PPG Industries (PPG)

Performance Overview

Sales decreased 30% for the first quarter of 2009 to $2,783 million compared to $3,962 million for the first quarter of 2008. Lower volumes in all reportable segments accounted for a decrease of 20%, weaker foreign currency accounted for a decrease of 7% and the absence of sales from the divested automotive glass and services business accounted for a decrease of 6%. These sales decreases were slightly offset by a 3% increase stemming from improved selling prices.

Cost of sales, exclusive of depreciation and amortization, decreased by $878 million for the first quarter of 2009 to $1,718 million compared to $2,596 million for the first quarter of 2008. This decrease corresponds with the decrease in sales. Cost of sales as a percentage of sales was 61.7% for the first quarter of 2009 compared to 65.5% for the first quarter of 2008. Cost of sales in the first quarter of 2008 includes $94 million for the flow through cost of sales of the step up to fair value of acquired inventory, which accounts for the majority of the noted decrease in cost of sales as a percentage of sales. Increased selling prices in 2009 totaling $125 million also caused cost of sales as a percentage of sales to be lower.

Selling, general and administrative expenses decreased by $155 million in the first quarter of 2009 compared to the first quarter of 2008 due to lower sales volumes, specific overhead cost reduction actions taken in response to the decline in the global economy and the impact of foreign currency translation.

Depreciation expense declined to $88 million in the first quarter of 2009 as compared to $107 million in the first quarter of 2008 due to both the impact of foreign currency translation and our third quarter 2008 restructuring charge. Research and development costs declined from $112 million in the first quarter of 2008 to $94 million in the first quarter of 2009 largely due cost reduction efforts and the impact of foreign currency translation. Interest expense declined from $64 million to $48 million in the first quarter of 2009, reflective of the lower debt balances in the first quarter of 2009.

The charge for in-process research and development in the first quarter of 2008 of $23 million was related to the 2008 SigmaKalon acquisition.

The business restructuring charge of $186 million in the first quarter of 2009 represents costs under a restructuring plan focused on further reducing PPG’s global cost structure. The actions included in the restructuring plan are expected to deliver pretax cost savings of approximately $60 million in 2009, growing to an annual run rate of about $140 million thereafter.

Other charges increased to $17 million in the first quarter of 2009 as compared to $6 million in the first quarter of 2008, due in part to foreign currency translation losses in 2009. Other earnings decreased to $7 million in the first quarter of 2009 as compared to $34 million for the first quarter of 2008. This decrease was largely due to lower equity earnings, including equity losses from PPG’s investment in the former automotive glass and services business and lower equity earnings from our Asian fiber glass joint ventures.

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The effective tax rate on pretax earnings in the first quarter of 2009 was 18% compared to approximately 31% in the first quarter of 2008. The first quarter 2009 effective tax rate includes a tax benefit of 24% on the charge for business restructuring and a tax benefit of 38.5% on the adjustment to increase the current value of the Company’s obligation under the proposed asbestos settlement. The effective tax rate on remaining pretax earnings was 33% in 2009. The first quarter 2008 effective tax rate of approximately 31% included a tax benefit of $6 million related to the settlement with the Internal Revenue Service of our U.S. tax returns for the years 2004 and 2005, a tax benefit of 24% on costs related to the acquisition of SigmaKalon and a tax benefit 39% on the adjustment to increase the current value of the Company’s obligation under the proposed asbestos settlement. The effective tax rate on remaining pretax earnings was 30%.

Net income (attributable to PPG) and earnings per share – assuming dilution (attributable to PPG) are summarized below:

Performance Overview

Sales increased 37% in the third quarter of 2008 to $4,225 million compared to $3,073 million for the third quarter of 2007. Sales related to acquisitions accounted for an increase of 30% and higher selling prices increased sales by 6%. The positive effect of foreign currency translation accounted for an increase of 2% while lower volumes decreased sales by 1%.

