Edgar Filing: Owens Corning

Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-33100

Owens Corning

(Exact name of registrant as specified in its charter)


Delaware				43-2109021
(State or other jurisdiction of incorporation or organization)				(I.R.S. Employer Identification No.)

One Owens Corning Parkway, Toledo, OH				43659
(Address of principal executive offices)				(Zip Code)

(419) 248-8000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

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


Large accelerated filer ¨		Accelerated filer þ		Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes þ No ¨

As of October 9, 2007, 130,913,061 shares of registrant’s common stock, par value $0.01 per share, were outstanding.

(i)

INDEX


			Page
Cover Page			1

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements
		Consolidated Statements of Earnings	2
		Consolidated Balance Sheets	3
		Consolidated Statements of Cash Flows	4
	Notes to Consolidated Financial Statements
	1.	General	5
	2.	Segment Data	5 - 8
	3.	Inventories	9
	4.	Goodwill and Other Intangibles	9 - 10
	5.	Property, Plant and Equipment	10 - 11
	6.	Acquisitions	11
	7.	Divestitures	11 - 13
	8.	Assets and Liabilities Held for Sale	13 - 14
	9.	Warranties	14
	10.	Restructuring of Operations and Other Charges (Credits)	14 - 15
	11.	Debt	15 - 17
	12.	Pension Plans and Other Postretirement Benefits	17 - 18
	13.	Stock Compensation	19 - 21
	14.	Contingent Liabilities and Other Matters	22 - 23
	15.	Earnings per Share	24
	16.	Comprehensive Earnings	25
	17.	Income Taxes	25
	18.	Accounting Pronouncements	25
	19.	Emergence from Chapter 11 Proceedings	26 - 27
	20.	Subsequent Events	27
	21.	Condensed Consolidating Financial Statements	27 - 35

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		36 - 53

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		53

Item 4.	Controls and Procedures		54

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings		55

Item 1A.	Risk Factors		55

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		56

Item 3.	Defaults Upon Senior Securities		56

Item 4.	Submission of Matters to a Vote of Security Holders		56

Item 5.	Other Information		56

Item 6.	Exhibits		56
		Signatures	57
		Exhibit Index	58 - 59

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PART I

ITEM 1. FINANCIAL STATEMENTS

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(unaudited)


	Successor			Predecessor			Successor			Predecessor
	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	(in millions, except per share data)
NET SALES	$	1,268		$	1,386		$	3,674		$	4,149
COST OF SALES		1,061			1,119			3,049			3,361

Gross margin		207			267			625			788

OPERATING EXPENSES
Marketing and administrative expenses		102			130			365			377
Science and technology expenses		15			13			46			42
Restructuring costs (credits)		(1	)		10			(3	)		10
Chapter 11 related reorganization items		1			1			4			28
Asbestos litigation recoveries		—			(10	)		—			(13	)
Employee emergence equity program		8			—			28			—
Gain on sale of fixed assets and other		(1	)		(22	)		(6	)		(64	)

Total operating expenses		124			122			434			380

EARNINGS FROM CONTINUING OPERATIONS BEFORE INTEREST AND TAXES		83			145			191			408
Interest expense, net		27			71			90			222

EARNINGS FROM CONTINUING OPERATIONS BEFORE TAXES		56			74			101			186
Income tax expense (benefit)		16			20			30			(169	)

EARNINGS FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST AND EQUITY IN NET EARNINGS OF AFFILIATES	$	40		$	54		$	71		$	355
Minority interest and equity in net earnings (loss) of affiliates		(2	)		(1	)		(4	)		2

EARNINGS FROM CONTINUING OPERATIONS		38			53			67			357
Discontinued operations
Earnings from discontinued operations, net of tax of $3, $5, $5, and $15, respectively		8			9			9			19
Gain on sale of discontinued operations, net of tax of $41		66			—			66			—

Total earnings from discontinued operations		74			9			75			19

NET EARNINGS	$	112		$	62		$	142		$	376

BASIC EARNINGS PER COMMON SHARE
Earnings from continuing operations	$	0.29		$	0.96		$	0.52		$	6.46

Earnings from discontinued operations	$	0.58		$	0.16		$	0.59		$	0.34

DILUTED EARNINGS PER COMMON SHARE
Earnings from continuing operations	$	0.29		$	0.88		$	0.51		$	5.96

Earnings from discontinued operations	$	0.57		$	0.16		$	0.58		$	0.32

WEIGHTED AVERAGE COMMON SHARES
Basic		128.1			55.3			128.1			55.3
Diluted		130.8			59.9			130.8			59.9

The accompanying notes to consolidated financial statements are an integral part of this statement.

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OWENS CORNING AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)


	Successor
	September 30, 2007		December 31, 2006
	(in millions)
ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	450	$	1,089
Receivables, less allowances of $9 million in 2007 and $26 million in 2006		624		573
Inventories		662		749
Restricted cash – disputed distribution reserve		54		85
Assets held for sale – current		55		—
Other current assets		65		56

Total current assets		1,910		2,552
Property, plant and equipment, net		2,225		2,521
Goodwill		1,173		1,313
Intangible assets		1,194		1,298
Deferred income taxes		554		549
Assets held for sale – non-current		234		—
Other non-current assets		218		237

TOTAL ASSETS	$	7,508	$	8,470

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	862	$	1,081
Accrued interest		39		39
Short-term debt		19		1,401
Long-term debt – current portion		10		39
Liabilities held for sale – current		39		—

Total current liabilities		969		2,560
Long-term debt, net of current portion		1,827		1,296
Pension plan liability		212		312
Other employee benefits liability		329		325
Liabilities held for sale – non-current		1		—
Other liabilities		207		247
Commitments and contingencies (Note 14)
Minority interest		38		44

STOCKHOLDERS’ EQUITY
Preferred stock, par value $0.01 per share
10 million shares authorized; none issued or outstanding at September 30, 2007, and December 31, 2006
Common stock, par value $0.01 per share
400 million shares authorized; 130.8 million issued and outstanding at September 30, 2007 and December 31, 2006		1		1
Additional paid in capital		3,767		3,733
Accumulated earnings (deficit)		77		(65	)
Accumulated other comprehensive earnings		80		17

Total stockholders’ equity		3,925		3,686

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	7,508	$	8,470

The accompanying notes to consolidated financial statements are an integral part of this statement.

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OWENS CORNING AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Successor			Predecessor
	Nine Months Ended September 30,
	2007			2006
	(in millions)
NET CASH FLOW PROVIDED BY (USED FOR) OPERATING ACTIVITIES
Net earnings	$	142		$	376
Adjustments to reconcile net earnings to cash provided by (used for) operating activities:
Depreciation and amortization		239			184
Provision for impairments		22			2
Gain on sale of businesses and fixed assets		(110	)		(49	)
Change in deferred income taxes		43			(164	)
Provision for pension and other employee benefits liabilities		31			74
Provision for post-petition interest/fees on pre-petition obligations		—			228
Provision for asbestos litigation claims		—			21
Employee emergence equity program		28			—
Decrease in restricted cash – disputed distribution reserve		31			—
Payments related to Chapter 11 filings		(26	)		—
Increase in receivables		(161	)		(99	)
Increase in inventories		(31	)		(118	)
Increase in prepaid assets		(1	)		(41	)
Decrease in accounts payable and accrued liabilities		(113	)		(68	)
Proceeds from insurance for asbestos litigation claims, excluding Fibreboard		—			18
Pension fund contribution		(117	)		(14	)
Payments for other employee benefits liabilities		(20	)		(20	)
Increase in restricted cash – asbestos and insurance related		—			(17	)
Increase in restricted cash, securities and other – Fibreboard		—			(67	)
Other		4			(2	)

Net cash flow provided by (used for) operating activities		(39	)		244

NET CASH FLOW PROVIDED BY (USED FOR) INVESTING ACTIVITIES
Additions to plant and equipment		(167	)		(270	)
Investment in affiliates and subsidiaries, net of cash acquired		(31	)		(47	)
Proceeds from the sale of assets or affiliate		437			65

Net cash flow provided by (used for) investing activities		239			(252	)

NET CASH FLOW USED FOR FINANCING ACTIVITIES
Payments of equity commitment agreement		—			(100	)
Payments on long-term debt		(78	)		(7	)
Proceeds from long-term debt		617			17
Payments on revolving credit facility		(383	)		—
Proceeds from revolving credit facility		383			—
Payment of note payable to 524(g) Trust		(1,390	)		—
Net increase (decrease) in short-term debt		3			(1	)

Net cash flow used for financing activities		(848	)		(91	)

Effect of exchange rate changes on cash		9			5

NET DECREASE IN CASH AND CASH EQUIVALENTS		(639	)		(94	)
Cash and cash equivalents at beginning of period		1,089			1,559

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	450		$	1,465

The accompanying notes to consolidated financial statements are an integral part of this statement.

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OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. GENERAL

Owens Corning (formerly known as Owens Corning (Reorganized) Inc.) was initially formed on July 21, 2006, as a wholly-owned subsidiary of Owens Corning Sales, LLC (formerly known as Owens Corning (“OCD”) and did not conduct significant operations prior to October 31, 2006 (the “Effective Date”), when OCD and 17 of its subsidiaries (collectively, the “Debtors”) emerged from Chapter 11 bankruptcy proceedings, as described more fully in Note 19. As part of a restructuring that was conducted in connection with OCD’s emergence from bankruptcy, on October 31, 2006, Owens Corning became a holding company and the ultimate parent company of OCD and the other Owens Corning companies.

Unless the context requires otherwise, the terms “Owens Corning”, “Company”, “we” and “our” in this report refer to Owens Corning (formerly known as Owens Corning (Reorganized) Inc.) and its subsidiaries.

In accordance with Statement of Position 90-7 (“SoP 90-7”), the Company adopted fresh-start accounting as of the Effective Date. Fresh-start accounting is required upon a substantive change in control and requires that the reporting entity allocate the reorganization value of the company to its assets and liabilities in a manner similar to that which is required under Statement of Financial Accounting Standards No. 141, “Business Combinations.” Under the provisions of fresh-start accounting, a new entity has been deemed created for financial reporting purposes. The financial information set forth in this report, unless otherwise expressly set forth or as the context otherwise indicates, reflects the consolidated results of operations and financial condition of Owens Corning and its subsidiaries for the periods following October 31, 2006 (“Successor”) and of OCD and its subsidiaries for the periods through October 31, 2006 (“Predecessor”).

