Edgar Filing: USG CORP

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended December 31, 2006

[ ] 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 1-8864

USG CORPORATION
(Exact name of Registrant as Specified in its Charter)

DELAWARE 36-3329400
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

125 S. FRANKLIN STREET, CHICAGO, ILLINOIS 60606-4678
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code: (312) 606-4000

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class Name of Exchange on Which Registered
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Common Stock, $0.10 par value New York Stock Exchange
Chicago Stock Exchange

Preferred Stock Purchase Rights New York Stock Exchange
(subject to Rights Agreement dated Chicago Stock Exchange
December 21, 2006)

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act. Yes [ ] No [X]

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 [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

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.

Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]

Indicate by check mark whether the registrant is a shell company (as
defined in Exchange Act Rule 12b-2) Yes [ ] No [X]

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 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 [X] No [ ] Not applicable. Although the registrant was
involved in bankruptcy proceedings during the preceding five years, it did not
distribute securities under its confirmed plan of reorganization.

The aggregate market value of the registrant's common stock held by
non-affiliates based on the New York Stock Exchange closing price as of June 30,
2006 (the last business day of the registrant's most recently completed second
fiscal quarter) was approximately $2,882,045,000.

The number of shares of the registrant's common stock outstanding as of
January 31, 2007 was 89,865,616.

DOCUMENTS INCORPORATED BY REFERENCE: Certain sections of USG Corporation's
definitive Proxy Statement for use in connection with the 2007 annual meeting of
stockholders, to be filed subsequently, are incorporated by reference into Part
III of this Form 10-K Report where indicated.

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TABLE OF CONTENTS

Page
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PART I
Item 1. Business...................................................... 3
Item 1A. Risk Factors.................................................. 8
Item 1B. Unresolved Staff Comments..................................... 13
Item 2. Properties.................................................... 14
Item 3. Legal Proceedings............................................. 15
Item 4. Submission of Matters to a Vote of Security Holders........... 15

PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.......... 16
Item 6. Selected Financial Data....................................... 17
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition.................................... 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risks... 34
Item 8. Financial Statements and Supplementary Data................... 35
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure................................... 63
Item 9A. Controls and Procedures....................................... 63
Item 9B. Other Information............................................. 65

PART III
Item 10. Directors, Executive Officers and Corporate Governance........ 65
Item 11. Executive Compensation........................................ 67
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters............................ 67
Item 13. Certain Relationships and Related Transactions, and Director
Independence............................................... 68
Item 14. Principal Accountant Fees and Services........................ 68

PART IV
Item 15. Exhibits and Financial Statement Schedules.................... 68

Signatures............................................................... 73

PART I

ITEM 1. BUSINESS

In this annual report on Form 10-K, "USG," "we," "our" and "us" refer to USG
Corporation, a Delaware corporation, and its subsidiaries included in the
consolidated financial statements, except as otherwise indicated or as the
context otherwise requires.

GENERAL

USG, through its subsidiaries, is a leading manufacturer and distributor of
building materials, producing a wide range of products for use in new
residential, new nonresidential, and repair and remodel construction as well as
products used in certain industrial processes.

In 1901, United States Gypsum Company, or U.S. Gypsum, was incorporated. In
1984, USG Corporation was incorporated in Delaware, and by a vote of
stockholders on December 19, 1984, U.S. Gypsum became a wholly owned subsidiary
of USG. Effective January 1, 1985, the stockholders of U.S. Gypsum became the
stockholders of USG.

RESOLUTION OF USG'S REORGANIZATION PROCEEDINGS

On June 25, 2001, USG Corporation and 10 of its United States subsidiaries,
collectively referred to as the debtors, filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the District of Delaware. The Chapter 11
cases were consolidated as In re: USG Corporation et al. (Case No. 01-2094).
These cases did not include any of our non-U.S. subsidiaries or companies that
our subsidiary L&W Supply Corporation acquired after we filed the bankruptcy
petitions.

In the second quarter of 2006, the debtors emerged from their Chapter 11
reorganization proceedings as a result of a plan of reorganization that was
confirmed by the bankruptcy court and the United States District Court for the
District of Delaware. The plan became effective on June 20, 2006, which is
referred to in this report as the Effective Date. The plan achieved our goals of
resolving asbestos claims in a fair and equitable manner, protecting the
long-term value of our businesses and maintaining our leadership positions in
markets in which we compete.

As part of the plan, the following important events have occurred:

- We created and funded a trust under Section 524(g) of the Bankruptcy Code
for the payment of asbestos personal injury claims against the debtors.
This trust is also referred to as the Asbestos Trust or the Trust.

- On the Effective Date, we paid $890 million to the Asbestos Trust and
issued to the Trust an interest-bearing note in the amount of $10 million,
which we paid on December 21, 2006.

- On December 21, 2006, we also paid $3.05 billion to the Asbestos Trust.
This additional $3.05 billion payment was due because the plan of
reorganization required that we pay this amount if the 109th Congress did
not pass the Fairness in Asbestos Injury Resolution Act of 2005 or
substantially similar legislation before Congress adjourned. Because the
109th Congress adjourned in December 2006 without passing this legislation,
we made the $3.05 billion payment to the Trust. As a result of this
payment, we have fully funded the Trust and have no further payment
obligations to the Trust.

- The bankruptcy court entered a channeling injunction which provides that
all present and future asbestos personal injury claims against the debtors
must be brought against the Trust and no one may bring such a claim against
the debtor companies.

- Asbestos property damage claims against the debtors are not part of the
channeling injunction or the Asbestos Trust, which deal only with asbestos
personal injury or related claims. We have reached agreements to settle all
remaining asbestos property damage claims asserted against the debtors,
with the exception of one small claim brought by a homeowner. In 2006, we
paid approximately $99 million for asbestos property damage claim
settlements. The estimated cost of

the unpaid settlements of the remaining asbestos property damage claims,
including associated legal fees, is approximately $48 million and is
included in accrued expenses.

- Pursuant to the plan of reorganization, allowed claims of all other
creditors have been, or will be, paid in full, with interest where agreed
or required.

- In connection with the plan of reorganization, we conducted an offering in
which we issued to stockholders as of June 30, 2006 the right to purchase,
at $40.00 per share, one new share of our common stock for each share
owned. This offering is referred to as the Rights Offering. In connection
with the Rights Offering, Berkshire Hathaway Inc. agreed to purchase at
that price all shares underlying any unexercised rights. We received net
proceeds of approximately $1.7 billion and issued 44.92 million new shares
of our common stock in connection with completion of the Rights Offering in
the third quarter of 2006.

The following subsidiaries were debtors in the Chapter 11 proceedings: U.S.
Gypsum; USG Interiors, Inc., or USG Interiors; USG Interiors International,
Inc.; L&W Supply Corporation, or L&W Supply; Beadex Manufacturing, LLC; B-R
Pipeline Company; La Mirada Products Co., Inc.; Stocking Specialists, Inc.; USG
Industries, Inc.; and USG Pipeline Company. The plan of reorganization resolving
the debtors' asbestos personal injury liabilities and the injunction channeling
those liabilities to the Trust do not include any of our non-U.S. subsidiaries,
any companies that L&W Supply acquired after we filed the bankruptcy petitions
or any companies that we may acquire in the future.

Additional information about funding the plan of reorganization is included
under "Liquidity and Capital Resources" in Management's Discussion and Analysis
of Results of Operations and Financial Condition and in Note 3 to the
Consolidated Financial Statements. Additional information about the Rights
Offering is included in Note 4 to the Consolidated Financial Statements.
Asbestos property damage claims are discussed in Note 19 to the Consolidated
Financial Statements.

OPERATING SEGMENTS

Our operations are organized into three operating segments: North American
Gypsum, Worldwide Ceilings and Building Products Distribution, the net sales of
which accounted for approximately 53%, 11% and 36%, respectively, of our 2006
consolidated net sales.

NORTH AMERICAN GYPSUM

BUSINESS

North American Gypsum, which manufactures and markets gypsum and related
products in the United States, Canada and Mexico, includes U.S. Gypsum in the
United States, the gypsum business of CGC Inc., or CGC, in Canada, and USG
Mexico, S.A. de C.V., or USG Mexico, in Mexico. U.S. Gypsum is the largest
manufacturer of gypsum wallboard in the United States and accounted for
approximately 30% of total domestic gypsum wallboard sales in 2006. CGC is the
largest manufacturer of gypsum wallboard in eastern Canada. USG Mexico is the
largest manufacturer of gypsum wallboard in Mexico.

PRODUCTS

North American Gypsum's products are used in a variety of building applications
to finish the interior walls, ceilings and floors in residential, commercial and
institutional construction and in certain industrial applications. These
products provide aesthetic as well as sound-dampening, fire-retarding,
abuse-resistance and moisture-control value. The majority of these products are
sold under the SHEETROCK(R) brand name. A line of joint compounds used for
finishing wallboard joints is also sold under the SHEETROCK(R) brand name. The
DUROCK(R) line of cement board and accessories provides water-damage-resistant
and fire-resistant assemblies for both interior and exterior construction. The
FIBEROCK(R) line of gypsum fiber panels includes abuse-resistant wall panels and
floor underlayment as well as sheathing panels usable as a substrate for most
exterior systems and as roof cover board sold under the SECUROCK(R) brand name.
The LEVELROCK(R) line of poured gypsum underlayments provides surface leveling
and enhanced sound performance for residential, commercial and multifamily
installations. We also produce a variety of construction plaster products used
to provide a custom finish for residential and commercial interiors. Like
SHEETROCK(R) brand gypsum wallboard, these

products provide aesthetic, sound-dampening, fire-retarding and abuse-resistance
value. Construction plaster products are sold under the trade names RED TOP(R),
IMPERIAL(R) and DIAMOND(R). We also produce gypsum-based products for
agricultural and industrial customers to use in a number of applications,
including soil conditioning, road repair, fireproofing and ceramics.

MANUFACTURING

North American Gypsum manufactures products at 44 plants located throughout the
United States, Canada and Mexico.

Gypsum rock is mined or quarried at 14 company-owned locations in North
America. In 2006, these locations provided approximately 71% of the gypsum used
by our plants in North America. Some of our manufacturing plants purchase or
acquire synthetic gypsum and natural gypsum rock from outside sources. Outside
purchases or acquisitions accounted for 29% of the gypsum used in our plants in
2006. As of December 31, 2006, our geologists estimated that our recoverable
rock reserves are sufficient for more than 21 years of operation based on our
average annual production of crude gypsum during the past five years of 9.9
million tons. Proven reserves contain approximately 210 million tons. Additional
reserves of approximately 157 million tons are found on four properties not in
operation.

About 24% of the gypsum used in our plants in North America is synthetic
gypsum, which is a byproduct of flue gas desulphurization carried out by
electric generation or industrial plants that burn coal as a fuel. The suppliers
of this kind of gypsum are primarily power companies, which are required to
operate scrubbing equipment for their coal-fired generating plants under federal
environmental regulations. We have entered into a number of long-term supply
agreements to acquire synthetic gypsum. We generally take possession of the
gypsum at the producer's facility and transport it to our wallboard plants by
ship, river barge, railcar or truck. The supply of synthetic gypsum continues to
increase as more power generation plants are fitted with desulphurization
equipment. Eleven of our 24 gypsum wallboard plants use some or all synthetic
gypsum in their operations.

We own and operate seven paper mills located across the United States.
Vertical integration in paper helps to ensure a continuous supply of
high-quality paper that is tailored to the specific needs of our wallboard
production processes. We augment our paper needs through purchases from outside
suppliers. About 6% of our paper supply was purchased from outside suppliers
during 2006.

MARKETING AND DISTRIBUTION

Our gypsum products are distributed through L&W Supply, our wholly owned
subsidiary, other specialty wallboard distributors, building materials dealers,
home improvement centers and other retailers, and contractors. Sales of gypsum
products are seasonal in the sense that sales are generally greater from spring
through the middle of autumn than during the remaining part of the year. Based
on our estimates using publicly available data, internal surveys and gypsum
wallboard shipment data from the Gypsum Association, we estimate that during
2006:

- New residential construction generated about 46% of total industry volume
demand for gypsum wallboard;

- Residential and nonresidential repair and remodel activity generated about
40% of volume demand;

- New nonresidential construction generated about 9% of volume demand; and

- Other activities such as exports and temporary construction generated the
remaining 5% of volume demand.

COMPETITION

U.S. Gypsum accounts for approximately 30% of the total gypsum wallboard sales
in the United States. In 2006, U.S. Gypsum shipped 10.8 billion square feet of
wallboard. The Gypsum Association estimated that U.S. industry shipments
(including imports) in 2006 were 36.2 billion square feet, the second highest
level in history.

Our competitors in the United States are: National Gypsum Company, BPB
Gypsum Inc. and BPB America Inc. (subsidiaries of Compagnie de Saint-Gobain SA),
Georgia-Pacific (a subsidiary of Koch Industries, Inc.), American Gypsum (a unit
of Eagle Materials Inc.), Temple-Inland Forest Products Corporation, Lafarge
North America, Inc., Federal Gypsum Company and PABCO Gypsum. Our

competitors in Canada include BPB Canada Inc. (a subsidiary of Compagnie de
Saint-Gobain SA), Georgia-Pacific (a subsidiary of Koch Industries, Inc.),
Lafarge North America, Inc. and Federal Gypsum Company. Our major competitor in
Mexico is Panel Rey, S.A. The principal methods of competition are quality of
products, service, pricing, compatibility of systems and product design
features.

WORLDWIDE CEILINGS

BUSINESS

Worldwide Ceilings, which manufactures and markets interior systems products
worldwide, includes USG Interiors, the international interior systems business
managed as USG International, and the ceilings business of CGC. We are a leading
supplier of interior ceilings products used primarily in commercial
applications. We estimate that we are the largest manufacturer of ceiling grid
and the second-largest manufacturer/marketer of acoustical ceiling tile in the
world.