Cost of sales, exclusive of depreciation and amortization, increased by $754 million for the third quarter of 2008 to $2,701 million compared to $1,947 million for the third quarter of 2007. This increase is consistent with the increase in sales. Cost of sales as a percentage of sales was 63.9% for the third quarter of 2008 compared to 63.4% for the third quarter of 2007.

Selling, general and administrative expenses increased by $282 million in the third quarter of 2008 compared to the third quarter of 2007 due to the impact of the acquisition of SigmaKalon and higher levels of cost to support growth in our coatings and optical businesses. Selling, general and administrative expenses as a percentage of sales were 20.8% for the third quarter of 2008 compared to 19.4% for the third quarter of 2007. The increase in selling, general and administrative expenses as a percentage of sales was due almost entirely to the addition of SigmaKalon and reflects the distribution nature of these businesses, which requires higher selling, distribution, advertising and regional management costs to serve their broad customer profile. Selling, general and administrative expenses as a percentage of sales in the Architectural Coatings - EMEA reportable segment are in line with PPG’s other architectural coatings businesses.

In the third quarter of 2008, depreciation expense increased by $16 million due primarily to the acquisition of SigmaKalon. Research and development costs increased by $28 million and amortization increased by $19 million compared to the third quarter of 2007. These increases were primarily due to the acquisition of SigmaKalon. Interest expense increased by $40 million in the quarter due largely to debt incurred to finance the acquisition of SigmaKalon.

The third quarter 2008 charge for business restructuring of $163 million represents the impact of a restructuring plan that is part of PPG’s global transformation strategy and the integration of its acquisition of SigmaKalon. As part of the restructuring, PPG will close several coatings manufacturing facilities, including those in Clarkson, Ont., Canada, and Geldermalsen, Netherlands, which are

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anticipated to close in the second and third quarters 2009, respectively. The Geldermalsen closure will be implemented following consultation with the applicable works council. Other staffing reductions will occur in PPG’s coatings businesses in North America and Europe. PPG also will close its Owen Sound, Ont., Canada, glass manufacturing facility in early 2009, and will idle one float glass production line at its Mt. Zion, Ill., facility in the second quarter of next year. Other actions will include writing off idle production assets in PPG’s fiber glass and chemicals businesses. The charge of $163 million for business restructuring includes severance and other costs of $73 million, pension curtailments of $21 million and asset write-offs of $69 million.

Other charges increased by $9 million in the third quarter of 2008 as compared to the third quarter of 2007 as a result of uninsured losses resulting from weather-related property damage, including two hurricanes that hit the U.S. Gulf Coast in the third quarter of 2008. Other earnings increased by $26 million in the third quarter of 2008 compared to the third quarter of 2007. This increase is largely due to the $15 million gain on the divestiture of the automotive glass and services business.

The effective tax rate on pre-tax earnings was 32.0% for the third quarter of 2008 compared to a tax rate on earnings from continuing and discontinued operations of 32.4% for the third quarter of 2007. The third quarter 2008 rate of 32.0% includes a tax benefit of 32% related to the business restructuring charge, a benefit of 39% on the adjustment to increase the current value of the Company’s obligation relating to asbestos claims under the PPG Settlement Arrangement and the tax expense related to the gain on divestiture of the automotive glass and services business. The effective tax rate on remaining pretax income was 30%. The third quarter 2007 rate of 32.4% includes a tax benefit of 39% on the adjustment to increase the current value of the Company’s obligation relating to asbestos claims under the PPG Settlement Arrangement, a tax benefit of 37% on the curtailment charge related to the sale of the automotive glass and services business, a tax benefit of 12% on the adjustment to write down the assets of the fine chemicals business to fair value less cost to sell and income tax expense of 31.5% on the remaining pretax earnings. The decline in the tax rate on the remaining pretax earnings from 31.5% to 30% is due to a change in the mix of PPG’s pretax earnings, as a larger proportion of PPG’s pretax earnings are in lower tax regions such as Europe and Asia in 2008.

Net income and earnings per share – assuming dilution are summarized below:

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Performance Overview

Sales increased 40% for the first six months of 2008 to $8,436 million compared to $6,043 million for the first six months of 2007. Sales related to acquisitions accounted for an increase of 30%, the positive effects of foreign currency translation accounted for an increase of 5%, an increase in selling prices accounted for an increase of 3% and improved sales volume accounted for an increase of 2%.

