Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Presentation of Discontinued Operations

During the third quarter of 2007, the Company entered into an agreement to sell its automotive glass businesses to Platinum Equity (“Platinum”) for approximately $500 million. Accordingly, the assets and liabilities of these businesses were classified as held for sale. In the fourth quarter of 2007, PPG was notified that affiliates of Platinum had filed suit in the Supreme Court of the State of New York, County of New York, alleging that Platinum was not obligated to consummate the agreement. Platinum subsequently terminated the agreement. PPG has sued Platinum and certain of its affiliates for damages, including the $25 million breakup fee stipulated by the terms of the agreement, based on various alleged actions of the Platinum parties.

While the transaction with Platinum was terminated, PPG management remains committed to a sale of the automotive glass businesses. Accordingly, the assets and liabilities of these businesses continue to be classified as held for sale and are stated at depreciated cost, which is lower than fair value less cost to sell, in the consolidated balance sheet under Item 8 of this Form 10-K as of December 31, 2007 and 2006. Further, the results of operations and cash flows of these businesses, which had previously been included in the Glass reportable segment, have been classified as discontinued operations in the consolidated statements of income and cash flows under Item 8 for the three years ended December 31, 2007.

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The decision to sell these businesses triggered curtailments related to certain of PPG’s defined benefit pension and other postretirement benefit plans. In 2007, PPG recorded a pretax charge of $17 million ($11 million aftertax), primarily representing curtailment losses on certain defined benefit pension plans. The sale of these businesses may result in additional curtailments and possibly settlements of other PPG employee benefit plans to be recorded upon or after the closing of a sale.

In the third quarter of 2007, PPG entered into an agreement to sell its fine chemicals business to ZaCh System S.p.A., a subsidiary of Zambon Company S.p.A., for approximately $65 million. The sale of this business was completed in November 2007. Accordingly, the assets and liabilities of this business have been reclassified as held for sale in the consolidated balance sheet under Item 8 as of December 31, 2006. Further, the results of operations and cash flows of this business, which had previously been included in the Optical and Specialty Materials reportable segment, have been classified as discontinued operations in the consolidated statements of income and cash flows under Item 8 for the three years ended December 31, 2007. PPG recorded a pretax loss on sale of the fine chemicals business of $25 million ($19 million aftertax) in 2007.

Performance in 2007 compared with 2006

Performance Overview

Our sales increased 14% to $11.2 billion in 2007 compared to $9.9 billion in 2006. Sales increased 6% due to the impact of acquisitions, 4% due to increased volumes and 4% due to the positive effects of foreign currency translation.

Cost of sales as a percentage of sales increased slightly to 63.2% compared to 62.4% in 2006 due to the adverse impact of inflation net of selling price changes. Selling, general and administrative expense increased slightly as a percentage of sales to 19.1% compared to 18.6% in 2006. These costs increased primarily due to higher expenses related to growth, including increased advertising costs and the impact of inflation.

Business restructuring expense decreased $35 million in 2007. In 2006, the Company finalized plans for certain actions to reduce its workforce and consolidate facilities and recorded a charge of $35 million.

Other charges decreased $193 million in 2007. The reduction was primarily due to a reduction in environmental expenses, which were $195 million lower in 2007 as compared to 2006.

Other earnings increased $24 million in 2007 due to higher royalty income, higher interest income and gains from asset sales.

Net income and earnings per share – assuming dilution for 2007 and 2006 are summarized below:

Results of Reportable Business Segments

Performance Coatings sales increased $723 million or 23% in 2007. Sales increased 15% due to sales from acquisitions in all three Performance Coatings businesses, 4% due to the positive impact of foreign currency translation and 3% due to improved sales volumes in our aerospace and automotive refinish businesses, which more than offset slightly lower volumes in architectural coatings. The volume growth in the aerospace and refinish businesses occurred throughout the world, while the volume decline in architectural coatings was in North America. Sales also increased 1% due to higher selling prices. Segment income increased $49 million to a total of $563 million in 2007. Factors increasing segment income were improved sales volumes, earnings from acquisitions and the positive impact of foreign currency translation.

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Additionally, the benefit of higher selling prices more than offset the impact of inflation. Segment income decreased due to higher overhead costs to support growth initiatives in this segment.