The consolidated financial statements included in this Report are unaudited, pursuant to certain rules and regulations of the Securities and Exchange Commission, and include, in the opinion of the Company, adjustments necessary for a fair presentation of the results for the periods indicated, which, however, are not necessarily indicative of results which may be expected for the full year. The financial statements for the period ended September 30, 2006, do not reflect the effect of any changes in the Company’s capital structure or changes in fair values of assets and liabilities as a result of fresh-start accounting. The December 31, 2006, balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. During the three months ended September 30, 2007, the Company recorded expenses of $2 million pretax ($4 million after tax) related to prior periods in 2007. There was no impact to the nine months ended September 30, 2007. The effect was not material to previously issued interim financial statements. Certain reclassifications have been made to the period presented for 2006 to conform to the classifications used in the period presented for 2007.

In the third quarter of 2007, the Company divested its Siding Solutions business, a component of its Other Building Materials and Services segment, and its Fabwel unit, a component of its Composite Solutions segment. See Note 7 for a detailed discussion of these transactions. The impact of these transactions have been segregated from the continuing operations of the Company and reclassified into discontinued operations in the Consolidated Statements of Earnings for all periods presented in this Report. The prior period Consolidated Balance Sheet and Statement of Cash Flow have not been recast.

In connection with the Consolidated Financial Statements and Notes included in this Report, reference is made to the Consolidated Financial Statements and Notes thereto contained in the Company’s 2006 annual report on Form 10-K, as filed with the Securities and Exchange Commission.

2. SEGMENT DATA

The Company discloses its segments in accordance with Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”). The Company’s

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OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

2. SEGMENT DATA (continued)

business operations fall within two general product categories, building materials and composites. There are three reportable segments in the building materials product category: (1) Insulating Systems; (2) Roofing and Asphalt; and (3) Other Building Materials and Services and there is one reportable segment in the composites product category: Composite Solutions. Accounting policies for the segments are the same as those for the Company.

The Company has reported financial and descriptive information about each of the Company’s four reportable segments below on a basis that is used internally for evaluating segment performance and deciding how to allocate resources to those segments.

The Company’s four reportable segments are defined as follows:

Insulating Systems

Manufactures and sells fiberglass insulation into residential, commercial and industrial markets for both thermal and acoustical applications. Also manufactures and sells glass fiber pipe insulation, energy efficient flexible duct media and foam insulation used in above and below grade construction applications.

Roofing and Asphalt

Manufactures and sells residential roofing shingles and oxidized asphalt materials used in residential and commercial construction and specialty applications.

Other Building Materials and Services

Manufactures and sells stone veneer building products. Also provides franchise opportunities for the home remodeling and new construction industries. The operating segments comprising this segment individually do not meet the threshold for reporting separately.

Composite Solutions

Manufactures, fabricates and sells glass fiber reinforcements, mat, veil and specialized products worldwide that are used in a wide variety of composite material systems. Primary end uses are in the transportation, building construction, telecommunications and electronics markets.

As noted in the segment financial data below, the Company records inter-segment sales from the Composite Solutions segment to the Roofing and Asphalt segment for sales of glass-reinforced mat materials used in the manufacture of residential roofing materials. All other inter-segment sales are not material to any segment.

Earnings from continuing operations before interest and taxes by segment consists of net sales less related costs and expenses and is presented on a basis that is used internally for evaluating segment performance. Certain categories of expenses – such as general corporate expenses or income, restructuring costs and certain other expense or income items – are excluded from the internal evaluation of segment performance. Accordingly, these items are not reflected in earnings from continuing operations before interest and taxes for the Company’s reportable segments. Reference is made below to the reconciliation of reportable segment earnings before interest and taxes to consolidated earnings from continuing operations before interest and taxes.

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OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

2. SEGMENT DATA (continued)

External customer sales are attributed to geographic region based upon the location from which the product is shipped to the external customer.


	Successor			Predecessor			Successor			Predecessor
	Three Months Ended September 30,						Nine Months Ended September 30,
NET SALES	2007			2006			2007			2006
	(in millions)
Reportable Segments

Insulating Systems	$	462		$	529		$	1,322		$	1,570
Roofing and Asphalt		379			458			1,099			1,420
Other Building Materials and Services		78			97			234			285
Composite Solutions		397			353			1,152			1,028

Total reportable segments		1,316			1,437			3,807			4,303
Corporate Eliminations (1)		(48	)		(51	)		(133	)		(154	)

Consolidated	$	1,268		$	1,386		$	3,674		$	4,149

External Customer Sales by Geographic Region
United States	$	911		$	1,071		$	2,667		$	3,289
Europe		129			104			382			315
Canada and other		228			211			625			545

NET SALES	$	1,268		$	1,386		$	3,674		$	4,149

(1)

Included in corporate eliminations are inter-segment sales, primarily from the Composite Solutions segment to the Roofing and Asphalt segment. Those eliminations were approximately $30 million and $35 million in the Successor three months ended September 30, 2007, and the Predecessor three months ended September 30, 2006, respectively, and approximately $94 million and $119 million in the Successor nine months ended September 30, 2007, and the Predecessor nine months ended September 30, 2006, respectively. The remaining inter-segment sales eliminations are not material to any other segment.

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OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

2. SEGMENT DATA (continued)


	Successor			Predecessor			Successor			Predecessor
EARNINGS FROM CONTINUING OPERATIONS BEFORE INTEREST AND TAXES	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	(in millions)
Reportable Segments

Insulating Systems	$	42		$	125		$	137		$	359
Roofing and Asphalt		15			20			36			97
Other Building Materials and Services		6			—			18	(a)		2
Composite Solutions		29			44	(b)		80			104	(b)

Total reportable segments	$	92		$	189		$	271		$	562

Reconciliation to Consolidated Earnings from Continuing Operations Before Interest and Taxes

Chapter 11-related reorganization items	$	(1	)	$	(1	)	$	(4	)	$	(28	)
Asbestos litigation recoveries		—			10			—			13
Restructuring (costs) credits		1			(10	)		3			(10	)
OCV Reinforcements transaction costs		(3	)		(4	)		(21	)		(4	)
Losses related to the exit of our HOMExperts service line		—			—			(7	)		—
Asset impairments		(11	)		—			(11	)		—
Employee emergence equity program		(8	)		—			(28	)		—
General corporate (expense) income	$	13		$	(39	)	$	(12	)	$	(125	)

CONSOLIDATED EARNINGS FROM CONTINUING OPERATIONS BEFORE INTEREST AND TAXES	$	83		$	145		$	191		$	408

(a)	Excludes $7 million of losses related to the exit of the HOMExperts service line.

(b)	Includes $10 million and $45 million of gains on the sale of metal which is reflected in the Consolidated Statement of Earnings under the caption gain on the sale of fixed assets and other in the three months ended September 30, 2006, and the nine months ended September 30, 2006, respectively.

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OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

3. INVENTORIES

Inventories are summarized as follows (in millions):


	Successor
	September 30, 2007		December 31, 2006
Finished goods	$	435	$	518
Materials and supplies		189		194

FIFO inventory		624		712
LIFO adjustment		38		37

Total inventories	$	662	$	749

4. GOODWILL AND OTHER INTANGIBLE ASSETS

Intangible assets and goodwill consist of the following (in millions):


	Successor
	September 30, 2007
	Weighted Average Useful Life	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Amortizable intangible assets:
Customer relationships	19	$	165	$	(8	)	$	157
Technology	20		183		(9	)		174
Franchise and other agreements	15		32		(2	)		30
Non-amortizable intangible assets:
Trademarks			833		—			833

Total intangible assets		$	1,213	$	(19	)	$	1,194

Goodwill		$	1,173


	Successor
	December 31, 2006
	Weighted Average Useful Life	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Amortizable intangible assets:
Customer relationships	19	$	174	$	(2	)	$	172
Technology	20		198		(2	)		196
Franchise and other agreements	15		33		(1	)		32
In process research and development			21		(21	)		—
Non-amortizable intangible assets:
Trademarks			898		—			898

Total intangible assets		$	1,324	$	(26	)	$	1,298

Goodwill		$	1,313

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OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

4. GOODWILL AND OTHER INTANGIBLE ASSETS (continued)

Other Intangible Assets

The values assigned to intangible assets upon the adoption of fresh-start accounting represent the Company’s best estimates of fair value based on internal and external valuations. As a result, the Company expects the ongoing amortization expense for finite intangible assets to be approximately $18 million in each of the next five fiscal years.

Goodwill

The changes in the net carrying amount of goodwill by segment are as follows (in millions):


Successor	Insulating Systems			Roofing & Asphalt			Other Building Materials & Services			Composite Solutions		Total
Balance as of December 31, 2006	$	852		$	261		$	142		$	58	$	1,313
Acquisitions (see Note 6)		—			—			—			20		20
Divestitures (see Note 7)		—			—			(60	)		—		(60	)
Income tax adjustments (see Notes 14 and 17)		(31	)		(40	)		(30	)		—		(101	)
Foreign currency adjustments		—			—			1			—		1

Balance as of September 30, 2007	$	821		$	221		$	53		$	78	$	1,173

The Successor has elected the fourth quarter to perform its annual testing for goodwill impairment. The Company tests goodwill for impairment as of October 1^st of each fiscal year, or more frequently should circumstances change or events occur that would more likely than not reduce the fair value of a reporting unit below its carrying amount, as provided for in Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:


	Successor
	September 30, 2007			December 31, 2006
	(in millions)
Land	$	181		$	188
Buildings and leasehold improvements		470			470
Machinery and equipment		1,647			1,732
Construction in progress		162			171

		2,460			2,561
Accumulated depreciation		(235	)		(40	)

Net property, plant and equipment	$	2,225		$	2,521

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OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

5. PROPERTY, PLANT AND EQUIPMENT (continued)

In the third quarter of 2007, the Company recorded an impairment loss on property, plant and equipment in conjunction with the integration of manufacturing facilities associated with our acquisition of the Saint-Gobain Reinforcement and Composites business of $11 million, which includes the $2 million impairment discussed in Note 8. The loss was measured using prices for similar assets, and was recorded as a corporate charge to cost of sales on the Consolidated Statement of Earnings.