Cost of sales, exclusive of depreciation and amortization, increased by $1,561 million for the first six months of 2008 to $5,425 million compared to $3,864 million for the first six months of 2007. This increase corresponds with the increase in sales. Cost of sales as a percentage of sales was 64.3% for the first six months of 2008 compared to 63.9% for the first six months of 2007. Cost of sales in the first six months of 2008 includes $94 million for the flow through cost of sales of the step up to fair value of acquired inventory, which more than accounts for the noted increase in cost of sales as a percentage of sales.

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Selling, general and administrative expenses increased by $704 million in the first six months of 2008 compared to the first six months of 2007 due to increased sales volumes, the impact of the acquisition of SigmaKalon, higher levels of cost to support growth in our coatings and optical businesses and the charge of $19 million for special termination benefits and a pension curtailment loss relating to the impact of benefit changes, including accelerated vesting, negotiated as part of the pending sale of the automotive glass and services business. Selling, general and administrative expenses as a percentage of sales were 21.4% for the first six months of 2008 compared to 18.2% for the first six months of 2007. The increase in selling, general and administrative expenses as a percentage of sales was due almost entirely to the addition of SigmaKalon and reflects the distribution nature of these businesses, which requires higher selling, distribution, advertising and regional management costs to serve their broad customer profile. Selling, general and administrative expenses in the Architectural Coatings—EMEA reportable segment are in line with PPG’s other architectural coatings businesses.

In the first six months of 2008, depreciation expense increased by $61 million due primarily to the acquisition of SigmaKalon and the charge of $17 million to reflect a catch-up of depreciation expense for the automotive glass and services business, which was suspended when the business was classified as a discontinued operation. Research and development costs increased by $60 million and amortization increased by $42 million compared to the first six months of 2007. These increases were primarily due to the acquisition of SigmaKalon. Interest expense increased by $86 million in the first six months of 2008 due to debt incurred to finance the acquisition of SigmaKalon.

Other charges decreased to $16 million for the first six months of 2008 as compared to $35 million for the six months of 2007, in part due to the absence in 2008 of a $10 million charge incurred in 2007 to write of PPG’s investment in a Venezuelan fiber glass joint venture. Other earnings increased to $81 million for the first six months of 2008 as compared to $66 million in the first six months of 2007. The increase in other earnings was due primarily to higher interest income, higher royalty income and an insurance recovery in 2008.

The effective tax rate on pre-tax earnings was 30% for the first six months of 2008 compared to 28.3% for the first six months of 2007. The 2008 rate of 30% includes a tax benefit of $6 million related to the settlement with the Internal Revenue Service of our U.S. tax returns for tax years 2004 and 2005. The 2008 rate also includes a tax benefit of 24% on costs related to the acquisition of SigmaKalon, a tax benefit of 36% on the charges for the catch-up of depreciation expense and the impact of benefit changes related to the divestiture of the automotive glass and services business, and a tax benefit of 39% on the adjustment to increase the current value of the Company’s obligation relating to asbestos claims under the PPG Settlement Arrangement. Income tax expense of 39% was recognized on earnings from the automotive glass and services business. The effective tax rate on remaining pretax income was 30%. The 2007 rate of 28.3% includes the benefit of reversing a $19 million valuation allowance previously recorded against the benefit of tax net operating loss carryforwards and a tax benefit of 39% on the adjustment to increase the current value of the Company’s obligation relating to asbestos claims under the PPG Settlement Arrangement. Income tax expense of 31.5% was recognized on the remaining pretax earnings. The decline in the tax rate on the remaining pretax earnings from 31.5% to 30% is due to a change in the mix of PPG’s pretax earnings in 2008, as a larger proportion of PPG’s pretax earnings are in low-tax regions such as Europe and Asia.