Industrial Coatings sales increased $410 million or 13% in 2007. Sales increased 6% due to the positive impact of foreign currency translation, 4% due to acquisitions in our automotive and industrial coatings businesses and 3% from improved sales volumes as volume increases in automotive coatings and packaging coatings more than offset declines in the volume of the industrial coatings business in the U.S. and Canada. Volume growth in the automotive coatings businesses occurred in all regions of the world, while the volume growth in packaging coatings was experienced mainly in Asia and Europe. The decline in industrial coatings’ North American volumes overshadowed solid growth for this business in Europe, Asia and Latin America. Segment income increased $21 million in 2007 due to improved sales volumes, the impact of acquisitions, lower manufacturing costs and the positive impact of foreign currency translation. Factors decreasing segment income were inflation, including higher raw material costs, which more than offset a slight improvement in selling prices, and increased overhead costs to support growth initiatives.

Optical and Specialty Materials sales increased $125 million or 14% in 2007. Sales increased 8% due to higher volumes primarily in the optical products business, 4% due to the positive impact of foreign currency translation, 1% as the result of sales from acquisitions in the optical products business and 1% due to higher selling prices. Segment income increased $18 million in 2007. The increase in segment income was primarily the result of the increased sales volumes partially offset by higher advertising expense related to optical products volume growth initiatives in all regions and to the impending launch of Transitions Optical’s next generation lens product in the first quarter of 2008.

Commodity Chemicals sales increased $56 million or 4% in 2007. Sales increased 9% due to higher sales volumes of caustic and derivatives, which was partially offset by a 5% decrease in selling prices in part due to lower natural gas input costs. Segment income decreased $42 million in 2007. Segment income was lower in large part due to lower selling prices, higher manufacturing costs, including maintenance costs and higher raw material costs. Segment income also decreased as a result of the absence of an insurance recovery received in 2006 for damage caused by Hurricane Rita in 2005. The benefit of lower energy and environmental costs and improved sales volumes were factors that increased segment income in 2007.

Glass sales increased by $31 million or 3% in 2007. Sales increased 3% due to higher sales volumes and 2% due to the positive impact of foreign currency translation. The negative impact of lower selling prices in our performance glazings business reduced segment sales by 2%. Pricing in the performance glazings business includes a surcharge related to the cost of energy lagged by one quarter. The surcharge in 2006 exceeded the current year surcharge due to higher energy costs during the comparable periods. Segment income decreased $9 million in 2007. Segment income decreased due to the negative impact of inflation and lower pricing, including the lower energy surcharge in performance glazings. These factors were only partially offset by the benefit from higher sales volumes.

See Note 24, “Reportable Business Segment Information,” under Item 8 of this Form 10-K for further information related to the Company’s operating segments and reportable business segments.

Other Significant Factors

The effective tax rate on pretax earnings from continuing operations in 2007 was 28.6% compared to 25.1% in 2006. The rate in 2007 includes the benefit of $15 million for the reversal of a valuation allowance previously recorded against the benefit of a tax net operating loss carryforward, the benefit associated with an enacted reduction in the Canadian federal corporate income tax rate and a tax benefit of 39% on the adjustment to increase the current value of the Company’s obligation relating to asbestos claims under the PPG Settlement Arrangement, as discussed in Note 15, “Commitments and Contingent Liabilities” under Item 8 of this Form 10-K. The tax rate was 30.3% on the remaining pretax earnings from continuing operations in 2007. The effective tax rate on earnings from continuing operations in 2006 included the benefit of a tax refund from Canada resulting from the favorable resolution of a tax dispute dating back to 1998 and a tax benefit related to the settlement with the Internal Revenue Service of our tax returns for the years 2001-2003. In the aggregate, these benefits reduced 2006 income tax expense by $39 million. The 2006 effective tax rate also included a tax benefit of 36% on the charge for business restructuring and a tax benefit of 39% on the third quarter environmental remediation charge for sites in New Jersey and Louisiana, on the charges for legal settlements, and on the adjustment to increase the current value of the Company’s obligation relating to asbestos claims under the PPG Settlement Arrangement. Income tax expense of 39% was recognized on certain insurance recoveries, and income tax expense of 31% was recognized on the remaining pretax earnings from continuing operations in 2006.

The effective tax rate on pretax earnings from discontinued operations in 2007 was 47.6% compared to

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37.8% in 2006. The rate in 2007 includes a tax benefit of 35% on the curtailment charge related to the automotive glass businesses and a tax benefit of 24% on the loss on the sale of the fine chemicals business. The tax rate was 39% on the remaining pretax earnings from discontinued operations in 2007.