6. ACQUISITIONS

During the second quarter of 2007, the Company increased its ownership in Owens Corning India Limited (“OCIL”) from 60% to 78.5%. The purchase price was approximately $28 million and was recorded as an increase in goodwill of approximately $20 million, an increase in plant and equipment of approximately $1 million and a decrease in minority interest of approximately $7 million on its Consolidated Balance Sheet. OCIL is a growing, profitable business with a low cost production platform that supplies Composites Solutions’ customers in India and exports to other markets.

7. DIVESTITURES

In August 2007, the Company completed the sale of its Siding Solutions business, a component of its Other Building Materials and Services segment, for net proceeds of approximately $368 million. The sale was a result of the Company’s strategic review of this business. The Company recognized a pretax gain of approximately $122 million on the sale, which is inclusive of an estimated purchase price adjustment related to working capital. The divested business includes the Norandex/Reynolds distribution business and three siding manufacturing facilities. The results of operations for the Siding Solutions business and the gain on the sale are reported within discontinued operations in the Consolidated Statements of Earnings, and prior period Consolidated Statements of Earnings have been recast. The prior period Consolidated Balance Sheet and Consolidated Cash Flow Statement have not been recast.

The disposed assets and liabilities of the Siding Solutions business at the closing date of the sale included the following (in millions):


Current assets
Receivables, less allowance for doubtful accounts of $7		109
Inventories		86
Other current assets		5

Total current assets		200
Property, plant and equipment, net		56
Goodwill		60
Intangible assets		32

Total assets	$	348

Current liabilities
Accounts payable and accrued liabilities	$	90

Total current liabilities		90
Other long-term liabilities		12

Total liabilities	$	102

-12-

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

7. DIVESTITURES (continued)

Operating results of the Siding Solutions business were as follows (in millions):


	Successor			Predecessor			Successor			Predecessor
	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Net sales	$	150		$	231		$	529		$	682
Earnings from discontinued operations	$	16		$	13		$	28		$	26
Income tax expense	$	(5	)	$	(5	)	$	(10	)	$	(12	)

Earnings from discontinued operations, net taxes	$	11		$	8		$	18		$	14

In conjunction with the divesture of the Siding Solutions business, certain corporate costs allocated to the operations of that business were retained by the Company. Those costs, which were $4 million and $5 million for the three months ended September 30, 2007 and 2006, respectively and $14 million and $15 million, for the nine months ended September 30, 2007 and 2006, respectively, are included in the ongoing operations of the Company and have not been reclassified into discontinued operations.

In September 2007, the Company completed the sale of its Fabwel unit, a component of its Composite Solutions segment, for net proceeds of approximately $57 million, which is inclusive of an estimated contingent liability. The sale was a result of the Company’s strategic review of this business. The Company recognized a pretax loss of $15 million on the sale, which is included in discontinued operations on the Consolidated Statement of Earnings. The results of operations for Fabwel are reported within discontinued operations in the accompanying Consolidated Statements of Earnings, and prior period Consolidated Statements of Earnings have been recast. The prior period Consolidated Balance Sheet and Consolidated Cash Flow Statement have not been recast.

The disposed assets and liabilities of Fabwel at the closing date of the sale included the following (in millions):


Current assets
Receivables	$	7
Inventories		17

Total current assets		24
Property, plant and equipment		19
Intangible assets		33

Total assets	$	76

Accounts payable and accrued liabilities	$	4

Total liabilities	$	4

-13-

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

7. DIVESTITURES (continued)

Operating results of Fabwel were as follows (in millions):


	Successor			Predecessor		Successor			Predecessor
	Three Months Ended September 30,					Nine Months Ended September 30,
	2007			2006		2007			2006
Net sales	$	24		$	40	$	97		$	148
Earnings (loss) from discontinued operations	$	(5	)	$	1	$	(14	)	$	8
Income tax benefit (expense)	$	2		$	—	$	5		$	(3	)

Earnings (loss) from discontinued operations, net of taxes	$	(3	)	$	1	$	(9	)	$	5

In conjunction with the divesture of the Fabwel unit, certain corporate costs allocated to the operations of that business were retained by the Company. Those costs, which were less than $1 million for each of the three months ended September 30, 2007 and 2006, and $1 million for each of the nine months ended September 30, 2007 and 2006, are included in the ongoing operations of the Company and have not been reclassified into discontinued operations.

In the first quarter of 2007, the Company sold its remaining 40% ownership interest in Owens Corning South Africa (Pty) Ltd, for $12 million.

8. ASSETS AND LIABILITIES HELD FOR SALE

In the third quarter of 2007, the Company committed to a plan to sell composite manufacturing facilities located in Battice, Belgium; Birkeland, Norway; and assets located in Huntingdon, Pennsylvania to gain regulatory approval for the Company’s acquisition of Saint-Gobain’s Reinforcement and Composites business. In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the assets and liabilities of these facilities are reported as held for sale on the Consolidated Balance Sheet and are valued at the lower of book value or fair value less costs to sell. As a result of applying this statement, the Company recorded an impairment loss of $2 million to write down the fixed assets of the Huntingdon, Pennsylvania facility, which is included in cost of sales on the Consolidated Statement of Earnings. As discussed further in Note 20, the Huntingdon sale closed in October 2007. The remaining divestiture is subject to regulatory approval, and is expected to close during the first quarter of 2008. These facilities are included in the Company’s Composite Solutions segment.

-14-

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

8. ASSETS AND LIABILITIES HELD FOR SALE (continued)

As of September 30, 2007, the assets and liabilities held for sale consist of the following (in millions):


	Successor
	September 30, 2007
Current assets
Receivables, net	$	27
Inventories		27
Other current assets		1

Total current assets		55
Property, plant and equipment, net		221
Intangible assets, net		13

Total assets	$	289

Accounts payable and accrued liabilities	$	39

Total current liabilities		39
Other liabilities		1

Total liabilities	$	40

9. WARRANTIES

The Company records a liability for warranty obligations at the date the related products are sold. Adjustments are made as new information becomes available. A reconciliation of the warranty liabilities is as follows (in millions):


	Successor
	Nine Months Ended September 30, 2007
Beginning balance	$	50
Amounts accrued for current year		10
Adjustment of preexisting accrual estimates		5
Settlements of warranty claims		(20	)
Siding Solutions divesture		(13	)

Ending balance	$	32

10. RESTRUCTURING OF OPERATIONS AND OTHER CHARGES (CREDITS)

In the second half of 2006, we substantially completed the 2006 restructuring actions taken to close facilities, exit certain product lines and reduce operating costs. During the nine months ended September 30, 2007, the Company recorded a credit of $3 million related to lower estimated employee severance cost for employee separations in the 2006 restructuring actions. We do not expect to incur any additional costs related to the 2006 actions and final payments are estimated to occur within the fourth quarter of 2007.

-15-

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

10. RESTRUCTURING OF OPERATIONS AND OTHER CHARGES (CREDITS) (continued)

The following table summarizes the status of the unpaid liabilities from the Company’s 2006 restructuring activities (in millions):


	Successor
	Nine Months Ended September 30, 2007
Beginning balance	$	29
Amounts credited in current year		(3	)
Cash payments		(23	)

Ending balance	$	3

11. DEBT

Details of our outstanding long-term debt at September 30, 2007, and December 31, 2006, are as follows (in millions):


	Successor
	September 30, 2007			December 31, 2006
6.50% Senior Notes, net of discount, due 2016	$	648		$	648
7.00% Senior Notes, net of discount, due 2036		539			539
Senior Term Loan, maturing in 2011		600			—
Revolving Credit Facility, maturing in 2011		—			—
Internal Revenue Service note, maturing in 2012, 8.0%		—			89
Various capital leases, due through 2050		24			20
Other floating rate debt, maturing through 2017		23			35
Other fixed rate debt, with maturities up to 2011, at rates from 5.0% to 11.0%		3			4

		1,837			1,335
Less – current portion		(10	)		(39	)

Total long-term debt	$	1,827		$	1,296

Senior Notes

We issued $1.2 billion of senior notes (collectively, the “Senior Notes”) concurrently with our emergence from bankruptcy on the Effective Date. The proceeds of these notes were used to pay certain unsecured and administrative claims, finance general working capital needs and for general corporate purposes.

The senior notes were initially offered and sold to qualified institutional buyers in reliance on Rule 144A of the Securities Act. In the second quarter of 2007, we filed a registration statement with the Securities and Exchange Commission for an offering pursuant to which notes substantially identical to the original notes were offered in exchange for the then outstanding notes. Such offering was completed in late June 2007, and all of the original notes were exchanged for registered notes (collectively, the “Senior Notes”).

-16-

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

11. DEBT (continued)

The Senior Notes consist of $650 million aggregate principal amount of 6.50% notes due December 1, 2016 and $550 million aggregate principal amount of 7.00% notes due December 1, 2036, with effective interest rates of 6.62% and 7.23%, respectively. Interest on each series of notes is payable on June 1 and December 1 of each year, beginning on June 1, 2007.

The Senior Notes are general unsecured obligations of the Company and rank pari passu with all existing and future unsecured senior indebtedness of the Company. The Senior Notes rank senior in right of payment to any subordinated indebtedness of the Company and are effectively subordinated to the Company’s secured indebtedness, to the extent of the value of the collateral securing such indebtedness.

The Senior Notes are also guaranteed by each of the Company’s current and future material wholly-owned United States subsidiaries that is a borrower or a guarantor under the Credit Agreement (defined below). Each guaranty of the Senior Notes is a general unsecured obligation of the guarantors and ranks pari passu with all existing and future unsecured senior indebtedness of the subsidiary guarantors. The guarantees of the Senior Notes rank senior in right of payment to any subordinated indebtedness of the guarantors and are effectively subordinated to the guarantor’s secured indebtedness, to the extent of the value of the collateral securing such indebtedness.

Owens Corning has the option to redeem all or part of the Senior Notes at any time at a “make whole” redemption price. We are subject to certain covenants in connection with the issuance of the Senior Notes.