PRODUCTS

Worldwide Ceilings manufactures ceiling tile in the United States and ceiling
grid in the United States, Canada, Europe and the Asia-Pacific region. We market
both ceiling tile and ceiling grid in the United States, Canada, Mexico, Europe,
Latin America and the Asia-Pacific region. Our integrated line of ceilings
products provides qualities such as sound absorption, fire retardation and
convenient access to the space above the ceiling for electrical and mechanical
systems, air distribution and maintenance. USG Interiors' significant trade
names include the AURATONE(R) and ACOUSTONE(R) brands of ceiling tile and the
DONN(R), DX(R), FINELINE(R), CENTRICITEE(R), CURVATURA(R) and COMPASSO(R) brands
of ceiling grid.

MANUFACTURING

Worldwide Ceilings manufactures products at 17 plants located in North America,
Europe and the Asia-Pacific region. Principal raw materials used to produce
Worldwide Ceilings' products include mineral fiber, steel, perlite, starch and
high-pressure laminates. We produce some of these raw materials internally and
obtain others from outside suppliers.

MARKETING AND DISTRIBUTION

Worldwide Ceilings sells products primarily in markets related to the
construction and renovation of nonresidential buildings. Ceiling products are
marketed and distributed through a network of distributors, installation
contractors, L&W Supply locations and home improvement centers.

COMPETITION

Our principal competitors in ceiling grid include WAVE (a joint venture between
Armstrong World Industries, Inc. and Worthington Industries) and Chicago
Metallic Corporation. Our principal global competitors in acoustical ceiling
tile include Armstrong World Industries, Inc., OWA Faserplattenwerk GmbH
(Odenwald), BPB America Inc. and BPB Canada Inc. (subsidiaries of Compagnie de
Saint-Gobain SA) and AMF Mineralplatten GmbH Betriebs KG (owned by Gebr. Knauf
Verwaltungsgellschaft KG). Principal methods of competition are quality of
products, service, pricing, compatibility of systems and product design
features.

BUILDING PRODUCTS DISTRIBUTION

BUSINESS

Building Products Distribution consists of L&W Supply, the leading specialty
building products distribution business in the United States. In 2006, L&W
Supply distributed approximately 12% of all gypsum wallboard in the United
States, including approximately 32% of U.S. Gypsum's wallboard production.

MARKETING AND DISTRIBUTION

L&W Supply was organized in 1971. It is a service-oriented business that stocks
a wide range of construction materials. It delivers less-than-truckload
quantities of construction materials to job sites and places them in areas where
work is being done, thereby reducing the need for handling by contractors. L&W
Supply specializes in the distribution of gypsum wallboard (which accounted for
54% of its 2006 net sales), joint compound and other gypsum products
manufactured by U.S. Gypsum and others. It also distributes products
manufactured by USG Interiors, such as acoustical ceiling tile and grid, as well
as products of other manufacturers, including drywall metal, insulation, roofing
products and accessories. L&W Supply leases

approximately 90% of its facilities from third parties. Typical leases have
terms of five years and include renewal options.

L&W Supply remains focused on opportunities to profitably grow its
specialty business as well as optimize asset utilization. L&W Supply increased
the number of its locations, largely through acquisitions, to 220 in 36 states
as of December 31, 2006, compared with 192 locations as of December 31, 2005 and
186 locations as of December 31, 2004.

COMPETITION

L&W Supply competes with a number of specialty wallboard distributors, lumber
dealers, hardware stores, home improvement centers and acoustical ceiling tile
distributors. Its competitors include Gypsum Management Supply with locations in
the southern, central and western United States, KCG, Inc. in the southwestern
and central United States, The Strober Organization, Inc. in the northeastern
and mid-Atlantic states, and Allied Building Products Corporation in the
northeastern, central and western United States. Principal methods of
competition are location, service, range of products and pricing.

EXECUTIVE OFFICERS OF THE REGISTRANT

See Part III, Item 10, Directors, Executive Officers and Corporate Governance -
Executive Officers of the Registrant (as of February 16, 2007).

OTHER INFORMATION

RESEARCH AND DEVELOPMENT

We perform research and development at the USG Research and Technology
Innovation Center in Libertyville, Ill. Research team members provide product
support and new product development for our operating units. With unique fire,
acoustical, structural and environmental testing capabilities, the research
center can evaluate products and systems. Chemical analysis and materials
characterization support product development and safety/quality assessment
programs. Development activities can be taken to an on-site pilot plant before
being transferred to a full-size plant. We also conduct research at two
satellite locations where industrial designers and fabricators work on new
ceiling grid concepts and prototypes. In 2006, we formed a new exploratory
research group that gives special focus to innovation, further enhancing the
research team's commitment to supporting our growth.

We charge research and development expenditures to earnings as incurred.
These expenditures amounted to $20 million in 2006, $17 million in 2005 and $17
million in 2004.

ENERGY

Our primary supplies of energy have been adequate, and we have not been required
to curtail operations as a result of insufficient supplies. Supplies are likely
to remain sufficient for our projected requirements. Currently, we use energy
price swap agreements to hedge the cost of a substantial majority of purchased
natural gas. Generally, we have a substantial majority of our anticipated
purchases of natural gas over the next 12 months hedged; however, we review our
positions regularly and make adjustments as market conditions warrant.

SIGNIFICANT CUSTOMER

On a worldwide basis, The Home Depot, Inc. accounted for approximately 11% of
our consolidated net sales in each of 2006, 2005 and 2004.

OTHER

Because we fill orders upon receipt, no operating segment has any significant
order backlog.

None of our operating segments has any special working capital
requirements.

Loss of one or more of our patents or licenses would not have a material
impact on our business or our ability to continue operations.

No material part of any of our business is subject to renegotiation of
profits or termination of contracts or subcontracts at the election of the
government.

All of our products regularly require improvement to remain competitive. We
also develop and produce comprehensive systems employing several of our
products. To maintain our high standards and remain a leader in the building
materials industry, we perform extensive research and development activities and
make the necessary capital expenditures to maintain production facilities in
good operating condition.

In 2006, our average number of employees was 14,700.

See Note 17 to the Consolidated Financial Statements for financial
information pertaining to operating and geographic segments and Item 1A, Risk

Factors, for information regarding the possible effects that compliance with
environmental laws and regulations may have on our businesses and operating
results.

AVAILABLE INFORMATION

We maintain a website at www.usg.com and make available at this website our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and all amendments to those reports as soon as reasonably practicable
after they are electronically filed with or furnished to the Securities and
Exchange Commission, or SEC. If you wish to receive a paper copy of any exhibit
to our reports filed with or furnished to the SEC, the exhibit may be obtained,
upon payment of reasonable expenses, by writing to: Corporate Secretary, USG
Corporation, P.O. Box 6721, Chicago, IL 60680-6721.

ITEM 1A. RISK FACTORS

Our business, operations and financial condition are subject to various risks
and uncertainties. We have described below significant factors that may
adversely affect our business, operations, industry or future financial
performance. You should carefully consider these factors, together with all of
the other information in this annual report on Form 10-K and in other documents
that we file with the SEC, before making any investment decision about our
securities. Adverse developments or changes related to any of the factors listed
below could affect our business, financial condition, results of operations and
growth.

OUR BUSINESSES ARE CYCLICAL IN NATURE, AND PROLONGED PERIODS OF WEAK DEMAND OR
EXCESS SUPPLY MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL
CONDITION AND OPERATING RESULTS.

Our businesses are cyclical in nature and sensitive to changes in general
economic conditions, including, in particular, conditions in the housing and
construction-based markets. Prices for our products and services are affected by
overall supply and demand in the markets for our products and for our
competitors' products. Market prices of building products historically have been
volatile and cyclical. There is currently significant excess wallboard
production capacity industry-wide, and we expect approximately 1 billion square
feet of additional capacity, net of recent closures, to become operational in
the industry in 2007, with more new capacity expected in 2008. Prolonged periods
of weak demand or excess supply in any of our businesses may have a material
adverse effect on our revenues and margins and harm our business, financial
condition and operating results.

The markets that we serve, including in particular the housing and
construction-based markets, are affected by the movement of interest rates.
Higher interest rates could have a material adverse effect on our business,
financial condition and results of operations. Our business is also affected by
a variety of other factors beyond our control, including employment levels,
foreign currency exchange rates, office vacancy rates, unforeseen inflationary
pressures and consumer confidence. Since our operations occur in a variety of
geographic markets, our businesses are subject to the economic conditions in
each of these geographic markets. General economic downturns or localized
downturns in the regions where we have operations may have a material adverse
effect on our business, financial condition and operating results.

THE SEASONAL NATURE OF OUR BUSINESSES MAY MATERIALLY AND ADVERSELY AFFECT THE
TRADING PRICES OF OUR SECURITIES.

A majority of our businesses are seasonal, with peak sales typically occurring
from spring through the middle of autumn. Quarterly results have varied
significantly in the past and are likely to vary significantly from quarter to
quarter in the future. Those variations may materially and adversely affect our
financial performance and the trading prices of our securities.

WE FACE COMPETITION IN EACH OF OUR OPERATING SEGMENTS. IF WE CANNOT SUCCESSFULLY
COMPETE IN THE MARKETPLACE, OUR BUSINESS, FINANCIAL CONDITION AND OPERATING
RESULTS MAY BE MATERIALLY AND ADVERSELY AFFECTED.

We face competition in each of our operating segments. Principal methods of
competition include quality of products, service, location, pricing,
compatibility of systems, range of products and

product design features. Actions of our competitors could lead to lower pricing
by us in an effort to maintain market share. To achieve and/or maintain
leadership positions in key product categories, we must continue to develop
brand recognition and loyalty, enhance product quality and performance and
develop our manufacturing and distribution capabilities.

We also compete through our use and improvement of information technology.
In order to remain competitive, we need to provide customers with timely,
accurate, easy-to-access information about product availability, orders and
delivery status using state-of-the-art systems. While we have provided manual
processes for short-term failures and disaster recovery capability, a prolonged
disruption of systems or other failure to meet customers' expectations regarding
the capabilities and reliability of our systems may materially and adversely
affect our operating results particularly during any prolonged period of
disruption.

We intend to continue making investments in research and development to
develop new and improved products and more efficient production methods. We need
to continue to develop new products and improve our existing products and
production efficiency in order to maintain our market leadership position. Our
failure to continue making these investments could depress our revenues and
adversely affect our operating results and market share. In addition, there can
be no assurance that revenue from new products or enhancements will be
sufficient to recover the research and development expenses associated with
their development.

WE INTEND TO PURSUE ACQUISITIONS, JOINT VENTURES AND OTHER TRANSACTIONS THAT
COMPLEMENT OR EXPAND OUR BUSINESSES. WE MAY NOT BE ABLE TO COMPLETE PROPOSED
TRANSACTIONS, AND EVEN IF COMPLETED, THE TRANSACTIONS MAY INVOLVE A NUMBER OF
RISKS THAT MAY RESULT IN A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL
CONDITION AND OPERATING RESULTS.

We have recently completed a number of acquisitions of businesses that we
believe will contribute to our future success. We intend to continue to pursue
opportunities to buy other businesses or technologies that could complement,
enhance or expand our current businesses or product lines or that might
otherwise offer us growth opportunities. We may have difficulty identifying
appropriate opportunities or, if we do identify opportunities, we may not be
successful in completing transactions for a number of reasons. Any transactions
that we are able to identify and complete may involve a number of risks,
including:

- the diversion of management's attention from our existing businesses to
integrate the operations and personnel of the acquired or combined business
or joint venture;

- possible adverse effects on our operating results during the integration
process;

- failure of the acquired business to achieve expected operational
objectives; and

- our possible inability to achieve the intended objectives of the
transaction.

In addition, we may not be able to successfully or profitably integrate,
operate, maintain and manage our newly acquired operations or their employees.
We may not be able to maintain uniform standards, controls, procedures and
policies, which may lead to operational inefficiencies. In addition, future
acquisitions may result in dilutive issuances of equity securities or the
incurrence of additional indebtedness.

IF COSTS OF KEY RAW MATERIALS, ENERGY OR EMPLOYEE BENEFITS INCREASE, OR THE
AVAILABILITY OF KEY RAW MATERIALS AND ENERGY DECREASES, OUR COST OF PRODUCTS
SOLD WILL INCREASE, AND OUR OPERATING RESULTS MAY BE MATERIALLY AND ADVERSELY
AFFECTED.

The cost and availability of raw materials and energy are critical to our
operations. For example, we use substantial quantities of gypsum, wastepaper,
mineral fiber, steel, perlite, starch and high pressure laminates. The cost of
these items has been volatile, and availability has sometimes been limited. We
obtain some of these materials from a limited number of suppliers, which
increases the risk of unavailability. Furthermore, we may not be able to pass
increased raw materials prices on to our customers if the market or existing
agreements with our customers do not allow us to raise the prices of our
finished products. If price adjustments

significantly trail the increase in raw materials prices or if we cannot
effectively hedge against price increases, our operating results may be
materially and adversely affected.

Wastepaper prices are affected by market conditions, principally supply. We
buy various grades of wastepaper, and shortages occur periodically in one or
more grades and may vary among geographic regions. As a result, we have
experienced, and expect in the future to experience, volatility in wastepaper
availability and its cost, affecting the mix of products manufactured at
particular locations or the cost of producing them.

Approximately one quarter of the gypsum used in our plants is synthetic
gypsum, which is a byproduct resulting primarily from flue gas desulphurization
carried out by electric generation or industrial plants burning coal as a fuel.
The suppliers of synthetic gypsum are primarily power companies, which are
required under federal environmental regulations to operate scrubbing equipment
for their coal-fired generating plants. Environmental regulatory changes or
changes in methods used to comply with environmental regulations could have an
impact on the price and availability of synthetic gypsum.

