average actual asset allocations and weighted averagetarget allocation ranges by asset category for the Company’s pension planassets were as follows:
| ** **              | ** ** | ** **                 | ** ** | ** **     | ** ** | **Target** | ** ** |
|-------------------------|------------|----------------------------|------------|----------------|------------|------------|------------|
| ** **              | ** ** | **Actual Allocation** | ** ** | **Allocation** | ** ** |
| **Asset Category** | ** ** | **2006**                   | ** ** | **2005**       | ** ** | **Ranges** | ** ** |
|                    |       |                       |       |           |       |       |       |
| Equity securites        |       | 64                         | %          | 64             | %          | 59-69      | %          |
| Debt securities         |       | 29                         | %          | 29             | %          | 24-34      | %          |
| Real estate             |       | 6                          | %          | 7              | %          | 1-11       | %          |
| Other                   |       | 1                          | %          |           |       | 0-6        | %          |
|                    |       |                       |       |           |       |       |       |
| 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 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 $53.9 million to its defined benefit pension plans in 2007.

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

| Year(s)     | ** ** | **Amount** | ** ** |
|-------------|------------|------------|------------|
|        |       |       |       |
| 2007        |       | $          | 73.6       |   |
| 2008        |       | 74.1       |       |
| 2009        |       | 77.0       |       |
| 2010        |       | 78.6       |       |
| 2011        |       | 82.7       |       |
| 2012 - 2016 |       | 449.6      |       |
|             |            |            |            |  |

 

**14.  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, accumulated postretirementbenefit obligation information pertaining to each subsidiary has not beenseparately determined.  As such, theaccumulated 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 $14.7 million, $14.5 million, and $25.9 million at December 31,2006, 2005, and 2004, respectively.

The Company’ssubsidiaries in Canada and The Netherlands also have postretirement benefitplans covering substantially all employees. The following tables relate to the Company’s postretirement benefit planin Canada and the Netherlands (the International Postretirement Benefit Plans).

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The changes in theInternational Postretirement Benefit Plans obligations were as follows:
| ** **                                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                             |       |     |       |     |       |
| Obligations at  beginning of year                                |       | $        | 100.0      |     | $          | 87.4 |   |
|                                                             |       |     |       |     |       |
| Change in  benefit obligations:                                  |       |     |       |     |       |
| Service cost                                                     |       | 1.9      |       | 1.9      |       |
| Interest cost                                                    |       | 4.2      |       | 4.6      |       |
| Actuarial loss, including the effect of changing  discount rates |       | (9.5     | )          | 9.3      |       |
| Curtailments                                                     |       | (18.8    | )          |     |       |
| Benefit payments                                                 |       | (3.0     | )          | (2.5     | )          |
| Foreign currency translation                                     |       | 2.1      |       | (0.7     | )          |
|                                                             |       |     |       |     |       |
| Net change in benefit obligations                                |       | (23.1    | )          | 12.6     |       |
|                                                             |       |     |       |     |       |
| Obligations at  end of year                                      |       | $        | 76.9       |     | $          | 100.0 |   |

 

The funded status of the InternationalPostretirement Benefit Plans at year end was as follows:
| ** **                                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                          |       |     |       |     |       |
| Post retirement  benefit obligations                          |       | $        | 76.9       |     | $          | 100.0 |   |
| Items not yet  recognized in net postretirement benefit cost: |       |     |       |     |       |
| Actuarial loss                                                |       | (4.4     | )          | (15.9    | )          |
|                                                          |       |     |       |     |       |
| Net amount  recognized                                        |       | $        | 72.5       |     | $          | 84.1 |   |

 

The net amount recognizedis included in the Consolidated Balance Sheets at December 31, 2006 and 2005 asfollows:
| ** **                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                      |       |     |       |     |       |
| Current  nonpension postretirement benefit, included with |       |     |       |     |       |
| Other accrued liabilities                                 |       | $        | 3.2        |     | $          | — |   |
| Nonpension  postretirement benefits                       |       | 73.7     |       | 85.1     |       |
| Accumulated  other comprehensive income                   |       | (4.4     | )          |     |       |
|                                                      |       |     |       |     |       |
| Net amount  recognized                                    |       | $        | 72.5       |     | $          | 85.1 |   |

 

The Company’s nonpensionpostretirement benefit obligations are included with other long termliabilities on the balance sheet.

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The components ofInternational Postretirement Benefit Plans net postretirement benefit cost wereas follows:
|                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
|                             |       |     |       |     |       |
| Service cost                     |       | $        | 1.9        |     | $          | 1.9 |   |
| Interest cost                    |       | 4.2      |       | 4.6      |       |
| Curtailment                      |       | (15.9    | )          |     |       |
| Other                            |       | 0.6      |       |     |       |
|                             |       |     |       |     |       |
| Amortization:                    |       |     |       |     |       |
| Loss                             |       | (1.0     | )          | (0.2     | )          |
|                             |       |     |       |     |       |
| Net postretirement  benefit cost |       | $        | (10.2      | )        | $          | 6.3 |   |

 

The weighted averagediscount rate used to determine the accumulated postretirement benefitobligation was 5.4% and 4.8% at December 31, 2006 and 2005, respectively.

The weighted averagediscount rate used to determine net postretirement benefit cost was 4.8% atDecember 31, 2006, 5.4% at December 31, 2005, and 6.0% at December 31, 2004.

The weighted average assumed health care cost trend rates at December 31were as follows:
| ** **                                                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                           |       |     |       |     |       |
| Health care cost trend  rate assumed for next year                             |       | 8.68     | %          | 6.74     | %          |
| Rate to which the cost  trend rate is assumed to decline (ultimate trend rate) |       | 4.88     | %          | 4.81     | %          |
| 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 no significant impact on total serviceand interest cost or on accumulated postretirement benefit obligations.

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

| Year(s)     | ** ** | **Amount** | ** ** |
|-------------|------------|------------|------------|
|        |       |       |       |
| 2007        |       | $          | 3.2        |   |
| 2008        |       | 3.3        |       |
| 2009        |       | 3.3        |       |
| 2010        |       | 3.5        |       |
| 2011        |       | 3.7        |       |
| 2012 - 2016 |       | 21.3       |       |
|             |            |            |            |  |

 

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 

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trust established bycollective bargaining.  Payments to thetrust as required by the bargaining agreements are based upon specified amountsper hour worked and were $6.6 million in 2006, $5.7 million in 2005, and $5.7million in 2004.  Postretirement healthand life benefits for retirees of foreign subsidiaries are generally providedthrough the national health care programs of the countries in which thesubsidiaries are located.

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 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 (dollars inmillions):
|                                                                    | ** ** | **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.

Other revenue in 2004includes a gain of $20.6 million ($14.5 million after tax) for the sale ofcertain real property and a gain of $31.0 million ($13.1 million after tax) fora restructuring in the Italian Specialty Glass business.

**16.  Other Costs and Expenses**Othercosts and expenses for 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 17 for additionaldetails.

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

·                  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 22 for more information.

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·                  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 theestimated amounts recorded in 2004 and the final amounts related to 2004accounted for a benefit of approximately $6.5 million.

**17.  Restructuring Accruals  **In September 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.  As a result, the Company recorded a charge of$27.5 million ($25.6 million after tax) in the third quarter of 2006.

Theclosing of this facility will result in the elimination of approximately 260jobs and a corresponding reduction in the Company’s workforce.  The Company anticipates that it will pay outapproximately $9.0 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:
| Godfrey 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 Godfrey plant  closing accrual as of December 31, 2006 |   | $      | 8.2    |   |

 

Duringthe second quarter of 2005, the Company concluded its evaluation of acquiredcapacity in connection with the BSN Acquisition (see Note 21) and announced thepermanent closing of its Düsseldorf, Germany glass container factory, and theshutdown of a furnace at its Reims, France glass container facility, both in2005.  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.

Thesesecond quarter actions resulted in the elimination of approximately 400 jobsand a corresponding reduction in the Company’s workforce.  The Company expects to reduce fixed cashcosts by approximately €35 million per year by closing the Düsseldorf factory,shutting down the furnace at Reims and moving most of the production to otherlocations.  The Company anticipates thatit 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.  In addition, theCompany expects to pay a total of approximately €65 million for other Europeanreorganization and integration activities, approximately 60% of which will beexpensed. Approximately 70% of these payments were made by the end of 2006 andthe Company expects that most of the balance will be paid by the end of 2007.

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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, with2006 activity translated from Euros into dollars at the December 31, 2006exchange rate:
| Total European restructuring  accrual (€110.9 million)       |   | $     | 134.1  |   |
|-------------------------------------------------------------------|--------|-------|--------|--------|
| Net cash paid,  principally severance and related benefits        |   | (41.0 | )      |
| Other,  principally 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  translation                                   |   | (1.5  | )      |
| Remaining  European restructuring accrual as of December 31, 2006 |   | $     | 38.1   |   |

 

**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, “Accountingfor Contingencies,” 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 and adjusted to reflect changes in thefactors upon which the estimates are based including additional information,negotiations, settlements, and other events. The ultimate legal and financialliability of the Company in respect to this pending litigation cannot beestimated with certainty.  However, theCompany 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.  Geographic Information**  The Company operates in the rigid packaging industry.  The Company has one primary reportableproduct segment within the rigid packaging industry: Glass Containers.  The Glass Containers segment includesoperations in North America, Europe, the Asia Pacific region, and SouthAmerica.

The Company currentlyevaluates performance and allocates resources based on earnings before interestincome, interest expense, provision for income taxes, and minority share owners’interests in earnings of subsidiaries (“Operating Profit”) excluding amountsrelated to certain items that management considers not representative ofongoing operations and, (“Segment Operating Profit”).  Net sales as shown in the geographic segmentinformation are based on the location of the Company’s affiliate which recordedthe sales.

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Financial informationregarding the Company’s geographic segments is as follows:
| ** **                                                       | ** ** | ** **  | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | **Total**      | ** ** |
|------------------------------------------------------------------|------------|-------------|------------|------------|------------|-------------|------------|-------------|------------|----------------|------------|
| ** **                                                       | ** ** | **North**   | ** ** | ** ** | ** ** | **Asia**    | ** ** | **South**   | ** ** | **Geographic** | ** ** |
| ** **                                                       | ** ** | **America** | ** ** | **Europe** | ** ** | **Pacific** | ** ** | **America** | ** ** | **Segments**   | ** ** |
|                                                             |       |        |       |       |       |        |       |        |       |           |       |
| Net sales:                                                       |       |        |       |       |       |        |       |        |       |           |       |
| 2006                                                             |       | $           | 2,196.3    |       | $          | 2,865.9     |       | $           | 833.8      |           | $          | 796.4 |   | $ | 6,692.4 |   |
| 2005                                                             |       | 1,986.6     |       | 2,840.0    |       | 844.7       |       | 685.1       |       | 6,356.4        |       |
| 2004                                                             |       | 1,926.1     |       | 2,164.1    |       | 870.9       |       | 561.2       |       | 5,522.3        |       |
|                                                             |       |        |       |       |       |        |       |        |       |           |       |
| Segment Operating  Profit:                                       |       |        |       |       |       |        |       |        |       |           |       |
| 2006                                                             |       | $           | 199.3      |       | $          | 243.2       |       | $           | 102.4      |           | $          | 199.9 |   | $ | 744.8 |   |
| 2005                                                             |       | 227.7       |       | 279.7      |       | 136.3       |       | 156.9       |       | 800.6          |       |
| 2004                                                             |       | 253.5       |       | 244.1      |       | 142.1       |       | 124.0       |       | 763.7          |       |
|                                                             |       |        |       |       |       |        |       |        |       |           |       |
|                                                             |       |        |       |       |       |        |       |        |       |           |       |
| Items excluded from  Segment Operating Profit:                   |       |        |       |       |       |        |       |        |       |           |       |
| 2006:                                                            |       |        |       |       |       |        |       |        |       |           |       |
| Mark to market  effect of certain commodity futurescontracts     |       | $(8.7       | )          |       |       |        |       |        |       | $(8.7          | )          |
| Charge for  closing the Godfrey, Illinois plant                  |       | (27.5       | )          |       |       |        |       |        |       | (27.5          | )          |
| CEO and other  transition charges                                |       |        |       | $          | (6.0       | )           |       |        |       |           | (6.0       | ) |
| Curtailment of  postretirement benefits in The Netherlands       |       |        |       | 15.9       |       |        |       |        |       | 15.9           |       |
| 2005:                                                            |       |        |       |       |       |        |       |        |       |           |       |
| Gain on the sale  of the Corsico, Italy glass container facility |       |        |       | 28.1       |       |        |       |        |       | 28.1           |       |
| Mark to market  effect of certain commodity futures contracts    |       | 3.8         |       |       |       |        |       |        |       | 3.8            |       |
| Goodwill  impairment                                             |       |        |       |       |       | $           | (494.0     | )           |       |           | (494.0     | ) |
| 2004:                                                            |       |        |       |       |       |        |       |        |       |           |       |
| Gain on sale of  certain real property                           |       |        |       | 20.6       |       |        |       |        |       | 20.6           |       |
| Italian  Specialty Glass gain                                    |       |        |       | 31.0       |       |        |       |        |       | 31.0           |       |
| Mark to market effect  of certain commodity futures contracts    |       | 4.9         |       |       |       |        |       |        |       | 4.9            |       |

 

Operations in individualcountries outside the United States that accounted for more than 10% ofconsolidated net sales were in Italy (2005 – 10.2% and 2004 – 11.9%), France(2006 – 19.3% and 2005 – 15.4%) and Australia (2004 – 11.7%).

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The Company’s net property, plant, and equipment by location are asfollows:
| ** ** | ** ** | **United** | ** ** | ** **  | ** ** | ** ** | ** ** |
|------------|------------|------------|------------|-------------|------------|------------|------------|
| ** ** | ** ** | **States** | ** ** | **Foreign** | ** ** | **Total**  | ** ** |
|       |       |       |       |        |       |       |       |
| 2006       |       | $          | 668.4      |        | $          | 2,172.8    |       | $ | 2,841.2 |   |
| 2005       |       | 694.7      |       | 2,121.6     |       | 2,816.3    |       |
| 2004       |       | 648.4      |       | 2,502.8     |       | 3,151.2    |       |
|            |            |            |            |             |            |            |            |  |  |  |

 

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

 
| ** ** | ** ** | **United** | ** ** | ** **  | ** ** | ** ** | ** ** |
|------------|------------|------------|------------|-------------|------------|------------|------------|
| ** ** | ** ** | **States** | ** ** | **Foreign** | ** ** | **Total**  | ** ** |
|       |       |       |       |        |       |       |       |
| 2006       |       | $          | 1,787.6    |        | $          | 4,904.8    |       | $ | 6,692.4 |   |
| 2005       |       | 1,621.1    |       | 4,735.3     |       | 6,356.4    |       |
| 2004       |       | 1,574.8    |       | 3,947.5     |       | 5,522.3    |       |
|            |            |            |            |             |            |            |            |  |  |  |

 

Reconciliations toconsolidated totals are as follows:
| ** **                                                                                                                                       | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                                                             |       |     |       |     |       |     |       |
| Revenues:                                                                                                                                        |       |     |       |     |       |     |       |
| Net sales                                                                                                                                        |       | $        | 6,692.4    |     | $          | 6,356.4  |       | $ | 5,522.3 |   |
| Royalties and  net technical assistance                                                                                                          |       | 17.6     |       | 16.4     |       | 20.9     |       |
| Equity earnings                                                                                                                                  |       | 23.4     |       | 20.4     |       | 26.1     |       |
| Interest                                                                                                                                         |       | 16.6     |       | 13.8     |       | 13.8     |       |
| Other                                                                                                                                            |       | 28.9     |       | 53.2     |       | 70.8     |       |
|                                                                                                                                             |       |     |       |     |       |     |       |
| Total                                                                                                                                            |       | $        | 6,778.9    |     | $          | 6,460.2  |       | $ | 5,653.9 |   |
|                                                                                                                                             |       |     |       |     |       |     |       |
| Reconciliation of  Segment Operating Profit to earnings before income taxes, minority share  owners’ interests in earnings of subsidiaries: |       |     |       |     |       |     |       |
| Segment  Operating Profit                                                                                                                        |       | $        | 744.8      |     | $          | 800.6    |       | $ | 763.7 |   |
| Items excluded  from Segment Operating Profit                                                                                                    |       | (26.3    | )          | (462.1   | )          | 56.5     |       |
| Interest expense                                                                                                                                 |       | (401.6   | )          | (408.2   | )          | (404.3   | )          |
| Interest income                                                                                                                                  |       | 16.6     |       | 13.8     |       | 13.8     |       |
|                                                                                                                                             |       |     |       |     |       |     |       |
| Total                                                                                                                                            |       | $        | 333.5      |     | $          | (55.9    | )          | $ | 429.7 |   |

 

**20.  Additional Interest Charges from EarlyExtinguishment of Debt**  During 2006, the Company recorded additional interest charges of $17.5million ($17.1 million after tax) for note repurchase premiums and thewrite-off of unamortized finance fees related to debt that was repaid prior toits maturity.  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.  During 2004, the Company recorded additionalinterest charges of $22.8 million ($14.9 million after tax) for note repurchasepremiums and $7.1 million ($4.7 million after 

149

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tax) for the write-off ofunamortized finance fees related to the reduction of available credit under theCompany’s bank credit agreement.