Outlook

In 2007, the U.S. and overall North American economy continued a slowing trend which began during the second half of 2006. U.S. gross domestic product (“GDP”) increased about 2% for the year. Growth rates slowed in several U.S. end-markets in the latter part of the year, but the growth rates were aided by higher exports and decreased imports. U.S. residential construction rates declined approximately 25% year-over-year, and North American vehicle production decreased by 3%. Despite these and other slowing markets, overall industrial production increased by 2%. Industrial production remains the economic metric that most positively correlates with our U.S. organic volume growth because it reflects activity in PPG’s broad end-use markets. The U.S. commercial construction sector continued to grow consistently throughout the year, increasing by approximately 15%.

Overall inflation remained modest as low labor rates in emerging regions have continued to hold labor rates in the mature regions relatively flat. Global energy prices, primarily oil, and other basic raw material costs increased to new or close to new record high levels. Natural gas costs in the U.S. declined for the second consecutive year, but remain at elevated levels when viewed historically.

The European economy grew at one of its highest rates in the past decade due to continued industrial activity and higher consumer spending. Western European vehicle production improved by 3%, and Eastern European automotive production grew by nearly 18%. Overall industrial production grew by 2.5%.

The Asian economies continued to post very high growth rates both relative to other major economies and historically, driven by strong growth in China and India. Chinese industrial production once again grew at just under 20%, supported, in part, by growth exceeding 20% in automobile production. Overall China GDP improved by 11% for the second consecutive year.

Entering 2008, the overall economic outlook is generally bearish with many economists concerned about the potential of a U.S. recession and its potential impact on the overall global economy. Meanwhile, inflation concerns have risen in basic materials, due primarily to oil prices which are at or close to all-time record highs. Interest rates, which had been rising in many of the world’s major economies, are now expected to decrease or remain flat due to lower anticipated growth rates.

Overall global growth is expected to continue as rapidly growing emerging regions, including China, India, Latin America and Eastern Europe, continue to grow into a more meaningful portion of the global economy. Despite slowing in the U.S. economy, and a variety of government actions in China designed to slow its growth rate, these emerging economies are expected to continue to produce growth rates well above those in more mature economies due in part to ongoing internal infrastructure expansion. This growth has benefited global companies, such as PPG as evidenced in 2007 when PPG grew organically by over 10% in these emerging regions.

In 2008, we expect cost pressures in certain raw materials, transportation and healthcare to remain. As PPG has historically done, we anticipate offsetting these cost increases with aggressive raw material sourcing, manufacturing cost improvements, productivity gains and selling price increases.

Our pension and post retirement benefit costs totaled $233 million in 2007, including a curtailment charge of $17 million related to discontinued operations. Excluding the curtailment charge, these costs decreased by $55 million compared to 2006. Based on our current estimates, we expect our pension and other postretirement benefits costs to decline by approximately $20 million in 2008. This decline is due primarily to an increase in the discount rate for 2008 as well as the impact of the $100 million contribution we made to our U.S. pension plans in 2007.

With respect to energy costs, 2007 natural gas costs remained high but declined as compared to 2006. Changes in natural gas prices have a significant impact on the operating performance of our Commodity Chemicals and Glass businesses. Each one dollar change in our price of natural gas per million British thermal units (“mmbtu”) has a direct impact of $60 million to $70 million on our annual operating costs. Our 2007 natural gas costs averaged about $7.50 per mmbtu for the year, while our 2006 costs averaged about $8.00. While it remains difficult to predict future natural gas prices, in order to reduce the risks associated with volatile prices, we use a variety of techniques, which include reducing consumption through improved manufacturing processes, switching to alternative fuels and hedging. We currently estimate our cost for natural gas in the first quarter of 2008 will be higher than the first quarter of 2007. We currently have nearly 40% of our first quarter 2008 natural gas purchases hedged at a price of about $8.75, and approximately 30% of our 2008 annual requirements hedged at about $8.25.