Energy costs also are affected by various market factors, including the
availability of supplies of particular forms of energy, energy prices and local
and national regulatory decisions. Prices for natural gas and electrical power,
which are significant components of the costs associated with our gypsum and
interior systems products, have both increased significantly and become more
volatile in recent years. There may be substantial increases in the price, or a
decline in the availability, of energy in the future, especially in light of
recent instability in some energy markets. As is the case with raw materials, we
may not be able to pass on increased costs through increases in the prices of
our products.

Transportation costs associated with our gypsum and interior systems
products are a significant portion of the variable cost of each of our operating
segments. Significant increases in the cost of fuel can result in material
increases in the cost of transportation, which could materially and adversely
affect our operating profits.

In addition, our profit margins are affected by costs related to
maintaining our employee benefit plans (pension and medical insurance for active
employees and retirees). The recognition of costs and liabilities associated
with these plans for financial reporting purposes is affected by assumptions
made by management and used by actuaries engaged by us to calculate the
projected and accumulated benefit obligations and the annual expense recognized
for these plans. The assumptions used in developing the required estimates
primarily include discount rates, expected return on plan assets for the funded
plans, compensation increase rates, retirement rates, mortality rates and, for
postretirement benefits, health-care-cost trend rates. Economic factors and
conditions could affect any of these assumptions and may affect our estimated
and actual employee benefit plan costs and our business, financial condition and
operating results.

IF THE MARKET PRICE OF NATURAL GAS DECLINES, IT MAY HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS AS A RESULT OF
OUR HEDGING TRANSACTIONS AND FIXED-PRICE SUPPLY AGREEMENTS FOR NATURAL GAS.

We use natural gas extensively in the production of gypsum and interior systems
products. As a result, our revenues, profitability, operating cash flows and
future rate of growth are highly dependent on the price of natural gas, which
has been historically very volatile and is affected by numerous factors beyond
our control. We are not always able to pass on increases in energy costs to our
customers through increases in product prices. In an attempt to reduce our price
risk related to fluctuations in natural gas prices, we periodically enter into
hedging transactions and fixed-price supply agreements. Although we benefit from
those agreements when spot prices exceed contractually specified prices, if the
market price for natural gas declines, we may not be able to take advantage of
decreasing market prices while our competitors may be able to do so. Any
substantial or extended decline in prices of or demand for natural gas could
cause our production costs to be greater than that of our competitors. As a
result, a decline in prices may have a material adverse effect on our business,
financial condition and operating results.

In addition, the results of our hedging transactions could be positive,
neutral or negative in any period depending on price changes in the hedged
exposures. Further, changes to the price of natural gas could result in changes
to the value of our hedging contracts, which could impact our results of

operations for a particular period. Our hedging activities are not designed to
mitigate long-term natural gas price fluctuations and, therefore, will not
protect us from long-term natural gas price increases.

THE LOSS OF SALES TO ONE OR MORE OF OUR MAJOR CUSTOMERS MAY HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS.

We face strong competition for our major customers. If one or more of our major
customers reduces, delays or cancels substantial orders, our business, financial
condition and operating results may be materially and adversely affected,
particularly for the quarter in which the reduction, delay or cancellation
occurs.

CERTAIN OF OUR CUSTOMERS HAVE BEEN EXPANDING AND MAY CONTINUE TO EXPAND THROUGH
CONSOLIDATION AND INTERNAL GROWTH, THEREBY POSSIBLY DEVELOPING INCREASED BUYING
POWER OVER US, WHICH MAY MATERIALLY AND ADVERSELY AFFECT OUR REVENUES AND
RESULTS OF OPERATIONS.

Certain of our important customers are large companies with significant buying
power over suppliers. In addition, potential further consolidation in the
distribution channels could enhance the ability of certain of our customers to
seek more favorable terms, including pricing, for the products that they
purchase from us. Accordingly, our ability to maintain or raise prices in the
future may be limited, including during periods of raw material and other cost
increases. If we are forced to reduce prices or to maintain prices during
periods of increased costs, or if we lose customers because of pricing or other
methods of competition, our revenues and operating results may be materially and
adversely affected.

OUR SUBSTANTIAL INDEBTEDNESS MAY ADVERSELY AFFECT OUR BUSINESS, FINANCIAL
CONDITION AND OPERATING RESULTS.

Our substantial indebtedness may have material adverse effects on our business,
including to:

- make it more difficult for us to satisfy our debt service obligations;

- limit our ability to obtain additional financing to fund our working
capital requirements, capital expenditures, acquisitions, investments, debt
service obligations and other general corporate requirements;

- require us to dedicate a substantial portion of our cash flows from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flows to fund working capital, capital
expenditures and other general operating requirements;

- restrict us from making strategic acquisitions or taking advantage of
favorable business opportunities;

- place us at a relative competitive disadvantage compared to our competitors
that have proportionately less debt;

- limit our flexibility to plan for, or react to, changes in our business and
the industries in which we operate, which may adversely affect our
operating results and ability to meet our debt service obligations with
respect to our outstanding indebtedness;

- increase our vulnerability to adverse general economic and industry
conditions, including recessions; and

- limit our ability or increase the cost to refinance indebtedness.

If we do incur additional indebtedness, the risks related to our substantial
indebtedness may intensify.

WE REQUIRE A SIGNIFICANT AMOUNT OF LIQUIDITY TO SERVICE OUR INDEBTEDNESS AND
FUND OPERATIONS, CAPITAL EXPENDITURES, RESEARCH AND DEVELOPMENT EFFORTS,
ACQUISITIONS AND OTHER CORPORATE EXPENSES.

Our ability to fund operations, capital expenditures, research and development
efforts, acquisitions and other corporate expenses, including repayment of our
indebtedness, depends on our ability to generate cash through future operating
performance, which is subject to economic, financial, competitive, legislative,
regulatory and other factors. Many of these factors are beyond our control. We
cannot

assure you that our business will generate sufficient cash flow from operations
or that future borrowings will be available to us in an amount sufficient to
fund our needs.

If we are unable to generate sufficient cash flow to fund our needs, we may
need to pursue one or more alternatives, such as to:

- curtail operations;

- reduce or delay planned capital expenditures, research and development or
acquisitions;

- obtain additional financing or restructure or refinance all or a portion of
our indebtedness on or before maturity;

- sell assets or businesses; and

- sell additional equity.

Any curtailment of operations, reduction or delay in planned capital
expenditures, research and development or acquisitions or sale of assets or
businesses may materially and adversely affect our future revenue prospects. In
addition, we cannot assure you that we will be able to raise additional equity
capital, restructure or refinance any of our indebtedness or obtain additional
financing on commercially reasonable terms or at all.

COVENANT RESTRICTIONS UNDER OUR CREDIT AGREEMENT AND THE INDENTURE GOVERNING OUR
SENIOR NOTES MAY LIMIT OUR ABILITY TO PURSUE BUSINESS ACTIVITIES OR OTHERWISE
OPERATE OUR BUSINESS.

Our credit agreement and the indenture governing our senior notes contain, among
other things, covenants that limit our ability to finance future operations or
capital needs or to engage in other business activities, including our ability
to:

- incur additional indebtedness;

- make guarantees;

- sell assets or make other fundamental changes;

- engage in mergers and acquisitions;

- make investments;

- enter into transactions with our affiliates;

- change our business purposes; and

- enter into sale and lease-back transactions.

In addition, we are subject to agreements that require us to meet and maintain
certain financial ratios and tests, which may require that we take action to
reduce our debt or to act in a manner contrary to our business objectives.
Events beyond our control, including changes in general business and economic
conditions, may affect our ability to comply with these covenants or meet those
financial ratios and tests. We may not meet those ratios and tests. A breach of
any of these covenants or failure to maintain the required ratios and meet the
required tests may result in an event of default under those agreements. This
may allow the counterparties to those agreements to declare all amounts
outstanding thereunder, together with accrued interest, to be immediately due
and payable. If this occurs, we may not be able to refinance the accelerated
indebtedness on favorable terms, or at all, or repay the accelerated
indebtedness.

WE ARE SUBJECT TO ENVIRONMENTAL AND SAFETY REGULATIONS THAT MAY CHANGE AND COULD
CAUSE US TO MAKE MODIFICATIONS TO HOW WE MANUFACTURE AND PRICE OUR PRODUCTS.

We are subject to federal, state, local and foreign laws and regulations
governing the protection of the environment and occupational health and safety,
including laws regulating air emissions, wastewater discharges, the management
and disposal of hazardous materials and wastes, and the health and safety of our
employees. We are also required to obtain permits from governmental authorities
for certain operations. If we were to violate or fail to comply with these laws,
regulations or permits, we could incur fines, penalties or other sanctions. In
addition, we could be held responsible for costs and damages arising from any
contamination at our past or present facilities or at third-party waste disposal
sites. We cannot completely eliminate the risk of contamination or injury
resulting from hazardous materials.

Environmental laws tend to become more

stringent over time, and we could incur material expenses relating to compliance
with future environmental laws. In addition, the price and availability of
certain of the raw materials that we use, including synthetic gypsum, may vary
in the future as a result of environmental laws and regulations affecting our
suppliers. An increase in the price of our raw materials, a decline in their
availability or future costs relating to our compliance with environmental laws
may materially and adversely affect our operating margins or result in reduced
demand for our products.

WE DEPEND ON OUR SENIOR MANAGEMENT TEAM FOR THEIR EXPERTISE AND LEADERSHIP, AND
THE LOSS OF ANY MEMBER COULD ADVERSELY AFFECT OUR OPERATIONS.

Our success depends on the management and leadership skills of our senior
management team. The loss of any of these individuals or an inability to attract
and retain additional personnel could prevent us from implementing our business
strategy. Although we have incentives for management to stay with us, we cannot
assure you that we will be able to retain all of our existing senior management
personnel or attract additional qualified personnel when needed.

WE DO NOT EXPECT TO PAY CASH DIVIDENDS ON OUR COMMON STOCK FOR THE FORESEEABLE
FUTURE.

We have not paid a dividend on our common stock since the first quarter of 2001
and have no plans to do so in the foreseeable future. Further, our credit
facilities prohibit us from paying a dividend on, or repurchasing, our stock if
a default exists under the credit facilities. Because we do not expect to pay
dividends on our common stock in the foreseeable future, investors will have to
rely on stock appreciation for a return on their investment.

A SMALL NUMBER OF OUR STOCKHOLDERS COULD BE ABLE TO SIGNIFICANTLY INFLUENCE OUR
BUSINESS AND AFFAIRS.

Based on filings made with the SEC and other information available to us, as of
January 31, 2007, we believe that fewer than 10 organizations or individuals
collectively controlled over 50% of our common stock, including Berkshire
Hathaway Inc., which beneficially owned approximately 19% of our common stock as
of that date. Accordingly, a small number of our stockholders could affect
matters requiring approval by stockholders, including the election of directors
and the approval of mergers or other business combination transactions.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We operate plants, mines, quarries, transport ships and other facilities in
North America, Europe and the Asia-Pacific region. In 2006, U.S. Gypsum's
SHEETROCK(R) brand gypsum wallboard plants operated at 92% of capacity. USG
Interiors' AURATONE(R) brand ceiling tile plants operated at 65% of capacity.
The locations of our production properties, grouped by operating segment, are as
follows (plants are owned unless otherwise indicated):

NORTH AMERICAN GYPSUM

GYPSUM WALLBOARD AND OTHER GYPSUM PRODUCTS *
Aliquippa, Pa.**
Baltimore, Md.**
Boston (Charlestown), Mass.
Bridgeport, Ala.**
Detroit (River Rouge), Mich.
East Chicago, Ind.**
Empire, Nev.
Fort Dodge, Iowa
Galena Park, Texas**
Jacksonville, Fla.**
New Orleans, La.**
Norfolk, Va.
Plaster City, Calif.
Rainier, Ore.
Shoals, Ind.**
Sigurd, Utah
Southard, Okla.
Sperry, Iowa**
Stony Point, N.Y.
Sweetwater, Texas
Hagersville, Ontario, Canada**
Montreal, Quebec, Canada **
Monterrey, Nuevo Leon, Mexico
Puebla, Puebla, Mexico

* The gypsum wallboard line at Santa Fe Springs, Calif., was permanently
closed in January 2007.

** Plants supplied fully or partially by synthetic gypsum

JOINT COMPOUND (SURFACE PREPARATION AND JOINT TREATMENT PRODUCTS)

Auburn, Wash.
Bridgeport, Ala.
Chamblee, Ga.
Dallas, Texas
East Chicago, Ind.
Fort Dodge, Iowa
Galena Park, Texas
Gypsum, Ohio
Jacksonville, Fla.
Phoenix (Glendale), Ariz. (leased)
Port Reading, N.J.
Sigurd, Utah
Torrance, Calif.
Calgary, Alberta, Canada (leased)
Hagersville, Ontario, Canada
Montreal, Quebec, Canada
Surrey, British Columbia, Canada
Monterrey, Nuevo Leon, Mexico
Puebla, Puebla, Mexico

CEMENT BOARD

Baltimore, Md.
Detroit (River Rouge), Mich.
New Orleans, La.
Santa Fe Springs, Calif.
Monterrey, Nuevo Leon, Mexico

GYPSUM ROCK (MINES AND QUARRIES)

Alabaster (Tawas City), Mich.
Empire, Nev.
Fort Dodge, Iowa
Plaster City, Calif.
Shoals, Ind.
Sigurd, Utah
Southard, Okla.
Sperry, Iowa
Sweetwater, Texas
Hagersville, Ontario, Canada
Little Narrows, Nova Scotia, Canada
Windsor, Nova Scotia, Canada
Tecoman, Colima, Mexico
Monterrey, Nuevo Leon, Mexico

PAPER FOR GYPSUM WALLBOARD

Clark, N.J.
Galena Park, Texas
Gypsum, Ohio
Jacksonville, Fla.
North Kansas City, Mo.
Oakfield, N.Y.
South Gate, Calif.