**21.**  **Acquisition of BSNGlasspack, S.A.  **On June 21, 2004, the Company completed theacquisition of BSN Glasspack, S.A. (“BSN”) from Glasspack Participations (the “BSNAcquisition”).  Total consideration forthe BSN Acquisition was approximately $1.3 billion, including the assumption ofapproximately $650 million of debt, a portion of which was refinanced inconnection with the BSN Acquisition.  BSNwas the second largest glass container manufacturer in Europe withmanufacturing facilities in France, Spain, Germany and the Netherlands.  The BSN Acquisition was financed withborrowings under the Company’s Second Amended and Restated Secured CreditAgreement.  In order to secure theEuropean Commission’s approval, the Company committed to divest the Barcelona,Spain, and Corsico, Italy glass plants. The Company completed the sale of these plants in January 2005 andreceived cash proceeds of approximately €138.2 million.

Hadthe BSN Acquisition and the related financing occurred at the beginning of2004, pro forma consolidated net sales and net earnings, and would have been asfollows:
| ** **   | ** ** | **Year ended December 31, 2004** | ** ** |
|--------------|------------|------------------------------------------------------|------------|
| ** **   | ** ** | **As**                                               | ** ** | **BSN** | ** ** | **Financing** | ** ** | **Pro Forma** | ** ** |
| ** **   | ** ** | **Reported**                                         | ** ** | **Adjustments** | ** ** | **Adjustments** | ** ** | **As Adjusted** | ** ** |
|         |       |                                                 |       |   |   |   |   |   |   |
| Net sales    |       | $                                                    | 5,522.3    |   | $ | 752.5 |   |   |   | $ | 6,274.8 |   |
|         |       |                                                 |       |   |   |   |   |   |   |
| Net earnings |       | $                                                    | 287.6      |   | $ | 17.6 |   | $ | (6.4 | ) | $ | 298.8 |   |
|              |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |

 

The 2004 earningsincluded the step-up effect of the finished goods inventory acquired in the Acquisitionthat reduced gross profit by approximately $31.1 million.  The 2004 earnings include estimatedamortization related to the $48.1 million of intangible assets recorded forcustomer relationships.   At averageexchange rates for each respective year, the pro forma amortization of theintangible asset was $4.0 million (net of tax) for 2004.

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**22.**  **Goodwill**   The changes in the carrying amount ofgoodwill for the years ended December 31, 2004, 2005 and 2006 are as follows:
| Balance as of January 1,  2004                                                               |   | $       | 1,919.6 |   |
|----------------------------------------------------------------------------------------------|--------|---------|---------|--------|
| Translation  effects                                                                         |   | 165.6   |    |
| Goodwill  acquired during the year                                                           |   | 696.0   |    |
| Other changes                                                                                |   | 18.4    |    |
| Balance as of  December 31, 2004                                                             |   | 2,799.6 |    |
| Write-down of  goodwill                                                                      |   | (494.0  | )       |
| Translation  effects                                                                         |   | (160.9  | )       |
| Other changes, principally  adjustments to finalize acquisition purchase price               |   | 15.0    |    |
| Balance as of  December 31, 2005                                                             |   | 2,159.7 |    |
| Translation  effects                                                                         |   | 133.6   |    |
| Other changes,  principally adjustments to reverse foreign deferred tax valuation allowances |   | (38.1   | )       |
| Balance as of December  31, 2006                                                             |   | $       | 2,255.2 |   |

 

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 operationscaused 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.

151

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

The Board of Directors and 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, 2006 and 2005, and the relatedconsolidated statements of results of operations, net Parent investment, andcash flows for each of the three years in the period ended December 31,2006.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  We were not engaged to perform an audit ofthe Company’s internal control over financial reporting. Our audits 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, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Owens-Brockway Glass ContainerInc. and subsidiaries at December 31, 2006 and 2005, and the consolidatedresults of its operations and its cash flows for each of the three years in theperiod ended December 31, 2006, in conformity with U.S. generally acceptedaccounting principles.

As discussed in Notes 1,12 and 13 to the consolidated financial statements, the Company changed its methodof accounting for stock-based compensation, defined benefit pension plans andother postretirement plans, respectively, in 2006.

Ernst& Young LLP

Toledo, Ohio

March 1, 2007

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**CONSOLIDATEDRESULTS OF OPERATIONS**   Owens-Brockway Glass Container Inc.

Dollars in millions
| **Years ended December 31,**                        | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                               |       |     |       |     |       |     |       |
| Revenues:                                                          |       |     |       |     |       |     |       |
| Net sales                                                          |       | $        | 6,692.4    |     | $          | 6,356.4  |       | $ | 5,522.3 |   |
| Other revenue                                                      |       | 86.5     |       | 103.8    |       | 131.6    |       |
|                                                               |       |     |       |     |       |     |       |
|                                                               |       | 6,778.9  |       | 6,460.2  |       | 5,653.9  |       |
| Costs and expenses:                                                |       |     |       |     |       |     |       |
| Manufacturing,  shipping, and delivery                             |       | 5,529.6  |       | 5,169.2  |       | 4,455.3  |       |
| Research and  development                                          |       | 16.4     |       | 15.3     |       | 15.2     |       |
| Engineering                                                        |       | 32.6     |       | 36.1     |       | 34.1     |       |
| Selling and  administrative                                        |       | 410.2    |       | 361.9    |       | 267.2    |       |
| Net intercompany  interest                                         |       | (3.0     | )          | 28.7     |       | 0.6      |       |
| Other interest  expense                                            |       | 404.6    |       | 379.5    |       | 403.7    |       |
| Other                                                              |       | 55.0     |       | 525.4    |       | 48.1     |       |
|                                                               |       |     |       |     |       |     |       |
|                                                               |       | 6,445.4  |       | 6,516.1  |       | 5,224.2  |       |
|                                                               |       |     |       |     |       |     |       |
| Earnings (loss) before  items below                                |       | 333.5    |       | (55.9    | )          | 429.7    |       |
|                                                               |       |     |       |     |       |     |       |
| Provision for income  taxes                                        |       | 138.8    |       | 130.6    |       | 109.1    |       |
|                                                               |       |     |       |     |       |     |       |
| Minority share owners’  interests in earnings of subsidiaries |       | 43.7     |       | 35.9     |       | 33.0     |       |
|                                                               |       |     |       |     |       |     |       |
| Net earnings (loss)                                                |       | $        | 151.0      |     | $          | (222.4   | )          | $ | 287.6 |   |

 

See accompanyingNotes to the Consolidated Financial Statements.

153

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

Dollars in millions
| **December 31,**                                                                                                                         | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                                                                                          |       |       |       |       |       |
| **Assets**                                                                                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Current assets:**                                                                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash, including  time deposits of $124.5 ($104.0 in 2005)                                                                                     |       | $          | 241.8      |       | $          | 243.9 |   |
| Receivables  including amount from related parties of $1.7 ($0.8 in 2005), less allowances  of $29.1 ($25.7 in 2005) for losses and discounts |       | 1,044.9    |       | 939.9      |       |
| Inventories                                                                                                                                   |       | 993.3      |       | 889.2      |       |
| Prepaid expenses                                                                                                                              |       | 42.9       |       | 31.3       |       |
|                                                                                                                                          |       |       |       |       |       |
| Total current  assets                                                                                                                         |       | 2,322.9    |       | 2,104.3    |       |
|                                                                                                                                          |       |       |       |       |       |
| **Other assets:**                                                                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Equity  investments                                                                                                                           |       | 95.3       |       | 102.2      |       |
| Repair parts  inventories                                                                                                                     |       | 135.9      |       | 162.7      |       |
| Prepaid pension                                                                                                                               |       | 31.7       |       | 17.1       |       |
| Deposits,  receivables, and other assets                                                                                                      |       | 449.4      |       | 397.2      |       |
| Goodwill                                                                                                                                      |       | 2,255.2    |       | 2,159.7    |       |
|                                                                                                                                          |       |       |       |       |       |
| Total other  assets                                                                                                                           |       | 2,967.5    |       | 2,838.9    |       |
|                                                                                                                                          |       |       |       |       |       |
| **Property, plant, and equipment:**                                                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Land, at cost                                                                                                                                 |       | 242.9      |       | 229.5      |       |
| Buildings and  equipment, at cost:                                                                                                            |       |       |       |       |       |
| Buildings and  building equipment                                                                                                             |       | 976.1      |       | 905.6      |       |
| Factory  machinery and equipment                                                                                                              |       | 4,346.5    |       | 4,070.2    |       |
| Transportation,  office, and miscellaneous equipment                                                                                          |       | 100.4      |       | 98.2       |       |
| Construction in  progress                                                                                                                     |       | 120.8      |       | 89.1       |       |
|                                                                                                                                          |       |       |       |       |       |
|                                                                                                                                          |       | 5,786.7    |       | 5,392.6    |       |
| Less accumulated  depreciation                                                                                                                |       | 2,945.5    |       | 2,576.3    |       |
|                                                                                                                                          |       |       |       |       |       |
| Net property,  plant, and equipment                                                                                                           |       | 2,841.2    |       | 2,816.3    |       |
|                                                                                                                                          |       |       |       |       |       |
| Total assets                                                                                                                                  |       | $          | 8,131.6    |       | $          | 7,759.5 |   |

 

154

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Dollars in millions

 
| **December 31,**                                                         | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                          |       |       |       |       |       |
| **Liabilities and Net Parent  Investment**                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Current liabilities:**                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Short-term loans                                                              |       | $          | 412.8      |       | $          | 26.3 |   |
| Accounts payable  including amount to related parties of $23.8 ($2.2 in 2005) |       | 883.3      |       | 765.6      |       |
| Salaries and  wages                                                           |       | 139.8      |       | 141.1      |       |
| U.S. and foreign  income taxes                                                |       | 138.4      |       | 107.8      |       |
| Other accrued  liabilities                                                    |       | 224.5      |       | 253.3      |       |
| Long-term debt  due within one year                                           |       | 24.4       |       | 252.0      |       |
|                                                                          |       |       |       |       |       |
| Total current  liabilities                                                    |       | 1,823.2    |       | 1,546.1    |       |
|                                                                          |       |       |       |       |       |
| **External long-term debt**                                                   |       | 3,956.6    |       | 3,958.6    |       |
| ** **                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Deferred taxes**                                                            |       | 153.8      |       | 232.9      |       |
| ** **                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other liabilities**                                                         |       | 708.1      |       | 741.3      |       |
| ** **                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Minority share owners’  interests**                                    |       | 207.2      |       | 182.0      |       |
| ** **                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net Parent investment:**                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Investment by  and advances from Parent                                       |       | 1,287.2    |       | 1,313.9    |       |
| Accumulated  other comprehensive loss                                         |       | (4.5       | )          | (215.3     | )          |
|                                                                          |       |       |       |       |       |
| Total net Parent  investment                                                  |       | 1,282.7    |       | 1,098.6    |       |
|                                                                          |       |       |       |       |       |
| Total liabilities and  net Parent investment                                  |       | $          | 8,131.6    |       | $          | 7,759.5 |   |

 

See accompanying Notes to the Consolidated FinancialStatements.

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

Dollars in millions
| **Years ended December 31,**                         | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                                |       |       |       |       |       |       |       |
| **Investment by and advances to  Parent**                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance at  beginning of year                                       |       | $          | 1,313.9    |       | $          | 2,020.6    |       | $ | 997.0 |   |
| Net intercompany  transactions                                      |       | (177.7     | )          | (484.3     | )          | 736.0      |       |
| Net earnings                                                        |       | 151.0      |       | (222.4     | )          | 287.6      |       |
|                                                                |       |       |       |       |       |       |       |
| Balance at end  of year                                             |       | 1,287.2    |       | 1,313.9    |       | 2,020.6    |       |
|                                                                |       |       |       |       |       |       |       |
| **Accumulated other comprehensive  loss**                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance at  beginning of year                                       |       | (215.3     | )          | 67.9       |       | (198.3     | )          |
| Foreign currency  translation adjustments                           |       | 284.9      |       | (290.5     | )          | 294.8      |       |
| Change in  minimum pension liability, net of tax                    |       | 22.6       |       | (7.2       | )          | (27.5      | )          |
| Adjustment to  initially apply FAS No. 158, net of tax              |       | (47.4      | )          |       |       |       |       |
| Change in fair  value of certain derivative instruments, net of tax |       | (49.3      | )          | 14.5       |       | (1.1       | )          |
|                                                                |       |       |       |       |       |       |       |
| Balance at end  of year                                             |       | (4.5       | )          | (215.3     | )          | 67.9       |       |
|                                                                |       |       |       |       |       |       |       |
| Total net Parent  investment                                        |       | $          | 1,282.7    |       | $          | 1,098.6    |       | $ | 2,088.5 |   |
|                                                                |       |       |       |       |       |       |       |
| **Total comprehensive income  (loss)**                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net earnings  (loss)                                                |       | $          | 151.0      |       | $          | (222.4     | )          | $ | 287.6 |   |
| Foreign currency  translation adjustments                           |       | 284.9      |       | (290.5     | )          | 294.8      |       |
| Change in minimum  pension liability, net of tax                    |       | 22.6       |       | (7.2       | )          | (27.5      | )          |
| Change in fair  value of certain derivative instruments, net of tax |       | (49.3      | )          | 14.5       |       | (1.1       | )          |
|                                                                |       |       |       |       |       |       |       |
| Total comprehensive  income (loss)                                  |       | $          | 409.2      |       | $          | (505.6     | )          | $ | 553.8 |   |

 

See accompanying Notes to the Consolidated FinancialStatements.

156

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

Dollarsin millions
| **Years ended December 31,**                                                           | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Operating activities:**                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net earnings  (loss)                                                                                  |       | $          | 151.0      |       | $          | (222.4     | )          | $ | 287.6 |   |
| Non-cash charges  (credits):                                                                          |       |       |       |       |       |       |       |
| Depreciation                                                                                          |       | 426.5      |       | 431.3      |       | 384.0      |       |
| Amortization of  deferred costs                                                                       |       | 32.6       |       | 35.4       |       | 35.2       |       |
| Deferred tax  provision (credit)                                                                      |       | 25.4       |       | (3.1       | )          | 11.4       |       |
| 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      | )          |       |       |       |       |
| Restructuring  costs and writeoffs of certain assets                                                  |       | 27.5       |       |       |       |       |       |
| Gains on asset  sales                                                                                 |       |       |       | (28.1      | )          | (51.6      | )          |
| Other                                                                                                 |       | 20.7       |       | (6.4       | )          | (70.0      | )          |
| Change in  non-current operating assets                                                               |       | (10.1      | )          | (14.6      | )          | 12.9       |       |
| Change in  non-current liabilities                                                                    |       | (52.1      | )          | (58.7      | )          | (10.1      | )          |
| Change in  components of working capital                                                              |       | (221.7     | )          | 80.9       |       | 181.6      |       |
| Cash provided by  operating activities                                                                |       | 378.2      |       | 708.3      |       | 781.0      |       |
| **Investing activities:**                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Additions to  property, plant and equipment                                                           |       | (271.5     | )          | (366.2     | )          | (407.6     | )          |
| Acquisitions,  net of cash acquired                                                                   |       |       |       | (11.6      | )          | (630.3     | )          |
| Collections on  accounts receivable arising from consolidation of receivables securitization  program |       | 127.3      |       | 50.7       |       |       |       |
| Net cash  proceeds from divestitures and other                                                        |       | 13.6       |       | 205.7      |       | 257.8      |       |
| Cash utilized in  investing activities                                                                |       | (130.6     | )          | (121.4     | )          | (780.1     | )          |
| **Financing activities:**                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Additions to  long-term debt                                                                          |       | 1,206.5    |       | 537.5      |       | 2,114.6    |       |
| Repayments of  long-term debt                                                                         |       | (1,341.7   | )          | (617.1     | )          | (2,611.1   | )          |
| Increase  (decrease) in short-term loans                                                              |       | 158.9      |       | 11.5       |       | (23.2      | )          |
| Net change in  intercompany debt                                                                      |       | (266.9     | )          | (414.2     | )          | 675.8      |       |
| Net payments for  hedging activity                                                                    |       | (6.8       | )          | (98.0      | )          | (25.9      | )          |
| Payment of  finance fees                                                                              |       | (12.3      | )          | (1.0       | )          | (34.4      | )          |
| Cash provided by  (utilized in) financing activities                                                  |       | (262.3     | )          | (581.3     | )          | 95.8       |       |
| Effect of  exchange rate fluctuations on cash                                                         |       | 12.6       |       | (13.3      | )          | 4.3        |       |
| Increase (decrease) in  cash                                                                          |       | (2.1       | )          | (7.7       | )          | 101.0      |       |
| Cash at beginning of  year                                                                            |       | 243.9      |       | 251.6      |       | 150.6      |       |
| Cash at end of year                                                                                   |       | $          | 241.8      |       | $          | 243.9      |       | $ | 251.6 |   |

 

See accompanying Notes to the Consolidated FinancialStatements.