Over the past few years we have also experienced increases in the prices we pay for raw materials used in many of our businesses, particularly in our coatings

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businesses. The increases have resulted from global industrial expansion, supply/demand imbalance and increases in supplier feedstock costs. We have and plan to continue to combat the impact of these rising costs by seeking alternate and global supply sources for our raw materials, reformulating our products, improving our production processes and raising our selling prices. Year-over-year coatings raw material costs rose by $75 million in 2006, and the rate of increase slowed to approximately $40 million in 2007, which represented about a one percent increase. Our current forecast for the early portion of 2008 is for coatings raw material inflation, likely in the two to four percent range, supported primarily by higher oil prices. However, full year raw material inflation may increase or decrease, with the main driver likely being overall economic conditions and resulting supply and demand factors.

In 2007 we completed several acquisitions that are intended to strengthen our coatings businesses by extending their geographic breadth. In addition, several acquisitions were completed in the middle or toward the end of 2006. The sales for businesses held for less than one year added slightly less than $600 million to PPG’s 2007 sales with operating margins approaching, but just below coatings industry averages.

Also in 2007, we sold our fine chemicals business and our Azdel fiber glass joint venture, and closed our Venezulean fiber glass joint venture. Additionally, we signed a contract for the sale of our automotive glass businesses; however this contract was later terminated by the purchaser. Nevertheless, we intend to sell the automotive glass businesses during 2008.

On January 2, 2008, PPG completed the purchase of SigmaKalon, a worldwide coatings producer based in the Netherlands, for approximately $3.2 billion. PPG expects 2008 sales from this acquisition of about $3 billion. This acquisition is not expected to be accretive to PPG’s earnings in 2008 due, in part, to certain acquisition related costs. PPG utilized interim debt financing upon closing of the transaction, and will install longer-term financing during 2008. The acquisition greatly extends PPG’s European coatings operations and customer breadth, and is expected to be accretive to earnings in 2009.

Economic conditions entering 2008 are challenging due primarily to continued softness in several U.S. markets and concern over global credit issues. The acquisition of SigmaKalon will result in a shift of our geographic sales mix, as now less than 50% of our sales will be derived in the U.S. and Canada. We anticipate continued organic growth in 2008 due to this more diverse geographic sales mix, along with our larger sales base in emerging regions. We anticipate this growth, coupled with our focus on cost improvement, will allow us to continue with our legacy of cash generation for the ongoing benefit of our shareholders.

Accounting Standard Adopted in 2007

In June 2006, the Financial Accounting Standards Board, (“FASB”), issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109”. FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company adopted the provisions of FIN No. 48 as of January 1, 2007. As a result of the implementation of FIN No. 48, the Company reduced its liability for unrecognized tax benefits by $11 million, which was recorded as a direct increase in retained earnings. Refer to Note 13, “Income Taxes,” under Item 8 for additional information.

Accounting Standards to be Adopted in Future Years

In September 2006, the FASB issued Statement of Financial Accounting Standards, (“SFAS”) No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework in generally accepted accounting principles for measuring fair value, and expands disclosures about fair value measurements. This standard only applies when other standards require or permit the fair value measurement of assets and liabilities. It does not increase the use of fair value measurement. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, except as it relates to nonrecurring fair value measurements of nonfinancial assets and liabilities, for which SFAS No. 157 is effective for fiscal years beginning after November 15, 2008. The Company evaluated the impact of adopting this statement, and concluded it will not have a significant effect on PPG’s consolidated results of operations or financial position.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company evaluated the impact of adopting this Statement, and concluded it will not have an effect on PPG’s consolidated results of operations or financial position.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS No.141(R)), which replaces SFAS No. 141, “Business Combinations.” SFAS No. 141(R) retains the underlying

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concepts of SFAS No. 141 in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting, but SFAS No. 141(R) changes the method of applying the acquisition method in a number of significant aspects. Acquisition costs will generally be expensed as incurred; noncontrolling interests will be valued at fair value at the acquisition date; in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. SFAS No. 141(R) is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with an exception related to the accounting for valuation allowances on deferred taxes and acquired contingencies related to acquisitions completed before the effective date. SFAS No. 141(R) amends SFAS No. 109 to require adjustments, made after the effective date of this statement, to valuation allowances for acquired deferred tax assets and income tax positions to be recognized as income tax expense. Beginning January 1, 2009, PPG will apply the provisions of SFAS No. 141(R) to its accounting for applicable business combinations.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51.” This statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. SFAS No. 160 requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS No. 160 amends certain of ARB No. 51’s consolidation procedures for consistency with the requirements of SFAS No. 141(R) . This statement requires changes in the parent’s ownership interest of consolidated subsidiaries to be accounted for as equity transactions. This statement also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. We are currently evaluating the effects that SFAS No. 160 may have on our consolidated financial statements.