OTHER PRODUCTS

We operate a mica-processing plant at Spruce Pine, N.C. We manufacture metal
lath, plaster and drywall accessories and light gauge steel framing products at
Puebla, Puebla, Mexico and Monterrey, Nuevo Leon, Mexico. We produce plaster
products at Saltillo, Coahuila, Mexico. We manufacture gypsum fiber panel
products at Gypsum, Ohio, paper-faced metal corner bead at Auburn, Wash., and
Weirton, W.Va., structural cementitious panels at Delavan,

Wis. (leased), light gauge steel framing products at Tuscaloosa, Ala. (leased),
and sealants and finishes at La Mirada, Calif.

NEW FACILITIES

Under our capital expenditures program, we are building new gypsum wallboard
plants in Washingtonville, Pa., which we expect to complete in 2008, and
Tecoman, Colima, Mexico, which we expect to complete in 2007. We are also
replacing existing capacity at U.S. Gypsum's Norfolk, Va., gypsum wallboard
plant with a new low-cost wallboard line. We expect to complete the Norfolk
project in 2007. In 2006, we acquired a paper mill in Otsego, Mich., and are
converting it to manufacture high-quality, low-cost wallboard paper. We expect
it to become operational in 2008.

OCEAN VESSELS

Gypsum Transportation Limited, our wholly owned subsidiary headquartered in
Bermuda, owns and operates a fleet of three self-unloading ocean vessels. Under
a contract of affreightment, these vessels transport gypsum rock from Nova
Scotia to our East Coast plants. We offer excess ship time, when available, for
charter on the open market to back haul cargo such as coal. We have placed an
order for a new 40,000-ton self-unloading ship that is intended to lower the
delivered cost of gypsum rock to East Coast wallboard plants. The new ship is
expected to become operational in 2008.

WORLDWIDE CEILINGS

CEILING GRID

Cartersville, Ga.
Stockton, Calif.
Westlake, Ohio
Auckland, New Zealand (leased)
Dreux, France
Oakville, Ontario, Canada
Peterlee, England (leased)
Shenzhen, China (leased)
St. Petersburg, Russia (leased)
Viersen, Germany

A coil coater and slitter plant used in the production of ceiling grid is
located in Westlake, Ohio. Slitter plants are located in Stockton, Calif.
(leased), and Antwerp, Belgium (leased).

CEILING TILE

Cloquet, Minn.
Greenville, Miss.
Walworth, Wis.

OTHER PRODUCTS

We manufacture mineral fiber products at Red Wing, Minn., and Walworth, Wis.,
metal specialty systems at Oakville, Ontario, Canada, joint compound at
Peterlee, England, St. Petersburg, Russia, Viersen, Germany, and Port Klang,
Malaysia (leased), gypsum wallboard and joint compound at Lima, Peru, and bead
and trim products at Stockton, Calif.

ITEM 3. LEGAL PROCEEDINGS

See Part II, Item 8, Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements, Note 2, Resolution of USG's Reorganization
Proceedings, and Note 19, Litigation, for information on legal proceedings,
which information is incorporated herein by reference.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock trades on the New York Stock Exchange, or NYSE, and the Chicago
Stock Exchange under the symbol USG. The NYSE is the principal market for our
common stock. As of January 31, 2007, there were 2,916 record holders of our
common stock. We currently do not pay dividends on our common stock.

See Part III, Item 12, Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters, for information regarding common
stock authorized for issuance under equity compensation plans.

We did not purchase any of our equity securities during the fourth quarter of
2006.

The high and low sales prices of our common stock in 2006 and 2005 were as
follows:

2006 2005
---------------- ---------------
High Low High Low
------- ------ ------ ------

First quarter $ 99.30 $64.05 $40.95 $26.80
Second quarter 121.70 65.33 50.00 30.07
Third quarter* 57.45 43.68 71.25 40.57
Fourth quarter 58.50 46.00 69.47 56.40

* During the third quarter of 2006, we completed the Rights Offering pursuant
to which our stockholders of record on June 30, 2006 were issued
transferable rights to purchase, at $40 per share, one new share of our
common stock for each share owned. In connection with the Rights Offering
we issued 44.92 million new shares of our common stock. The historical
common stock prices shown above have not been adjusted to reflect the
Rights Offering.

ITEM 6. SELECTED FINANCIAL DATA

USG CORPORATION
FIVE-YEAR SUMMARY

Years Ended December 31,
-----------------------------------------------
2006 2005 2004 2003 2002
------- ------- ------- ------- -------

(dollars in millions, except per-share data)
STATEMENT OF OPERATIONS DATA:
Net sales $ 5,810 $ 5,139 $ 4,509 $ 3,666 $ 3,468
Cost of products sold 4,440 4,037 3,672 3,121 2,884
Gross profit 1,370 1,102 837 545 584
Selling and administrative expenses 419 352 317 324 312
Asbestos claims provision (reversal) (44) 3,100 -- -- --
Chapter 11 reorganization expenses 10 4 12 11 14
Operating profit (loss) 985 (2,354) 508 210 258
Interest expense (a) 555 5 5 6 8
Interest income (43) (10) (6) (4) (4)
Other income, net (3) -- -- (9) (2)
Income taxes (benefit) 188 (924) 197 79 117
Earnings (loss) before cumulative effect of accounting change 288 (1,425) 312 138 139
Cumulative effect of accounting change -- (11) -- (16) (96)
Net earnings (loss) 288 (1,436) 312 122 43
Net Earnings (Loss) Per Common Share (b):
Cumulative effect of accounting change -- (0.20) -- (0.29) (1.72)
Basic 4.34 (25.49) 5.62 2.18 .77
Diluted 4.33 (25.49) 5.62 2.18 .77
------- ------- ------- ------- -------
BALANCE SHEET DATA (as of the end of the year):
Working capital 943 1,579 1,220 1,084 939
Current ratio 1.53 3.63 3.14 3.62 3.14
Cash and cash equivalents (c) 565 936 756 700 649
Property, plant and equipment, net 2,210 1,946 1,853 1,818 1,788
Total assets 5,365 6,142 4,278 3,799 3,636
Long-term debt (d) (e) 1,439 -- 1 2 2
Liabilities subject to compromise (e) -- 5,340 2,242 2,243 2,272
Total stockholders' equity (deficit) 1,534 (302) 1,024 689 535
------- ------- ------- ------- -------
OTHER INFORMATION:
Capital expenditures 393 198 138 111 100
Stock price per common share (f) 54.80 65.00 40.27 16.57 8.45
Cash dividends declared per common share -- -- -- -- --
Average number of employees 14,700 14,100 13,800 13,900 14,100

(a) Interest expense for 2006 included post-petition interest and fees of $528
million related to pre-petition obligations. In accordance with bankruptcy
accounting rules, interest expense on pre-petition debt and other
obligations had not been accrued or recorded from June 25, 2001, the date
on which we filed our Chapter 11 petition for reorganization, through
December 31, 2005.

(b) Net earnings (loss) per common share reflect the effect of the Rights
Offering described in Note 4 to the Consolidated Financial Statements.

(c) Cash, cash equivalents and restricted cash totaled $571 million as of
December 31, 2006. Cash, cash equivalents, restricted cash and marketable
securities totaled $1.577 billion as of December 31, 2005, $1.249 billion
as of December 31, 2004, $947 million as of December 31, 2003 and $830
million as of December 31, 2002.

(d) Total debt as of December 31, 2006 was $2.504 billion. See Note 3 to the
Consolidated Financial Statements.

(e) Debt of $1.005 billion was included in liabilities subject to compromise
for 2002 through 2005.

(f) Stock price per common share reflects the final closing price of the year.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION

OVERVIEW

RESOLUTION OF USG'S REORGANIZATION PROCEEDINGS

As part of the plan, the following important events have occurred:

- On the Effective Date, we paid $890 million to the Asbestos Trust and
issued to the Trust an interest-bearing note in the amount of $10 million,
which we paid on December 21, 2006.

- Pursuant to the plan of reorganization, allowed claims of all other
creditors have been, or will be, paid in full, with interest where agreed
or required.

our common stock in connection with completion of the Rights Offering in
the third quarter of 2006.

The following subsidiaries were debtors in the Chapter 11 proceedings: United
States Gypsum Company, or U.S. Gypsum; USG Interiors, Inc.; USG Interiors
International, Inc.; L&W Supply Corporation, or L&W Supply; Beadex
Manufacturing, LLC; B-R Pipeline Company; La Mirada Products Co., Inc.; Stocking
Specialists, Inc.; USG Industries, Inc.; and USG Pipeline Company.

Additional information about funding the plan of reorganization is included
under "Liquidity and Capital Resources" below and in Note 3 to the Consolidated
Financial Statements. Additional information about the Rights Offering is
included in Note 4 to the Consolidated Financial Statements. Asbestos property
damage claims are discussed in Note 19 to the Consolidated Financial Statements.

FINANCIAL INFORMATION

Net sales in 2006 were a record $5.810 billion, surpassing the previous record
set in 2005 by 13%. Operating profit of $985 million was also a record. Net
earnings were $288 million, or $4.33 per diluted share.

These results were primarily driven by higher selling prices for our
products and a strong level of new housing construction in the early part of
2006. However, housing starts fell considerably during the second half of the
year causing demand for building products to decrease.

Shipments of gypsum wallboard in 2006 were the second highest in history
for the industry. Capacity utilization rates in excess of 90% for the industry
resulted in higher market selling prices for gypsum wallboard in 2006. The
nationwide average realized selling price for our SHEETROCK(R) brand gypsum
wallboard rose 25% from 2005. However, as demand fell in the second half of the
year, capacity utilization rates and selling prices also began to drop.

As of December 31, 2006, we had $565 million of cash and cash equivalents
compared with $1.6 billion of cash, cash equivalents, restricted cash and
marketable securities as of December 31, 2005. The decline primarily reflects
our funding of payments due under our plan of reorganization.

MARKET TRENDS

Our businesses are cyclical in nature and sensitive to changes in general
economic conditions, including, in particular, conditions in the housing and
construction-based markets. Housing starts, a major source of demand for our
products and services, experienced a rapid decline in the second half of 2006.
According to data issued by the U.S. Bureau of the Census, starts fell from an
annualized rate of more than 2 million units at the beginning of 2006 to about
1.6 million at the end of the year, representing a drop of over 20%.

The downturn that began in 2006 has been rapid as both homebuilders and
drywall dealers reduced activity to keep inventories from expanding. For us,
that meant a rapid contraction in wallboard demand. Industry wallboard
shipments, which were up about 6% in the first seven months of 2006 compared
with the first seven months of 2005, were down 15% in the last five months of
2006 compared with the same period in 2005. As a result, industry capacity
utilization rates went from about 100% at mid-year 2006 to less than 80% at the
end of the year, and wallboard pricing began declining as capacity utilization
rates fell below 90%, the level at which prices historically have begun to
erode. U.S. Gypsum's wallboard capacity utilization rate was about 79% for the
fourth quarter of 2006.

During 2007, we expect USG and industry wallboard volumes to be below 2006
levels, and we expect a further decline in selling prices. This combination is
expected to have a significant negative impact on North American Gypsum profits
compared with the record-setting performance of recent years.

We are responding to the changing market conditions with a goal of matching
our gypsum wallboard operations more closely to current demand levels. As of
January 31, 2007, we had temporarily curtailed annual gypsum wallboard
production by more than 2 billion square feet by reducing shifts and days of
operation at higher-cost plants. In addition, in January 2007, we permanently
closed two older, high-cost production lines, one at our Jacksonville, Fla.,
plant and one at our Santa Fe Springs, Calif., plant, eliminating an additional
400 million square feet of annual capacity.

Currently, there is significant excess wallboard production capacity
industry-wide. We expect approximately 1 billion square feet of additional

capacity, net of recent closures, to become operational in the industry in 2007,
with more new capacity expected in 2008. We expect to see continued downward
pressure on industry utilization rates and selling prices during 2007.

See Part I, Item 1A, Risk Factors, for additional information on the
cyclicality of our businesses and other risks and uncertainties that affect our
businesses.

STRATEGIC ACTIONS

In addition to the steps we have taken to match our gypsum wallboard operations
more closely to current demand levels, we intend to continue to seek
opportunities to grow our business and improve operating results by:

- making selective acquisitions to grow our Building Products Distribution
business;

- continuing to invest in new, low-cost gypsum wallboard manufacturing
capacity to improve operating margins and maintain our commitment to
customer service;

- introducing new products that complement our current product lines and
leverage our customer relationships; and

- reducing costs by improving production efficiencies and completing
information technology initiatives to enhance operations, including a
supply chain optimization project.

CONSOLIDATED RESULTS OF OPERATIONS

NET SALES

Net sales were $5.810 billion in 2006, $5.139 billion in 2005 and $4.509 billion
in 2004.

Net sales for 2006 reached an all-time high and represented a 13% increase
over 2005 primarily due to higher realized selling prices for all major product
lines. For the third consecutive year, net sales increased for all three
operating segments. Net sales were up for the North American Gypsum and Building
Products Distribution operating segments primarily due to higher selling prices,
partially offset by lower volume, for gypsum wallboard. Net sales for the
Worldwide Ceilings operating segment increased primarily due to higher selling
prices and volume for ceiling grid and higher selling prices, partially offset
by lower volume, for ceiling tile.

Net sales for 2005 were up 14% over 2004. Net sales increased for North
American Gypsum primarily due to higher selling prices and record shipments for
SHEETROCK(R) brand gypsum wallboard. Net sales for the Building Products
Distribution segment improved primarily due to record shipments and higher
selling prices for gypsum wallboard. Net sales for the Worldwide Ceilings
segment increased primarily due to higher selling prices for ceiling grid and
tile, while shipments of these product lines were down.