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Owens-BrockwayGlass Container Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSTabular data dollars in millions

**1.   Significant AccountingPolicies**

**Basis of Consolidated Statements**   Theconsolidated financial statements of Owens-Brockway Glass Container, Inc. (“Company”)include the accounts of its subsidiaries. Newly acquired subsidiaries have been included in the consolidatedfinancial statements from dates of acquisition.

Certainamounts included in the Consolidated Statement of Cash Flows for the year endedDecember 31, 2005 have been reclassified to conform to the 2006presentation.  These amounts, whichrelate to receipts from customers in payment of the accounts receivable in theEuropean accounts receivable securitization program at the date of its consolidation,have been reclassified from operating activities to investing activities.  See Note 5 for additional information.  While this reclassification had no effect ontotal cash flows, cash provided by operations and cash utilized in investingactivities both decreased by $50.7 million. Net earnings and net parent investment were not affected by thisreclassification.

TheCompany uses the equity method of accounting for investments in which it has asignificant ownership interest, generally 20% to 50%.  Other investments are accounted for at cost.

**Relationship with Owens-BrockwayPackaging, Inc., Owens-Illinois Group, Inc.****and Owens-Illinois, Inc.  **TheCompany is a wholly-owned subsidiary of Owens-Brockway Packaging, Inc. (“OBPackaging”), and an indirect subsidiary of Owens-IllinoisGroup, Inc. (“OI Group”) and 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 of Operations**   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 of Estimates**   Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management of the Company tomake estimates and assumptions that affect certain amounts reported in thefinancial statements and accompanying notes. Actual results may differ from those estimates, at which time theCompany would revise its estimates accordingly.

**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.

**Fair Values of Financial Instruments**   Thecarrying amounts reported for cash, short-term investments and short-term loansapproximate fair value.  In addition,carrying amounts approximate fair value for certain long-term debt obligationssubject to frequently redetermined interest rates.  Fair values for the Company’s significantfixed rate debt obligations are generally based on published market quotations.

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**Derivative Instruments**   The Company uses currency swaps,interest rate swaps, options, and commodity futures contracts to manage risksgenerally associated with foreign exchange rate, interest rate and commoditymarket volatility.  Derivativefinancial instruments are included on the balance sheet at fair value.  Whenever possible, derivative instruments are designated as and areeffective as hedges, in accordance with accounting principles generallyaccepted in the United States.  If theunderlying hedged transaction ceases to exist, all changes in fair value of therelated derivatives that have not been settled are recognized in currentearnings.  The Company does not enterinto derivative financial instruments for trading purposes and is not a partyto leveraged derivatives. In accordance with FAS No. 104, cash flows from fairvalue hedges of debt and short-term forward exchange contracts are classifiedas a financing activity.  Cash flows ofcurrency swaps, interest rate swaps, and commodity futures contracts areclassified as operating activities. See Note 8 for additional informationrelated to derivative instruments.

**Inventory Valuation**   TheCompany values most U.S. inventories at 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**   Goodwillrepresents the excess of cost over fair value of assets of businessesacquired.  Goodwill is evaluatedannually, as of October 1, for impairment or more frequently if an impairmentindicator exists.

**Intangible Assets and Other Long-Lived Assets**   Intangibleassets are amortized over the expected 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, theasset 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 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 molding machines)depreciated over 7-15 years.  Buildingsand building equipment are depreciated over periods ranging from 10 to 50years.  Maintenance and repairs areexpensed as incurred.  Costs assigned toPP&E of acquired businesses are based on estimated fair values at the dateof acquisition.

**Revenue Recognition**   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.

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

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

**Foreign Currency Translation**   Theassets and liabilities of most subsidiaries and associates are translated atcurrent exchange rates and any related translation adjustments are recordeddirectly in net Parent investment.

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**Accounts Receivable  **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.

**Allowance for 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.

**New Accounting Standards  **In July2006, the Financial Accounting Standards Board issued Interpretation No. 48 (“FIN48”), “Accounting for Uncertainty in Income Taxes”.  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 for IncomeTaxes”.  FIN 48 defines criteria that anindividual tax position must meet for any part of the benefit of that positionto be recognized in an enterprise’s financial statements and also includesrequirements for measuring the amount of the benefit to be recognized in thefinancial statements.  FIN 48 iseffective for fiscal years beginning after December 15, 2006, therefore theCompany will adopt its provisions effective as of January 1, 2007.  The Company has not yet determined the impactof adopting FIN 48.

InSeptember 2006, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards No. 157 (“FAS No. 157”), “Fair ValueMeasurements”.  FAS No. 157 defines fairvalue, establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair valuemeasurements.  FAS No. 157 applies underother accounting pronouncements that require or permit fair valuemeasurements.  The statement does notrequire any new fair value measurements. The statement is effective for fiscal years beginning after November 15,2007.   Adoption of FAS No. 157 is notexpected to have a material impact on the Company’s results of operations orfinancial position.

InFebruary 2007, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards No. 159 (“FAS No. 159”), “Fair Value Option forFinancial Assets and Financial Liabilities — Including an amendment of FASBStatement No. 115”.  FAS No. 159 permitsentities to choose to measure many financial instruments and certain otheritems at fair value.  The statement iseffective for fiscal years beginning after November 15, 2007.   Adoption of FAS No. 159 is not expected tohave a material impact on the Company’s results of operations or financialposition.

**Participationin OI Inc. Stock Option Plans 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.

*Stock Options*

Foroptions granted prior to March 22, 2005, no options may be exercised in wholeor in part during the first year after the date granted. In general, subject toaccelerated exercisability provisions related to the performance of OI Inc.’scommon stock or change of control, 50% of the options become exercisable on thefifth anniversary of the date of the option grant, with the remaining 50%becoming exercisable on the sixth anniversary date of the option grant.** **In general, options expire following terminationof employment or the day after the tenth anniversary date of the option grant.

Foroptions granted after March 21, 2005, no options may be exercised in whole orin part during the first year after the date granted.  In general, subject to change in control, theseoptions become exercisable

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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 ratably overfive 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 range fromone to four years.

*Restricted Shares*

Sharesgranted to employees prior to March 22, 2005, generally vest after three yearsor upon retirement, whichever is later. Shares granted after March 21, 2005, vest 25% per year beginning on thefirst 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 over thevesting period.  The fair value ofrestricted shares granted after March 21, 2005, is amortized over the vestingperiods 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 in whichthey are granted.  Holders of vestedunits 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, OIInc. accounted for these equity compensation plans under the recognition andmeasurement provisions of Accounting Principles Board (APB) Opinion No.25, “Accountingfor Stock Issued to Employees”, and related interpretations, as permitted byFAS No. 123, “Accounting for Stock-Based Compensation” (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 the underlyingcommon stock on the date of the grant. Prior to January 1, 2006, compensation cost was recognized forrestricted shares and restricted share units. Effective January 1, 2006, OI Inc. adopted the fair value recognitionprovisions of FAS No. 123 (R), “Share-Based Payment” (FAS No. 123R), using themodified-prospective method.  Under thismethod, compensation cost recognized after January 1, 2006 includes: (1)compensation cost for all share-based payments granted through December 31, 2005,but for which the requisite service period had not been completed as ofDecember 31, 2005, based on the grant date fair value estimated in accordancewith the original

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provisions of FAS No.123,and (2) compensation cost for share-based payments granted subsequent toDecember 31, 2005, based on the grant date fair value estimated in accordancewith the provisions 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.   Changes in Components of Working CapitalRelated to Operations  **Changes in the components ofworking capital related to operations (net of the effects related toacquisitions and divestitures) were as follows (the 2005 receivables amount hasbeen adjusted to conform to the 2006 presentation in relation to the Europeanaccounts receivable securitization program):
| ** **                                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Decrease  (increase) in current assets:      |       |     |       |     |       |     |       |
| Receivables                                  |       | $        | (173.9     | )        | $          | (68.9    | )          | $ | 75.7 |   |
| Inventories                                  |       | (36.8    | )          | 58.1     |       | 83.8     |       |
| Prepaid expenses                             |       | 2.4      |       | (4.7     | )          | 32.4     |       |
| Increase  (decrease) in current liabilities: |       |     |       |     |       |     |       |
| Accounts payable and accrued liabilities     |       | (28.1    | )          | 32.4     |       | 36.1     |       |
| Salaries and wages                           |       | (13.8    | )          | (2.8     | )          | (0.9     | )          |
| U.S. and foreign income taxes                |       | 28.5     |       | 66.8     |       | (45.5    | )          |
|                                         |       | $        | (221.7     | )        | $          | 80.9     |       | $ | 181.6 |   |

 

**3.   Inventories**  Major classes of inventory are as follows:
| ** **          | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
| Finished goods      |       | $        | 825.0      |     | $          | 748.5 |   |
| Work in process     |       | 7.7      |       | 3.5      |       |
| Raw materials       |       | 93.8     |       | 74.9     |       |
| Operating  supplies |       | 66.8     |       | 62.3     |       |
|                |       | $        | 993.3      |     | $          | 889.2 |   |

 

Ifthe inventories which are valued on the LIFO method had been valued at standardcosts, which approximate current costs, consolidated inventories would behigher than reported by $20.8 million and $20.9 million, at December 31, 2006and 2005, respectively.

Inventorieswhich are valued at the lower of standard costs (which approximate averagecosts), or market at December 31, 2006 and 2005 were approximately $859.3million and $775.6 million, respectively.

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**4.   Equity Investments  **Summarizedinformation pertaining to the Company’s equity associates follows:
|                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| At end of year:                   |       |     |       |     |       |
| Equity in undistributed earnings: |       |     |       |     |       |
| Foreign                           |       | $        | 20.3       |     | $          | 19.5 |   |
| Domestic                          |       | 15.9     |       | 17.6     |       |
| Total                             |       | $        | 36.2       |     | $          | 37.1 |   |

 
|                     | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------|------------|----------|------------|----------|------------|----------|------------|
| For the year:       |       |     |       |     |       |     |       |
| Equity in earnings: |       |     |       |     |       |     |       |
| Foreign             |       | $        | 2.1        |     | $          | 6.8      |       | $ | 15.2 |   |
| Domestic            |       | 21.4     |       | 13.6     |       | 10.9     |       |
| Total               |       | $        | 23.5       |     | $          | 20.4     |       | $ | 26.1 |   |
| Dividends  received |       | $        | 43.5       |     | $          | 11.0     |       | $ | 12.8 |   |

 

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**5.   External Long-Term Debt**   Thefollowing table summarizes the external long-term debt of the Company atDecember 31, 2006 and 2005:
| ** **                                                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Secured Credit  Agreement:                                                           |       |     |       |     |       |
| Revolving Credit Facility:                                                           |       |     |       |     |       |
| Revolving Loans                                                                      |       | $        | 45.2       |     | $          | — |   |
| Term Loans:                                                                          |       |     |       |     |       |
| Term Loan A (292.5 million AUD)                                                      |       | 231.5    |       |     |       |
| Term Loan B                                                                          |       | 195.5    |       |     |       |
| Term Loan C (134.6 million CAD)                                                      |       | 115.9    |       |     |       |
| Term Loan D (€195.5 million)                                                    |       | 257.4    |       |     |       |
| Third Amended  and Restated Secured Credit Agreement:                                |       |     |       |     |       |
| Term Loans                                                                           |       |     |       |     |       |
| A1 Term Loan                                                                         |       |     |       | 223.9    |       |
| B1 Term Loan                                                                         |       |     |       | 220.8    |       |
| C1 Term Loan                                                                         |       |     |       | 185.6    |       |
| C2 Term Loan                                                                         |       |     |       | 54.9     |       |
| Accounts  receivable securitization (included in short-term loans at Dec. 31, 2006): |       |     |       |     |       |
| European program                                                                     |       |     |       | 231.8    |       |
| Asia Pacific program                                                                 |       |     |       | 80.6     |       |
| Senior Secured  Notes:                                                               |       |     |       |     |       |
| 8.875%, due 2009                                                                     |       | 850.0    |       | 1,000.0  |       |
| 7.75%, due 2011                                                                      |       | 450.0    |       | 450.0    |       |
| 8.75%, due 2012                                                                      |       | 625.0    |       | 625.0    |       |
| Senior Notes:                                                                        |       |     |       |     |       |
| 8.25%, due 2013                                                                      |       | 440.8    |       | 436.6    |       |
| 6.75%, due 2014                                                                      |       | 400.0    |       | 400.0    |       |
| 6.75%, due 2014 (€225 million)                                                  |       | 296.2    |       | 267.0    |       |
| Senior  Subordinated Notes:                                                          |       |     |       |     |       |
| 9.25%, due 2009                                                                      |       |     |       | 0.5      |       |
| Other                                                                                |       | 73.5     |       | 33.9     |       |
|                                                                                 |       | 3,981.0  |       | 4,210.6  |       |
| Less amounts due within one year                                                     |       | 24.4     |       | 252.0    |       |
| External  long-term debt                                                             |       | $        | 3,956.6    |     | $          | 3,958.6 |   |

 

On June 14, 2006, the Company’s subsidiary borrowersentered into the Secured Credit Agreement (the “Agreement”).  Proceeds from the Agreement were used torepay all outstanding amounts under the previous credit agreement. At December31, 2006, the Agreement included a $900.0 million revolving credit facility, a292.5 million Australian dollar term loan, and a 134.6 million Canadian dollarterm loan, each of which has a final maturity date of June 15, 2012. It alsoincluded a $195.5 million term loan and a €195.5 million term loan each ofwhich have a final maturity date of June 14, 2013. The Agreement also permitsthe Company, at its option, to refinance certain of its outstanding notes anddebentures prior to their scheduled maturity. The Company recorded $10.2million of additional interest charges for the write-off of unamortized financefees related to the early repayment of the previous credit agreement.

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At December 31, 2006 the Company’s subsidiaryborrowers had unused credit of $765.6 million available under the Agreement.

The interest rate on borrowings under the RevolvingCredit Facility is, at the Company’s option, the Base Rate or the AdjustedEurodollar rate.  The interest rate onborrowings under the Revolving Credit Facility also includes a margin linked tothe Company’s Consolidated Leverage Ratio, as defined in the Agreement.  The margin is limited to ranges of 1.125% to2.0% for Eurodollar loans and 0.125% to 1.0% for Base Rate loans.  The weighted average interest rate onborrowings outstanding under the Agreement at December 31, 2006 was 6.52%.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 under the Agreement are secured bysubstantially all of the assets of the Company’s domestic subsidiaries andcertain foreign subsidiaries, which have a book value of approximately $2.4billion.  Borrowings are also secured bya pledge of intercompany debt and equity in most of the Company’s domesticsubsidiaries and stock of certain foreign subsidiaries.  All borrowings under the agreement areguaranteed by substantially all domestic subsidiaries of the Company for theterm of the Agreement.

The Agreement containscovenants and provisions that, among other things, restrict the ability of theCompany and its subsidiaries to dispose of assets, incur additionalindebtedness, prepay other indebtedness or amend certain debt instruments, paydividends, create liens on assets, enter into contingent obligations, enterinto sale and leaseback transactions, make investments, loans or advances, makeacquisitions, engage in mergers or consolidations, change the businessconducted, engage in certain transactions with affiliates and otherwiserestrict certain corporate activities. In addition, the Agreement contains financial covenants that require theCompany to maintain specified financial ratios and meet specified tests basedupon financial statements of the Company and its subsidiaries on a consolidatedbasis, including minimum interest coverage ratios, maximum leverage ratios andspecified capital expenditure tests.

DuringJuly of 2006, a subsidiary of the Company used borrowings under the Agreementto repurchase $150.0 million principal amount of the 8.875% Senior SecuredNotes due 2009.  During the third quarter,the Company recorded $7.3 million of additional interest charges for noterepurchase premiums and the related write-off of unamortized finance fees.

Duringthe fourth quarter of 2005, the Company expanded the capacity of its Europeanaccounts receivable securitization program from €200 million to €320 million toinclude operations in Italy and the United Kingdom. The accounts receivablesecuritization program provides lower costs of financing than traditional bankdebt. The terms of this expansion resulted in changing from off-balance sheetto on-balance sheet accounting for the program by consolidating both theaccounts receivable in the program and the secured indebtedness of the sameamount. Cash inflows related to receipts from customers in payment of theaccounts receivable consolidated at December 13, 2005 have been classified asinvesting cash inflows in the accompanying Consolidated Statement of CashFlows.

DuringOctober of 2006, the Company entered into a new €300 million European accountsreceivable securitization program.  Thenew program replaces the previous European program, described in the precedingparagraph, which was set to terminate in October 2006.

AtDecember 31, 2006, the European program had a balance of $195.0 million, andthe Asia Pacific program had a balance of $84.4 million recorded in short termloans.  The interest rate on the accountsreceivable securitization program is a local short term variable rate plus amargin over the variable rate of

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0.70%for the European program and 0.85% for the Asia Pacific program.  The weighted average interest rate onborrowings under the European program was 4.81% at December 31, 2006.  The weighted average interest rate onborrowings under the Asia Pacific program was 7.43% at December 31, 2006.  These programs have maturity dates rangingfrom January of 2008 through October of 2011.