In November 2007, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 07-1, “Accounting for Collaborative Arrangements,” which defines collaborative arrangements and establishes reporting and disclosure requirements for such arrangements. EITF 07-1 is effective for fiscal years beginning after December 15, 2008. The Company is continuing to evaluate the impact of adopting the provisions EITF 07-1; however, it does not anticipate that adoption will have a material effect on PPG’s consolidated results of operations or financial position.

In March 2007, EITF Issue No. 06-10, “Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements,” was issued. Under the provisions of EITF 06-10, an employer is required to recognize a liability for the postretirement benefit related to a collateral assignment split-dollar life insurance arrangement in accordance with either SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” or Accounting Principles Board Opinion No. 12, “Omnibus Opinion – 1967,” if the employer has agreed to maintain a life insurance policy during the employee’s retirement or provide the employee with a death benefit based on the substantive arrangement with the employee. The provisions of EITF 06-10 also require an employer to recognize and measure the asset in a collateral assignment split-dollar life insurance arrangement based on the nature and substance of the arrangement. EITF 06-10 is effective as of January 1, 2008. PPG has collateral assignment split-dollar life insurance arrangements within the scope of EITF 06-10. The Company will adopt the provisions of EITF 06-10 as of January 1, 2008, and does not expect it to have a material effect on PPG’s consolidated results of operations or financial position.

Performance in 2006 Compared with 2005

Performance Overview

Our sales increased 9% to $9.9 billion in 2006 compared to $9.0 billion in 2005. Sales increased 4% due to the impact of acquisitions, 2% due to increased volumes, 2% due to increased selling prices and 1% due to the positive effects of foreign currency translation.

Cost of sales as a percentage of sales increased slightly to 62.4% compared to 62.0% in 2005 due to the adverse impact of inflation net of selling price changes. Selling, general and administrative expense increased slightly as a percentage of sales to 18.6% compared to 18.0% in 2005. These costs increased primarily due to higher expenses related to expansion of the company-owned store network in our architectural coatings business and increased advertising to promote sales growth in our optical products business.

Business restructuring expense increased $35 million in 2006, as the Company finalized plans for certain actions to reduce its workforce and consolidate facilities and recorded a related charge.

Other charges decreased $56 million in 2006. Other charges in 2006 included pretax charges of $185 million for estimated environmental remediation costs at sites in

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New Jersey and $42 million for legal settlements offset in part by pretax earnings of $44 million for insurance recoveries related to the Marvin legal settlement and to Hurricane Rita. Other charges in 2005 included pretax charges of $132 million related to the Marvin legal settlement net of related insurance recoveries of $18 million, $61 million for the federal glass class action antitrust legal settlement, $34 million of direct costs related to the impact of hurricanes Rita and Katrina and $19 million for debt refinancing costs.

Other earnings increased $24 million in 2006 due to higher equity earnings, primarily from our Asian fiber glass joint ventures, and higher royalty income.

Net income and earnings per share – assuming dilution for 2006 and 2005 are summarized below:

Performance Coatings sales increased $420 million or 16% in 2006. Sales increased 8% due to acquisitions, 4% due to higher selling prices in the refinish, aerospace and architectural coatings businesses, 3% due to increased volumes in our aerospace and architectural coatings businesses and 1% due to the positive effects of foreign currency translation. Segment income increased $50 million in 2006. The increase in segment income was primarily due to the impact of increased sales volume and higher selling prices, which more than offset the impact of inflation. Segment income was reduced by increased overhead costs to support growth in our architectural coatings business.

Industrial Coatings sales increased $315 million or 11% in 2006. Sales increased 4% due to acquisitions, 4% due to increased volumes in the automotive, industrial and packaging coatings businesses, 2% due to higher selling prices, particularly in the industrial and packaging coatings businesses, and 1% due to the positive effects of foreign currency translation. Segment income increased $65 million in 2006. The increase in segment income was primarily due to the impact of increased sales volume, lower overhead and manufacturing costs, and the impact of acquisitions. Segment income was reduced by the adverse impact of inflation, which was substantially offset by higher selling prices.