COST OF PRODUCTS SOLD

Cost of products sold totaled $4.440 billion in 2006, $4.037 billion in 2005 and
$3.672 billion in 2004.

Cost of products sold increased in 2006 compared with 2005 primarily due to
the effect of higher costs for natural gas and raw materials for all major
product lines.

Cost of products sold increased in 2005 compared with 2004 primarily
reflecting increased volume for SHEETROCK(R) brand gypsum wallboard and
gypsum-related products as well as higher costs for natural gas, freight and raw
materials.

GROSS PROFIT

Gross profit was $1.370 billion in 2006, $1.102 billion in 2005 and $837 million
in 2004. Gross margin (gross profit as a percentage of net sales) was 23.6% in
2006, 21.4% in 2005 and 18.6% in 2004.

Gross profit increased in 2006 compared with 2005 primarily due to higher
selling prices for SHEETROCK(R) brand gypsum wallboard and for all other major
product lines, partially offset by higher costs for natural gas and raw
materials.

Gross profit improved in 2005 versus 2004 primarily due to increased
shipments of SHEETROCK(R) brand gypsum wallboard and higher selling prices for
many major product lines, offset in part by higher costs for natural gas,
freight and raw materials.

SELLING AND ADMINISTRATIVE EXPENSES

Selling and administrative expenses totaled $419 million in 2006, $352 million
in 2005 and $317 million in 2004. As a percentage of net sales, these expenses
were 7.2% in 2006, 6.8% in 2005 and 7.0% in 2004.

The increase in 2006 selling and administrative expenses versus 2005
primarily reflected increased expenses for compensation and benefits, including
incentive compensation, costs associated with the move to our new corporate
offices scheduled for March 2007 and funding for marketing and growth
initiatives.

The increase in 2005 selling and administrative expenses compared with 2004
primarily reflected compensation and benefits expenses, including retention and
incentive compensation, and higher funding for marketing and growth initiatives.

ASBESTOS CLAIMS PROVISION (REVERSAL)

In connection with our evaluation of the cost of resolving our asbestos-related
liabilities, in the fourth quarter of 2005 we recorded a pretax charge of $3.1
billion ($1.935 billion, or $34.34 per share, after-tax), increasing our reserve
for all asbestos claims to $4.161 billion. In increasing our reserve, we
included the anticipated cost of funding the Asbestos Trust. We also included
the estimated cost of resolving asbestos property damage claims, other
asbestos-related claims and associated legal expenses.

In 2006, we reversed $44 million pretax ($27 million, or $0.41 per diluted
share, after-tax) of our reserve for asbestos-related liabilities. This included
pretax reversals of $27 million in the second quarter and an additional $17
million in the third quarter. These reversals, which are reflected as income in
the consolidated statement of operations, were based on our evaluation in each
quarter of the settlements of asbestos property damage claims.

CHAPTER 11 REORGANIZATION EXPENSES

Chapter 11 reorganization expenses consisted of the following:

2006 2005 2004
----- ---- ----

(millions)
Legal and financial advisory fees $ 34 $ 36 $ 24
Bankruptcy-related interest income (24) (32) (12)
----- ---- ----
Total 10 4 12
===== ==== ====

INTEREST EXPENSE

Interest expense was $555 million in 2006, $5 million in 2005 and $5 million in
2004. Interest expense for 2006 included a charge for post-petition interest and
fees related to pre-petition obligations totaling $528 million ($325 million, or
$4.88 per diluted share, after-tax). In accordance with American Institute of
Certified Public Accountants Statement of Position 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code," virtually all of our
outstanding debt had been classified as liabilities subject to compromise in
prior periods, and from the date on which we filed our Chapter 11 petition for
reorganization through December 31, 2005, interest expense on this debt and
other pre-petition obligations had not been accrued or recorded. Contractual
interest expense not accrued or recorded on pre-petition debt totaled $80
million in 2005 and $71 million in 2004.

INTEREST INCOME

Non-bankruptcy-related interest income was $43 million in 2006, $10 million in
2005 and $6 million in 2004. This interest income was generated primarily from
our investments in marketable securities that we held during the bankruptcy
period. As of December 31, 2006, we had no investments in marketable securities.

OTHER INCOME, NET

Other income, net was $3 million in 2006 and zero in 2005 and 2004.

INCOME TAXES (BENEFIT)

Income tax expense of $188 million was recorded in 2006. An income tax benefit
of $924 million was recorded in 2005 as a result of the provision for asbestos
claims. Income tax expense was $197 million in 2004. Our effective tax rates
were 39.5% for 2006, 39.3% for 2005 and 38.6% for 2004.

The effective tax rate for 2005 reflected a $25 million reduction in our
third quarter 2005 income tax provision in connection with the Internal Revenue
Service's completion of its audit of our federal income tax returns for the
years 2000 through 2002. Due to the results of the audit, a portion of our
recorded income tax contingency reserves became unnecessary and were eliminated.
In the fourth quarter of 2005, this reduction was offset by an increase of $41
million ($28 million net of federal benefit) in the valuation allowance relating
to our reserve for asbestos claims.

CUMULATIVE EFFECT OF ACCOUNTING CHANGE

In December 2005, we adopted Financial Accounting Standards Board Interpretation
No. 47, or FIN 47. A noncash, after-tax charge of $11 million ($18 million
pretax) was reflected in the consolidated statement of operations as a
cumulative effect of a change in accounting principle as of December 31, 2005.

See Note 12 to the Consolidated Financial Statements for additional
information related to the adoption of FIN 47.

NET EARNINGS (LOSS)

Net earnings in 2006 were $288 million, or $4.33 per diluted share. These
amounts included an after-tax charge of $325 million, or $4.88 per diluted
share, for post-petition interest and fees related to pre-petition obligations
as described above. Net earnings and diluted earnings per share for 2006
included after-tax income of $27 million, or $0.41 per diluted share, as a
result of the reversal of the reserve for asbestos-related claims described
above.

We incurred a net loss of $1.436 billion, or $25.49 per diluted share, in
2005. This loss included the after-tax provision of $1.935 billion, or $34.34
per share, for asbestos claims and an after-tax charge of $11 million, or $0.20
per share, for the cumulative effect of an accounting change related to the
adoption of FIN 47.

Net earnings in 2004 were $312 million, or $5.62 per diluted share.

Earnings per share data for 2006 reflect the issuance of 44.92 million
shares of common stock in the third quarter of 2006 in connection with the
Rights Offering. We have adjusted earnings per share data for 2005 and 2004 to
reflect the effect of the issuance of shares of common stock in connection with
the Rights Offering.

CORE BUSINESS RESULTS OF OPERATIONS

Net Sales Operating Profit (Loss)
------------------------- -----------------------
2006 2005 2004 2006 2005 2004
------- ------ ------ ----- ------- -----

(millions)
NORTH AMERICAN GYPSUM:
United States Gypsum Company $ 3,215 $2,881 $2,474 $ 742 $(2,557) $348
CGC Inc. (gypsum) 341 323 297 46 53 49
Other subsidiaries* 266 224 178 48 38 31
Eliminations (201) (206) (196) -- -- --
------- ------ ------ ----- ------- ----
Total 3,621 3,222 2,753 836 (2,466) 428
------- ------ ------ ----- ------- ----
WORLDWIDE CEILINGS:
USG Interiors, Inc. 507 489 488 53 43 42
USG International 235 210 200 13 9 12
CGC Inc. (ceilings) 57 55 51 11 10 8
Eliminations (43) (47) (51) -- -- --
------- ------ ------ ----- ------- ----
Total 756 707 688 77 62 62
------- ------ ------ ----- ------- ----
BUILDING PRODUCTS DISTRIBUTION:
L&W Supply Corporation 2,477 2,048 1,738 203 149 103
------- ------ ------ ----- ------- ----
Corporate -- -- -- (117) (90) (73)
Chapter 11 reorganization expenses -- -- -- (10) (4) (12)
Eliminations (1,044) (838) (670) (4) (5) --
------- ------ ------ ----- ------- ----
TOTAL USG CORPORATION 5,810 5,139 4,509 985 (2,354) 508
======= ====== ====== ===== ======= ====

* Includes USG Mexico, S.A. de C.V., a building products business in Mexico;
Gypsum Transportation Limited, a shipping company in Bermuda; and USG
Canadian Mining Ltd., a mining operation in Nova Scotia

NORTH AMERICAN GYPSUM

Net sales for the North American Gypsum segment increased 12% in 2006 and 17% in
2005 compared with the respective prior years. Operating profit of $836 million
in 2006 included the reversal of $44 million of our reserve for asbestos-related
liabilities. An operating loss of $2.466 billion in 2005 resulted primarily from
a $3.1 billion charge for asbestos-related claims recorded in the fourth quarter
of 2005 that was associated with our then-proposed plan of reorganization.
Operating profit in 2004 amounted to $428 million.

United States Gypsum Company - 2006 Compared With 2005: Net sales in 2006
increased $334 million, or 12%, from 2005. Operating profit in 2006 was $742
million and included the above-mentioned reversal of $44 million of our reserve
for asbestos-related liabilities. An operating loss of $2.557 billion in 2005
included the above-mentioned $3.1 billion charge for asbestos claims. Operating
results benefited in 2006 primarily from higher average selling prices for
SHEETROCK(R) brand gypsum wallboard, SHEETROCK(R) brand joint treatment products
and FIBEROCK(R) brand gypsum fiber panels. However, the higher levels of average
selling prices were partially offset by lower shipments of gypsum wallboard and
higher manufacturing costs.

New housing construction was strong in the first half of 2006 resulting in
strong demand for gypsum wallboard. However, housing starts fell considerably
during the second half of the year causing demand for gypsum wallboard to
decrease. As a result, industry shipments of gypsum wallboard in 2006 were down

approximately 3% from 2005. U.S. Gypsum shipped 10.8 billion square feet of
SHEETROCK(R) brand gypsum wallboard in 2006, a 4% decrease from the previous
record of 11.3 billion square feet in 2005. For the fourth quarter of 2006, our
shipments of SHEETROCK(R) brand gypsum wallboard were 2.3 billion square feet,
down 18% from 2.8 billion square feet in the fourth quarter of 2005.

In an effort to balance production levels more closely with market demand,
as of January 31, 2007, we had temporarily curtailed annual gypsum wallboard
production by more than 2 billion square feet by reducing shifts and days of
operation at higher-cost plants. In addition, in January 2007, we permanently
closed two older, high-cost production lines, one at our Jacksonville, Fla.,
plant and one at our Santa Fe Springs, Calif., plant, eliminating an additional
400 million square feet of annual capacity. U.S. Gypsum's capacity utilization
for gypsum wallboard averaged 92% in 2006, down from 96% in 2005. Capacity
utilization was 79% in the fourth quarter of 2006 compared with 98% in the
fourth quarter of 2005.

In 2006, our nationwide average realized selling price for SHEETROCK(R)
brand gypsum wallboard was $180.59 per thousand square feet, up 25% from $143.93
in 2005. However, as residential market conditions weakened in the second half
of 2006, industry wallboard prices began a decline that continued through the
end of the year and into 2007. U.S. Gypsum's average realized selling price for
SHEETROCK(R) brand gypsum wallboard was $181.75 per thousand square feet during
the fourth quarter of 2006, down 4% from the third quarter of 2006, but 17%
higher compared with the fourth quarter of 2005.

Manufacturing costs for U.S. Gypsum increased in 2006 primarily due to
higher costs for energy and raw materials.

United States Gypsum Company - 2005 Compared With 2004: Net sales increased 16%
in 2005 compared with 2004. An operating loss of $2.557 billion was recorded in
2005 as discussed above, while operating profit was $348 million in 2004.

Strong demand for SHEETROCK(R) brand gypsum wallboard led to record
shipments of 11.3 billion square feet during 2005, a 3% increase from 11.0
billion square feet in 2004. U.S. Gypsum's wallboard plants operated at 96% of
capacity in 2005, compared with 94% in 2004. Industry shipments of gypsum
wallboard in 2005 were up approximately 6% from 2004.

While U.S. Gypsum realized stronger demand in 2005, it also experienced
significant cost pressures, as energy, freight and raw material prices increased
significantly. These cost increases were offset by increased industry pricing,
which reflected the strong demand and high industry capacity utilization rates.

The nationwide average realized price for SHEETROCK(R) brand gypsum
wallboard was $143.93 per thousand square feet in 2005, up 18% from $122.37 in
2004.

Increased shipments and higher selling prices were also realized for
SHEETROCK(R) brand joint treatment products and FIBEROCK(R) brand gypsum fiber
panels in 2005 as compared with 2004.

CGC Inc.: Net sales increased 6%, while operating profit decreased 13% in 2006
versus 2005. The decline in operating profit was primarily due to lower volume
and higher manufacturing costs, partially offset by higher selling prices for
CGC's SHEETROCK(R) brand gypsum wallboard and the favorable effects of currency
translation.

Comparing 2005 with 2004, net sales increased 9%, and operating profit rose
8%. These results were primarily attributable to the favorable effects of
currency translation. Higher selling prices for CGC's SHEETROCK(R) brand gypsum
wallboard, partially offset by lower volume and higher manufacturing costs, also
contributed to the improved level of operating profit.

WORLDWIDE CEILINGS

Net sales and operating profit increased 7% and 24%, respectively, in 2006
versus 2005. Net sales in 2005 increased 3% compared with 2004, while operating
profit was unchanged.

USG Interiors, Inc.: Net sales in 2006 for our domestic ceilings business were
$507 million, an $18 million increase compared with 2005. Operating profit of
$53 million increased 23% compared with 2005. Results for ceiling grid improved
in 2006 due to increased shipments and higher selling prices, partially offset
by higher manufacturing costs. Results for ceiling tile improved due to higher
selling prices,

partially offset by lower shipments and higher manufacturing costs.