Annual maturities for all of the Company’s long-termdebt through 2011 are as follows: 2007, $24.4 million; 2008, $9.1 million;2009, $883.0 million; 2010, $53.7 million; and 2011, $620.1 million.

Interest paid in cash, including note repurchasepremiums, aggregated $380.0 million for 2006, $365.2 million for 2005, and $434.7million for 2004.

Fairvalues at December 31, 2006, of the Company’s significant fixed rate debtobligations were as follows:
| ** **                           | ** ** | **Principal Amount** | ** ** | **Indicated** | ** ** | **Fair Value**   | ** ** | **Hedge Value**  | ** ** |
|--------------------------------------|------------|---------------------------|------------|---------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **(millions of**     | ** ** | **Market**    | ** ** | **(millions of** | ** ** | **(millions of** | ** ** |
| ** **                           | ** ** | **dollars)**              | ** ** | **Price**     | ** ** | **dollars)**          | ** ** | **dollars)**          | ** ** |
| Senior Secured  Notes:               |       |                      |       |          |       |                  |       |                  |       |
| 8.875%, due 2009                     |       | $                         | 850.0      |          | 102.52     |                  | $          | 871.4                 |       |   |   |
| 7.75%, due 2011                      |       | 450.0                     |       | 103.50        |       | 465.8                 |       |                  |       |
| 8.75%, due 2012                      |       | 625.0                     |       | 106.25        |       | 664.1                 |       |                  |       |
| Senior Notes:                        |       |                      |       |          |       |                  |       |                  |       |
| 8.25%, due 2013                      |       | 450.0                     |       | 103.25        |       | 464.6                 |       | $                     | 440.8      |   |
| 6.75%, due 2014                      |       | 400.0                     |       | 97.75         |       | 391.0                 |       |                  |       |
| 6.75%, due 2014  (€225 million) |       | 296.2                     |       | 99.75         |       | 295.5                 |       |                  |       |
|                                      |            |                           |            |               |            |                       |            |                       |            |  |  |  |

 

**6.   Operating Leases**   Rentexpense attributable to all warehouse, office buildings, and equipmentoperating leases was $75.7 million in 2006, $66.5 million in 2005, and $66.3million in 2004.  Minimum future rentalsunder operating leases are as follows: 2007, $42.2 million; 2008, $30.3 million; 2009, $22.9 million; 2010,$16.9 million; and 2011, $7.4 million; and 2012 and thereafter, $8.2 million.

**7.   Foreign Currency Transactions**   Aggregateforeign currency exchange gains (losses) included in other costs and expenseswere $(1.0) million in 2006, $2.8 million in 2005, and $(1.4) million in 2004.

**8.   Derivative Instruments  **AtDecember 31, 2006, the Company had the following derivative instruments relatedto its various hedging programs:

*Hedges of Debt*

Certainof the Company’s subsidiaries have entered into short term forward exchangecontracts which effectively swap intercompany loans to other subsidiaries thatare denominated in the functional currency of the borrowers.  These contracts swap the principal amount ofloans and in some cases they swap the related interest.

TheCompany recognizes the above derivatives on the balance sheet at fairvalue.  Accordingly, the changes in thevalue of the swaps are recognized in current earnings and are expected tosubstantially offset any exchange rate gains or losses on the relatednonfunctional currency loans.  For theyear ended December 31, 2006, the amount not offset was not material.

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*Interest Rate Swaps Designated asFair Value Hedges*

Inthe fourth quarter of 2003 and the first quarter of 2004, the Company enteredinto a series of interest rate swap agreements with a total notional amount of$1.05 billion that mature from 2007 through 2013.  The swaps were executed in order to:(i) convert a portion of the senior notes and senior debentures fixed-ratedebt into floating-rate debt; (ii) maintain a capital structure containingappropriate amounts of fixed and floating-rate debt; and (iii) reduce netinterest payments and expense in the near-term.

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 liability along with a correspondingnet decrease 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 (see table below).  The interest rate differential on each swapis recognized as an adjustment of interest expense during each six-month periodover the term of the agreement.

Thefollowing selected information relates to fair value swaps at December 31, 2006(based on a projected U.S. LIBOR rate of 5.1515% based on rates at December 31,2006):
| ** **                                                               | ** ** | ** ** | ** ** | **Average** | ** ** | ** **  | ** ** | **Asset**       | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|-----------------|------------|
| ** **                                                               | ** ** | **Amount** | ** ** | **Receive** | ** ** | **Average** | ** ** | **(Liability)** | ** ** |
| ** **                                                               | ** ** | **Hedged** | ** ** | **Rate**    | ** ** | **Spread**  | ** ** | **Recorded**    | ** ** |
| OI Inc. public  notes swapped by the company through intercompany loans: |       |       |       |        |       |        |       |            |       |
| Senior Notes due 2007                                                    |       | $          | 300.0      |        | 8.10       | %           | 4.5        | %               | $          | (1.8 | ) |
| Senior Notes due 2008                                                    |       | 250.0      |       | 7.35        | %          | 3.5         | %          | (4.3            | )          |
| Senior Debentures due 2010                                               |       | 250.0      |       | 7.50        | %          | 3.2         | %          | (5.8            | )          |
|                                                                     |       |       |       |        |       |        |       |            |       |
| Notes issued by  OBGC:                                                   |       |       |       |        |       |        |       |            |       |
| Senior Notes due 2013                                                    |       | 250.0      |       | 8.25        | %          | 3.7         | %          | (9.4            | )          |
| Total                                                                    |       | $          | 1,050.0    |        |       |        |       |            | $          | (21.3 | ) |

 

*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 twenty-four monthsand periodically enters into commodity futures contracts in order to hedge aportion of its usage requirements over that period.  At December 31, 2006, the Company had enteredinto commodity futures contracts for approximately 57% (approximately13,450,000 MM BTUs) for the full year of 2007 and approximately 9%(approximately 2,160,000 MM BTUs) for the full 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 OCI and reclassified into earnings in the same period or periodsduring 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.

167

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The above futures contracts are accounted for ascash flow hedges at December 31, 2006.

At December 31, 2006, an unrecognized loss of $32.8million (pretax and after tax), related to the domestic commodity futures contracts,was included in OCI, which will be reclassified into earnings over the nexttwelve months.  The ineffectivenessrelated to these natural gas hedges for the year ended December 31, 2006 wasnot 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*

TheCompany records the fair values of derivative financial instruments on thebalance sheet as follows: (1) receivables if the instrument has a positive fairvalue and maturity within one year, (2) deposits, receivables, and other assetsif the instrument has a positive fair value and maturity after one year, (3)accounts payable and other accrued liabilities if the instrument has a negativefair value and maturity within one year, and (4) other liabilities if theinstrument has a negative fair value and maturity after one year.

**9.   Accumulated Other Comprehensive Income(Loss)  **The components of comprehensive income (loss)are: (a) net earnings (loss); (b) change in fair value of certain derivativeinstruments; (c) adjustment of minimum pension liabilities; (d) adjustment toadopt FAS No. 158; and, (e) foreign currency translation adjustments. The neteffect of exchange rate fluctuations generally reflects changes in the relativestrength of the U.S. dollar against major foreign currencies between thebeginning and end of the year.

168

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Thefollowing table lists the beginning balance, yearly activity and ending balanceof each component of accumulated other comprehensive income (loss):
| ** **                | ** ** | **Net Effect of  Exchange Rate  Fluctuations** | ** ** | **Deferred Tax  Effect for  Translation** | ** ** | **Change in  Minimum  Pension  Liability  (net of tax)** | ** ** | **Change in  Certain  Derivative  Instruments  (net of tax)** | ** ** | **Adjustment  to initially  apply FAS  No. 158  (net of tax)** | ** ** | **Total  Accumulated  Comprehensive  Income (Loss)** | ** ** |
|---------------------------|------------|---------------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Balance on Jan.  1, 2004  |       | $                                                             | (110.0     | )                                                   | $          | 21.5                                                                    |       | $                                                                            | (110.8     | )                                                                                       | $          | 1.0                                                       |       | $ | — |   | $ | (198.3 | ) |
|                      |       |                                                          |       |                                                |       |                                                                    |       |                                                                         |       |                                                                                    |       |                                                      |       |
| 2004 Change               |       | 303.5                                                         |       | (8.7                                                | )          | (44.6                                                                   | )          | (1.6                                                                         | )          |                                                                                    |       | 248.6                                                     |       |
| Translation  effect       |       |                                                          |       |                                                |       | 9.0                                                                     |       |                                                                         |       |                                                                                    |       | 9.0                                                       |       |
| Tax effect                |       |                                                          |       |                                                |       | 8.1                                                                     |       | 0.5                                                                          |       |                                                                                    |       | 8.6                                                       |       |
| Balance on Dec.  31, 2004 |       | 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 | ) |

 

**10.   Income Taxes  **Deferredincome taxes reflect:  (1) the net taxeffects of temporary differences between the carrying amounts of assets andliabilities for financial reporting purposes and the amounts used for incometax purposes and (2) carryovers and credits for income tax purposes.Significant components of the Company’s deferred tax assets and liabilities atDecember 31, 2006 and 2005 are as follows:
| ** **                             | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  assets:                  |       |     |       |     |       |
| Tax loss carryovers                    |       | $        | 289.5      |     | $          | 259.2 |   |
| Capital loss carryovers                |       | 34.4     |       | 30.3     |       |
| Accrued postretirement benefits        |       | 23.4     |       | 19.8     |       |
| Other, principally accrued liabilities |       | 239.0    |       | 212.7    |       |
| Total deferred tax assets              |       | 586.3    |       | 522.0    |       |
|                                   |       |     |       |     |       |
| Deferred tax  liabilities:             |       |     |       |     |       |
| Property, plant and equipment          |       | 242.9    |       | 204.2    |       |
| Inventory                              |       | 21.8     |       | 27.6     |       |
| Other                                  |       | 64.7     |       | 75.6     |       |
| Total deferred tax liabilities         |       | 329.4    |       | 307.4    |       |
| Valuation  allowance                   |       | (264.9   | )          | (349.7   | )          |
| Net deferred tax  liabilities          |       | $        | (8.0       | )        | $          | (135.1 | ) |

 

169

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Deferredtaxes are included in the Consolidated Balance Sheets at December 31, 2006 and2005 as follows:
| ** **                               | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
| Prepaid expenses                         |       | $        | 15.7       |     | $          | 3.7 |   |
| Deposits,  receivables, and other assets |       | 130.1    |       | 94.1     |       |
| Deferred taxes                           |       | (153.8   | )          | (232.9   | )          |
| Net deferred tax  liabilities            |       | $        | (8.0       | )        | $          | (135.1 | ) |

 

Theprovision for income taxes consists of the following:
| ** **   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------|------------|----------|------------|----------|------------|----------|------------|
| Current:     |       |     |       |     |       |     |       |
| U.S. Federal |       | $        | —     |     | $          | —   |       | $ | — |   |
| State        |       | 0.3      |       | 0.3      |       | 0.2      |       |
| Foreign      |       | 113.1    |       | 133.4    |       | 97.5     |       |
|         |       | 113.4    |       | 133.7    |       | 97.7     |       |
| Deferred:    |       |     |       |     |       |     |       |
| U.S. Federal |       | 12.9     |       | 1.7      |       | 18.5     |       |
| State        |       | (3.6     | )          | 8.0      |       | 13.1     |       |
| Foreign      |       | 16.1     |       | (12.8    | )          | (20.2    | )          |
|         |       | 25.4     |       | (3.1     | )          | 11.4     |       |
| Total:       |       |     |       |     |       |     |       |
| U.S. Federal |       | 12.9     |       | 1.7      |       | 18.5     |       |
| State        |       | (3.3     | )          | 8.3      |       | 13.3     |       |
| Foreign      |       | 129.2    |       | 120.6    |       | 77.3     |       |
|         |       | $        | 138.8      |     | $          | 130.6    |       | $ | 109.1 |   |

 

Theprovision for income taxes was calculated based on the following components ofearnings (loss) before income taxes:
| ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Domestic   |       | $        | (119.1     | )        | $          | (20.7    | )          | $ | 25.3 |   |
| Foreign    |       | 452.6    |       | (35.2    | )          | 404.4    |       |
|       |       | $        | 333.5      |     | $          | (55.9    | )          | $ | 429.7 |   |

 

170

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Incometaxes paid (received) in cash were as follows:
| ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Domestic   |       | $        | (0.4       | )        | $          | —   |       | $ | 0.2 |   |
| Foreign    |       | 126.8    |       | 112.9    |       | 95.8     |       |
|       |       | $        | 126.4      |     | $          | 112.9    |       | $ | 96.0 |   |

 

Areconciliation of the provision for income taxes based on the statutory U.S.Federal tax rate of 35% to the provision for income taxes is as follows:
| ** **                                                                            | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Tax provision  (benefit) on pretax earnings (loss) at statutory U.S. Federal tax rate |       | $        | 116.7      |     | $          | (19.6    | )          | $ | 150.4 |   |
| Increase  (decrease) in provision for income taxes due to:                            |       |     |       |     |       |     |       |
| Valuation allowance - U.S.                                                            |       | 46.5     |       | 7.0      |       |     |       |
| Reversal of non-U.S. tax valuation allowance                                          |       | (34.7    | )          |     |       |     |       |
| Restructuring charges                                                                 |       | 21.2     |       |     |       |     |       |
| Goodwill impairment                                                                   |       |     |       | 172.9    |       |     |       |
| State taxes, net of federal benefit                                                   |       | (0.3     | )          | 2.5      |       | 13.6     |       |
| Rate differences on non-U.S. earnings                                                 |       | (10.7    | )          | (22.5    | )          | (24.6    | )          |
| Australian tax consolidation                                                          |       |     |       | (2.8     | )          | (33.1    | )          |
| Adjustment for non-U.S. tax law changes                                               |       | (1.6     | )          | (7.1     | )          |     |       |
| Other items                                                                           |       | 1.7      |       | 0.2      |       | 2.8      |       |
| Provision for income  taxes                                                           |       | $        | 138.8      |     | $          | 130.6    |       | $ | 109.1 |   |

 

TheCompany is included in OI Inc.’s consolidated tax returns.  OI Inc. has net operating losses, capitallosses, alternative minimum tax credits, and research and development creditsavailable to offset future U.S. Federal income tax.

AtDecember 31, 2006, the Company’s equity in the undistributed earnings offoreign subsidiaries for which income taxes had not been provided approximated$1,747.4 million.  It is not practicableto estimate the U.S. and foreign tax which would be payable should theseearnings be distributed.

**11.   Related Party Transactions  **Chargesfor administrative services are allocated to the Company by OI Inc. based on anannual utilization level.  Such servicesinclude compensation and benefits administration, payroll processing, use ofcertain general accounting systems, auditing, income tax planning andcompliance, and treasury services.

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

Management believes thatsuch transactions are on terms no less favorable to the Company than those thatcould be obtained from unaffiliated third parties.

171

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Thefollowing information summarizes the Company’s significant related partytransactions:
| ** **                     | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------|------------|---------------------------------------------|------------|
| ** **                     | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|                           |       |                                        |       |   |   |   |   |
| Revenues:                      |       |                                        |       |   |   |   |   |
| Sales to  affiliated companies |       | $                                           | 0.5        |   | $ | 0.7 |   | $ | 4.7 |   |
|                           |       |                                        |       |   |   |   |   |
| Expenses:                      |       |                                        |       |   |   |   |   |
| Administrative  services       |       | 25.5                                        |       | 19.9 |   | 15.6 |   |
| Corporate  management fee      |       | 27.1                                        |       | 23.4 |   | 18.0 |   |
| Total expenses                 |       | $                                           | 52.6       |   | $ | 43.3 |   | $ | 33.6 |   |

 

Theabove expenses are recorded in the statement of operations as follows:
| ** **                                    | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                          |       |                                        |       |   |   |   |   |
| Cost of sales                                 |       | $                                           | 22.6       |   | $ | 17.7 |   | $ | 13.7 |   |
| Selling,  general, and adminstrative expenses |       | 30.0                                        |       | 25.6 |   | 19.9 |   |
| Total expenses                                |       | $                                           | 52.6       |   | $ | 43.3 |   | $ | 33.6 |   |

 

Intercompanyinterest is charged to the Company from OI Inc. based on intercompany debtbalances.  An interest rate is calculatedmonthly based on OI Inc’s total consolidated monthly external debt balance andthe related interest expense, including finance fee amortization and commitmentfees. The calculated rate (8.9% at December 31, 2006) is applied monthly to theintercompany 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 inthe plans; 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 $7.7 million in 2006, $21.5 millionin 2005, and $20.8 million in 2004.

OIInc. also sponsors several defined contribution plans for all salaried andhourly U.S. employees of the Company.  Participation is voluntary and participants’ contributions are based ontheir compensation.  OI Inc. matchescontributions of participants, up to various limits, in substantially allplans.  OI Inc. charges the Company forits share of the match.  The Company’sshare of the contributions to these plans amounted to $5.5 million in 2006,$5.2 million in 2005, and $4.9 million in 2004.

TheCompany’s subsidiaries in the United Kingdom, the Netherlands, Canada,Australia, Germany and France also have pension plans covering substantiallyall employees.  The following tablesrelate to the Company’s principal defined benefit pension plans in the UnitedKingdom, the Netherlands, Canada, Australia, Germany and France (theInternational Pension Plans).