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Net income and earnings per share – assuming dilution are summarized below:

Performance Overview

Sales increased 41% for the first quarter of 2008 to $3,720 million compared to $2,632 million for the first quarter of 2007. Sales related to acquisitions accounted for an increase of 30% and the positive effects of foreign currency translation accounted for an increase of 6%. Higher selling prices, primarily in our Commodity Chemicals segment, increased sales by 3%, while higher volumes, primarily in our Optical and Specialty Materials and Industrial Coatings business segments, increased sales by 2%.

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Cost of sales, exclusive of depreciation and amortization, increased by $747 million for the first quarter of 2008 to $2,424 million compared to $1,677 million for the first quarter of 2007. This increase corresponds with the increase in sales, including that which is associated with the acquisition of SigmaKalon. Cost of sales as a percentage of sales was 65.2% for the first quarter of 2008 compared to 63.7% for the first quarter of 2007. Cost of sales in the first quarter of 2008 includes $94 million for the flow through cost of sales of the step up to fair value of acquired inventory, which more than accounts for the noted increase in cost of sales as a percentage of sales.

Selling, general and administrative expenses increased by $320 million in the first quarter of 2008 compared to the first quarter of 2007 due to increased sales volumes, the impact of the acquisition of SigmaKalon and higher levels of cost to support growth in our coatings and optical businesses. Selling, general and administrative expenses as a percentage of sales were 22.1% for the first quarter of 2008 compared to 19.1% for the first quarter of 2007. The increase in selling, general and administrative expenses as a percentage of sales was due almost entirely to the addition of SigmaKalon and reflects the distribution nature of these businesses, which requires higher selling, distribution, advertising and regional management costs to serve their broad customer profile. Selling, general and administrative expenses in the Architectural Coatings—EMEA reportable segment are in line with PPG’s other architectural coatings businesses.

In the first quarter of 2008, depreciation expense increased by $29 million, research and development costs increased by $30 million, and amortization increased by $20 million compared to the first quarter of 2007. These increases were primarily due to the acquisition of SigmaKalon. Interest expense increased by $44 million in the quarter due to debt incurred to finance the acquisition of SigmaKalon.

The effective tax rate on pre-tax earnings from continuing operations was 30.2% for the first quarter of 2008 compared to 22.7% for the first quarter of 2007. See “Other Factors” on page 36 for additional information concerning the effective tax rate for 2008 and 2007.

Net income and earnings per share – assuming dilution are summarized below:

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Performance Overview

Sales increased 12% for the first six months of 2007 to $6,090 million compared to $5,462 million for the first six months of 2006. Sales related to acquisitions accounted for an increase of 7%, volume accounted for an increase of 3%, and the positive effects of foreign currency translation accounted for an increase of 3%. A slight decline in selling prices reduced sales by 1%.

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Net income and earnings per share – assuming dilution for the first six months of 2007 were $443 million and $2.67, respectively, compared to $464 million and $2.79, respectively, for the first six months of 2006. Net income for the first six months of 2007 included aftertax charges of $11 million, or 6 cents a share, to reflect the net increase in the current value of the Company’s obligation under the asbestos settlement agreement. Net income for the first six months of 2006 included aftertax earnings of $12 million, or 7 cents a share, for litigation related insurance recoveries in excess of litigation related costs and aftertax charges of $23 million, or 14 cents a share, for business restructuring and $10 million, or 6 cents a share, to reflect the net increase in the current value of the Company’s obligation under the asbestos settlement agreement.

Net income for the first six months of 2007 compared to the first six months of 2006 was $21 million lower. The decrease in net income was due to lower selling prices in our Commodity Chemicals and Glass segments, the negative impact of inflation, higher overhead expenses related to our growth initiatives, a higher effective tax rate and higher manufacturing costs, primarily in our Commodity Chemicals segment. Factors which increased net income were the positive impact of higher sales volume, the positive impact of acquisitions, the absence of prior year restructuring charges, and the positive effect of foreign currency translation. The absence in 2007 of litigation related insurance recoveries in excess of litigation related costs that occurred in 2006 was offset by lower environmental expense and higher equity earnings.