Net sales in 2005 were $489 million, a $1 million increase compared with
2004, as higher selling prices for ceiling grid and tile were partially offset
by lower shipments of these products. Operating profit of $43 million, which
also represented a slight increase from 2004, was favorably affected by a
variation in last-in, first-out (LIFO) reserve adjustments for ceiling tile and
grid inventory. These adjustments accounted for a $19 million year-on-year
increase in operating profit, which was offset to a large extent by higher
energy, freight and raw material costs for ceiling grid and tile.

USG International: Net sales for USG International were up 12%, and operating
profit increased 44% from 2005. These increases primarily reflected increased
demand for USG ceiling grid in Europe and increased exports to Latin America.

Comparing 2005 with 2004, net sales increased 5%, while operating profit
declined to $9 million from $12 million, primarily due to higher prices for
steel used in manufacturing ceiling grid in Europe.

CGC Inc.: CGC reported increases of $2 million in net sales and $1 million in
operating profit as compared with 2005. These results primarily reflected the
favorable effects of currency translation and improved pricing for ceiling tile.

Comparing 2005 with 2004, net sales increased $4 million, and operating
profit increased $2 million.

BUILDING PRODUCTS DISTRIBUTION

Net sales and operating profit in 2006 for L&W Supply were the highest for any
year in its history. Net sales of $2.477 billion represented a 21% increase
compared with 2005, while operating profit rose 36% to $203 million. These
results were primarily attributable to a 26% increase in selling prices for
gypsum wallboard and record shipments of gypsum wallboard, which were up 3% from
2005. Record sales of complementary building products such as drywall metal,
ceiling products and joint compound also contributed to the improved results in
2006. L&W Supply's gypsum wallboard price and volume trends in the fourth
quarter of 2006 were similar to those for our North American Gypsum segment due
to the weakened conditions in residential markets during the second half of the
year.

Comparing 2005 with 2004, L&W Supply reported increases in net sales of 18%
and operating profit of 45%. These results primarily reflected increased
shipments and higher selling prices for gypsum wallboard. Increased sales of
complementary building products also contributed to the improved results.
Shipments of gypsum wallboard were up 12%, while selling prices rose 18%
compared with 2004.

L&W Supply remains focused on opportunities to profitably grow its
specialty business as well as optimize asset utilization. As part of its growth
plan, L&W Supply increased the number of its locations, largely through
acquisitions, to 220 in 36 states as of December 31, 2006, compared with 192
locations as of December 31, 2005 and 186 locations as of December 31, 2004. On
a same-location basis, net sales increased 15% in 2006 compared with 2005.

MARKET CONDITIONS AND OUTLOOK

Housing starts are a major source of demand for our products and services. Based
on preliminary data issued by the U.S. Bureau of the Census, U.S. housing starts
in 2006 were an estimated 1.801 million units, compared with actual housing
starts of 2.068 million units in 2005 and 1.956 million units in 2004. While new
housing construction was strong early in the year, housing starts fell
considerably during the second half of 2006. The downturn that began in 2006 has
been rapid as both homebuilders and drywall dealers reduced activity to keep
inventories from expanding. For us, that meant a rapid contraction in wallboard
demand.

Industry shipments of gypsum wallboard in the United States were an
estimated 36.2 billion square feet in 2006, the second highest level in history
and a 3% decrease from the previous record level of 37.2 billion square feet in
2005. However, industry wallboard shipments, which were up about 6% in the first
seven months of 2006 compared with the first seven months of 2005, were down 15%
in the last five months of 2006 compared with the same period in 2005. As a
result, industry capacity utilization rates dropped from about 100% at mid-year
2006 to less than 80% at the end of the year, and wallboard pricing began
declining as capacity utilization rates

fell below 90%, the level at which prices historically have begun to erode. U.S.
Gypsum's wallboard capacity utilization rate was about 79% for the fourth
quarter of 2006.

The repair and remodel market, which includes renovation of both
residential and nonresidential buildings, accounts for the second-largest
portion of our sales, behind new housing construction. Because many buyers begin
to remodel an existing home within two years of purchase, opportunity from the
residential repair and remodel market in 2006 remained strong, as sales of
existing homes in 2006 are estimated at 6.5 million units, following 2005's
record level of 7.1 million units.

Demand for our products from new nonresidential construction is determined
by floor space for which contracts are signed. Installation of gypsum and
ceilings products follows signing of construction contracts by about a year.
After a moderate increase in 2005, total floor space for which contracts were
signed increased 4% in 2006, with increased investments in the hotel, education
and office construction segments.

During 2007, we expect a continued decline in new residential construction.
Consequently, we expect USG and industry wallboard volumes to be below 2006
levels, resulting in a further decline in selling prices. This combination is
expected to have a significant negative impact on our profits compared with the
record-setting performance of recent years. We expect that the fundamentals for
nonresidential building and repair and remodel activity will remain solid.

In this environment, we remain focused on balancing production levels with
market demand and maintaining high levels of quality, service, safety and
operational efficiency.

LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY

As of December 31, 2006, we had $565 million of cash and cash equivalents. We
believe that cash on hand, future cash available from operations and the other
sources of liquidity described below will provide sufficient liquidity to allow
our businesses to carry on normal operations. Normal-course cash requirements
include, among other things, capital expenditures, working capital needs and
contractual obligations. Additionally, from time to time we consider selective
strategic transactions to create value and improve performance, including
acquisitions, joint ventures, partnerships, restructurings and dispositions.
Transactions of these types may result in material cash expenditures or
proceeds.

During the third quarter of 2006, we entered into a credit agreement with a
syndicate of banks that includes a $650 million revolving credit facility with a
$250 million sublimit for letters of credit. As of December 31, 2006, we had not
drawn upon the revolving credit facility except for approximately $86 million of
outstanding letters of credit.

The credit agreement also includes a $1.0 billion term loan facility and a
$1.15 billion tax bridge facility, each available to us in a single drawing of
up to these respective amounts. As explained below, we used a portion of the
amounts available under these facilities to fund part of our payments to the
Trust on December 21, 2006. Additional amounts cannot be drawn on these
facilities.

REORGANIZATION TRANSACTIONS

On the Effective Date, we paid $890 million to the Asbestos Trust and issued to
the Trust an interest-bearing note in the amount of $10 million, which we paid
on December 21, 2006. Because the 109th Congress adjourned without passing the
Fairness in Asbestos Injury Resolution Act of 2005 or substantially similar
legislation, we also paid our $3.05 billion obligation to the Asbestos Trust on
December 21, 2006. In addition to the payments to the Trust, from the Effective
Date through December 31, 2006, we paid $1.4 billion to unsecured creditors,
approximately $99 million for asbestos property damage settlements and $19
million for the settlement of other asbestos-related claims.

GROWTH INITIATIVES

During 2006, L&W Supply, which makes up the Building Products Distribution
operating segment, purchased the outstanding stock of several companies for
approximately $128 million, net of cash acquired. Certain of our North American
subsidiaries are currently in various stages of discussions with respect to the
potential acquisition of a number of distribution and manufacturing businesses.
A number of these

potential acquisitions may be announced and/or consummated during 2007. These
potential acquisitions would require investment in a total amount that we
estimate to be approximately $300 million to $400 million. There can, of course,
be no assurance that any of these acquisitions will be consummated or, if
consummated, what the required investment or timing of their consummation would
be.

FUNDING OF REORGANIZATION TRANSACTIONS AND GROWTH INITIATIVES

In 2006, we funded the reorganization transactions and our growth initiatives
using cash on hand, cash generated from the sale of our marketable securities,
net proceeds of approximately $1.7 billion in connection with the Rights
Offering, one-time borrowings of $1.065 billion under the tax bridge facility
and $700 million under the term loan facility, and the net proceeds from our
$500 million senior unsecured notes offering in the fourth quarter of 2006.

We expect to receive a federal tax refund of approximately $1.1 billion in
2007 associated with our funding of the Trust. This refund will be used to repay
the outstanding borrowing under the tax bridge facility.

We plan to fund future growth projects from cash on hand, future cash
available from operations and, if determined to be appropriate, borrowings under
our revolving credit facility. We may from time to time consider other debt or
equity financing alternatives to supplement, or as an alternative to, financing
under the revolving credit facility.

CASH FLOWS

The following table presents a summary of our cash flows:

2006 2005 2004
------- ----- -----

(millions)
Net cash provided by (used for):
Operating activities $(3,703) $ 506 $ 428
Investing activities 119 (372) (387)
Financing activities 3,212 44 6
Effect of exchange rate changes on cash 1 2 9
------- ----- -----
Net (decrease) increase in cash and
cash equivalents (371) 180 56
======= ===== =====

Operating Activities: The variation between 2006 and 2005 primarily reflected
our payments in 2006 to fund our obligations under the plan of reorganization,
which included payments of $3.95 billion to the Trust, $499 million for interest
on pre-petition debt and $166 million for pre-petition trade claims and related
interest. We also made payments of approximately $99 million for asbestos
property damage settlements and $19 million for the settlement of other
asbestos-related claims.

Investing Activities: The variation between 2006 and 2005 primarily reflected
the following transactions. In 2006, we received net cash of $565 million from
the sale of our marketable securities. This cash was used to fund a portion of
our obligations under the plan of reorganization. In 2005, we had net purchases
of $115 million of marketable securities. Restricted cash of $72 million was
returned to us in 2006 primarily due to the termination of a credit agreement
with LaSalle Bank National Association, while in 2005 we deposited $35 million
in restricted cash. Partially offsetting these sources of cash in 2006, we
increased our spending on capital projects by $195 million and increased our
spending to acquire businesses by $99 million.

Financing Activities: The variation between 2006 and 2005 primarily reflected
the following 2006 transactions: We borrowed $1.065 billion under the tax bridge
facility and $700 million under the term loan facility. We issued $500 million
of 6.3% senior unsecured notes. We received net proceeds of approximately $1.7
billion in connection with the Rights Offering. These cash inflows, which were
used to fund a portion of our obligations under the plan of reorganization, were
partially offset by the payment of $766 million related to pre-petition debt
principal.

CAPITAL EXPENDITURES

Capital spending amounted to $393 million in 2006 compared with $198 million in
2005. As of December 31, 2006, capital expenditure commitments for the
replacement, modernization and expansion of operations amounted to $494 million,
compared with $587 million as of December 31, 2005. We expect to fund our
capital expenditures program with cash from operations and, if determined to be
appropriate, borrowings under the revolving credit facility or other alternative
financings. Capital projects commenced as of December 31, 2006 include the
following projects with the total estimated costs indicated:

- approximately $180 million for a new low-cost gypsum wallboard plant in
Washingtonville, Pa., that will serve the Northeast markets. Construction
of this plant began in late 2006 and is expected to be completed in 2008.

- approximately $130 million to replace existing capacity at U.S. Gypsum's
Norfolk, Va., gypsum wallboard plant with a new low-cost wallboard line
designed to position the company for profitable growth in the mid-Atlantic
market. Construction on this project began in 2005 and is expected to be
completed in 2007.

- approximately $109 million for the acquisition of a paper mill in Otsego,
Mich., in 2006 and to subsequently convert it to manufacture high-quality,
low-cost paper for U.S. Gypsum's wallboard plants. The plant is expected to
begin production in 2008.

- approximately $75 million for a new 40,000-ton self-unloading ship intended
to lower the delivered cost of gypsum rock to East Coast wallboard plants.
The new ship is expected to become operational in 2008.

- approximately $70 million for a new gypsum wallboard plant in Tecoman,
Colima, Mexico. This facility will serve markets in western Mexico and
export gypsum wallboard to Latin America. Construction of this plant began
in 2006 and is expected to be completed in 2007.

In addition, our Board of Directors has approved capital expenditures totaling
approximately $250 million for additional projects to expand wallboard
manufacturing and other operations. No spending commitments have yet been made
on these additional projects.

WORKING CAPITAL

As of December 31, 2006, working capital (current assets less current
liabilities) amounted to $943 million, and the ratio of current assets to
current liabilities was 1.53-to-1. As of December 31, 2005, working capital
amounted to $1.579 billion, and the ratio of current assets to current
liabilities was 3.63-to-1. The decrease in working capital was primarily due to
the use of cash, cash equivalents and marketable securities to fund a portion of
our obligations under the plan of reorganization.

Receivables decreased slightly to $448 million as of December 31, 2006 from
$453 million as of December 31, 2005. Inventories increased to $348 million from
$315 million primarily due to slower business conditions and additional
inventories from businesses acquired in 2006. Accounts payable as of December
31, 2006 increased to $303 million from $281 million as of December 31, 2005,
while accrued expenses increased to $358 million from $275 million. The increase
in accrued expenses largely reflected the reclassification of liabilities
subject to compromise and accrued interest on debt in 2006.

DEBT

As of December 31, 2006, total debt amounted to $2.504 billion. During the third
quarter of 2006, we entered into the credit facilities as described in Note 3 to
the Consolidated Financial Statements. During the fourth quarter of 2006, we
borrowed $1.065 billion under the tax bridge facility and $700 million under the
term loan facility and issued $500 million of 6.3% senior notes that mature in
November 2016. We used these borrowings to pay a portion of our obligations to
the Trust. Because we expect to repay the $1.065 billion borrowing on the tax
bridge facility in 2007, we classified it as short-term debt on the consolidated
balance sheet as of December 31, 2006.

Total debt as of December 31, 2005, which was included in liabilities
subject to compromise, amounted to $1.005 billion. During 2006, we repaid $766
million and reinstated $239 million of this debt in accordance with the plan of
reorganization and reclassified the reinstated amount to long-term debt.