TheInternational Pension Plans use a December 31 measurement date.

172

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Thechanges in the International Pension Plans benefit obligations for the yearwere as follows:
| ** **                                                               | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                     |       |     |       |     |       |
| Obligations at  beginning of year                                        |       | $        | 1,447.7    |     | $          | 1,417.3 |   |
|                                                                     |       |     |       |     |       |
| Change in  benefit obligations:                                          |       |     |       |     |       |
| Service cost                                                             |       | 28.1     |       | 23.0     |       |
| Interest cost                                                            |       | 69.1     |       | 68.4     |       |
| Actuarial (gain) loss, including the effect of  change in discount rates |       | (73.8    | )          | 118.7    |       |
| Participant contributions                                                |       | 10.0     |       | 9.4      |       |
| Benefit payments                                                         |       | (70.7    | )          | (65.4    | )          |
| Plan amendments                                                          |       | (7.2     | )          |     |       |
| Foreign currency translation                                             |       | 137.2    |       | (123.7   | )          |
| Other                                                                    |       | 4.0      |       |     |       |
|                                                                     |       |     |       |     |       |
| Net increase in benefit obligations                                      |       | 96.7     |       | 30.4     |       |
|                                                                     |       |     |       |     |       |
| Obligations at  end of year                                              |       | $        | 1,544.4    |     | $          | 1,447.7 |   |

 

Thechanges in the fair value of the International Pension Plans’ assets for theyear were as follows:
|                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
|                                 |       |     |       |     |       |
| Fair value at beginning  of year     |       | $        | 1,068.6    |     | $          | 1,008.5 |   |
|                                 |       |     |       |     |       |
| Change in fair  value:               |       |     |       |     |       |
| Actual gain on plan assets           |       | 77.0     |       | 162.1    |       |
| Benefit payments                     |       | (70.7    | )          | (65.4    | )          |
| Employer contributions               |       | 65.8     |       | 39.4     |       |
| Participant contributions            |       | 10.0     |       | 9.4      |       |
| Foreign currency translation         |       | 102.6    |       | (85.4    | )          |
|                                 |       |     |       |     |       |
| Net increase in fair value of assets |       | 184.7    |       | 60.1     |       |
|                                 |       |     |       |     |       |
| Fair value at  end of year           |       | $        | 1,253.3    |     | $          | 1,068.6 |   |

 

173

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Thefunded status of the International Pension Plans at year end was as follows:
|                                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
|                                                |       |     |       |     |       |
| Plan assets at  fair value                          |       | $        | 1,253.3    |     | $          | 1,068.6 |   |
| Projected  benefit obligations                      |       | 1,544.4  |       | 1,447.7  |       |
|                                                |       |     |       |     |       |
| Plan assets less than projected benefit obligations |       | (291.1   | )          | (379.1   | )          |
|                                                |       |     |       |     |       |
| Items not yet  recognized in pension expense:       |       |     |       |     |       |
| Actuarial loss                                      |       | 244.2    |       | 282.5    |       |
| Prior service cost                                  |       | (9.2     | )          | 14.0     |       |
|                                                |       |     |       |     |       |
|                                                |       | 235.0    |       | 296.5    |       |
|                                                |       |     |       |     |       |
| Net amount  recognized                              |       | $        | (56.1      | )        | $          | (82.6 | ) |

 

Thenet amount recognized is included in the Consolidated Balance Sheets atDecember 31, 2006 and 2005 as follows:
|                                                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                   |       |     |       |     |       |
| Prepaid pension                                                        |       | $        | 31.7       |     | $          | 17.1 |   |
| Current pension  liability, included with Other accrued liabilities    |       | (7.7     | )          |     |       |
| Noncurrent  pension liability, included with Pension benefits          |       | (315.1   | )          | (163.2   | )          |
| Additional  minimum pension liability, included with Other liabilities |       |     |       | (143.7   | )          |
| Intangible  asset, included with Deposits and other assets             |       |     |       | 9.4      |       |
| Accumulated  other comprehensive income                                |       | 235.0    |       | 197.8    |       |
|                                                                   |       |     |       |     |       |
| Net amount recognized                                                  |       | $        | (56.1      | )        | $          | (82.6 | ) |

 

Theaccumulated benefit obligation for all defined benefit pension plans was$1,393.2 million and $1,288.3 million at December 31, 2006 and 2005,respectively.

174

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Thecomponents of the International Pension Plans’ net pension expense were asfollows:
| ** **             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|
|                   |       |     |       |     |       |     |       |
| Service cost           |       | $        | 28.1       |     | $          | 23.0     |       | $ | 20.3 |   |
| Interest cost          |       | 69.1     |       | 68.4     |       | 57.0     |       |
| Expected asset  return |       | (81.5    | )          | (75.0    | )          | (62.5    | )          |
|                   |       |     |       |     |       |     |       |
| Amortization:          |       |     |       |     |       |     |       |
| Prior service cost     |       | 0.2      |       | 0.7      |       | 1.6      |       |
| Loss                   |       | 15.8     |       | 9.7      |       | 7.9      |       |
|                   |       |     |       |     |       |     |       |
| Net amortization       |       | 16.0     |       | 10.4     |       | 9.5      |       |
|                   |       |     |       |     |       |     |       |
| Net expense            |       | $        | 31.7       |     | $          | 26.8     |       | $ | 24.3 |   |

 

Amountsthat will be amortized from accumulated other comprehensive income into netpension expense during 2007:
| Amortization:      |   |   |   |
|--------------------|--------|--------|--------|
| Loss               |   | $      | 11.1   |   |
| Prior service cost |   | (0.1   | )      |
|               |   |   |   |
| Net amortization   |   | $      | 11.0   |   |

 

Thefollowing information is for plans with projected benefit obligations in excessof the fair value of plan assets at year end:
| ** **                     | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
|                           |       |     |       |     |       |
| Projected  benefit obligations |       | $        | 1,065.4    |     | $          | 1,353.2 |   |
| Fair value of  plan assets     |       | 742.6    |       | 961.2    |       |
|                                |            |          |            |          |            |  |  |

 

Thefollowing information is for plans with accumulated benefit obligations inexcess of the fair value of plan assets at year end:
| ** **                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
|                             |       |     |       |     |       |
| Accumulated  benefit obligations |       | $        | 1,065.4    |     | $          | 876.3 |   |
| Fair value of  plan assets       |       | 962.7    |       | 621.5    |       |
|                                  |            |          |            |          |            |  |  |

 

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Theweighted average assumptions used to determine benefit obligations were asfollows:
| ** **                     | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
|                           |       |     |       |     |       |
| Discount rate                  |       | 4.92     | %          | 4.57     | %          |
| Rate of  compensation increase |       | 3.34     | %          | 3.78     | %          |

 

Theweighted average assumptions used to determine net periodic pension costs wereas follows:
| ** **                                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                         |       |     |       |     |       |     |       |
| Discount rate                                |       | 4.57     | %          | 5.15     | %          | 5.68     | %          |
| Rate of  compensation increase               |       | 3.78     | %          | 3.41     | %          | 3.86     | %          |
| Expected  long-term rate of return on assets |       | 7.15     | %          | 7.15     | %          | 7.35     | %          |

 

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

As ofDecember 31, 2006, the Company adjusted the minimum pension liability for thepension plan in the United Kingdom from the minimum liabilities recorded in2002, 2003, 2004 and 2005.  Pursuant tothis requirement, the Company decreased the minimum pension liability by $38.5million and decreased accumulated other comprehensive loss by $38.5 million.

Asof December 31, 2006, the Company adjusted the minimum pension liability forthe pension plan in Canada from the minimum liabilities recorded in 2002, 2003 and2004.  Pursuant to this requirement, theCompany decreased the minimum pension liability by $9.7 million and decreasedaccumulated other comprehensive loss by $9.7 million.

Asof December 31, 2006, the Company adjusted the minimum pension liability forthe pension plan in 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.

TheCompany adopted the provisions of Financial Accounting Standards No. 158 (“FASNo. 158”), “Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans” 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.

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Thefollowing table shows the impact on the balance sheet of applying FAS No. 158at 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                                                 | )          |
|                                                                          |            |                                                       |            |  |

 

For2006, the Company’s weighted average expected long-term rate of return onassets was 7.15%.   In developing thisassumption, the Company evaluated input from its third party pension plan assetmanagers, including their review of asset class return expectations andlong-term inflation assumptions.  TheCompany also considered its historical 10-year average return (through December31, 2005), which was in line with the expected long-term rate of returnassumption for 2006.

Theweighted average actual asset allocations and weighted average targetallocation ranges by asset category for the Company’s pension plan assets wereas follows:
|                         | ** ** | ** **                 | ** ** | ** **     | ** ** | **Target** | ** ** |
|-------------------------|------------|----------------------------|------------|----------------|------------|------------|------------|
| ** **              | ** ** | **Actual Allocation** | ** ** | **Allocation** | ** ** |
| **Asset Category** | ** ** | **2006**                   | ** ** | **2005**       | ** ** | **Ranges** | ** ** |
|                    |       |                       |       |           |       |       |       |
| Equity securites        |       | 64                         | %          | 64             | %          | 59-69      | %          |
| Debt securities         |       | 29                         | %          | 29             | %          | 24-34      | %          |
| Real estate             |       | 6                          | %          | 7              | %          | 1-11       | %          |
| Other                   |       | 1                          | %          |           |       | 0-6        | %          |
|                    |       |                       |       |           |       |       |       |
| Total                   |       | 100                        | %          | 100            | %          |       |       |
|                    |       |                       |       |           |       |       |       |

 

Itis the Company’s policy to invest pension plan assets in a diversifiedportfolio consisting of an array of asset classes within the above target assetallocation ranges.  The investment riskof the assets is limited by appropriate diversification both within and betweenasset classes.  The assets are primarilyinvested in a broad mix of domestic and international equities, domestic andinternational bonds, and real estate, subject to the target asset allocationranges.  The assets are managed with aview to ensuring that sufficient liquidity will be available to meet expectedcash flow requirements.

TheCompany expects to contribute $53.9 million to its defined benefit pensionplans in 2007.

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

| Year(s)     | ** ** | **Amount** | ** ** |
|-------------|------------|------------|------------|
|        |       |       |       |
| 2007        |       | $          | 73.6       |   |
| 2008        |       | 74.1       |       |
| 2009        |       | 77.0       |       |
| 2010        |       | 78.6       |       |
| 2011        |       | 82.7       |       |
| 2012 - 2016 |       | 449.6      |       |
|             |            |            |            |  |

 

**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.

TheCompany’s net periodic postretirement benefit cost, as allocated by OI Inc.,for domestic employees was $14.7 million, $14.5 million, and $25.9 million atDecember 31, 2006, 2005, and 2004, respectively.

TheCompany’s subsidiaries in Canada and The Netherlands also have postretirementbenefit plans covering substantially all employees.  The following tables relate to the Company’spostretirement benefit plan in Canada and the Netherlands (the InternationalPostretirement Benefit Plans).

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The changes in the International PostretirementBenefit Plans obligations were as follows:
| ** **                                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                             |       |     |       |     |       |
| Obligations at  beginning of year                                |       | $        | 100.0      |     | $          | 87.4 |   |
|                                                             |       |     |       |     |       |
| Change in  benefit obligations:                                  |       |     |       |     |       |
| Service cost                                                     |       | 1.9      |       | 1.9      |       |
| Interest cost                                                    |       | 4.2      |       | 4.6      |       |
| Actuarial loss, including the effect of changing  discount rates |       | (9.5     | )          | 9.3      |       |
| Curtailments                                                     |       | (18.8    | )          |     |       |
| Benefit payments                                                 |       | (3.0     | )          | (2.5     | )          |
| Foreign currency translation                                     |       | 2.1      |       | (0.7     | )          |
|                                                             |       |     |       |     |       |
| Net change in benefit obligations                                |       | (23.1    | )          | 12.6     |       |
|                                                             |       |     |       |     |       |
| Obligations at end of  year                                      |       | $        | 76.9       |     | $          | 100.0 |   |

 

Thefunded status of the International Postretirement Benefit Plans at year end wasas follows:
| ** **                                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                          |       |     |       |     |       |
| Post retirement  benefit obligation                           |       | $        | 76.9       |     | $          | 100.0 |   |
| Items not yet  recognized in net postretirement benefit cost: |       |     |       |     |       |
| Actuarial loss                                                |       | (4.4     | )          | (15.9    | )          |
|                                                          |       |     |       |     |       |
| Net amount  recognized                                        |       | $        | 72.5       |     | $          | 84.1 |   |

 

Thenet amount recognized is included in the Consolidated Balance Sheets atDecember 31, 2006 and 2005 as follows:
| ** **                                                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                |       |     |       |     |       |
| Current  nonpension postretirement benefit, included with Other accrued liabilities |       | $        | 3.2        |     | $          | — |   |
| Nonpension  postretirement benefits                                                 |       | 73.7     |       | 85.1     |       |
| Accumulated  other comprehensive income                                             |       | (4.4     | )          |     |       |
|                                                                                |       |     |       |     |       |
| Net amount  recognized                                                              |       | $        | 72.5       |     | $          | 85.1 |   |

 

TheCompany’s nonpension postretirement benefit obligations are included with otherlong term liabilities on the balance sheet.

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Thecomponents of International Postretirement Benefit Plans net postretirementbenefit cost were as follows:
|                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
|                             |       |     |       |     |       |
| Service cost                     |       | $        | 1.9        |     | $          | 1.9 |   |
| Interest cost                    |       | 4.2      |       | 4.6      |       |
| Curtailment                      |       | (15.9    | )          |     |       |
| Other                            |       | 0.6      |       |     |       |
|                             |       |     |       |     |       |
| Amortization:                    |       |     |       |     |       |
| Loss                             |       | (1.0     | )          | (0.2     | )          |
|                             |       |     |       |     |       |
| Net  postretirement benefit cost |       | $        | (10.2      | )        | $          | 6.3 |   |

 

Theweighted average discount rate used to determine the accumulated postretirementbenefit obligation was 5.4% and 4.8% at December 31, 2006 and 2005,respectively.

Theweighted average discount rate used to determine net postretirement benefitcost was 4.8% at December 31, 2006, 5.4% at December 31, 2005, and 6.0% atDecember 31, 2004.

Theweighted average assumed health care cost trend rates at December 31 were asfollows:
| ** **                                                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                           |       |     |       |     |       |
| Health care cost  trend rate assumed for next year                             |       | 8.68     | %          | 6.74     | %          |
| Rate to which  the cost trend rate is assumed to decline (ultimate trend rate) |       | 4.88     | %          | 4.81     | %          |
| Year that the  rate reaches the ultimate trend rate                            |       | 2009     |       | 2009     |       |

 

Assumedhealth care cost trend rates affect the amounts reported for the postretirementbenefit plans.  A one-percentage-pointchange in assumed health care cost trend rates would have no significant impacton total service and interest cost or on accumulated postretirement benefitobligations.

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

| Year(s)     | ** ** | **Amount** | ** ** |
|-------------|------------|------------|------------|
|        |       |       |       |
| 2007        |       | $          | 3.2        |   |
| 2008        |       | 3.3        |       |
| 2009        |       | 3.3        |       |
| 2010        |       | 3.5        |       |
| 2011        |       | 3.7        |       |
| 2012 - 2016 |       | 21.3       |       |
|             |            |            |            |  |

 

Benefitsprovided by OI Inc. for certain hourly retirees of the Company are determinedby collective bargaining.  Most otherdomestic hourly retirees receive health and life insurance benefits from amultiemployer

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trustestablished by collective bargaining. Payments to the trust as required by the bargaining agreements are basedupon specified amounts per hour worked and were $6.6 million in 2006, $5.7million in 2005, and $5.7 million in 2004. 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.

FASNo. 158 requires employers to adjust the assets and liabilities related todefined benefit plans so that the amounts reflected on the balance sheetrepresent 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 otherpostretirement benefit plans, the fair value of plan assets is compared to theAccumulated Postretirement Benefit Obligation (“APBO”).   In the Company’s case, the requiredadjustments resulted in a non-cash charge to the Accumulated Other ComprehensiveIncome component of net parent investment. The following table shows the impact on the balance sheet of applyingFAS 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 |       | $                                                     | 3.2        |   |
| Deferred taxes                                                                     |       | (1.8                                                  | )          |
| Nonpension  postretirement benefits, included in Other liabilities                 |       | 2.0                                                   |       |
| Accumulated  other comprehensive income (loss)                                     |       | (3.4                                                  | )          |
|                                                                                    |            |                                                       |            |  |

 

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

Other revenue in 2005 includes $28.1 million (pretaxand after tax) for the sale of the Company’s Corsico, Italy glass containerfacility.

Otherrevenue in 2004 includes a gain of $20.6 million ($14.5 million after tax) forthe sale of certain real property and a gain of $31.0 million ($13.1 millionafter tax) for a restructuring in the Italian Specialty Glass business.

**15.  Other Costs and Expenses**Othercosts and expenses for 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:

·                  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.

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·                  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 theestimated amounts recorded in 2004 and the final amounts related to 2004accounted for a benefit of approximately $6.5 million.