Senior Credit Facilities

On October 31, 2006, the Company entered into a credit agreement (the “Credit Agreement”) with Citibank, N.A., as administrative agent and various lenders, which are parties thereto. The Credit Agreement created two credit facilities (the “Credit Facilities”), consisting of:

•

a $1.0 billion multi-currency senior revolving credit facility; and

•

a $600 million delayed-draw senior term loan facility.

The Credit Facilities each have a five-year maturity. Proceeds from the revolving credit facility are available for general working capital needs and for other general corporate purposes. The term loan was used to partially fund payments to the Owens Corning/Fibreboard Asbestos Personal Injury Trust (the “524(g) Trust”) in January of 2007 (see Note 19). The revolving credit facility is comprised of a U.S. facility, a Canadian facility and a European facility. The Credit Agreement allows the Company to borrow under multiple options, which provide for varying terms and interest rates.

Any obligations under the Credit Facilities are unconditionally and irrevocably guaranteed by the Company’s current and future material wholly-owned United States subsidiaries. The Company had no borrowings and $92 million of letters of credit outstanding under the revolving credit facility at September 30, 2007.

The Credit Agreement also requires payment to the lenders of a commitment fee based on the average daily unused commitments under the Credit Facilities at rates based upon the applicable corporate credit ratings of the Company. Voluntary prepayments of the loans and voluntary reductions of the unutilized portion of the commitments under the Credit Facilities are permissible without penalty, subject to certain conditions.

-17-

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

11. DEBT (continued)

The Credit Agreement contains financial, affirmative and negative covenants that we believe are usual and customary for a senior unsecured credit agreement.

Short Term Debt

At September 30, 2007, and December 31, 2006, short-term borrowings were $19 million and $1.401 billion, respectively. The December 31, 2006, balance included a note payable to the 524(g) Trust of $1.390 billion, which was paid in January of 2007 (see Note 19). The remaining short-term borrowings for both periods consisted of various operating lines of credit and working capital facilities maintained by certain of the Company’s non-U.S. subsidiaries. Certain of these borrowings are collateralized by receivables, inventories or property. The borrowing facilities are typically for one-year renewable terms. The weighted average interest rate on short-term borrowings was approximately 7.5% and 7.0% at September 30, 2007, and December 31, 2006, respectively.

12. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

Pension Plans

The Company has several defined benefit pension plans covering most employees. Under the plans, pension benefits are based on an employee’s years of service and, for certain categories of employees, qualifying compensation. Company contributions to these pension plans are determined by an independent actuary. Contributions to the U.S. pension plan are based on amounts needed to meet or exceed minimum funding requirements. The unrecognized cost of retroactive amendments and actuarial gains and losses are amortized over the average future service period of plan participants expected to receive benefits.

The following tables provide information regarding pension expense recognized during the year (in millions):


	Successor									Predecessor
	Three Months Ended September 30, 2007									Three Months Ended September 30, 2006
	U.S.			Non-U.S.			Total			U.S.			Non-U.S.			Total
Components of Net Periodic Pension Cost

Service cost	$	6		$	2		$	8		$	5		$	2		$	7
Interest cost		14			6			20			14			6			20
Expected return on plan assets		(17	)		(7	)		(24	)		(14	)		(6	)		(20	)
Amortization of actuarial loss		—			—			—			10			2			12
Amortization of prior service cost		—			—			—			2			—			2

Net periodic pension cost	$	3		$	1		$	4		$	17		$	4		$	21

-18-

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

12. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (continued)



	Successor									Predecessor
	Nine Months Ended September 30, 2007									Nine Months Ended September 30, 2006
	U.S.			Non-U.S.			Total			U.S.			Non-U.S.			Total
Components of Net Periodic Pension Cost

Service cost	$	17		$	4		$	21		$	16		$	4		$	20
Interest cost		43			19			62			43			16			59
Expected return on plan assets		(50	)		(21	)		(71	)		(43	)		(16	)		(59	)
Amortization of transition amount		—			—			—			—			(1	)		(1	)
Amortization of actuarial loss		—			—			—			31			6			37
Amortization of prior service cost		—			—			—			5			—			5

Net periodic pension cost	$	10		$	2		$	12		$	52		$	9		$	61

Owens Corning expects to contribute approximately $105 million in cash to the U.S. pension plans and approximately $15 million to non-U.S. plans during 2007. The Company made cash contributions of approximately $117 million to the plans during the nine months ended September 30, 2007.

Postemployment and Postretirement Benefits Other than Pension Plans

The Company and its subsidiaries maintain health care and life insurance benefit plans for certain retired employees and their dependents. The health care plans in the U.S. are non-funded and pay either (1) stated percentages of covered medically necessary expenses, after subtracting payments by Medicare or other providers and after stated deductibles have been met, or (2) fixed amounts of medical expense reimbursement.

The following table provides the components of net periodic benefit cost for aggregated U.S. and non-U.S. Plans for the periods indicated (in millions):


	Successor		Predecessor			Successor		Predecessor
	Three Months Ended September 30,					Nine Months Ended September 30,
	2007		2006			2007		2006
Components of Net Periodic Benefit Cost

Service cost	$	1	$	2		$	3	$	4
Interest cost		5		5			14		15
Amortization of loss		—		—			—		1
Amortization of prior service cost		—		(3	)		—		(10	)

Net periodic benefit cost	$	6	$	4		$	17	$	10

-19-

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

13. STOCK COMPENSATION

On October 31, 2006, all stock and stock options of the Predecessor were extinguished in accordance with the plan of reorganization (the “Plan”) confirmed as a part of the Debtors’ emergence from Chapter 11 bankruptcy proceedings.

2006 Stock Plan

In conjunction with the confirmation of the Plan, the Company’s 2006 Stock Plan was approved by the United States Bankruptcy Court for the District of Delaware (the “USBC”). In accordance with Section 303 of the Delaware General Corporation Law, such approval constituted stockholder approval of the 2006 Stock Plan. The 2006 Stock Plan became effective on October 31, 2006, the date that the Debtors emerged from Chapter 11 Bankruptcy.

The 2006 Stock Plan authorizes grants of stock options, stock appreciation rights, restricted stock awards, restricted stock units, bonus stock awards and performance stock awards to be made pursuant to the plan. At September 30, 2007, the maximum number of shares remaining available under the 2006 Stock Plan for all stock awards was 3,267,082 shares.

Stock Options

The Company granted stock options under its employee emergence equity program and its executive compensation plan. The Company calculates a weighted-average grant date fair value, using a Black-Scholes valuation model for options granted. No stock options were exercised and 69,470 were granted during the nine months ended September 30, 2007. The weighted-average grant date fair value of stock options granted during the nine months ended September 30, 2007 was $9.28.

The following table summarizes the assumptions that were used in the Company’s Black-Scholes valuation model to estimate the grant date fair value of options granted:


	Successor
	Nine Months Ended September 30, 2007
Expected volatility	33.30	%
Expected dividends	1.50	%
Expected term (in years)	6.5
Risk-free rate	4.30	%

In general, the exercise price of each option awarded under the Plan equals the market price of the Company’s common stock on the date of grant and an option’s maximum term is 10 years. Shares issued from the exercise of options are recorded in the common stock accounts at the option price. The awards and vesting periods of such awards are determined at the discretion of the Compensation Committee of the Board of Directors. The volatility assumption was based on a benchmark study of our peers.

-20-

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

13. STOCK COMPENSATION (continued)

The following table summarizes our share option activity during the Successor nine months ended September 30, 2007:


Successor	Number of Shares		Weighted- Average Exercise Price
Outstanding at December 31, 2006	2,123,100		$	30.00
Options granted	69,470		$	26.99
Options exercised	—			—
Options forfeited	(26,400	)	$	30.00

Outstanding at September 30, 2007	2,166,170		$	29.90

The following table summarizes information about options outstanding and exercisable at September 30, 2007:


		Weighted-Average
Range of Exercise Prices	Options Outstanding	Remaining Contractual Life	Exercise Price	Options Exercisable	Weighted- Averaged Exercise Price
$26.99 – $30.00	2,166,170	9.08	$ 29.90	—	—

During the nine months ended September 30, 2007, the Company recognized expense of $6 million related to the Company’s stock options, which was recorded under the caption employee emergence equity program on the Consolidated Statements of Earnings. As of September 30, 2007, there was $13 million of total unrecognized compensation cost related to stock options awards. There was no intrinsic value of the options outstanding as of September 30, 2007.

Restricted Stock Awards and Restricted Stock Units

The Company granted restricted stock awards and restricted stock units under its employee emergence equity program, Board of Director compensation plan, and its long-term incentive plan (“LTIP”). Compensation expense for restricted stock is measured based on the market price of the stock on the date of grant and is recognized on a straight-line basis over the vesting period. Stock restrictions are subject to alternate vesting plans for death, disability, approved early retirement and involuntary termination, over various periods ending in 2009.

A summary of the status of the Company’s plans that had restricted stock issued as of September 30, 2007, and changes during the nine months ended September 30, 2007, are presented below:


Successor	Number of Shares		Weighted- Average Grant- Date Fair Value
Outstanding at December 31, 2006	3,030,150		$	30.00
Granted	299,833		$	32.47
Vested	(1,800	)	$	30.00
Forfeited	(140,195	)	$	30.00

Outstanding at September 30, 2007	3,187,988		$	30.23

-21-

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

13. STOCK COMPENSATION (continued)

During the nine months ended September 30, 2007, the Company recognized expense of $24 million related to the Company’s restricted stock, of which $22 million was recorded under the caption employee emergence equity program on the Consolidated Statements of Earnings. The Company previously recorded $3 million in restricted stock expense related to its fiscal 2006 restructuring activities. As of September 30, 2007, there was $49 million of total unrecognized compensation cost related to restricted stock. That cost is expected to be recognized over a weighted average period of 2.14 years. The total fair value of shares vested during the nine months ended September 30, 2007, was less than $1 million.