REALIZATION OF DEFERRED TAX ASSET

Our consolidated balance sheet as of December 31, 2006 includes a net current
deferred tax asset of $169 million and a net long-term deferred tax asset of
$187 million. Included in these amounts is a deferred tax asset of $112 million
and $302 million, respectively, relating to the U.S. federal and state income
tax benefits expected to be realized in future periods with respect to various
federal and state net operating loss and tax credit carryforwards arising in
2006 and prior years as a result of the amounts paid to the Asbestos Trust in
2006. We have concluded, based on the weight of available evidence, that all but
$51 million of these tax benefits are more likely than not to be realized in the
future. This amount represents a decrease of $4 million from the valuation
allowance of $55 million previously recorded with respect to these tax benefits
as of December 31, 2005.

In arriving at this conclusion, we considered the federal taxable income we
reported for the 1996 through 2005 taxable years, as well as future reversals of
existing taxable temporary differences and projections of future taxable income.
The federal income tax deduction resulting from the amounts paid to the Asbestos
Trust created a net operating loss in 2006. Under the Internal Revenue Code, a
net operating loss resulting from the payment of asbestos claims, including
payments to the Trust, can be carried back and offset against our federal
taxable income in the 10 preceding years, generating a refund of taxes paid in
those years. Since we have reported federal taxable income of $3.2 billion, in
the aggregate, for the years 1996 through 2005, the carryback of this loss is
expected to produce a refund of federal income taxes paid in those years of
approximately $1.1 billion, which we expect to receive in 2007. Further, as a
result of federal taxable income projected to be realized in future years, we
expect to utilize the remaining $217 million of federal income tax benefits
relating to our federal net operating loss and tax credit carryforwards in full.
If certain specified changes in our ownership should occur, there could be an
annual limitation on the amount of the carryforwards that can be utilized;
however, based on our current equity value, we do not believe that this
limitation (if it occurs) would impair our ability to fully utilize these
carryforwards. As a result, it is more likely than not that we will realize the
federal deferred tax asset relating to these carryforwards.

In contrast to the results under the Internal Revenue Code, most U.S.
states do not allow the carryback of a net operating loss in any significant
amount. As a result, most of the state tax benefits resulting from the amounts
paid to the Asbestos Trust will be realized through a reduction of future state
income tax liabilities by offsetting the net operating losses resulting from our
payments to the Trust against future state taxable income. Based on projections
of future taxable income (consistent with historical results and anticipated
future trends) in the U.S. states in which we conduct business operations and
the loss carryforward periods allowed by current state laws (generally five to
20 years), we have concluded that all but $51 million of the $197 million of
state income tax benefits relating to our state net operating loss carryforwards
is more likely than not to be realized.

CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS

CONTRACTUAL OBLIGATIONS

As of December 31, 2006, our contractual obligations and commitments were as
follows:

Payments Due by Period
-----------------------------------------
2008- 2010- There-
Total 2007 2009 2011 after
------ ------ ----- ------ ------

(millions)
Debt obligations $2,504 $1,065 $ -- $ 700 $ 739
Other long-term
liabilities (a) 496 10 11 11 464
Interest payments (b) 951 154 177 177 443
Purchase obligations (c) 496 164 201 42 89
Commitments for capital
expenditures (d) 494 395 99 -- --
Operating leases 438 82 130 77 149
------ ------ ---- ------ ------
Total 5,379 1,870 618 1,007 1,884
====== ====== ==== ====== ======

(a) Other long-term liabilities primarily consist of asset retirement
obligations that principally extend over a 50-year period. The majority of
associated payments are due toward the latter part of that period.

(b) Reflects estimated interest payments on debt obligations as of December 31,
2006. Assumes principal amounts on five-year term loan are held constant;
floating interest rates on term loans are held constant; and tax bridge
loan to be outstanding until December 31, 2007 upon receipt of federal tax
refund.

(d) Amounts shown are estimates of future spending on capital projects that
were committed to prior to December 31, 2006 but were not completed by that
date.

Our defined benefit pension plans have no minimum funding requirements under the
Employee Retirement Income Security Act of 1974. In accordance with our funding
policy, we currently plan to voluntarily contribute approximately $70 million of
cash to our pension plans in 2007.

The above table excludes liabilities related to postretirement benefits
(retiree health care and life insurance). We voluntarily provide postretirement
benefits for eligible employees and retirees. The portion of benefit claim
payments we made in 2006 was $16 million. See Note 13 to the Consolidated
Financial Statements for additional information on future expected cash payments
for pension and other postretirement benefits.

As of December 31, 2006, purchase obligations, as defined by Statement of
Financial Accounting Standards, or SFAS, No. 47, "Disclosure of Long-Term
Obligations," were immaterial.

OFF-BALANCE-SHEET ARRANGEMENTS

With the exception of letters of credit, it is not our general business practice
to use off-balance-sheet arrangements, such as third-party special-purpose
entities or guarantees of third-party obligations.

LEGAL CONTINGENCIES

Our plan of reorganization resolved the debtors' liability for all present and
future asbestos personal injury and related claims by channeling those
liabilities to the Asbestos Trust, which we have fully funded. The plan of
reorganization resolving the debtors' asbestos personal injury liabilities and
the injunction channeling those liabilities to the Trust do not include any of
our non-U.S. subsidiaries, any companies that L&W Supply acquired after we filed
the bankruptcy petitions or any companies that we may acquire in the future.

Asbestos property damage claims are not part of the Asbestos Trust or the
channeling injunction. The plan of reorganization provides that all settled
asbestos property damage claims will be paid. The debtors have resolved all
asbestos property damage claims filed in the reorganization proceedings, with
the exception of one small claim brought by a homeowner.

USG and certain of its subsidiaries have been notified by state and federal
environmental protection agencies of possible involvement as one of numerous
"potentially responsible parties" in a number of so-called "Superfund" sites in
the United States. We believe that neither these matters nor any other known
governmental proceeding regarding environmental matters will have a material
adverse effect upon our financial position, cash flows or results of operations.

See Note 19 to the Consolidated Financial Statements for additional
information on asbestos and environmental litigation.

CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements are prepared in conformity with accounting
policies generally accepted in the United States of America. The preparation of
these financial statements requires management to make estimates, judgments and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses during the periods presented. The following is a summary of the
accounting policies we believe are the most important to aid in understanding
our financial results.

SHARE-BASED COMPENSATION

Effective January 1, 2006, we adopted SFAS No. 123(R), "Share Based Payment."
This is a new critical accounting policy that we believe is important to aid in
understanding our financial results for 2006. Under SFAS No. 123(R), we use the
Black-Scholes option valuation model to determine the fair value of USG stock
options and stock appreciation rights. The Black-Scholes option valuation model
incorporates certain assumptions, such as the expected volatility, risk-free
interest rate, expected dividend yield and expected life of options, in order to
arrive at a fair value estimate. As a result, share-based compensation expense,
as calculated and recorded under SFAS No. 123(R), could have been impacted if
other assumptions were used. Furthermore, if we use different assumptions in
future periods, stock-based compensation expense could be impacted in future
periods. We use an independent third party to assist in determining these
assumptions. See Note 14 to the Consolidated Financial Statements for additional
information.

EMPLOYEE RETIREMENT PLANS

We maintain defined benefit pension plans for most of our employees. Most of
these plans require employee contributions in order to accrue benefits. We also
maintain plans that provide postretirement benefits (retiree health care and
life insurance) for eligible employees. For accounting purposes, these plans
depend on assumptions made by management, which are used by actuaries we engage
to calculate the projected and accumulated benefit obligations and the annual
expense recognized for these plans. The assumptions used in developing the
required estimates primarily include discount rates, expected return on plan
assets for the funded plans, compensation increase rates, retirement rates,
mortality rates and, for postretirement benefits, health-care-cost trend rates.

We determined the assumed discount rate based on the Hewitt Yield Curve, or
HYC, which was designed by Hewitt Associates to provide a means for plan
sponsors to value the liabilities of their defined benefit pension and
postretirement benefit plans. The HYC is a hypothetical AA yield curve
represented by a series of annualized individual discount rates. Each bond issue
underlying the HYC is required to have a credit rating of Aa or better by
Moody's Investor Service, Inc. or a credit rating of AA or better by Standard &
Poor's. The use of a different discount rate would impact net pension and
postretirement benefit costs and benefit obligations. In determining the
expected return on plan assets, we use a "building block" approach, which
incorporates historical experience, our pension plan investment guidelines and
expectations for long-term rates of return. The use of a different rate of
return would impact net pension costs. A one-half-percentage-point change in the
assumed discount rate and return-on-plan-asset rate would have the following
effects (dollars in millions):

Increase (Decrease) in
-------------------------
2006
2007 Projected
Percentage Net Annual Benefit
Assumption Change Benefit Cost Obligation
---------- ------------- ------------ ----------

Pension Benefits:
Discount rate 0.5% increase $(9) $(71)
Discount rate 0.5% decrease 9 79
Asset return 0.5% increase (5) --
Asset return 0.5% decrease 5 --
Postretirement Benefits:
Discount rate 0.5% increase (4) (31)
Discount rate 0.5% decrease 4 32

Compensation increase rates are based on historical experience and anticipated
future management actions. Retirement rates are based primarily on actual plan
experience, while standard actuarial tables are used to estimate mortality
rates. We developed health-care-cost trend rate assumptions based on historical
cost data and an assessment of likely long-term trends.

Results that differ from these assumptions are accumulated and amortized
over future periods and, therefore, generally affect the net benefit cost of
future periods. The sensitivity of assumptions reflects the impact of changing
one assumption at a time and is specific to conditions at the end of 2006.
Economic factors and conditions could affect multiple assumptions
simultaneously, and the effects of changes in assumptions are not necessarily
linear.

See Note 13 to the Consolidated Financial Statements for additional
information regarding costs, plan obligations, plan assets and assumptions
including the health-care-cost trend rate.

SELF-INSURANCE RESERVES

We purchase insurance from third parties for workers' compensation, automobile,
product and general liability claims that exceed certain levels. However, we are
responsible for the payment of claims up to those levels. In estimating the
obligation associated with incurred and incurred-but-not-reported losses, we use
estimates prepared by actuarial consultants. These estimates use our historical
data to project the future development of losses and take into account the
impact of claims that were stayed during our bankruptcy proceedings. These
claims will impact the actuarial analysis until all pre-petition claims are
closed. We monitor and review all estimates and related assumptions for
reasonableness. Loss estimates are adjusted based upon actual claims settlements
and reported claims.

INCOME TAXES

We record valuation allowances to reduce our deferred tax assets if it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. As of December 31, 2006, we have recorded valuation allowances
totaling $73 million for various U.S. state and foreign net operating loss and
tax credit carryforwards, the substantial majority of which arose from the
funding of the Asbestos Trust in 2006. Under "Realization of Deferred Tax Asset"
above, we describe the amount and nature of the net operating loss and tax
credit carryforwards that result from funding the Asbestos Trust and our
conclusion on the need for valuation allowances on the related deferred tax
assets. While we have considered future taxable income in assessing the need for
the valuation allowances based on our best available projections, if these
estimates and assumptions change in the future or actual results differ from our
projections, we may be required to adjust our valuation allowances. This could
result in a charge to, or an increase in, income in the period such
determination is made.

In addition, USG operates within multiple taxing jurisdictions and is
subject to audit in these jurisdictions. We record accruals for the estimated
outcomes of these audits, and these accruals may change in the future due to new
developments in each matter. In each of the past two years, we have experienced
adjustments to our accruals for the settlement of tax audits as described in
Note 15 to the Consolidated Financial Statements. Such adjustments could result
in a charge to, or an increase in, income in the period the determination is
made.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the Financial Accounting Standards Board, or FASB, issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of Financial Accounting Standards Board Statement No. 109." This
interpretation clarifies the accounting and disclosure for uncertain income tax
positions relating to the uncertainty about whether a tax return position will
ultimately be sustained by the respective tax authorities. This interpretation
is effective for fiscal years beginning after December 15, 2006. The adoption of
this interpretation is expected to have an impact of between zero and $15
million on our reported amounts of income tax liabilities and retained earnings
when recorded.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements."
This statement defines fair value in generally accepted accounting principles
and expands disclosures about fair value measurements that are required or
permitted under other accounting pronouncements. This statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. We are currently reviewing this
pronouncement to determine the impact, if any, that it may have on our financial
statements.

In October 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit

Pension and Other Postretirement Plans." This statement amends certain
requirements of SFAS Nos. 87, 88, 106 and 132(R). Under SFAS No. 158, companies
are required to report the plan's funded status on their balance sheets. The
difference between the plan's funded status and its current balance sheet
position is recognized, net of tax, as a component of accumulated other
comprehensive income, or AOCI. This statement is effective for fiscal years
ending after December 15, 2006. We adopted SFAS No. 158 effective December 31,
2006. See Note 1 to the Consolidated Financial Statements for the incremental
effect of applying SFAS No. 158 on individual line items on our consolidated
balance sheet as of December 31, 2006.

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 related to management's
expectations about future conditions. Actual business, market or other
conditions may differ from management's expectations and accordingly may affect
our sales and profitability or other results and liquidity. Actual results may
differ due to various other factors, including:

- economic conditions, such as the levels of new home and other construction
activity, employment levels, mortgage interest rates, housing
affordability, currency exchange rates and consumer confidence;

- competitive conditions, such as price and product competition;

- shortages in raw materials;

- increases in raw material, energy, transportation and employee benefit
costs;

- loss of one or more major customers;

- capacity constraints;

- capital markets conditions and the availability of borrowings under our
credit agreement;

- the amount and timing of the tax refund we expect to receive;

- changes in laws or regulations, including environmental and safety
regulations;

- the effects of acts of terrorism or war upon domestic and international
economies and financial markets; and

- acts of God.

We assume no obligation to update any forward-looking information contained in
this report.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

We use derivative instruments from time to time to manage selected commodity
price and foreign currency exposures. We do not use derivative instruments for
speculative trading purposes. In addition, we use financial instruments,
including fixed and variable rate debt, to finance our operations in the normal
course of business.