**16.  Restructuring Accruals  **In September 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.  As a result, the Company recorded a charge of$27.5 million ($25.6 million after tax) in the third quarter of 2006.

Theclosing of this facility will result in the elimination of approximately 260jobs and a corresponding reduction in the Company’s workforce.  The Company anticipates that it will pay outapproximately $9.0 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:
| Godfrey 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 Godfrey plant  closing accrual as of December 31, 2006 |   | $      | 8.2    |   |

 

Duringthe second quarter of 2005, the Company concluded its evaluation of acquiredcapacity in connection with the BSN Acquisition (see Note 20) and announced thepermanent closing of its Düsseldorf, Germany glass container factory, and theshutdown of a furnace at its Reims, France glass container facility, both in 2005.  These actions were part of the Europeanintegration strategy to optimally align the manufacturing capacities with themarket and improve operational efficiencies. As a result, the Company recorded an accrual of €47.1 million through anadjustment to goodwill.

Thesesecond quarter actions resulted in the elimination of approximately 400 jobsand a corresponding reduction in the Company’s workforce.  The Company expects to reduce fixed cashcosts by approximately €35 million per year by closing the Düsseldorf factory,shutting down the furnace at Reims and moving most of the production to otherlocations.  The Company anticipates thatit will pay a total of approximately €110.9 million in cash related to severance,benefits, plant clean-up, and other plant closing costs related torestructuring accruals.  In addition, theCompany expects to pay a total of approximately €65 million for other Europeanreorganization and integration activities, approximately 60% of which will beexpensed. Approximately 70% of these payments were made by the end of 2006 andthe Company expects that most of the balance will be paid by the end of 2007.

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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, with2006 activity translated from Euros into dollars at the December 31, 2006exchange rate:
| Total European restructuring  accrual (€110.9 million)       |   | $     | 134.1  |   |
|-------------------------------------------------------------------|--------|-------|--------|--------|
| Net cash paid,  principally severance and related benefits        |   | (41.0 | )      |
| Other,  principally 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 translation                                   |   | (1.5  | )      |
| Remaining European  restructuring accrual as of December 31, 2006 |   | $     | 38.1   |   |

 

**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, “Accountingfor Contingencies,” 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 and adjusted to reflect changes in the factorsupon which the estimates are based including additional information,negotiations, settlements, and other events. The ultimate legal and financialliability of the Company in respect to this pending litigation cannot beestimated with certainty.  However, theCompany 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.

**18.  Geographic Information**  The Company operates in the rigid packagingindustry.  The Company has one primaryreportable product segment within the rigid packaging industry: GlassContainers.  The Glass Containers segmentincludes operations in North America, Europe, the Asia Pacific region, andSouth America.

TheCompany currently evaluates performance and allocates resources based onearnings before interest income, interest expense, provision for income taxes,and minority share owners’ interests in earnings of subsidiaries (“OperatingProfit”) excluding amounts related to certain items that management considersnot representative of ongoing operations and, (“Segment Operating Profit”).  Net sales as shown in the geographic segmentinformation are based on the location of the Company’s affiliate which recordedthe sales.

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Financialinformation regarding the Company’s geographic segments is as follows:
| ** **                                                       | ** ** | ** **  | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | **Total**      | ** ** |
|------------------------------------------------------------------|------------|-------------|------------|------------|------------|-------------|------------|-------------|------------|----------------|------------|
| ** **                                                       | ** ** | **North**   | ** ** | ** ** | ** ** | **Asia**    | ** ** | **South**   | ** ** | **Geographic** | ** ** |
| ** **                                                       | ** ** | **America** | ** ** | **Europe** | ** ** | **Pacific** | ** ** | **America** | ** ** | **Segments**   | ** ** |
|                                                             |       |        |       |       |       |        |       |        |       |           |       |
| Net sales:                                                       |       |        |       |       |       |        |       |        |       |           |       |
| 2006                                                             |       | $           | 2,196.3    |       | $          | 2,865.9     |       | $           | 833.8      |           | $          | 796.4 |   | $ | 6,692.4 |   |
| 2005                                                             |       | 1,986.6     |       | 2,840.0    |       | 844.7       |       | 685.1       |       | 6,356.4        |       |
| 2004                                                             |       | 1,926.1     |       | 2,164.1    |       | 870.9       |       | 561.2       |       | 5,522.3        |       |
|                                                             |       |        |       |       |       |        |       |        |       |           |       |
| Segment Operating  Profit:                                       |       |        |       |       |       |        |       |        |       |           |       |
| 2006                                                             |       | $           | 199.3      |       | $          | 243.2       |       | $           | 102.4      |           | $          | 199.9 |   | $ | 744.8 |   |
| 2005                                                             |       | 227.7       |       | 279.7      |       | 136.3       |       | 156.9       |       | 800.6          |       |
| 2004                                                             |       | 253.5       |       | 244.1      |       | 142.1       |       | 124.0       |       | 763.7          |       |
|                                                             |       |        |       |       |       |        |       |        |       |           |       |
| Items excluded from  Segment Operating Profit:                   |       |        |       |       |       |        |       |        |       |           |       |
| 2006:                                                            |       |        |       |       |       |        |       |        |       |           |       |
| Mark to market  effect of certain commodity futures contracts    |       | $           | (8.7       | )          |       |        |       |        |       |           | $          | (8.7 | ) |
| Charge for  closing the Godfrey, Illinois plant                  |       | (27.5       | )          |       |       |        |       |        |       | (27.5          | )          |
| CEO and other  transition charges                                |       |        |       | $          | (6.0       | )           |       |        |       |           | (6.0       | ) |
| Curtailment of  postretirement benefits in The Netherlands       |       |        |       | 15.9       |       |        |       |        |       | 15.9           |       |
| 2005:                                                            |       |        |       |       |       |        |       |        |       |           |       |
| Gain on the sale  of the Corsico, Italy glass container facility |       |        |       | 28.1       |       |        |       |        |       | 28.1           |       |
| Mark to market  effect of certain commodity futures contracts    |       | 3.8         |       |       |       |        |       |        |       | 3.8            |       |
| Goodwill  impairment                                             |       |        |       |       |       | $           | (494.0     | )           |       |           | (494.0     | ) |
| 2004:                                                            |       |        |       |       |       |        |       |        |       |           |       |
| Gain on sale of  certain real property                           |       |        |       | 20.6       |       |        |       |        |       | 20.6           |       |
| Italian  Specialty Glass gain                                    |       |        |       | 31.0       |       |        |       |        |       | 31.0           |       |
| Mark to market  effect of certain commodity futures contracts    |       | 4.9         |       |       |       |        |       |        |       | 4.9            |       |

 

Operations in individualcountries outside the United States that accounted for more than 10% ofconsolidated net sales were in Italy (2005 — 10.2% and 2004 — 11.9%), France(2006 — 19.3% and 2005 — 15.4%) and Australia (2004 — 11.7%).

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TheCompany’s net property, plant, and equipment by location are as follows:
| ** ** | ** ** | **United** | ** ** | ** **  | ** ** | ** ** | ** ** |
|------------|------------|------------|------------|-------------|------------|------------|------------|
| ** ** | ** ** | **States** | ** ** | **Foreign** | ** ** | **Total**  | ** ** |
|       |       |       |       |        |       |       |       |
| 2006       |       | $          | 668.4      |        | $          | 2,172.8    |       | $ | 2,841.2 |   |
| 2005       |       | 694.7      |       | 2,121.6     |       | 2,816.3    |       |
| 2004       |       | 648.4      |       | 2,502.8     |       | 3,151.2    |       |
|            |            |            |            |             |            |            |            |  |  |  |

 

The Company’s net salesby geographic segment are as follows:
| ** ** | ** ** | **United** | ** ** | ** **  | ** ** | ** ** | ** ** |
|------------|------------|------------|------------|-------------|------------|------------|------------|
| ** ** | ** ** | **States** | ** ** | **Foreign** | ** ** | **Total**  | ** ** |
|       |       |       |       |        |       |       |       |
| 2006       |       | $          | 1,787.6    |        | $          | 4,904.8    |       | $ | 6,692.4 |   |
| 2005       |       | 1,621.1    |       | 4,735.3     |       | 6,356.4    |       |
| 2004       |       | 1,574.8    |       | 3,947.5     |       | 5,522.3    |       |
|            |            |            |            |             |            |            |            |  |  |  |

 

Reconciliationsto consolidated totals are as follows:
| ** **                                                                                                                                       | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                                                             |       |     |       |     |       |     |       |
| Revenues:                                                                                                                                        |       |     |       |     |       |     |       |
| Net sales                                                                                                                                        |       | $        | 6,692.4    |     | $          | 6,356.4  |       | $ | 5,522.3 |   |
| Royalties and  net technical assistance                                                                                                          |       | 17.6     |       | 16.4     |       | 20.9     |       |
| Equity earnings                                                                                                                                  |       | 23.4     |       | 20.4     |       | 26.1     |       |
| Interest                                                                                                                                         |       | 16.6     |       | 13.8     |       | 13.8     |       |
| Other                                                                                                                                            |       | 28.9     |       | 53.2     |       | 70.8     |       |
| Total                                                                                                                                            |       | $        | 6,778.9    |     | $          | 6,460.2  |       | $ | 5,653.9 |   |
|                                                                                                                                             |       |     |       |     |       |     |       |
| Reconciliation of  Segment Operating Profit to earnings before income taxes, minority share  owners’ interests in earnings of subsidiaries: |       |     |       |     |       |     |       |
| Segment  Operating Profit                                                                                                                        |       | $        | 744.8      |     | $          | 800.6    |       | $ | 763.7 |   |
| Items excluded  from Segment Operating Profit                                                                                                    |       | (26.3    | )          | (462.1   | )          | 56.5     |       |
| Interest expense                                                                                                                                 |       | (401.6   | )          | (408.2   | )          | (404.3   | )          |
| Interest income                                                                                                                                  |       | 16.6     |       | 13.8     |       | 13.8     |       |
| Total                                                                                                                                            |       | $        | 333.5      |     | $          | (55.9    | )          | $ | 429.7 |   |

 

**19.  Additional Interest Charges from EarlyExtinguishment of Debt**     During 2006, the Company recorded additional interest charges of $17.5million ($17.1 million after tax) for note repurchase premiums and thewrite-off of unamortized finance fees related to debt that was repaid prior toits maturity.  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.  During 2004, the Company recorded additionalinterest charges of $22.8 million ($14.9 million after tax) for note repurchasepremiums and $7.1 million ($4.7 million after

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tax) for the write-off ofunamortized finance fees related to the reduction of available credit under theCompany’s bank credit agreement.

**20.**  **Acquisition of BSNGlasspack, S.A.  **On June 21, 2004, the Company completed theacquisition of BSN Glasspack, S.A. (“BSN”) from Glasspack Participations (the “BSNAcquisition”).  Total consideration forthe BSN Acquisition was approximately $1.3 billion, including the assumption ofapproximately $650 million of debt, a portion of which was refinanced inconnection with the BSN Acquisition.  BSNwas the second largest glass container manufacturer in Europe withmanufacturing facilities in France, Spain, Germany and the Netherlands.  The BSN Acquisition was financed withborrowings under the Company’s Second Amended and Restated Secured CreditAgreement.  In order to secure the EuropeanCommission’s approval, the Company committed to divest the Barcelona, Spain,and Corsico, Italy glass plants.  TheCompany completed the sale of these plants in January 2005 and received cashproceeds of approximately €138.2 million.

Had the BSN Acquisition and the related financingoccurred at the beginning of 2004, pro forma consolidated net sales and netearnings, and would have been as follows:
| ** **   | ** ** | **Year ended December 31, 2004** | ** ** |
|--------------|------------|------------------------------------------------------|------------|
| ** **   | ** ** | **As**                                               | ** ** | **BSN** | ** ** | **Financing** | ** ** | **Pro Forma** | ** ** |
| ** **   | ** ** | **Reported**                                         | ** ** | **Adjustments** | ** ** | **Adjustments** | ** ** | **As Adjusted** | ** ** |
|         |       |                                                 |       |   |   |   |   |   |   |
| Net sales    |       | $                                                    | 5,522.3    |   | $ | 752.5 |   |   |   | $ | 6,274.8 |   |
|         |       |                                                 |       |   |   |   |   |   |   |
| Net earnings |       | $                                                    | 287.6      |   | $ | 17.6 |   | $ | (6.4 | ) | $ | 298.8 |   |
|              |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |

 

The 2004 earningsincluded the step-up effect of the finished goods inventory acquired in theAcquisition that reduced gross profit by approximately $31.1 million.  The 2004 earnings include estimatedamortization related to the $48.1 million of intangible assets recorded for customerrelationships.   At average exchangerates for each respective year, the pro forma amortization of the intangibleasset was $4.0 million (net of tax) for 2004.

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**21.**  **Goodwill**   The changes in the carrying amount ofgoodwill for the years ended December 31, 2004, 2005 and 2006 are as follows:
| Balance as of January 1,  2004                                                               |   | $       | 1,919.6 |   |
|----------------------------------------------------------------------------------------------|--------|---------|---------|--------|
|                                                                                         |   |    |    |
| Translation  effects                                                                         |   | 165.6   |    |
|                                                                                         |   |    |    |
| Goodwill  acquired during the year                                                           |   | 696.0   |    |
| Other changes                                                                                |   | 18.4    |    |
| Balance as of  December 31, 2004                                                             |   | 2,799.6 |    |
|                                                                                         |   |    |    |
| Write-down of  goodwill                                                                      |   | (494.0  | )       |
| Translation  effects                                                                         |   | (160.9  | )       |
| Other changes,  principally adjustments to finalize acquisition purchase price               |   | 15.0    |    |
| Balance as of  December 31, 2005                                                             |   | 2,159.7 |    |
| Translation  effects                                                                         |   | 133.6   |    |
| Other changes,  principally adjustments to reverse foreign deferred tax valuation allowances |   | (38.1   | )       |
| Balance as of December  31, 2006                                                             |   | $       | 2,255.2 |   |

 

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 operationscaused 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.

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

TheBoard of Directors and Share Owner ofOI Plastic Products FTS Inc.

We have audited the accompanying consolidated balancesheets of OI Plastic Products FTS Inc. and subsidiaries as of December 31, 2006and 2005, and the related consolidated statements of results of operations, netParent investment, and cash flows for each of the three years in the periodended December 31, 2006.  These financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements 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 to perform an audit of the Company’s internalcontrol over financial reporting. Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting.  Accordingly, we express nosuch opinion.  An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation.  We believe that ouraudits provide 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 OI Plastic Products FTS Inc. andsubsidiaries at December 31, 2006 and 2005, and the consolidated results of itsoperations and its cash flows for each of the three years in the period endedDecember 31, 2006, in conformity with U.S. generally accepted accountingprinciples.

As discussed inNote 1 to the consolidated financial statements, the Company changed its methodof accounting for stock-based compensation in 2006.
|               | Ernst &  Young LLP |
|---------------|------------------------|
|          |                   |
|          |                   |
| Toledo, Ohio  |
| March 1, 2007 |

 

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**CONSOLIDATED RESULTS OF OPERATIONS**    OIPlastic Products FTS Inc.

 
| **Dollars in millions**                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Years ended December 31,**             | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|                                                    |       |       |       |       |       |       |       |
| Revenues:                                               |       |       |       |       |       |       |       |
| Net sales                                               |       | $          | 730.0      |       | $          | 723.1      |       | $ | 631.5 |   |
| Other revenue                                           |       | 2.3        |       | 1.9        |       | 0.2        |       |
|                                                    |       | 732.3      |       | 725.0      |       | 631.7      |       |
| Costs and  expenses:                                    |       |       |       |       |       |       |       |
| Manufacturing, shipping, and delivery                   |       | 565.6      |       | 562.5      |       | 478.7      |       |
| Research and development                                |       | 14.7       |       | 14.0       |       | 10.8       |       |
| Selling and administrative                              |       | 35.5       |       | 31.9       |       | 34.5       |       |
| Net intercompany interest                               |       | (65.8      | )          | (47.2      | )          | 10.2       |       |
| Other interest expense                                  |       | —     |       | 0.8        |       | 0.8        |       |
| Other                                                   |       | (3.1       | )          | 0.3        |       | 1.9        |       |
|                                                    |       | 546.9      |       | 562.3      |       | 536.9      |       |
|                                                    |       |       |       |       |       |       |       |
| Earnings from  continuing operations before items below |       | 185.4      |       | 162.7      |       | 94.8       |       |
| Provision for  income taxes                             |       | 65.0       |       | 56.8       |       | 33.6       |       |
|                                                    |       |       |       |       |       |       |       |
| Earnings from  continuing operations                    |       | 120.4      |       | 105.9      |       | 61.2       |       |
| Net earnings of  discontinued operations                |       |       |       | 1.2        |       | 66.4       |       |
| Net earnings                                            |       | $          | 120.4      |       | $          | 107.1      |       | $ | 127.6 |   |

 

See accompanying Notes to Consolidated Financial Statements.