Performance Overview

Sales increased 11% for the first quarter of 2007 to $2,917 million compared to $2,638 million for the first quarter of 2006. Sales related to acquisitions accounted for an increase of 7% and higher volumes, primarily in our Optical and Specialty Materials and Commodity Chemicals business segments, increased sales by 3%. The positive effects of foreign currency translation accounted for an increase of 3%. Lower selling prices, primarily in our Commodity Chemicals segment, reduced sales by 2%.

Net income and earnings per share – assuming dilution for the first quarter of 2007 were $194 million and $1.17, respectively, compared to $184 million and $1.11, respectively, for the first quarter of 2006. Net income for the first quarter of 2007 included aftertax charges of $5 million, or 3 cents a share, to reflect the net increase in the current value of the Company’s obligation relating to asbestos claims under the PPG Settlement Arrangement. See Note 16, “Commitments and Contingent Liabilities” for a description of these charges. Net income for the first quarter of 2006 included aftertax charges of $23 million, or 14 cents a share, for business restructuring and $6 million, or 3 cents a share, to reflect the net increase in the current value of the Company’s obligation relating to asbestos claims under the PPG Settlement Arrangement.

Net income for the first quarter of 2007 compared to the first quarter of 2006 was $10 million higher. Net income increased due to improved sales volumes, the absence of the negative impact of the 2006 business restructuring charge, the positive effects of foreign currency translation, earnings from acquisitions and lower pension costs. The negative impact of lower prices, primarily in our Commodity Chemicals segment, higher overhead expenses, primarily to support our growth initiatives, higher manufacturing costs and the write-off of our investment in a joint venture were factors that decreased net income for the first quarter of 2007.

Performance Overview

Our sales increased 7% to $10.2 billion in 2005 compared to $9.5 billion in 2004. Sales increased 6% due to higher selling prices, primarily in our Commodity Chemicals, Industrial Coatings and Performance and Applied Coatings reportable business segments, and 1% due to the positive effects of foreign currency translation. The impact

Table of Contents

Management’s Discussion and Analysis

of increased volumes in our Performance and Applied Coatings, Optical and Specialty Materials and Glass reportable business segments was offset by volume declines in the Commodity Chemicals reportable business segment. The volume decline in the Commodity Chemicals reportable business segment was due in part to lost sales resulting from the impact of Hurricane Rita, as discussed below.

Cost of sales as a percentage of sales increased to 63.5% as compared to 63.1% in 2004. Inflation, including higher coatings raw material costs and higher energy costs in our Commodity Chemicals and Glass reportable business segments increased our cost of sales.

Selling, general and administrative expense declined slightly as a percentage of sales to 17.4% despite increasing by $56 million in 2005. These costs increased primarily due to increased advertising in our optical products operating segment and higher expenses due to store expansions in our architectural coatings operating segment. Interest expense declined $9 million in 2005, reflecting the year over year reduction in the outstanding debt balance of $80 million.

Other charges increased $284 million in 2005 primarily due to pretax charges of $132 million related to the Marvin legal settlement, net of $18 million in insurance recoveries, $61 million for the federal glass class action antitrust legal settlement, $34 million of direct costs related to the impact of hurricanes Rita and Katrina, $27 million for an asset impairment charge in our fine chemicals operating segment, $19 million for debt refinancing costs and an increase of $12 million for environmental remediation costs.

Net income and earnings per share – assuming dilution for 2005 were $596 million and $3.49 respectively, compared to $683 million and $3.95, respectively, for 2004. Net income in 2005 included aftertax charges of $117 million, or 68 cents a share, for legal settlements net of insurance; $21 million, or 12 cents a share for direct costs related to the impact of hurricanes Katrina and Rita; $17 million, or 10 cents a share related to an asset impairment charge related to our fine chemicals business; and $12 million, or 7 cents a share, for debt refinancing costs. The legal settlements net of insurance include aftertax charges of $80 million for the Marvin legal settlement, net of insurance recoveries, and $37 million for the impact of the federal glass class action antitrust legal settlement. Net income for 2005 and 2004 included an aftertax charge of $13 million, or 8 cents a share, and $19 million, or 11 cents a share, respectively, to reflect the net increase in the current value of the Company’s obligation relating to asbestos claims under the PPG Settlement Arrangement.