Performance Stock Awards and Performance Stock Units

The Company grants performance stock awards and performance stock units as a part of its LTIP. In the second quarter of 2007, the Company granted performance stock, of which fifty percent will be settled in stock and fifty percent will be settled in cash. The amount of the performance stock is contingent on meeting various company-wide performance goals, including cumulative earnings per share. Compensation expense for performance stock settled in stock is measured based on the market price of the stock on the date of grant and is recognized on a straight-line basis over the vesting period. Compensation expense for performance stock settled in cash is measured based on the market price of the stock at the end of each quarter and is recognized on a straight-line basis over the vesting period. The initial valuation of all performance stock granted assumes that performance goals will be achieved. This assumption is monitored each quarter and if it becomes probable that such goals will not be achieved or will be exceeded, compensation cost recognized will be adjusted and previous surplus compensation cost recognized will be reversed or additional cost will be recognized. This assumption was adjusted during the quarter ended September 30, 2007 due to significantly weaker than expected market conditions, which resulted in a downward adjustment to performance-based compensation expense. Stock restrictions are subject to alternate vesting plans for death, disability, approved early retirement and involuntary termination, over various periods ending in 2009.

A summary of the status of the Company’s plans that had performance stock issued as of September 30, 2007, and changes during the nine months ended September 30, 2007, are presented below. The weighted-average grant date fair value for performance stock issued in 2007 that will be settled in stock is $34.06.


Successor		Number of Shares
Outstanding at December 31, 2006		—
Granted		226,460
Vested		—
Forfeited		—

Outstanding at September 30, 2007		226,460

During the nine months ended September 30, 2007, the Company recognized expense of $2 million related to the Company’s performance stock, of which approximately $1 million relates to the retirement of certain employees. As of September 30, 2007, there was $4 million of total unrecognized compensation cost related to performance stock. That cost is expected to be recognized over a weighted average period of 2.3 years.

-22-

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

14. CONTINGENT LIABILITIES AND OTHER MATTERS

Bankruptcy Related-Matters

In accordance with the terms of the Plan, the Company established a Disputed Distribution Reserve (as defined in the Plan) funded in the initial amount of approximately $85 million, which is reflected as restricted cash on the Consolidated Balance Sheet as of December 31, 2006, for the potential payment of certain non-tax claims against the Debtors that were disputed as of the Effective Date. In the nine months ended 2007, approximately $31 million of the claims were settled. The remaining reserve, in the amount of $54 million at September 30, 2007, is reflected as restricted cash on the Consolidated Balance Sheet as of September 30, 2007. See Note 19 to the Consolidated Financial Statements for a discussion of certain other bankruptcy-related matters.

Tax Matters

Owens Corning’s federal income tax returns typically are audited by the IRS in multi-year audit cycles. The audit for the years 1992-1995 was completed in late 2000. Due to OCD’s Chapter 11 filing in 2000, the IRS also accelerated and completed the audit for the years 1996-1999 by March of 2001. As a result of these audits and unresolved issues from prior audit cycles, the IRS asserted claims for unpaid income taxes plus interest thereon. As a result of settlement negotiations, in the fourth quarter of 2004 the Company and the IRS reached an agreement in principle to settle such claims in return for total settlement payments by the Company of approximately $69 million, plus interest. The settlement was approved by the USBC by Order dated November 15, 2004, and by the Congressional Joint Committee on Taxation on May 17, 2005. The Company estimated the interest applicable to the settlement to be approximately $30 million. However, the IRS computed such interest to be approximately $71 million. In the second quarter of 2007, the Company and the IRS reconciled the differences between the two interest computations. The IRS substantively accepted the position of the Company and, accordingly, reduced the interest by approximately $38 million, which was recorded as a reduction to goodwill and long-term debt on the Consolidated Balance Sheets. The Company subsequently paid off the IRS Note in the second quarter of 2007.

Securities and Certain Other Litigation

On or about September 2, 2003, certain of OCD’s directors and officers were named as defendants in a lawsuit captioned Kensington International Limited, et al. v. Glen Hiner, et al. in the Supreme Court of the State of New York, County of New York. OCD is not named in the lawsuit. The suit, which was brought by Kensington International Limited and Springfield Associates, LLC, two assignees of lenders under OCD’s pre-petition credit facility, alleged causes of action (1) against all defendants for breach of fiduciary duty and (2) against certain defendants for fraud in connection with certain loans made under the pre-petition credit facility. The complaint sought an unspecified amount in damages. On February 7, 2005, all defendants filed a joint motion to dismiss. A hearing on the motion to dismiss was held on May 2, 2005 and the motion to dismiss was granted by the USBC on August 22, 2006. On October 20, 2006, the New York court entered an order and judgment dismissing the New York complaint in its entirety and on November 22, 2006, the plaintiffs filed an appeal of the order and judgment with the First Department of the New York Supreme Court, Appellate Division. On May 31, 2007, the Supreme Court, Appellate Division, dismissed plaintiffs’ appeal. The Court ruled that as a result of distributions made under OCD’s plan of reorganization, the plaintiffs no longer have a claim for damages and accordingly, their claim is moot. On July 11, 2007, plaintiffs filed a Notice of Motion For Permission To Appeal to the Court of Appeals of the State of New York. On October 11, 2007, the Court of Appeals of the State of New York denied the plaintiffs’ appeal.

-23-

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

14. CONTINGENT LIABILITIES AND OTHER MATTERS (continued)

On September 1, 2006, various members of OCD’s Investment Review Committee were named as defendants in a lawsuit captioned Brown v. Owens Corning Investment Review Committee, et al., in the United States District Court for the Northern District of Ohio (Western Division). Neither the Company nor OCD is named in the lawsuit but such individuals would have a contingent indemnification claim against OCD. The suit, brought by former employees of OCD, was brought under ERISA alleging that the defendants breached their fiduciary duties to certain pension benefit plans and to class members in connection with the investments in an OCD company common stock fund. A motion to dismiss was filed on behalf of the defendants on March 5, 2007.

Environmental Liabilities

We have been deemed by the Environmental Protection Agency (“EPA”) to be a Potentially Responsible Party (“PRP”) with respect to certain sites under the Comprehensive Environmental Response Compensation and Liability Act. We have also been deemed a PRP under similar state or local laws and in other instances other PRPs have brought suits against us as a PRP for contribution under such federal, state, or local laws. At September 30, 2007, we had environmental remediation liabilities as a PRP at 41 sites. Our environmental liabilities at 23 of these sites will be resolved pursuant to the terms of the Plan and will be paid out of the Non-Tax Bankruptcy Reserve. At the other 18 sites, we have a continuing legal obligation to either complete remedial actions or contribute to the completion of remedial actions as part of a group of PRPs. For these sites we estimate a reserve in accordance with accounting principles generally accepted in the United States to reflect environmental liabilities that have been asserted or are probable of assertion, in which liabilities are probable and reasonably estimable. At September 30, 2007, our reserve for such liabilities was $8 million, of which $4 million is recorded in the Non-Tax Bankruptcy Reserve as discussed in Note 19. We will continue to review our environmental reserve and make such adjustments as appropriate.

-24-

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

15. EARNINGS PER SHARE

The following table reconciles the weighted average number of shares used in the basic earnings per share calculation to the weighted average number of shares used to compute diluted earnings per share (in millions, except per share amounts):


	Successor		Predecessor		Successor		Predecessor
	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Earnings from continuing operations	$	38	$	53	$	67	$	357
Earnings from discontinued operations, net of tax		74		9		75		19

Net earnings	$	112	$	62	$	142	$	376

Weighted-average number of shares outstanding used for basic earnings per share		128.1		55.3		128.1		55.3
Non-vested restricted shares		2.7		—		2.7		—
Shares from assumed conversion of preferred securities		—		4.6		—		4.6

Weighted-average number of shares outstanding and common equivalent shares used for diluted earnings per share		130.8		59.9		130.8		59.9

Basic earnings per common share
Basic earnings from continuing operations	$	0.29	$	0.96	$	0.52	$	6.46
Basic earnings from discontinued operations		0.58		0.16		0.59		0.34

Basic net earnings per share	$	0.87	$	1.12	$	1.11	$	6.80

Diluted earnings per common share
Diluted earnings from continuing operations	$	0.29	$	0.88	$	0.51	$	5.96
Diluted earnings from discontinued operations		0.57		0.16		0.58		0.32

Diluted net earnings per share	$	0.86	$	1.04	$	1.09	$	6.28

For the successor nine months ended September 30, 2007, the number of shares used in the calculation of diluted earnings per share did not include 0.3 million common equivalent shares of restricted stock units, 2.2 million common equivalent shares of deferred awards, 15.7 million common equivalent shares from Series A Warrants and 7.8 million common equivalent shares from Series B Warrants due to their anti-dilutive effect.

-25-

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

16. COMPREHENSIVE EARNINGS

The following table presents comprehensive earnings for the periods indicated (in millions):


	Successor			Predecessor			Successor		Predecessor
	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007		2006
Net earnings	$	112		$	62		$	142	$	376
Currency translation adjustment		31			—			59		30
Pension and other postretirement adjustment		—			—			1		(5	)
Deferred income (loss) on hedging		(1	)		(8	)		3		(28	)

Comprehensive earnings	$	142		$	54		$	205	$	373

17. INCOME TAXES

The Successor’s income tax expense on continuing operations for the nine months ended September 30, 2007, was $30 million, which represents a 30% effective tax rate. The difference between the 30% effective rate and the Federal statutory tax rate of 35% was primarily due to the effect of tax savings resulting from various initiatives implemented in 2006 and 2007.

During the third quarter, the Company filed its 2006 federal income tax returns. After this filing, the Company’s net operating loss relating to 2006 increased from $2.8 million to $3.1 billion. This increase was primarily related to changes in tax planning strategies and other changes in estimates. This resulted in an increase of approximately $60 million in deferred income taxes and a corresponding reduction in goodwill.

On an on-going basis, the Company records valuation allowances related to realization of certain tax assets. In light of the Predecessor’s financial position and Chapter 11 proceedings, the Predecessor decreased its valuation allowance for tax assets related to asbestos-related liabilities by $40 million during the first quarter of 2006, resulting in a $40 million tax benefit in the quarter and an effective tax rate of negative 30%. In the second quarter of 2006, the Predecessor further decreased its valuation allowance by an additional $225 million for tax assets related to asbestos-related liabilities, resulting in a $225 million tax benefit in the quarter. As a result of these items, the Predecessor had an effective tax rate of negative 90% for the first nine months of 2006.

On May 18, 2006, new Texas state tax legislation, which substantially changed the state’s tax system, was enacted. The legislation impacted the Predecessor’s ability to utilize its deferred tax assets, including previously recorded state of Texas net operating loss carry forwards. As a result of this legislation, the Predecessor incurred $10 million of additional tax expense during the second quarter of 2006 to record its deferred tax assets and net operating loss carry forwards at realizable value.

18. ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements.” This statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within that fiscal year. The Company is in the process of evaluating the impact of adopting this statement.

-26-

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FAS 115.” This statement permits entities to choose to measure many financial instruments and certain other items at fair value. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, including interim periods within that fiscal year. The Company is in the process of evaluating the impact of adopting this statement.

19. EMERGENCE FROM CHAPTER 11 PROCEEDINGS

Background

On October 5, 2000 (the “Petition Date”), OCD and the 17 United States subsidiaries listed below (collectively with OCD, the “Debtors”) filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the USBC:


CDC Corporation		Integrex Testing Systems LLC
Engineered Yarns America, Inc.		HOMExperts LLC
Falcon Foam Corporation		Jefferson Holdings, Inc.
Integrex		Owens-Corning Fiberglas Technology, Inc.
Fibreboard Corporation		Owens-Corning HT, Inc.
Exterior Systems, Inc.		Owens-Corning Overseas Holdings, Inc.
Integrex Ventures LLC		Owens Corning Remodeling Systems, LLC
Integrex Professional Services LLC		Soltech, Inc.
Integrex Supply Chain Solutions LLC

Until October 31, 2006, the date on which the Debtors emerged from bankruptcy, the Debtors operated their businesses as debtors-in-possession in accordance with the Bankruptcy Code. The Chapter 11 cases of the Debtors (collectively, the “Chapter 11 Cases”) were jointly administered under Case No. 00-3837 (JKF). The Debtors filed for relief under Chapter 11 of the Bankruptcy Code to address the growing demands on cash flow resulting from the multi-billion dollars of asbestos personal injury claims that had been asserted against OCD and Fibreboard Corporation.

Under the terms of the Plan and related Confirmation Order, asbestos personal injury claims against each of OCD and Fibreboard will be administered and distributions on account of such claims will be made, exclusively from the 524(g) Trust that has been established and funded pursuant to the Plan. In addition, all asbestos property damage claims against OCD or Fibreboard either (i) have been resolved, (ii) will be resolved pursuant to the Plan, along with certain other unsecured claims for an aggregate amount within the Company’s Non-Tax Bankruptcy Reserve (defined below), or (iii) are barred pursuant to the Plan and Confirmation Order. Accordingly, other than the limited number and value of property damage claims being resolved pursuant to clause (ii) above, the Company has no further asbestos liabilities.

Pursuant to the terms of the Plan, the Company is obligated to make certain additional payments to certain creditors, including certain payments to holders of administrative expense priority claims and professional advisors in the Chapter 11 Cases. The Company had reserved approximately $64 million as of September 30, 2007, to pay remaining claims in the Bankruptcy of which approximately $62 million relate to non-tax claims (the “Non-Tax Bankruptcy Reserve”). Pursuant to the Plan, the Company has established a Disputed Distribution Reserve, funded in the amount of approximately $54 million as of September 30, 2007, which is reflected as restricted cash in the Consolidated Balance Sheet, for the potential payment of certain non-tax claims against the Debtors that were disputed as of the Effective Date.

-27-

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

19. EMERGENCE FROM CHAPTER 11 PROCEEDINGS (continued)

The amount for Chapter 11 related reorganization items in the Consolidated Statements of Earnings consist of the following (in millions):


	Successor		Predecessor			Successor		Predecessor
	Three Months Ended September 30,					Nine Months Ended September 30,
	2007		2006			2007		2006
Professional fees	$	1	$	37		$	4	$	87
Payroll and compensation		—		2			—		10
Investment income		—		(39	)		—		(70	)
Other, net		—		1			—		1

Total	$	1	$	1		$	4	$	28

20. SUBSEQUENT EVENTS

On October 31, 2007, the Company completed the acquisition of Saint-Gobain’s Reinforcement and Composites business for $640 million in cash, accelerating the Company’s global growth strategy by enhancing its presence in fast-growing emerging markets around the world. Under prior ownership, the acquired business leased certain metals used in its production tooling. In the near term, Owens Corning expects to continue the leasing of such metals.

To gain regulatory approval for the acquisition of Saint-Gobain’s Reinforcement and Composites business, the Company divested its Continuous Filament Mat business in Huntingdon, Pennsylvania, as well as certain related production assets in Anderson, South Carolina, on October 26, 2007.

21. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

The following Condensed Consolidating Financial Statements present the financial information required with respect to those entities which guarantee certain of the Company’s debt. The Condensed Consolidating Financial Statements are presented on the equity method. Under this method, the investments in subsidiaries are recorded at cost and adjusted for the Company’s share of the subsidiaries’ cumulative results of operations, capital contributions, distributions and other equity changes. The principal elimination entries eliminate investment in subsidiaries and intercompany balances and transactions.

Guarantor and Nonguarantor Financial Statements

As described in Note 11, Owens Corning issued $1.2 billion aggregate principal amount of Senior Notes. The Senior Notes and the Senior Credit Facilities are guaranteed, fully, unconditionally and jointly and severally, by each of Owens Corning’s current and future 100% owned material domestic subsidiaries that are a borrower or a guarantor under Owens Corning’s Credit Facilities, which permits changes to the named guarantors in certain situations (collectively, the “Guarantor Subsidiaries”). The remaining subsidiaries have not guaranteed the Senior Notes and the Senior Credit Facilities (collectively, the “Nonguarantor Subsidiaries”). As disclosed in Note 1, Owens Corning became the holding company and ultimate parent company of OCD and the other Owens Corning companies on October 31, 2006, as a part of the restructuring that was conducted in connection with OCD’s emergence from bankruptcy.

-28-

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

21. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EARNINGS (LOSS)

FOR THE SUCCESSOR THREE MONTHS ENDED SEPTEMBER 30, 2007

(in millions)


	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
NET SALES	$	—		$	937		$	390		$	(59	)	$	1,268
COST OF SALES		—			814			306			(59	)		1,061

Gross Margin		—			123			84			—			207

OPERATING EXPENSES
Marketing and administrative expenses		2			80			20						102
Science and technology expenses		—			13			2						15
Restructure costs		—			(1	)		—						(1	)
Chapter 11 related reorganization items		—			1			—						1
Employee emergence equity program		—			7			1						8
Other		16			(37	)		20						(1	)

Total operating expenses		18			63			43						124

EARNINGS FROM CONTINUING OPERATIONS BEFORE INTEREST AND TAXES		(18	)		60			41						83
Interest (income) expense, net		33			(7	)		1			—			27

EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES		(51	)		67			40						56
Income tax expense		(20	)		26			10			—			16
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST AND EQUITY IN NET EARNINGS (LOSS) OF AFFILIATES		(31	)		41			30						40
Equity in net earnings (loss) of subsidiaries		143			48			—			(191	)		—
Minority interest and equity in net earnings (loss) of affiliates		—			(1	)		(1	)		—			(2	)

EARNINGS FROM CONTINUING OPERATIONS		112			88			29			(191	)		38
Discontinued operations
Earnings from discontinued operations, net of tax		—			9			(1	)					8
Gain on sale of discontinued operations, net of tax		—			46			20						66

Total earnings from discontinued operations		—			55			19						74

NET EARNINGS (LOSS)	$	112		$	143		$	48		$	(191	)	$	112

-29-

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

21. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EARNINGS (LOSS)

FOR THE SUCCESSOR THREE MONTHS ENDED SEPTEMBER 30, 2006

(in millions)


	Parent		Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
NET SALES	$	—	$	1,100		$	377		$	(91	)	$	1,386
COST OF SALES		—		915			295			(91	)		1,119

Gross Margin		—		185			82			—			267

OPERATING EXPENSES
Marketing and administrative expenses		—		111			19						130
Science and technology expenses		—		11			2						13
Restructure costs		—		10			—						10
Chapter 11 related reorganization items		—		1			—						1
Asbestos litigation recoveries		—		(10	)		—						(10	)
Employee emergence equity program		—		—			—						—
Other		—		(48	)		26						(22	)

Total operating expenses		—		75			47			—			122

EARNINGS FROM CONTINUING OPERATIONS BEFORE INTEREST AND TAXES		—		110			35			—			145
Interest (income) expense, net		—		69			2						71

EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES		—		41			33			—			74
Income tax expense		—		25			(5	)					20
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST AND EQUITY IN NET EARNINGS (LOSS) OF AFFILIATES		—		16			38			—			54
Equity in net earnings (loss) of subsidiaries		—		35			—			(35	)		—
Minority interest and equity in net earnings (loss) of affiliates		—		1			(2	)					(1	)

EARNINGS FROM CONTINUING OPERATIONS		—		52			36			(35	)		53
Discontinued operations
Earnings from discontinued operations, net of tax		—		10			(1	)					9
Gain on sale of discontinued operations, net of tax		—		—			—						—

Total earnings from discontinued operations		—		10			(1	)					9

NET EARNINGS (LOSS)	$	—	$	62		$	35		$	(35	)	$	62

-30-

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

21. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EARNINGS (LOSS)

FOR THE SUCCESSOR NINE MONTHS ENDED SEPTEMBER 30, 2007

(in millions)


	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
NET SALES	$	—		$	2,743		$	1,122		$	(191	)	$	3,674
COST OF SALES		—			2,360			880			(191	)		3,049

Gross Margin		—			383			242			—			625

OPERATING EXPENSES
Marketing and administrative expenses		71			235			59						365
Science and technology expenses		—			41			5						46
Restructure costs		—			(3	)		—						(3	)
Chapter 11 related reorganization items		—			3			1						4
Employee emergence equity program		3			20			5						28
Other		(75	)		15			54						(6	)

Total operating expenses		(1	)		311			124						434

EARNINGS FROM CONTINUING OPERATIONS BEFORE INTEREST AND TAXES		1			72			118						191
Interest (income) expense, net		97			(9	)		2			—			90

EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES		(96	)		81			116						101
Income tax expense		(27	)		25			32			—			30
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST AND EQUITY IN NET EARNINGS (LOSS) OF AFFILIATES		(69	)		56			84						71
Equity in net earnings (loss) of subsidiaries		211			102			—			(313	)		—
Minority interest and equity in net earnings (loss) of affiliates		—			(2	)		(2	)		—			(4	)