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**CONSOLIDATED BALANCE SHEETS**   OIPlastic Products FTS Inc.

 
| **Dollars in millions**                                                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **December 31,**                                                                                                              | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|                                                                                                                               |       |       |       |       |       |
| **Assets**                                                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Current  assets:**                                                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash                                                                                                                               |       | $          | 4.2        |       | $          | 1.5 |   |
| Receivables including $0.5 ($0.5 in 2005) from related  parties, less allowances of $23.3 ($21.8 in 2005) for losses and discounts |       | 51.9       |       | 57.7       |       |
| Inventories                                                                                                                        |       | 44.1       |       | 49.9       |       |
| Prepaid expenses                                                                                                                   |       | 14.7       |       | 15.6       |       |
| Total current assets                                                                                                               |       | 114.9      |       | 124.7      |       |
|                                                                                                                               |       |       |       |       |       |
| **Other  assets:**                                                                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Equity investments                                                                                                                 |       | 12.4       |       | 11.6       |       |
| Repair parts inventories                                                                                                           |       | 7.1        |       | 7.6        |       |
| Deposits, receivables, and other assets                                                                                            |       | 8.0        |       | 10.5       |       |
| Goodwill                                                                                                                           |       | 209.5      |       | 209.5      |       |
| Total other assets                                                                                                                 |       | 237.0      |       | 239.2      |       |
|                                                                                                                               |       |       |       |       |       |
| **Property,  plant, and equipment:**                                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Land, at cost                                                                                                                      |       | 5.7        |       | 5.8        |       |
| Buildings and equipment, at cost:                                                                                                  |       |       |       |       |       |
| Buildings and building equipment                                                                                                   |       | 84.7       |       | 86.1       |       |
| Factory machinery and equipment                                                                                                    |       | 559.8      |       | 539.7      |       |
| Transportation, office, and miscellaneous equipment                                                                                |       | 4.2        |       | 6.4        |       |
| Construction in progress                                                                                                           |       | 23.0       |       | 20.8       |       |
|                                                                                                                               |       | 677.4      |       | 658.8      |       |
| Less accumulated depreciation                                                                                                      |       | 371.8      |       | 347.4      |       |
| Net property, plant, and equipment                                                                                                 |       | 305.6      |       | 311.4      |       |
| Total assets                                                                                                                       |       | $          | 657.5      |       | $          | 675.3 |   |

 

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| **Dollars in millions**                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **December 31,**                                               | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|                                                                |       |       |       |       |       |
| **Liabilities  and Net Parent Investment**                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Current  liabilities:**                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accounts payable including $15.9 ($9.6 in 2005) to  related parties |       | $          | 63.5       |       | $          | 54.4 |   |
| Salaries and wages                                                  |       | 8.0        |       | 9.8        |       |
| Other accrued liabilities                                           |       | 11.9       |       | 24.1       |       |
| Total current liabilities                                           |       | 83.4       |       | 88.3       |       |
|                                                                |       |       |       |       |       |
| **External  long-term debt**                                        |       | 0.2        |       | 0.3        |       |
| ** **                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Deferred  taxes**                                                 |       | 46.6       |       | 50.0       |       |
| ** **                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other  liabilities**                                              |       | 0.3        |       | 0.5        |       |
| ** **                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  Parent investment**                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Investment by and advances from Parent                              |       | 547.0      |       | 556.8      |       |
| Accumulated other comprehensive loss                                |       | (20.0      | )          | (20.6      | )          |
| Total net Parent investment                                         |       | 527.0      |       | 536.2      |       |
| Total liabilities and  net Parent investment                        |       | $          | 657.5      |       | $          | 675.3 |   |

 

See accompanyingNotes to Consolidated Financial Statements.

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**CONSOLIDATED NET PARENT INVESTMENT  **OI Plastic Products FTS Inc.
| **Dollars in millions**           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Years ended December 31,** | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|                                        |       |       |       |       |       |       |       |
| **Investment  by and advances to Parent**   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance at  beginning of year               |       | $          | 556.8      |       | $          | 527.8      |       | $ | 1,658.0 |   |
| Net intercompany  transactions              |       | (130.2     | )          | (78.1      | )          | (1,257.8   | )          |
| Net earnings                                |       | 120.4      |       | 107.1      |       | 127.6      |       |
| Balance at end  of year                     |       | 547.0      |       | 556.8      |       | 527.8      |       |
|                                        |       |       |       |       |       |       |       |
| **Accumulated  other comprehensive loss**   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance at  beginning of year               |       | (20.6      | )          | (22.2      | )          | (44.9      | )          |
| Foreign currency  translation adjustments   |       | 0.6        |       | 1.6        |       | 22.7       |       |
| Balance at end  of year                     |       | (20.0      | )          | (20.6      | )          | (22.2      | )          |
| Total net Parent  investment                |       | $          | 527.0      |       | $          | 536.2      |       | $ | 505.6 |   |
| **Total  comprehensive income**             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net earnings                                |       | $          | 120.4      |       | $          | 107.1      |       | $ | 127.6 |   |
| Foreign currency  translation adjustments   |       | 0.6        |       | 1.6        |       | 22.7       |       |
| Total  comprehensive income                 |       | $          | 121.0      |       | $          | 108.7      |       | $ | 150.3 |   |

 

See accompanying Notes toConsolidated Financial Statements

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**CONSOLIDATEDCASH FLOWS ** OI Plastic Products FTS Inc.
| **Dollars in millions**                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Years ended December 31,**                | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|                                                       |       |       |       |       |       |       |       |
| **Operating  activities:**                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net earnings                                               |       | $          | 120.4      |       | $          | 107.1      |       | $ | 127.6 |   |
| Net earnings of  discontinued operations                   |       |       |       | (1.2       | )          | (66.4      | )          |
| Non-cash charges  (credits):                               |       |       |       |       |       |       |       |
| Depreciation                                               |       | 39.0       |       | 44.1       |       | 54.4       |       |
| Amortization of  deferred costs                            |       | 3.5        |       | 3.9        |       | 3.5        |       |
| Loss on sale of  certain closures assets                   |       |       |       |       |       |       |       |
| Deferred tax  provision                                    |       | (3.1       | )          | 7.1        |       | 31.5       |       |
| Other                                                      |       | 2.5        |       | (7.1       | )          | 0.1        |       |
| Change in  non-current operating assets                    |       | (0.8       | )          | (0.7       | )          | (4.7       | )          |
| Change in  components of working capital                   |       | 5.0        |       | 6.7        |       | 25.5       |       |
| Cash provided by  continuing operating activities          |       | 166.5      |       | 159.9      |       | 171.5      |       |
| Cash provided by  discontinued operating activities        |       |       |       |       |       | 51.2       |       |
| Cash provided by  total operating activities               |       | 166.5      |       | 159.9      |       | 222.7      |       |
| **Investing  activities:**                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Additions to  property, plant and equipment - continuing   |       | (34.5      | )          | (31.1      | )          | (30.7      | )          |
| Additions to  property, plant and equipment - discontinued |       |       |       |       |       | (25.0      | )          |
| Net cash  proceeds from divestitures and other             |       | 1.5        |       | (38.7      | )          | 1,172.3    |       |
| Cash provided by  (utilized in) investing activities       |       | (33.0      | )          | (69.8      | )          | 1,116.6    |       |
| **Financing  activities:**                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net change in  intercompany debt                           |       | (130.7     | )          | (78.9      | )          | (1,357.6   | )          |
| Repayments of  long-term debt                              |       | (0.2       | )          | (10.8      | )          | (0.3       | )          |
| Additions to  long-term debt                               |       |       |       | 0.1        |       | 10.5       |       |
| Cash utilized in  financing activities                     |       | (130.9     | )          | (89.6      | )          | (1,347.4   | )          |
| Effect of  exchange rate fluctuations on cash              |       | 0.1        |       |       |       | (0.7       | )          |
| Increase  (decrease) in cash                               |       | 2.7        |       | 0.5        |       | (8.8       | )          |
| Cash at  beginning of year                                 |       | 1.5        |       | 1.0        |       | 9.8        |       |
| Cash at end of year                                        |       | $          | 4.2        |       | $          | 1.5        |       | $ | 1.0 |   |

 

See accompanying Notes to Consolidated FinancialStatements.

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**OI Plastic Products FTS Inc.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Tabular data dollars in millions**

**1. Significant Accounting Policies**

**Basis of Consolidated Statements**  The consolidated financial statements of OIPlastic Products FTS Inc. (“Company”) include the accounts of itssubsidiaries.  Newly acquiredsubsidiaries have been included in the consolidated financial statements fromdates of acquisition.  Results ofoperations for the divested blow-molded plastic container business which wassold in 2004 have been presented as a discontinued operation.

TheCompany uses the equity method of accounting for investments in which it has asignificant ownership interest, generally 20% to 50%.  Other investments are accounted for at cost.

**Relationship with Owens-Illinois, Inc.and Owens-Illinois, Group Inc.**  The Company is a wholly-ownedsubsidiary of Owens-Illinois Group, Inc. (“OI Group”) and anindirect subsidiary 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. Current income taxes arerecorded by the Company on a basis consistent with separate returns.

**Nature of Operations**  The Company is a manufacturer of plasticspackaging products. The Company’s principal product lines include healthcarecontainers, closures and prescription containers. The Company’s principaloperations are in North America, however, the Company does have minoroperations in Puerto Rico and Brazil. Major markets include the United States healthcare market.  One customer accounted for 12.6%, 10.4% and15.7% of the Company’s sales in 2006, 2005 and 2004, respectively.

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

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

**Fair Values of Financial Instruments**  The carrying amounts reported for cash,short-term investments and short-term loans approximate fair value.  In addition, carrying amounts approximatefair value for certain long-term debt obligations subject to frequentlyredetermined interest rates.  The Companyis not a party to any material derivative financial instruments.

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

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

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**Intangible Assets 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 andequipment (“PP&E”) is carried at cost and includes expenditures for newfacilities and equipment and those costs which substantially increase theuseful lives or capacity of existing PP&E. In general, depreciation is computed using the straight-line method andrecorded over the estimated useful life of the asset.  Factory machinery and equipment isdepreciated over periods ranging from 5 to 25 years with the majority of suchassets depreciated over 7-15 years. Buildings and building equipment are depreciated over periods rangingfrom 10 to 50 years.  Maintenance andrepairs are expensed as incurred.  Costsassigned to PP&E of acquired businesses are based on estimated fair valuesat the date of acquisition.

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

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

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

**Foreign Currency Translation**  The assets and liabilities of most affiliatesand associates are translated at current exchange rates and any relatedtranslation adjustments are recorded directly in net Parent investment.

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

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

**New Accounting Standards **In July 2006, the Financial Accounting Standards Boardissued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in IncomeTaxes”.  This interpretation was issuedto clarify the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with FAS No. 109, “Accountingfor Income Taxes”.  FIN 48 definescriteria that an individual tax position must meet for any part of the benefitof that position to be recognized in an enterprise’s financial statements andalso includes requirements for measuring the amount of the benefit to berecognized in the financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006,therefore the Company will adopt its provisions effective as of January 1,2007.  The Company has not yet determinedthe impact of adopting FIN 48.

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InSeptember 2006, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards No. 157 (“FAS No. 157”), “Fair ValueMeasurements”.  FAS No. 157 defines fairvalue, establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair valuemeasurements.  FAS No. 157 applies underother accounting pronouncements that require or permit fair value measurements.  The statement does not require any new fairvalue measurements.  The statement iseffective for fiscal years beginning after November 15, 2007. Adoption of FASNo. 157 is not expected to have a material impact on the Company’s results ofoperations or financial position.

InFebruary 2007, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards No. 159 (“FAS No. 159”), “Fair Value Option forFinancial Assets and Financial Liabilities – Including an amendment of FASBStatement No. 115”.  FAS No. 159 permitsentities to choose to measure many financial instruments and certain otheritems at fair value.  The statement iseffective for fiscal years beginning after November 15, 2007.   Adoption of FAS No. 159 is not expected tohave a material impact on the Company’s results of operations or financialposition.

**Participationin OI Inc. Stock Option Plans 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.

*Stock Options*

Foroptions granted prior to March 22, 2005, no options may be exercised in wholeor in part during the first year after the date granted. In general, subject toaccelerated exercisability provisions related to the performance of OI Inc.’scommon stock or change of control, 50% of the options become exercisable on thefifth anniversary of the date of the option grant, with the remaining 50%becoming exercisable on the sixth anniversary date of the option grant.** **In general, options expire 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 whole orin 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 ratably overfive 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 range fromone to four years.

*Restricted Shares*

Sharesgranted to employees prior to March 22, 2005, generally vest after three yearsor upon retirement, whichever is later. Shares granted after March 21, 2005, vest 25% per year beginning on thefirst 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 over thevesting period.  The fair value ofrestricted shares granted after March 21, 2005, is amortized over the vestingperiods which range from one to four years.

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*Performance Vested Restricted Share Units*

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

Thefair value of each restricted share unit is equal to the product of the fairvalue of OI Inc.’s common stock on the date of grant and the estimated numberof shares into which the restricted share unit will be converted.  The fair value of restricted share units isamortized ratably over the vesting period. Should 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, OIInc. accounted for these equity compensation plans under the recognition andmeasurement provisions of Accounting Principles Board (APB) Opinion No.25, “Accountingfor Stock Issued to Employees”, and related interpretations, as permitted byFAS No. 123, “Accounting for Stock-Based Compensation” (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 costwas recognized for restricted shares and restricted share units.  Effective January 1, 2006, OI Inc. adoptedthe fair value recognition 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 for allshare-based payments granted through December 31, 2005, but for which therequisite service period had not been completed as of December 31, 2005, basedon the grant date fair value estimated in accordance with the originalprovisions of FAS No.123, and (2) compensation cost for share-based paymentsgranted subsequent to December 31, 2005, based on the grant date fair valueestimated in accordance with the provisions of FAS No. 123R.

Asdiscussed in Note 9, 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.

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**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:
| ** **                                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Decrease  (increase) in current assets:      |       |     |       |     |       |     |       |
| Receivables                                  |       | $        | 5.9        |     | $          | (7.9     | )          | $ | 2.9 |   |
| Inventories                                  |       | 4.8      |       | 14.9     |       | 22.7     |       |
| Prepaid expenses                             |       | 0.5      |       | 0.3      |       | (2.8     | )          |
| Increase  (decrease) in current liabilities: |       |     |       |     |       |     |       |
| Accounts payable and accrued liabilities     |       | (4.3     | )          | 2.1      |       | (98.0    | )          |
| Salaries and wages                           |       | (1.8     | )          | 1.4      |       | 64.2     |       |
| U.S. and foreign income taxes                |       | (0.1     | )          | (4.1     | )          | (3.7     | )          |
|                                         |       | $        | 5.0        |     | $          | 6.7      |       | $ | (14.7 | ) |
| Continuing  operations                       |       | $        | 5.0        |     | $          | 6.7      |       | $ | 25.5 |   |
| Discontinued  operations                     |       |     |       |     |       | (40.2    | )          |
|                                         |       | $        | 5.0        |     | $          | 6.7      |       | $ | (14.7 | ) |

 

**3.**  **Inventories**   Major classes of inventory are as follows:
| ** **          | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
| Finished goods      |       | $        | 31.6       |     | $          | 30.5 |   |
| Raw materials       |       | 10.8     |       | 16.1     |       |
| Operating  supplies |       | 1.7      |       | 3.3      |       |
|                |       | $        | 44.1       |     | $          | 49.9 |   |

 

Ifthe inventories which are valued on the LIFO method had been valued at standardcosts, which approximate current costs, consolidated inventories would behigher than reported by $12.3 million and $17.9 million at December31, 2006 and 2005, respectively.

Inventorieswhich are valued at the lower of standard costs (which approximate averagecosts), or market at December 31, 2006 and 2005 were approximately $2.2 millionand $4.0 million, respectively.

**4. Supplemental Cash Flow Information **Interest paid in cash aggregated $0.1 million for2006, $0.7 million for 2005, and $0.3 million for 2004.

**5. Guarantees of Debt  **Underthe Secured Credit Agreement, the Company has guaranteed certain debt of OIGroup’s domestic and foreign subsidiaries which amounted to $845.5 million atDecember 31, 2006.  This guaranteeexpires with the Agreement on June 15, 2012.

TheCompany also has guaranteed $850.0 million of 8.875%, $625.0 million of 8.75%,and $450.0 million of 7.75% Senior Secured Notes, and $450.0 million of 8.25%,$400.0 million of 6.75%, and €225.0 million of 6.75% Senior notes issued by anaffiliate of the Company.  Theseguarantees expire in 2009 for the $850.0 million of 8.875% Senior SecuredNotes, 2012 for the $625.0 million of 8.75% Senior Secured Notes, 2011 for the$450.0 million of 7.75% Senior Secured Notes, 2013 for the $450.0 million of8.25% Senior Notes, and 2014 for the $400.0 million of 6.75% Senior Notes and€225 million 

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of6.75% Senior Notes. The assets of the Company and most of its domesticsubsidiaries are pledged as security for the Senior Secured Notes.

TheCompany will be obligated under the above guarantees in the event that OI Group’sdomestic or foreign subsidiaries cannot make the required interest or principalpayments under the above obligations.