Optical and Specialty Materials sales increased $113 million or 14% in 2006. Sales increased 8% due to higher volumes, particularly in optical products, 5% due to acquisitions in our optical products business and 1% due to higher selling prices. Segment income increased $18 million in 2006. The increase in segment income was primarily due to increased volumes, lower manufacturing costs and the absence of the 2005 hurricane costs of $3 million, net of 2006 insurance recoveries, which were only partially offset by increased overhead costs in our optical products business to support growth and the negative impact of inflation.

Commodity Chemicals sales decreased $48 million or 3% in 2006. Sales decreased 4% due to lower chlor-alkali volumes and increased 1% due to higher selling prices. Segment income decreased $28 million in 2006. The year-over-year decline in segment income was due primarily to lower sales volumes and higher manufacturing costs associated with reduced production levels. The absence of the 2005 charges for direct costs related to hurricanes increased segment income by $29 million. The impact of higher selling prices; lower inflation, primarily natural gas costs; and an insurance recovery of $10 million related to the 2005 hurricane losses also increased segment income in 2006.

Our fourth-quarter chlor-alkali sales volumes and earnings were negatively impacted by production outages at several customers over the last two months of 2006.

Glass sales increased $33 million or 3% in 2006. Sales increased 2% due to improved volumes in our performance glazings business and 1% due to higher

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selling prices in performance glazings. Segment income increased $39 million in 2006. This increase in segment

income was primarily the result of higher selling prices, higher equity earnings from our Asian fiber glass joint ventures, higher other income and lower manufacturing and natural gas costs, which more than offset the negative impacts of higher inflation and lower margin mix of sales.

Our fiber glass business made progress during 2006 in achieving our multi-year plan to improve profitability and cash flow. A transformation of our supply chain, which includes production of a more focused product mix at each manufacturing plant, manufacturing cost reduction initiatives and improved equity earnings from our Asian joint ventures are the primary focus and represent the critical success factors in this plan. During 2006, our new joint venture in China started producing high labor content fiber glass reinforcement products, which allows us to refocus our U.S. production capacity on higher margin, direct process products. The 2006 earnings improvement by our fiber glass business accounted for the bulk of the 2006 improvement in the Glass reportable business segment income.

See Note 24, “Reportable Business Segment Information,” under Item 8 of this Form 10-K for further information related to our operating segments and reportable business segments.

Other Significant Factors

The effective tax rate on pretax earnings from continuing operations in 2006 was 25.1% compared to 29.0% in 2005. The effective tax rate on earnings from continuing operations in 2006 included the benefit of a tax refund from Canada resulting from the favorable resolution of a tax dispute dating back to 1998 and a tax benefit related to the settlement with the Internal Revenue Service of our tax returns for the years 2001-2003. In the aggregate, these benefits reduced 2006 income tax expense by $39 million. The 2006 effective tax rate also included a tax benefit of 36% on the charge for business restructuring and a tax benefit of 39% on the third quarter environmental remediation charge for sites in New Jersey and Louisiana, on the charges for legal settlements, and on the adjustment to increase the current value of the Company’s obligation relating to asbestos claims under the PPG Settlement Arrangement, as discussed in Note 15, “Commitments and Contingent Liabilities” under Item 8 of this Form 10-K. Income tax expense of 39% was recognized on certain insurance recoveries, and income tax expense of 31.0% was recognized on the remaining pretax earnings from continuing operations in 2006. The effective tax rate on earnings from continuing operations in 2005 included a tax benefit of 39% on the charge for the Marvin legal settlement net of insurance recoveries, the settlement of the federal glass class action antitrust case, the charge for debt refinancing costs and the adjustment to increase the current value of the Company’s obligation relating to asbestos claims under the PPG Settlement Arrangement. The 2005 effective tax rate also included tax expense of $9 million related to dividends repatriated under the American Jobs Creation Act of 2004 and tax expense of 30.3% on the remaining pretax earnings.

The effective tax rate on pretax earnings from discontinued operations in 2006 was 37.8% compared to 39.4% in 2005.