Performance Overview

Sales increased 7% for the first nine months of 2006 to $8,264 million compared to $7,696 million for the first nine months of 2005. Sales of acquired businesses increased sales by 3%. Increased prices, primarily in our coatings and chemicals segments, accounted for an increase in sales of 2%. Improved volumes increased sales by 2% with increases in our coatings and glass segments and optical products business more than offsetting volume declines in our chlor-alkali products business.

Gross profit in the first nine months of 2006 increased $161 million due to higher sales. The gross profit percentage decreased to 36.7% for the first nine months of 2006 compared to 37.3% for the first nine months of 2005. Inflation, primarily higher raw material costs, lowered our gross profit percentage. The benefits realized from higher selling prices, the favorable mix of sales volume growth and improved manufacturing efficiencies increased our gross profit percentage.

Net income and earnings per share – assuming dilution for the first nine months of 2006 were $554 million and $3.33, respectively, compared to $483 million and $2.81, respectively, for the first nine months of 2005. Net income for the first nine months of 2006 included aftertax

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charges of $106 million, or 64 cents a share, for the estimated environmental remediation costs at our former chromium manufacturing plant in Jersey City, N.J. and at the Calcasieu River estuary near our Lake Charles, La. facility; $26 million, or 15 cents a share, for legal settlements including the settlement of a federal class-action lawsuit related to alleged antitrust violations in the U.S. automotive refinish industry; $23 million, or 14 cents a share, for business restructuring; and $14 million, or 8 cents a share, to reflect the net increase in the current value of the Company’s obligation under the asbestos settlement agreement. Net income for the first nine months of 2006 also included aftertax earnings of $24 million, or 14 cents a share, for insurance recoveries. Net income for the first nine months of 2005 included aftertax charges of $128 million, or 74 cents a share, for legal settlements; $11 million, or 6 cents a share, for direct costs related to the impact of hurricanes Katrina and Rita; $12 million, or 7 cents a share, for debt refinancing costs; and $10 million, or 6 cents a share, to reflect the net increase in the current value of the Company’s obligation under the asbestos settlement agreement. Net income for the first nine months of 2005 also included aftertax earnings of $12 million, or 7 cents a share, for insurance recoveries.

Net income for the first nine months of 2006 compared to the first nine months of 2005 was $71 million higher. The charges for environmental remediation, legal settlements, debt refinancing, asbestos and restructuring, the earnings related to insurance recoveries and the impact of hurricanes described above combined to increase net income for the first nine months of 2006 by $4 million compared with the prior year. The remaining increase in net earnings totaled $67 million. Factors increasing net earnings were the favorable mix of sales volume growth, increased manufacturing efficiencies and a lower effective tax rate. Net income was reduced by the negative impact of inflation, which more than offset increases in selling prices, and higher overhead expenses, primarily to support growth initiatives, including higher advertising expense.

Performance Overview

Sales increased 6% for the first six months of 2006 to $5,462 million compared to $5,149 million for the first six months of 2005. Increases in selling prices, primarily in our coatings and chemicals business segments, increased sales by 3%, and increases in volumes, primarily in our coatings and glass business segments which more than offset volume declines in our chlor-alkali products, accounted for an increase in sales of 2%. Additionally a 1% increase is due to sales from acquisitions.

Gross profit in the first six months of 2006 increased $83 million due to higher sales. The gross profit percentage decreased to 37.1% for the first six months of 2006 compared to 37.7% for the first six months of 2005. Inflation, primarily higher raw material and energy costs, lowered our gross profit percentage. The benefits realized from higher selling prices, the favorable mix of sales volume growth and improved manufacturing efficiencies across all of our business segments, increased our gross profit percentage.