**6.  OperatingLeases**   Rent expenseattributable to all warehouse, office buildings, and equipment operating leaseswas $3.8 million in 2006, $3.5 million in 2005, and $3.4 million in2004.  Minimum future rentals underoperating leases are as follows:  2007, $2.4 million;2008, $1.8 million; 2009, $1.3 million; 2010, $1.0 million; 2011,$0.5 million; and 2012 and thereafter $0.3 million.

**7.  ForeignCurrency Transactions**  Aggregate foreign currency exchange gains(losses) included in other costs and expenses were $(0.6) million in 2004.Amounts for 2006 and 2005 were not significant.

**8.  IncomeTaxes**   Deferred incometaxes reflect:  (1) the net tax effectsof temporary differences between the carrying amounts of assets and liabilitiesfor financial reporting purposes and the amounts used for income tax purposesand (2) carryovers and credits for income tax purposes.

Significantcomponents of the Company’s deferred tax assets and liabilities at December 31,2006 and 2005 are as follows:
| ** **                             | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  assets:                  |       |     |       |     |       |
| Tax loss carryovers                    |       | $        | 6.0        |     | $          | 4.3 |   |
| Receivables                            |       | 8.1      |       | 7.5      |       |
| Other, principally accrued liabilities |       | 5.6      |       | 6.7      |       |
| Total deferred tax assets              |       | 19.7     |       | 18.5     |       |
|                                   |       |     |       |     |       |
| Deferred tax  liabilities:             |       |     |       |     |       |
| Property, plant and equipment          |       | 45.9     |       | 47.6     |       |
| Inventory                              |       | 1.5      |       | 1.9      |       |
| Other                                  |       | 4.9      |       | 6.9      |       |
| Total deferred tax liabilities         |       | 52.3     |       | 56.4     |       |
| Valuation  allowance                   |       | (4.8     | )          | (2.5     | )          |
| Net deferred tax  liabilities          |       | $        | (37.4      | )        | $          | (40.4 | ) |

 

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Deferredtaxes are included in the Consolidated Balance Sheets at December 31, 2006 and2005 as follows:
| ** **                               | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
| Prepaid expenses                         |       | $        | 8.3        |     | $          | 8.9 |   |
| Deposits,  receivables, and other assets |       | 0.9      |       | 0.7      |       |
| Deferred taxes                           |       | (46.6    | )          | (50.0    | )          |
| Net deferred tax  liabilities            |       | $        | (37.4      | )        | $          | (40.4 | ) |

 

Theprovision for income taxes consists of the following:
| ** **                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current:                           |       |     |       |     |       |     |       |
| U.S. Federal                       |       | $        | 65.9       |     | $          | 47.9     |       | $ | — |   |
| State                              |       | 1.7      |       | 1.3      |       | 2.7      |       |
| Foreign                            |       | 0.5      |       | 0.5      |       | 4.1      |       |
|                               |       | 68.1     |       | 49.7     |       | 6.8      |       |
| Deferred:                          |       |     |       |     |       |     |       |
| U.S. Federal                       |       | (1.6     | )          | 2.0      |       | 8.4      |       |
| State                              |       | (1.6     | )          | (0.7     | )          | 5.5      |       |
| Foreign                            |       | 0.1      |       | 0.4      |       | (0.4     | )          |
|                               |       | (3.1     | )          | 1.7      |       | 13.5     |       |
| Total:                             |       |     |       |     |       |     |       |
| U.S. Federal                       |       | 64.3     |       | 49.9     |       | 8.4      |       |
| State                              |       | 0.1      |       | 0.6      |       | 8.2      |       |
| Foreign                            |       | 0.6      |       | 0.9      |       | 3.7      |       |
|                               |       | $        | 65.0       |     | $          | 51.4     |       | $ | 20.3 |   |
| Total for  continuing operations   |       | $        | 65.0       |     | $          | 56.8     |       | $ | 33.6 |   |
| Total for  discontinued operations |       |     |       | (5.4     | )          | (13.3    | )          |
|                               |       | $        | 65.0       |     | $          | 51.4     |       | $ | 20.3 |   |

 

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Theprovision for income taxes was calculated based on the following components ofearnings (loss) before income taxes:
| **Continuing operations** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Domestic                       |       | $        | 181.5      |     | $          | 158.4    |       | $ | 87.0 |   |
| Foreign                        |       | 3.9      |       | 4.3      |       | 7.8      |       |
|                           |       | $        | 185.4      |     | $          | 162.7    |       | $ | 94.8 |   |

 
| **Discontinued  operations** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Domestic                     |       | $        | —     |     | $          | (4.2     | )          | $ | 45.2 |   |
| Foreign                      |       |     |       |     |       | 8.0      |       |
|                         |       | $        | —     |     | $          | (4.2     | )          | $ | 53.2 |   |

 

Incometaxes paid in cash were as follows:
| ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Domestic   |       | $        | 0.8        |     | $          | 0.6      |       | $ | 2.1 |   |
| Foreign    |       |     |       | 0.1      |       | 3.0      |       |
|       |       | $        | 0.8        |     | $          | 0.7      |       | $ | 5.1 |   |

 

Areconciliation of the provision for income taxes based on the statutory U.S.Federal tax rate of 35% to the provision for income taxes is as follows:
| ** **                                                           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Tax provision on  pretax earnings at statutory U.S. Federal tax rate |       | $        | 64.9       |     | $          | 56.9     |       | $ | 33.2 |   |
| Increase  (decrease) in provision for income taxes due to:           |       |     |       |     |       |     |       |
| State taxes, net of federal benefit                                  |       |     |       | (0.1     | )          | 1.5      |       |
| Rate differences on non-U.S. earnings                                |       | (2.4     | )          | (0.6     | )          | (1.2     | )          |
| Valuation allowance                                                  |       | 2.3      |       | 0.5      |       |     |       |
| Other items                                                          |       | 0.2      |       | 0.1      |       | 0.1      |       |
| Provision (benefit) for  income taxes                                |       | $        | 65.0       |     | $          | 56.8     |       | $ | 33.6 |   |

 

TheCompany is included with OI Inc.’s consolidated tax returns. OI Inc. has netoperating losses, capital losses, alternative minimum tax credits, and researchand development credits available to offset future U.S. Federal income tax.Therefore, a substantial portion of the current provision for income taxes inthe table above is offset by OI Inc. losses, resulting in minimal cash taxpayments by the Company.

AtDecember 31, 2006, the Company’s equity in the undistributed earnings offoreign subsidiaries for which income taxes had not been provided approximated$7.8 million.  It is not practicable toestimate the U.S. and foreign tax which would be payable should these earningsbe distributed.

**9.  RelatedParty Transactions  **Chargesfor administrative services are allocated to the Company by OI Inc. based on anannual utilization level.  Such servicesinclude compensation and benefits administration, 

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payrollprocessing, use of certain general accounting systems, auditing, income taxplanning and compliance, and treasury services.

Allocated costsalso include charges associated with OI Inc.’s equity compensation plans.  A substantial number of the options,restricted shares and restricted share units granted under these plans havebeen granted to key employees of another subsidiary of OI Inc., some of whose compensationcosts, including stock-based compensation, are included in an allocation ofcosts to all operating subsidiaries of OI Inc., including the Company.

Managementbelieves that such transactions are on terms no less favorable to the Companythan those that could be obtained from unaffiliated third parties.

Thefollowing information summarizes the Company’s significant related partytransactions:
| ** **                                                                  | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                  | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                        |       |                                        |       |   |   |   |   |
| Revenues:                                                                   |       |                                        |       |   |   |   |   |
| Sales to affiliated companies                                               |       | $                                           | 0.4        |   | $ | 0.3 |   | $ | 0.3 |   |
|                                                                        |       |                                        |       |   |   |   |   |
| Expenses:                                                                   |       |                                        |       |   |   |   |   |
| Administrative services                                                     |       | 9.8                                         |       | 8.5 |   | 5.5 |   |
| Corporate management fee                                                    |       | 3.2                                         |       | 2.6 |   | 2.7 |   |
| Total expenses                                                              |       | $                                           | 13.0       |   | $ | 11.1 |   | $ | 8.2 |   |
|                                                                        |       |                                        |       |   |   |   |   |
| The above  expenses are recorded in the statement of operations as follows: |       |                                        |       |   |   |   |   |
| Cost of sales                                                               |       | $                                           | 8.5        |   | $ | 3.5 |   | $ | 4.8 |   |
| Selling, general, and adminstrative expenses                                |       | 4.5                                         |       | 7.6 |   | 3.4 |   |
| Total expenses                                                              |       | $                                           | 13.0       |   | $ | 11.1 |   | $ | 8.2 |   |

 

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 (8.9% at December 31, 2006) is applied monthly to theintercompany debt balance to determine intercompany interest expense.

**10.  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 inthe plans; 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 (charges) credits to results of operations for the Company’sallocated portion of the domestic pension costs amounted to $(0.6) million in2006, $2.9 million in 2005, and $0.2 million in 2004.

OIInc. also sponsors several defined contribution plans for all salaried andhourly U.S. employees of the Company.  Participation is voluntary and participants’ contributions are based ontheir compensation.  OI 

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Inc.matches contributions of participants, up to various limits, in substantiallyall plans.  OI Inc. charges the Companyfor its share of the match.  The Company’sshare of the contributions to these plans amounted to $1.8 million in 2006,$1.7 million in 2005, and $1.4 million in 2004.

**11. Postretirement Benefits Other Than Pensions**   OI Inc. provides certain retiree health careand life insurance benefits covering substantially all U.S. salaried andcertain hourly employees.  Employees aregenerally eligible for benefits upon retirement and completion of a specifiednumber of years of creditable service. Independent actuaries determinepostretirement benefit costs for each subsidiary of OI Inc.; however,accumulated postretirement benefit obligation information pertaining to eachsubsidiary has not been separately determined. As such, the accumulated postretirement benefit obligation has been retainedby another subsidiary of OI Inc.

TheCompany’s net periodic postretirement benefit cost, as allocated by OI Inc.,was $2.5 million, $3.3 million, and $4.3 million at December 31, 2006, 2005,and 2004, respectively.

**12. Contingencies**   Certain litigation is pending against theCompany, in many cases involving ordinary and routine claims incidental to thebusiness of the Company and in others presenting allegations that arenon-routine and involve compensatory, punitive or treble damage claims as wellas other types of relief. In accordance with FAS No. 5, “Accounting forContingencies,” 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 and adjusted to reflect changes in thefactors upon which the estimates are based including additional information,negotiations, settlements, and other events. The ultimate legal and financialliability of the Company in respect to this pending litigation cannot beestimated with certainty.  However, theCompany 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.

**13.**  **Goodwill**   The changes in the carrying amount ofgoodwill for the years ended December 31, 2004, 2005 and 2006 are as follows:
| Balance as of  January 1, 2004   |   | $      | 360.6  |   |
|----------------------------------|--------|--------|--------|--------|
| Sale of  discontinued operations |   | (151.1 | )      |
| Balance as of  December 31, 2004 |   | 209.5  |   |
| Balance as of  December 31, 2005 |   | 209.5  |   |
| Balance as of December  31, 2006 |   | $      | 209.5  |   |

 

**14.Discontinued Operations **On October 7, 2004, the Company announcedthat it had completed the sale of its blow-molded plastic container operationsin North America, South America and Europe, to Graham Packaging Company.

Cashproceeds of approximately $1.2 billion were used to repay term loans under theCompany’s bank credit facility, which was amended to permit the sale.  The sale agreement included a post-closingpurchase price adjustment based on changes in certain working capitalcomponents and certain other assets and liabilities of the business.  This adjustment was finalized in April 2005,and Graham was paid approximately $39 million. The adjustment did not impact results of operations.

Includedin the sale were 24 plastics manufacturing plants in the U.S., two in Mexico,two in Europe and two in South America, serving consumer products companies inthe food, beverage, household, 

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chemicaland personal care industries.  Theblow-molded plastic container operations were part of the consumer productsbusiness unit of the plastics packaging segment.

Asrequired by FAS No. 144, the Company has presented the results of operationsfor the blow-molded plastic container business in the Consolidated Results ofOperations for 2004 as a discontinued operation.  Interest expense was allocated todiscontinued operations based on debt that was required to be repaid from theproceeds.

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

|                                            | ** ** | **Year ended**   | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **December 31,** | ** ** |
| ** **                                 | ** ** | **2004**              | ** ** |
| **Revenues:**                              |       |                  |       |
| Net sales                                  |       | $                     | 853.7      |   |
| Other revenue                              |       | 7.6                   |       |
|                                       |       | 861.3                 |       |
| **Costs  and expenses:**                   |       |                  |       |
|                                       |       |                  |       |
| Manufacturing,  shipping and delivery      |       | 736.8                 |       |
| Research,  development and engineering     |       | 14.9                  |       |
| Selling and  administrative                |       | 22.8                  |       |
| Interest                                   |       | 44.8                  |       |
| Other                                      |       | 22.9                  |       |
|                                       |       | 842.2                 |       |
| Earnings before  items below               |       | 19.1                  |       |
| Provision for  income taxes                |       | 26.5                  |       |
| Gain on sale of  discontinued operations   |       | 73.8                  |       |
| Net earnings  from discontinued operations |       | $                     | 66.4       |   |

 

The sale of theblow-molded plastic business resulted in a substantial capital loss, primarilyrelated to previous goodwill write downs that were not deductible whenrecorded.  The gain on the sale ofdiscontinued operations of $73.8 million includes a credit for income taxes of$39.7 million, representing the tax benefit from offsetting a portion of theloss against otherwise taxable capital gains.

Net earnings of discontinued operations of $1.2million in 2005 relates to an adjustment of the 2004 gain on the sale of theblow-molded plastic container operations principally from finalizing certain taxallocations.

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# **SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.
|                           | OWENS-ILLINOIS GROUP, INC.                 |
|---------------------------|--------------------------------------------|
|                      |                                       |   |   |   |
|                      |                                       |   |   |   |
|                      |                                       | (Registrant) |
|                      |                                       |   |   |   |
|                      |                                       |   |   |   |
|                      | By:                                        | /s/ JAMES W. BAEHREN |
|                      |                                       |   |
|                      |    James W. Baehren              |
|                      |    Vice  President and Secretary |
|                      |                                       |   |
|                      |                                       |   |
| Date:  March 1, 2007 |                                       |   |

 

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**Signatures**

Pursuant to the requirements of the Securities ExchangeAct of 1934, this report has been signed below by the following persons onbehalf of Owens-Illinois Group, Inc. and in the capacities and on the datesindicated.
| Signatures                | ** ** | **Title**                                                           |
|---------------------------|------------|---------------------------------------------------------------------|
|                      |       |                                                                |
| Matthew G. Longthorne     |       | Director                                                            |
|                      |       |                                                                |
| 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                              |
|                      |       |                                                                |
|                      |       |                                                                |
|                      |       | By:                                                                 | /s/ James W. Baehren |
|                      |       |                                                                | James W. Baehren |
|                      |       |                                                                | Attorney-in-fact |
|                      |       |                                                                |   |
|                      |       |                                                                |   |
| Date:  March 1, 2007 |       |                                                                |

 

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**INDEX TOFINANCIAL STATEMENT SCHEDULE**

**FinancialStatement Schedule of Owens-Illinois Group, Inc. and Subsidiaries:**

For the yearsended December 31, 2006, 2005, and 2004:
|                                                            | ** ** | **PAGE** |
|------------------------------------------------------------|------------|----------|
|                                                       |       |     |
| II – Valuation and Qualifying Accounts (Consolidated) |       |     |

 

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**OWENS-ILLINOISGROUP, INC.**

 

**SCHEDULEII — VALUATION AND QUALIFYING ACCOUNTS (CONSOLIDATED)**

**Yearsended December 31, 2006, 2005, and 2004**

**(Millions of Dollars)**

Reserves deductedfrom assets in the balance sheets:

Allowances forlosses and discounts on receivables
| ** ** | ** ** | ** **          | ** ** | **Additions**       | ** ** | ** ** | ** ** | ** **        | ** ** |
|------------|------------|---------------------|------------|---------------------|------------|------------|------------|-------------------|------------|
| ** ** | ** ** | **Balance at** | ** ** | **Charged to** | ** ** | ** ** | ** ** | ** **        | ** ** | **Balance** | ** ** |
| ** ** | ** ** | **beginning**       | ** ** | **costs and**  | ** ** | ** ** | ** ** | **Deductions**    | ** ** | **at end of** | ** ** |
| ** ** | ** ** | **of period**  | ** ** | **expenses**        | ** ** | **Other**  | ** ** | **(Note 1)** | ** ** | **period** | ** ** |
|       |       |                |       |                |       |       |       |              |       |   |   |
| 2006       |       | $                   | 47.4       |                | $          | 83.7       |       | $                 | (1.1       | ) | $ | 77.6 |   | $ | 52.4 |   |
| 2005       |       | $                   | 50.3       |                | $          | 71.1       |       | $                 | (4.3       | ) | $ | 69.7 |   | $ | 47.4 |   |
| 2004       |       | $                   | 44.5       |                | $          | 76.9       |       | $                 | 7.2        |   | $ | 78.3 |   | $ | 50.3 |   |

 

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(1)             Deductions fromallowances for losses and discounts on receivables represent uncollectiblenotes and accounts written off.

S-1

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