EARNINGS FROM CONTINUING OPERATIONS		142			156			82			(313	)		67
Discontinued operations
Earnings from discontinued operations, net of tax		—			9			—						9
Gain on sale of discontinued operations, net of tax		—			46			20						66

Total earnings from discontinued operations		—			55			20						75

NET EARNINGS (LOSS)	$	142		$	211		$	102		$	(313	)	$	142

-31-

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

21. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

OWENS CORNING AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EARNINGS (LOSS)

FOR THE SUCCESSOR NINE MONTHS ENDED SEPTEMBER 30, 2006

(in millions)


	Parent		Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
NET SALES	$	—	$	3,385		$	1,038		$	(274	)	$	4,149
COST OF SALES		—		2,807			828			(274	)		3,361

Gross Margin		—		578			210			—			788

OPERATING EXPENSES
Marketing and administrative expenses		—		315			62						377
Science and technology expenses		—		36			6						42
Restructure costs		—		10			—						10
Chapter 11 related reorganization items		—		28			—						28
Asbestos litigation recoveries		—		(13	)		—						(13	)
Employee emergence equity program		—		—			—						—
Other		—		(123	)		59						(64	)

Total operating expenses		—		253			127			—			380

EARNINGS FROM CONTINUING OPERATIONS BEFORE INTEREST AND TAXES		—		325			83			—			408
Interest (income) expense, net		—		218			4			—			222

EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES		—		107			79			—			186
Income tax expense		—		(196	)		27						(169	)
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST AND EQUITY IN NET EARNINGS (LOSS) OF AFFILIATES		—		303			52			—			355
Equity in net earnings (loss) of subsidiaries		—		49			—			(49	)		—
Minority interest and equity in net earnings (loss) of affiliates		—		3			(1	)		—			2

EARNINGS FROM CONTINUING OPERATIONS		—		355			51			(49	)		357
Discontinued operations
Earnings from discontinued operations, net of tax		—		21			(2	)					19
Gain on sale of discontinued operations, net of tax		—		—			—						—

Total earnings from discontinued operations		—		21			(2	)					19

NET EARNINGS (LOSS)	$	—	$	376		$	49		$	(49	)	$	376

-32-

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

21. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

OWENS CORNING AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF THE SUCCESSOR SEPTEMBER 30, 2007

(in millions)


	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	69		$	124	$	257		$			$	450
Receivables, net		—			367		257						624
Due from affiliates		106			618		171			(895	)		—
Inventories		—			511		151						662
Restricted cash – disputed claims reserve		—			54		—						54
Assets held for sale – current		—			2		53						55
Other current assets		—			25		40						65

Total current assets		175			1,701		929			(895	)		1,910

Investment in subsidiaries		5,450			1,043		—			(6,493	)		—
Due from affiliates		—			28		—			(28	)		—
Property, plant and equipment		474			1,243		508						2,225
Goodwill		—			1,141		32						1,173
Intangible assets		—			1,100		94						1,194
Deferred income taxes		13			558		(17	)					554
Assets held for sale – non-current		—			1		233						234
Other non-current assets		23			75		120						218

TOTAL ASSETS	$	6,135		$	6,890	$	1,899		$	(7,416	)	$	7,508

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT
Accounts payable and accrued liabilities	$	(38	)	$	581	$	319		$			$	862
Due from affiliates		424			245		226			(895	)		—
Accrued interest		36			2		1						39
Short-term debt		—			—		19						19
Long-term debt – current portion		—			1		9						10
Liabilities held for sale – current		—			—		39						39

Total current liabilities		422			829		613			(895	)		969

Long-term debt, net of current portion		1,788			20		19						1,827
Due from affiliates		—			—		28			(28	)		—
Pension plan liability		—			99		113						212
Other employee benefits liability		—			300		29						329
Commitments and contingencies		—			—		—						—
Liabilities held for sale – non-current		—			—		1						1
Other liabilities		—			192		15						207
Minority interest		—			—		38						38
STOCKHOLDERS’ EQUITY
Successor preferred stock		—			—		—						—
Successor common stock		1			—		—						1
Additional paid in capital		3,767			5,295		924			(6,219	)		3,767
Retained earnings (accumulated deficit)		77			155		119			(274	)		77
Accumulated other comprehensive earnings		80			—		—						80

Total stockholders’ equity		3,925			5,450		1,043			(6,493	)		3,925

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	6,135		$	6,890	$	1,899		$	(7,416	)	$	7,508

-33-

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

21. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

OWENS CORNING AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF THE SUCCESSOR December 31, 2006

(in millions)


	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	—		$	906		$	183		$	—		$	1,089
Receivables, net		—			328			245			—			573
Due from affiliates		6			192			155			(353	)		—
Inventories		—			579			170			—			749
Restricted cash – disputed claims reserve		—			85			—			—			85
Assets held for sale – current		—			—			—			—			—
Other current assets		—			27			29			—			56

Total current assets		6			2,117			782			(353	)		2,552

Investment in subsidiaries		4,948			884			—			(5,832	)		—
Due from affiliates		—			28			—			(28	)		—
Property, plant and equipment		—			1,816			705			—			2,521
Goodwill		—			1,307			6			—			1,313
Intangible assets		—			1,191			107			—			1,298
Deferred income taxes		—			555			(6	)		—			549
Assets held for sale – non-current		—			—			—			—			—
Other non-current assets		18			103			116			—			237

TOTAL ASSETS	$	4,972		$	8,001		$	1,710		$	(6,213	)	$	8,470

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT
Accounts payable and accrued liabilities	$	(6	)	$	759		$	328		$	—		$	1,081
Due from affiliates		—			137			216			(353	)		—
Accrued interest		15			23			1			—			39
Short-term debt		—			1,390			11			—			1,401
Long-term debt – current portion		15			19			5			—			39
Liabilities held for sale – current		—			—			—			—			—

Total current liabilities		24			2,328			561			(353	)		2,560

Long-term debt, net of current portion		1,262			1			33			—			1,296
Due from affiliates		—			—			28			(28	)		—
Pension plan liability		—			192			120			—			312
Other employee benefits liability		—			300			25			—			325
Commitments and contingencies
Liabilities held for sale – non-current		—			—			—			—			—
Other liabilities		—			232			15			—			247
Minority interest		—			—			44			—			44
STOCKHOLDERS’ EQUITY
Successor preferred stock		—			—			—			—			—
Successor common stock		1			—			—			—			1
Additional paid in capital		3,733			5,004			867			(5,871	)		3,733
Retained earnings (accumulated deficit)		(65	)		(56	)		17			39			(65	)
Accumulated other comprehensive earnings		17			—			—			—			17

Total stockholders’ equity		3,686			4,948			884			(5,832	)	$	3,686

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	4,972		$	8,001		$	1,710		$	(6,213	)	$	8,470

-34-

OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

21. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

OWENS CORNING AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SUCCESSOR NINE MONTHS ENDED SEPTEMBER 30, 2007

(in millions)


	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Consolidated
NET CASH FLOW FROM OPERATING ACTIVITIES	$	—		$	(144	)	$	105		$		$	(39	)

NET CASH FLOW FROM INVESTING ACTIVITIES
Additions to plant and equipment		—			(130	)		(37	)				(167	)
Investment in affiliates and subsidiaries, net of cash acquired		—			(1	)		(30	)				(31	)
Proceeds from the sale of assets or affiliate		394			12			31					437

Net cash flow from investing activities		394			(119	)		(36	)		—		239

NET CASH FLOW FROM FINANCING ACTIVITIES
Payments on long-term debt		(41	)		(19	)		(18	)				(78	)
Proceeds from long-term debt		600			6			11					617
Payments of note payable to 524(g) Trust		—			(1,390	)		—					(1,390	)
Payments on revolving credit facility		(383	)		—			—					(383	)
Proceeds from revolving credit facility		383			—			—					383
Net increase (decrease) in short-term debt		—			—			3					3
Parent loans and advances		(884	)		884			—					—

Net cash flow from financing activities		(325	)		(519	)		(4	)		—		(848	)

Effect of exchange rate changes on cash		—			—			9					9

NET DECREASE IN CASH AND CASH EQUIVALENTS		69			(782	)		74			—		(639	)
Cash and cash equivalents at beginning of period		—			906			183					1,089

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	69		$	124		$	257		$	—	$	450

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OWENS CORNING AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

21. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

OWENS CORNING AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE PREDECESSOR NINE MONTHS ENDED SEPTEMBER 30, 2006

(in millions)


	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Consolidated
NET CASH FLOW FROM OPERATING ACTIVITIES	$	—		$	150		$	94		$	—	$	244

NET CASH FLOW FROM INVESTING ACTIVITIES
Additions to plant and equipment		—			(193	)		(77	)				(270	)
Investment in affiliates and subsidiaries, net of cash acquired		—			(5	)		(42	)				(47	)
Proceeds from the sale of assets or affiliate		—			65			—					65

Net cash flow from investing activities		—			(133	)		(119	)		—		(252	)

NET CASH FLOW FROM FINANCING ACTIVITIES
Payment of equity commitment agreement		(100	)		—			—					(100	)
Payments on long-term debt		—			—			(7	)				(7	)
Proceeds from long-term debt		—			—			17					17
Payments of note payable to 524(g) Trust		—			—			—					—
Proceeds from revolving credit facility		—			—			—					—
Net increase (decrease) in short-term debt		—			—			(1	)				(1	)
Parent loans and advances		100			(100	)		—					—

Net cash flow from financing activities		—			(100	)		9			—		(91	)

Effect of exchange rate changes on cash		—			—			5					5

NET DECREASE IN CASH AND CASH EQUIVALENTS		—			(83	)		(11	)				(94	)
Cash and cash equivalents at beginning of period		—			1,377			182					1,559

Net change in cash of discontinued operations
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	—		$	1,294		$	171		$		$	1,465

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(All per share information discussed below is on a diluted basis. References in this Report to the “Consolidated Financial Statements” refer to the Consolidated Financial Statements included in this Report.)

Unless the context requires otherwise, the terms “Owens Corning”, “Company”, “we” and “our” in this report refer to Owens Corning and its subsidiaries. As a result of the application of fresh-start accounting on October 31, 2006, and in accordance with SoP 90-7, the financial results of the Company for the periods following October 31, 2006, are referred to as “Successor”, and the financial results of OCD and its subsidiaries for the periods through October 31, 2006, are referred to as “Predecessor”.