Commitments and Contingent Liabilities, including Environmental Matters

PPG is involved in a number of lawsuits and claims, both actual and potential, including some that it has asserted against others, in which substantial monetary damages are sought. See Item 3, “Legal Proceedings” and Note 15, “Commitments and Contingent Liabilities,” under Item 8 of this Form 10-K for a description of certain of these lawsuits, including a description of the proposed PPG Settlement Arrangement for asbestos claims announced on May 14, 2002 and a description of the antitrust suits against PPG related to the flat glass and automotive refinish industries. As discussed in Item 3 and Note 15, although the result of any future litigation of such lawsuits and claims is inherently unpredictable, management believes that, in the aggregate, the outcome of all lawsuits and claims involving PPG, including asbestos-related claims in the event the PPG Settlement Arrangement described in Note 15 does not become effective, will not have a material effect on PPG’s consolidated financial position or liquidity; however, any such outcome may be material to the results of operations of any particular period in which costs, if any, are recognized.

It is PPG’s policy to accrue expenses for environmental contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Reserves for environmental contingencies are exclusive of claims against third parties and are generally not discounted. Management anticipates that the resolution of the Company’s environmental contingencies will occur over an extended period of time. As of December 31, 2007 and 2006, PPG had reserves for environmental contingencies totaling $276 million and $282 million, respectively, of which $57 million and $65 million, respectively, were classified as current liabilities. Pretax charges against income for environmental remediation costs in 2007, 2006 and 2005 totaled $12 million, $207 million and $27 million, respectively, and are included in “Other charges” in the consolidated statement of income. Cash outlays related to such environmental remediation aggregated $19 million, $22 million and $14 million, in 2007, 2006 and 2005, respectively.

In addition to the amounts currently reserved for environmental remediation, the Company may be subject

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to loss contingencies related to environmental matters estimated to be as much as $200 million to $300 million, which range is unchanged since December 31, 2006. Such unreserved losses are reasonably possible but are not currently considered to be probable of occurrence.

Charges for estimated environmental remediation costs in 2006 were significantly higher than our historical range. Our continuing efforts to analyze and assess the environmental issues associated with a former chromium manufacturing plant site located in Jersey City, NJ and at the Calcasieu River Estuary located near our Lake Charles, LA chlor-alkali plant resulted in a pre-tax charge of $173 million in the third quarter of 2006 for the estimated costs of remediating these sites. Excluding 2006, pretax charges against income have ranged between $10 million and $49 million per year for the past 15 years. We anticipate that charges against income in 2008 for environmental remediation costs will be within this historical range.

Management expects cash outlays for environmental remediation costs to be approximately $45 million in 2008 and to range from $35 million to $60 million annually through 2012. It is possible that technological, regulatory and enforcement developments, the results of environmental studies and other factors could alter our expectations with respect to charges against income and future cash outlays. Specifically, the level of expected cash outlays is highly dependent upon activity related to the former chromium manufacturing plant site in New Jersey, as PPG awaits approval of workplans that have been submitted to the applicable regulatory agencies.

Impact of Inflation

In 2007, the increase in our costs due to the negative effects of inflation, including the impact of higher raw material costs in our Industrial Coatings reportable segment, was not offset by higher selling prices. Higher selling prices did offset the negative impact of inflation in our Performance Coatings and Optical and Specialty Materials reportable segments. However, in our Industrial Coatings, Commodity Chemicals and Glass reportable segments, the negative impact of inflation was not offset by higher selling prices.

In 2006, the increase in our costs due to the negative effects of inflation, including the impact of higher raw material costs in our coatings businesses, was offset by higher selling prices in our Industrial Coatings, Performance Coatings and Commodity Chemicals reportable segments and by reduced manufacturing costs in our Glass and Optical and Specialty Materials reportable segments.

In 2005, the increase in our costs due to the negative effects of inflation, including the impact of higher coatings raw material costs and higher energy costs in our Glass and Commodity Chemicals businesses were offset by higher selling prices in our Commodity Chemicals and Performance Coatings reportable segments but were not offset by the combination of higher selling prices and lower manufacturing costs in our Industrial Coatings, Optical and Specialty Materials and Glass reportable segments.

In 2008, we expect the negative impact of inflation on raw materials, energy and employee benefit costs to slightly exceed the combined impacts of productivity improvements, lower manufacturing costs and higher selling prices. Lower manufacturing costs and productivity improvements are not expected to offset the negative impacts of lower selling prices and inflation, primarily in the cost of raw materials and energy, in our Industrial Coatings and Commodity Chemicals reporting segments. In our remaining reportable segments, the combination of higher selling prices, lower manufacturing costs and productivity improvements is expected to more than offset negative inflationary impacts.