Net income and earnings per share – assuming dilution for the first six months of 2006 were $464 million and $2.79, respectively, compared to $326 million and $1.89, respectively, for the first six months of 2005. Net income for the first six months of 2006 included aftertax earnings of $12 million, or 7 cents a share, for litigation related insurance recoveries in excess of litigation related costs and aftertax charges of $23 million, or 14 cents a share, for business restructuring and $10 million, or 6 cents a share, to reflect the net increase in the current value of the Company’s obligation under the asbestos settlement agreement. Net income for the first six months of 2005 included aftertax charges of $91 million, or 52 cents a share, for a legal settlement; $12 million, or 7 cents a share, for debt refinancing costs; and $7 million, or 4 cents a share, to reflect the net increase in the current value of the Company’s obligation under the asbestos settlement agreement.

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Net income for the first six months of 2006 compared to the first six months of 2005 was $138 million higher. The increase in net income was due to the favorable impact of the 2006 litigation related insurance recoveries in excess of litigation related costs, increased selling prices, improved manufacturing efficiencies, the favorable mix of sales volume growth and the absence of the 2005 legal settlement and debt refinancing costs. Factors which decreased net income for the second quarter of 2006 included the negative impact of inflation, primarily raw material and energy costs; restructuring charges; higher environmental expense; and increased overhead expenses, primarily related to growth initiatives in architectural coatings and higher advertising expense in optical products.

Performance Overview

Sales increased 6% for the first quarter of 2006 to $2,638 million compared to $2,493 million for the first quarter of 2005. Increases in selling prices, primarily in our chemicals and coatings business segments, increased sales by 4%, and increases in volumes, primarily in our coatings and glass business segments which more than offset volume declines in our chemicals segment, accounted for an increase in sales of 3%. An additional 1% increase in sales is due to sales from acquisitions. The negative effects of foreign currency translation accounted for a decrease of 2%.

Gross profit in the first quarter 2006 increased $12 million due to higher sales. The gross profit percentage decreased to 35.9% for the first quarter of 2006 compared to 37.5% for the first quarter of 2005. Inflation, primarily higher raw material and energy costs, lowered our gross profit percentage. The benefits realized from higher selling prices and improved manufacturing efficiencies, primarily in our glass and coatings segments, increased our gross profit percentage.

Net income and earnings per share – assuming dilution for the first quarter of 2006 were $184 million and $1.11, respectively, compared to $95 million and $0.55, respectively, for the first quarter of 2005. Net income for the first quarter of 2006 included aftertax charges of $23 million, or 14 cents a share, for business restructuring, and $6 million, or 3 cents a share, to reflect the net increase in the current value of the Company’s obligation under the asbestos settlement agreement. Net income for the first quarter of 2005 included aftertax charges of $91 million, or 52 cents a share, for the Marvin legal settlement and $5 million, or 3 cents a share, to reflect the net increase in the current value of the Company’s obligation under the asbestos settlement agreement.

Net income for the first quarter of 2006 compared to the first quarter of 2005 was $89 million higher. The increase in net income was due to the absence of the negative impact of the 2005 legal settlement, increased selling prices, improved manufacturing efficiencies, and improved sales volumes. The negative impact of inflation, primarily raw material and energy costs; business restructuring; higher income tax expense; and higher environmental expense decreased net income for the first quarter of 2006.

Performance Overview

Our sales increased 7% to $10.2 billion in 2005 compared to $9.5 billion in 2004. Sales increased 6% due to higher selling prices, primarily in our chemicals and coatings segments, and 1% due to the positive effects of foreign currency translation. The impact of increased volumes in our coatings and glass segments was offset by volume declines in the chemicals segment. The volume decline in the chemicals segment was due in part to lost sales resulting from the impact of Hurricane Rita, as discussed below.

Gross profit increased $214 million due to higher sales. The gross profit percentage decreased slightly to 36.5% for 2005 compared to 36.9% in 2004. Inflation, including higher raw material costs, primarily in our coatings segment, and higher energy costs in our chemicals and glass segments decreased our gross profit. The benefits realized from increased selling prices, along with improved manufacturing efficiencies, primarily in our coatings and glass segments, were all factors which increased our gross profit.