In the third quarter of 2007, the Company divested its Siding Solutions business, a component of its Other Building Materials and Services segment, and its Fabwel unit, a component of its Composite Solutions segment, (see Note 7 for a detailed discussion of these transactions). The impact of these transactions have been segregated from the continuing operations of the Company and reclassified into discontinued operations in the Consolidated Statements of Earnings for all periods presented in this Report. The prior period Consolidated Balance Sheet and Consolidated Statement of Cash Flow have not been recast.

OVERVIEW

General Business Overview

Headquartered in Toledo, Ohio, Owens Corning is a leading global producer of residential and commercial building materials and glass fiber reinforcements and other materials for composite systems. We operate within two general product categories: building materials, which includes our Insulating Systems, Roofing and Asphalt, and Other Building Materials and Services reportable segments, and composites systems, which includes our Composite Solutions reportable segment. Through these lines of business, we manufacture and sell products primarily in the United States, Canada, Europe, Asia and Latin America. We maintain leading market positions in all of our major product categories.

During the third quarter of 2007, we completed transactions that will allow us to focus more on our core businesses. On August 31, 2007 we sold our Siding Solutions business to the Saint-Gobain Group for net proceeds of approximately $368 million. Siding Solutions was the largest business in our Other Building Materials and Services segment. In addition, we sold our Fabwel unit for net proceeds of approximately $57 million. Fabwel was a unit of our Composites Solutions business which produced and fabricated components and sidewalls for recreational vehicles and cargo trailers. The financial results for these businesses have been segregated and are reported as discontinued operations in the Consolidated Statement of Earnings for all periods presented. Business segment results and the discussion thereof have been adjusted to exclude the results of Siding Solutions and Fabwel.

A downturn in new residential construction in the United States began in mid-2006 and accelerated during the first nine months of 2007. During the third quarter of 2007, the impact of the downturn significantly impacted demand for our residential insulation, residential roofing, and manufactured stone veneer products. We currently anticipate that the weakness in new residential construction will continue through the fourth quarter of 2007 and throughout 2008.

Our Insulating Systems segment includes those businesses with the significant fluctuations in new residential construction. During the third quarter of 2007, our residential insulation businesses experienced sales declines of 12.7% compared to the third quarter of 2006, and demand weakness put pressure on prices which also declined compared to 2006. Our commercial and industrial insulation businesses also experienced a decline in sales in the third quarter, primarily in HVAC related products. In response to the decline in demand we have curtailed

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

production at multiple locations, primarily through extending downtime when furnaces need to be repaired or rebuilt. If new residential construction in the United States continues to decline, additional production curtailments may be necessary.

Our Roofing and Asphalt business was also impacted by the decline in new United States housing construction during the third quarter of 2007. Although demand for our Roofing and Asphalt products is primarily driven by the repair of residential roofs, repair activity varies somewhat with housing turnover, which is heavily influenced by new home sales. Demand for our residential roofing products was also negatively impacted by adverse weather conditions in certain regions of the United States, and a lack of significant storm related demand. Demand weakness also put pressure on prices. Absent significant storm related demand, we anticipate that demand for our roofing and asphalt products in the fourth quarter will be slightly above the fourth quarter of 2006.

Our Other Building Materials and Services segment is now comprised of our Masonry Products business (previously Cultured Stone) and our Construction Services business. In Masonry Products, sales volume in North America was down in the third quarter of 2007 compared to the third quarter of 2006. However, sales in the third quarter of 2007 include those of a European manufactured stone business that was acquired late in 2006. The lower volume in North America was almost entirely offset by the acquired European business, which resulted in a relatively small decrease in sales during the third quarter of 2007 compared to the third quarter of 2006. We achieved significant manufacturing productivity improvements in 2007 but have been unable to take full advantage of these actions because of weakened demand. We have curtailed production at our facilities and anticipate that the curtailments will continue through the end of 2007. Sales in our Construction Services business were down significantly in the third quarter of 2007 compared to the third quarter of 2006 due to the closure of our HOMExperts portion of the business during the fourth quarter of 2006. We continue to experience growth in our basement finishing franchises and have been increasing franchises for our Sunsuites^™ and other outdoor living designs. We foresee continued growth in our franchise businesses during the remainder of 2007 and for 2008.

Our Composite Solutions segment continued to experience sales growth during the third quarter of 2007. Volume is strong in most of our markets with the exception of glass mat for residential roofing in North America and our North American automotive markets. We experienced robust growth in our European automotive markets, our infrastructure markets including wind energy and pipe, and in our non-woven glass mat markets. Our mold resistant fiberglass facing for wall board enjoyed significant growth during the third quarter in spite of the decline in the new residential construction market in the United States. Prices during the third quarter increased somewhat compared to 2006, primarily the result of increases in geographic areas where demand is very strong. We have curtailed production of mat products in the United States due to the weakness in the market for roofing shingles and expect that these curtailments will remain in place through, at least, the end of 2007. We have also curtailed production at one facility in Asia due to weak demand. We expect the curtailment to continue through the end of 2007. We anticipate worldwide demand for composite products overall will continue to increase during the remainder of 2007 and in 2008. We continue to experience competitive pressures particularly from producers in China. The acquisition of the Saint-Gobain Group’s composites business will enhance our ability to compete on a global basis, particularly as we expect to benefit from synergies as the result of this acquisition.

Overall, inflation did not have a significant impact on our consolidated results during the third quarter of 2007, primarily due to a decline in the cost of a key raw material used in our roofing shingles. However, we view this as a temporary situation and expect inflation in raw materials and energy will increase our overall production costs during the remainder of 2007. Because of the weakness in several markets, it is unlikely that we will be able to recover these increased costs through price increases to our customers. We are continuing to focus on generating productivity gains that will offset these cost increases. However, due to curtailments at selected manufacturing facilities, we are incurring idle facility costs which are making it difficult to recover inflation via productivity gains.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

We are continuing our efforts to expand markets, and develop new products and ideas that will generate growth for the Company and increase profitability. Our Insulating Systems business continues to promote the benefits of reinsulating existing homes and the energy savings that homeowners can achieve from reinsulating. We are also developing and marketing complimentary products, services, and accessories in markets where we have a strong brand presence and market share. Our acquisition of the composites business from the Saint-Gobain Group will significantly increase our share in the global composites market and offset our exposure to the cyclical new residential construction markets in North America.

RESULTS OF OPERATIONS

Consolidated Results


	Successor			Predecessor			Successor			Predecessor
	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	(in millions)
Net sales	$	1,268		$	1,386		$	3,674		$	4,149
Gross margin	$	207		$	267		$	625		$	788
As a percent of sales		16.3	%		19.3	%		17.0	%		19.0	%
Marketing and administrative	$	102		$	130		$	365		$	377
As a percent of sales		8.0	%		9.4	%		9.9	%		9.1	%
Science and technology	$	15		$	13		$	46		$	42
As a percent of sales		1.2	%		0.9	%		1.3	%		1.0	%
Employee emergence equity program	$	8		$	—		$	28		$	—
Earnings from continuing operations before interest and taxes	$	83		$	145		$	191		$	408
Interest expense, net	$	27		$	71		$	90		$	222
Income tax expense (benefit)	$	16		$	20		$	30		$	(169	)
Earnings from continuing operations	$	38		$	53		$	67		$	357
Discontinued operations, net of tax	$	74		$	9		$	75		$	19
Net earnings	$	112		$	62		$	142		$	376

Items Affecting Comparability

Because of the nature of certain items related to our prior Chapter 11 proceedings, restructuring activities, business acquisitions and dispositions and the employee emergence equity program, management does not find reported earnings from continuing operations before interest and taxes to be the most useful and transparent financial measure of the Company’s year-over-year operational performance. These items are not the result of current operations of the Company.

Our management measures operating performance by excluding the items referenced in the preceding paragraph for various purposes, including reporting results of operations to the Board of Directors of the Company, and for analysis of performance and related employee compensation measures. Although management believes that these adjustments to earnings from continuing operations before interest and taxes provide a more meaningful representation of the Company’s operational performance, our operating performance excluding these items should not be considered in isolation or as a substitute for earnings from continuing operations before interest and taxes prepared in accordance with accounting principles generally accepted in the United States.

-39-

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

The reconciliation of significant items impacting the year-over-year comparability of reported earnings from continuing operations before interest and taxes are noted in the table below (in millions):


	Successor			Predecessor			Successor			Predecessor
	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
NET EARNINGS	$	112		$	62		$	142		$	376
Discontinued operations
Earnings (loss) from discontinued operations, net of tax of $3, $5, $5, and $15 , respectively		8			9			9			19
Gain on sale of discontinued operations, net of tax of $41		66			—			66			—

Total earnings from discontinued operations		74			9			75			19

EARNINGS FROM CONTINUING OPERATIONS		38			53			67			357
Minority interest and equity in net (loss) earnings of affiliates		(2	)		(1	)		(4	)		2

EARNINGS FROM CONTINUING OPERATIONS
BEFORE MINORITY INTEREST AND EQUITY
IN NET EARNINGS OF AFFILIATES		40			54			71			355
Income tax expense (benefit)		16			20			30			(169	)

EARNINGS FROM CONTINUING OPERATIONS BEFORE TAXES		56			74			101			186
Interest expense, net		27			71			90			222

EARNINGS FROM CONTINUING OPERATIONS BEFORE INTEREST AND TAXES		83			145			191			408

Adjustments to remove items impacting comparability:
Chapter 11 related reorganization items	$	1		$	1		$	4		$	28
Asbestos litigation recoveries – Owens Corning		—			(10	)		—			(13	)
Restructuring cost and other (credits)		(1	)		—	(a)		(3	)		(35	)(a)
OCV Reinforcements transaction costs		3			4			21			4
Loss related to the exit of our HOMExperts service line		—			—			7			—
Asset impairments		11			—			11			—
Employee emergence equity program		8			—			28			—

Total adjustments to remove comparability items:		22			(5	)		68			(16	)
ADJUSTED EARNINGS FROM CONTINUING OPERATIONS BEFORE INTEREST AND TAXES	$	105		$	140		$	259