Selling, general and administrative expense declined slightly as a percentage of sales to 17.4% despite increasing by $56 million in 2005. These costs increased primarily due to increased advertising in our optical products business and higher expenses due to store expansions in our architectural finishes business. Interest expense declined $9 million in 2005, reflecting the year over year reduction in the outstanding debt balance of $80 million.

Other charges increased $284 million in 2005 primarily due to pretax charges of $132 million related to the Marvin legal settlement, net of $18 million in insurance recoveries, $61 million for the federal glass class action antitrust legal settlement, $34 million of direct costs related to the impact of hurricanes Rita and Katrina, $27 million for an asset impairment charge in our fine chemicals business, $19 million for debt refinancing costs and an increase of $12 million for environmental remediation costs.

Net income and earnings per share – assuming dilution for 2005 were $596 million and $3.49 respectively, compared to $683 million and $3.95, respectively, for 2004. Net income in 2005 included aftertax charges of $117 million, or 68 cents a share, for legal settlements net of insurance; $21 million, or 12 cents a share for direct costs related to the impact of hurricanes Katrina and Rita; $17 million, or 10 cents a share related to an asset impairment charge related to our fine chemicals business; and $12 million, or 7 cents a share, for debt refinancing costs. The legal settlements net of insurance include aftertax charges of $80 million for the Marvin legal settlement, net of insurance recoveries, and $37 million for the impact of the federal glass class

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Management’s Discussion and Analysis

action antitrust legal settlement. Net income for 2005 and 2004 included an aftertax charge of $13 million, or 8 cents a share, and $19 million, or 11 cents a share, respectively, to reflect the net increase in the current value of the Company’s obligation under the PPG Settlement Arrangement relating to asbestos claims.

Performance Overview

Sales increased 8% for the first nine months of 2005 to $7,696 million compared to $7,102 million for the first nine months of 2004. Increases in selling prices, primarily in our chemicals and coatings segments, increased sales by 6%; the positive effects of foreign currency translation accounted for 1.5% and the remainder was due to volumes.

Gross profit for the first nine months of 2005 increased $245 million, and the gross profit percentage increased to 37.3% for the first nine months of 2005 compared to 37.0% for the first nine months of 2004. The benefits realized from increased selling prices, the favorable mix of sales volume growth; along with improved manufacturing efficiencies, primarily in our glass segment were all factors which increased our gross profit. Inflation, including higher raw material costs, primarily in our coatings segment, and higher energy costs in our chemicals and glass segments, decreased our gross profit.

Net income and earnings per share – assuming dilution for the first nine months of 2005 were $483 million and $2.81, respectively, compared to $500 million and $2.89, respectively, for the first nine months of 2004. Net income for the first nine months of 2005 included aftertax charges of $116 million, or 67 cents a share, for net legal and insurance settlements; $11 million, or 6 cents a share for direct costs related to the impact of hurricanes Katrina and Rita; and $12 million, or 7 cents a share, for debt refinancing costs. The net legal and insurance settlements include aftertax charges of $80 million for the Marvin legal settlement, net of insurance recoveries, and $37 million for the impact of the glass antitrust legal settlement and an aftertax gain of $1 million for the net impact of several other legal and insurance settlements. Net income for the first nine months of 2005 and 2004 included an aftertax charge of $10 million, or 6 cents a share, and $13 million, or 8 cents a share, respectively, to reflect the net increase in the current value of the Company’s obligation under the asbestos settlement agreement, as discussed in Note 15.

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Net income for the first nine months of 2005 compared to the first nine months of 2004 was $17 million lower including a reduction of $136 million for the matters described in the preceding paragraph. Other factors caused earnings in the first nine months of 2005 to be $119 million higher than the prior year period. Increased selling prices, primarily in our chlor-alkali and coatings businesses, exceeded the negative impacts of inflation due primarily to higher raw material and energy costs resulting in increased net income of approximately $57 million. The remaining increase in net income of $62 million is primarily due to the higher sales volume, the favorable impact of currency and improved manufacturing efficiencies.