COMMODITY PRICE RISK

We use swap contracts to manage our exposure to fluctuations in commodity prices
associated with anticipated purchases of natural gas. Generally, we have a
substantial majority of our anticipated purchases of natural gas over the next
12 months hedged; however, we review our positions regularly and make
adjustments as market and business conditions warrant. A sensitivity analysis
was prepared to estimate the potential change in the fair value of our natural
gas swap contracts assuming a hypothetical 10% change in market prices. Based on
results of this analysis, which may differ from actual results, the potential
change in the fair value of our natural gas swap contracts is $23 million. This
analysis does not consider the underlying exposure.

FOREIGN CURRENCY EXCHANGE RISK

We have operations in a number of countries and use forward contracts from time
to time to hedge selected risk of changes in cash flows resulting from
forecasted intercompany and third-party sales or purchases denominated in
non-U.S. currencies, or to hedge selected risk of changes in our net investment
in foreign subsidiaries. As of December 31, 2006, we had no outstanding foreign
currency contracts.

INTEREST RATE RISK

We have interest rate risk as a result of the amount of our floating-rate debt
outstanding. Based on the results of a sensitivity analysis, for a hypothetical
change in interest rates of 25 basis points, the potential change in annual
interest expense is $4 million.

See Notes 1 and 16 to the Consolidated Financial Statements for additional
information on our financial exposures.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Page
----

CONSOLIDATED FINANCIAL STATEMENTS:
Statements of Operations.............................................. 36
Balance Sheets........................................................ 37
Statements of Cash Flows.............................................. 38
Statements of Stockholders' Equity (Deficit).......................... 39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
1. Significant Accounting Policies................................... 40
2. Resolution of USG's Reorganization Proceedings.................... 43
3. Debt.............................................................. 45
4. Rights Offering................................................... 46
5. Stockholders Rights Plan.......................................... 47
6. Earnings Per Share................................................ 48
7. Inventories....................................................... 48
8. Property, Plant and Equipment..................................... 48
9. Goodwill and Other Intangible Assets.............................. 48
10. Accrued Expenses.................................................. 49
11. Accumulated Other Comprehensive Income............................ 49
12. Asset Retirement Obligations...................................... 49
13. Employee Retirement Plans......................................... 50
14. Share-Based Compensation.......................................... 52
15. Income Taxes...................................................... 54
16. Derivative Instruments............................................ 56
17. Segments and Acquisitions......................................... 56
18. Commitments and Contingencies..................................... 57
19. Litigation........................................................ 58
20. Quarterly Financial Data (unaudited).............................. 60

Report of Independent Registered Public Accounting Firm.................. 61
Schedule II - Valuation and Qualifying Accounts.......................... 62

All other schedules have been omitted because they are not required or
applicable or the information is included in the consolidated financial
statements or notes thereto.

USG CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31,
-------------------------
2006 2005 2004
------ ------- ------

(millions, except per-share data)
Net sales $5,810 $ 5,139 $4,509
Cost of products sold 4,440 4,037 3,672
------ ------- ------
Gross profit 1,370 1,102 837
Selling and administrative expenses 419 352 317
Asbestos claims provision (reversal) (44) 3,100 --
Chapter 11 reorganization expenses 10 4 12
------ ------- ------
Operating profit (loss) 985 (2,354) 508
Interest expense 555 5 5
Interest income (43) (10) (6)
Other income, net (3) -- --
------ ------- ------
Earnings (loss) before income taxes and cumulative
effect of accounting change 476 (2,349) 509
Income taxes (benefit) 188 (924) 197
------ ------- ------
Earnings (loss) before cumulative effect of accounting change 288 (1,425) 312
Cumulative effect of accounting change -- (11) --
------ ------- ------
Net earnings (loss) 288 (1,436) 312
====== ======= ======
Basic Earnings (Loss) Per Common Share:
Before cumulative effect of accounting change 4.34 (25.29) 5.62
Cumulative effect of accounting change -- (0.20) --
------ ------- ------
Basic earnings (loss) per common share 4.34 (25.49) 5.62
====== ======= ======
Diluted Earnings (Loss) Per Common Share:
Before cumulative effect of accounting change 4.33 (25.29) 5.62
Cumulative effect of accounting change -- (0.20) --
------ ------- ------
Diluted earnings (loss) per common share 4.33 (25.49) 5.62
====== ======= ======

The notes to consolidated financial statements are an integral part of these
statements.

USG CORPORATION
CONSOLIDATED BALANCE SHEETS

As of
December 31,
---------------
2006 2005
------ ------

(millions, except share data)
ASSETS
Current Assets:
Cash and cash equivalents $ 565 $ 936
Short-term marketable securities -- 234
Restricted cash 6 78
Receivables (net of reserves: 2006 - $16; 2005 - $14) 448 453
Inventories 348 315
Income taxes receivable 1,102 6
Deferred income taxes 169 2
Other current assets 69 155
------ ------
Total current assets 2,707 2,179
------ ------
Long-term marketable securities -- 329
Property, plant and equipment, net 2,210 1,946
Deferred income taxes 187 1,423
Goodwill 154 64
Other assets 107 201
------ ------
Total assets 5,365 6,142
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable 303 281
Accrued expenses 358 275
Short-term debt 1,065 --
Deferred income taxes -- 6
Income taxes payable 38 38
------ ------
Total current liabilities 1,764 600
------ ------
Long-term debt 1,439 --
Deferred income taxes 11 28
Other liabilities 617 476
Liabilities subject to compromise -- 5,340
Commitments and contingencies
Stockholders' Equity (Deficit):
Preferred stock (000) - $1 par value, $1.80 convertible
preferred stock (initial series); authorized 36,000
shares; outstanding - none -- --
Common stock (000) - $0.10 par value; authorized 200,000
shares; issued: 2006 - 94,908 shares; 2005 - 49,985 shares 9 5
Treasury stock at cost (000) - 2006 - 5,043 shares;
2005 - 5,348 shares (208) (219)
Capital received in excess of par value 2,176 435
Accumulated other comprehensive (loss) income (136) 72
Retained earnings (deficit) (307) (595)
------ ------
Total stockholders' equity (deficit) 1,534 (302)
------ ------
Total liabilities and stockholders' equity (deficit) 5,365 6,142
====== ======

The notes to consolidated financial statements are an integral part of these
statements.

USG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,
-------------------------
2006 2005 2004
------- ------- -----

(millions)
OPERATING ACTIVITIES
Net earnings (loss) $ 288 $(1,436) $ 312
Adjustments to Reconcile Net Earnings (Loss) to Net Cash:
Asbestos claims provision (reversal) (44) 3,100 --
Share-based compensation expense 17 -- --
Cumulative effect of accounting change -- 11 --
Depreciation, depletion and amortization 138 125 120
Deferred income taxes 1,198 (1,261) 49
Gain on asset dispositions -- (5) (1)
(Increase) Decrease in Working Capital (net of acquisitions):
Receivables (12) (31) (92)
Income taxes receivable (1,096) 19 2
Inventories (18) 27 (58)
Payables 38 (30) 77
Accrued expenses (24) 41 15
Increase in other assets (33) (43) (38)
Increase in other liabilities 40 20 31
Payment to Section 524(g) asbestos trust (3,950) -- --
Reorganization distribution - other (783) -- --
Change in asbestos receivable -- -- 11
Increase (decrease) in liabilities subject to compromise 521 (2) (1)
Other, net 17 (29) 1
------- ------- -----
Net cash (used for) provided by operating activities (3,703) 506 428
------- ------- -----
INVESTING ACTIVITIES
Capital expenditures (393) (198) (138)
Purchases of marketable securities (112) (648) (546)
Sales or maturities of marketable securities 677 533 332
Acquisitions of businesses (128) (29) (5)
Net proceeds from asset dispositions 3 5 6
Return (deposit) of restricted cash 72 (35) (36)
------- ------- -----
Net cash provided by (used for) investing activities 119 (372) (387)
------- ------- -----
FINANCING ACTIVITIES
Issuance of debt 2,265 -- --
Proceeds from Rights Offering, net of expenses 1,720 -- --
Reorganization distribution - debt principal (766) -- --
Payment of debt issuance fees (26) -- --
Repayment of debt -- (1) (1)
Proceeds from stock options exercised 14 45 7
Tax benefit of share-based payments 5 -- --
------- ------- -----
Net cash provided by financing activities 3,212 44 6
------- ------- -----
Effect of exchange rate changes on cash 1 2 9
Net (decrease) increase in cash and cash equivalents (371) 180 56
Cash and cash equivalents at beginning of period 936 756 700
------- ------- -----
Cash and cash equivalents at end of period 565 936 756
======= ======= =====
Supplemental Cash Flow Disclosures:
Interest paid 548 2 2
Income taxes paid, net 108 341 126

The notes to consolidated financial statements are an integral part of these
statements.

USG CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

Common Capital Accumulated
Shares Treasury Received in Retained Other
Issued Shares Common Treasury Excess of Earnings Comprehensive
(000) (000) Stock Stock Par Value (Deficit) Income (Loss) Total
------ -------- ------ -------- ----------- --------- ------------- -------

(millions, except share data)
BALANCE AT JANUARY 1, 2004 49,985 (6,935) $5 $(258) $ 414 $ 529 $ (1) $ 689
------ ------ --- ----- ------ ------- ----- -------
Net earnings 312 312
Foreign currency translation 23 23
Change in fair value of
derivatives, net of tax
benefit of $3 (4) (4)
Loss on marketable securities
net of tax of zero (1) (1)
-------
Total comprehensive income 330
Stock issuances 299 2 5 7
Other (40) (2) (2)
------ ------ --- ----- ------ ------- ----- -------
BALANCE AT DECEMBER 31, 2004 49,985 (6,676) 5 (256) 417 841 17 1,024
------ ------ --- ----- ------ ------- ----- -------
Net loss (1,436) (1,436)
Foreign currency translation 6 6
Change in fair value of
derivatives, net of tax of $34 54 54
Minimum pension liability,
net of tax benefit of $3 (5) (5)
-------
Total comprehensive loss (1,381)
Stock issuances 1,330 37 8 45
Other (2) 10 10
------ ------ --- ----- ------ ------- ----- -------
BALANCE AT DECEMBER 31, 2005 49,985 (5,348) 5 (219) 435 (595) 72 (302)
====== ====== === ===== ====== ======= ===== =======
Net earnings 288 288
Foreign currency translation 3 3
Change in fair value of
derivatives, net of tax
benefit of $56 (86) (86)
Gain on marketable securities,
net of tax of $1
1 1
Minimum pension liability,
net of tax benefit of $10 (5) (5)
-------
Total comprehensive income 201
Adjustment to initially apply
SFAS No. 158, net of tax
benefit of $97 (121) (121)
Proceeds from stock options
exercised 309 11 3 14
Rights Offering 44,923 4 1,716 1,720
Share-based compensation 17 17
Other (4) 5 5
------ ------ --- ----- ------ ------- ----- -------
BALANCE AT DECEMBER 31, 2006 94,908 (5,043) 9 (208) 2,176 (307) (136) 1,534
====== ====== === ===== ====== ======= ===== =======

The notes to consolidated financial statements are an integral part of these
statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In the following Notes to Consolidated Financial Statements, "USG," "we," "our"
and "us" refer to USG Corporation, a Delaware corporation, and its subsidiaries
included in the consolidated financial statements, except as otherwise indicated
or as the context otherwise requires.

1. SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

USG Corporation, through its subsidiaries, is a leading manufacturer and
distributor of building materials, producing a wide range of products for use in
new residential, new nonresidential, and repair and remodel construction as well
as products used in certain industrial processes. Our operations are organized
into three operating segments: North American Gypsum, which manufactures
SHEETROCK(R) brand gypsum wallboard and related products in the United States,
Canada and Mexico; Worldwide Ceilings, which manufactures ceiling tile in the
United States and ceiling grid in the United States, Canada, Europe and the
Asia-Pacific region; and Building Products Distribution, which distributes
gypsum wallboard, drywall metal, ceilings products, joint compound and other
building products throughout the United States. Our products also are
distributed through building materials dealers, home improvement centers and
other retailers, specialty wallboard distributors, and contractors.

CONSOLIDATION

Our consolidated financial statements include the accounts of USG Corporation
and its majority-owned subsidiaries. Our subsidiaries in which we have more than
a 20% but not more than 50% ownership interest are accounted for on the equity
basis of accounting and are not material to consolidated operations. All
intercompany balances and transactions are eliminated in consolidation.

USE OF ESTIMATES

The preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets, liabilities, revenues and
expenses. Actual results could differ from these estimates.

REVENUE RECOGNITION

With the exception of our Building Products Distribution operating segment, we
recognize revenue upon the shipment of products to customers, which is when
title and risk of loss are transferred to customers. For Building Products
Distribution, revenue is recognized and title and risk of loss are transferred
when customers receive products, either through delivery by company trucks or
customer pickup. We record provisions for discounts to customers based on the
terms of sale in the same period in which the related sales are recorded. We
record estimated reductions to revenue for customer programs and incentive
offerings, including promotions and other volume-based incentives. With the
exception of Building Products Distribution, our products are generally shipped
free on board, commonly called FOB, shipping point.

SHIPPING AND HANDLING COSTS

Shipping and handling costs are included in cost of products sold.

ADVERTISING

Advertising expenses consist of media advertising and related production costs
and sponsorships. We charge advertising expenses to earnings as incurred. These
expenses amounted to $20 million in 2006, $16 million in 2005 and $13 million in
2004.

RESEARCH AND DEVELOPMENT

We charge research and development expenditures to earnings as incurred. These
expenditures amounted to $20 million in 2006, $17 million in 2005 and $17
million in 2004.

INCOME TAXES

We account for income taxes using the asset and liability method. Deferred tax
assets and liabilities are recognized for the expected future tax consequences
of temporary differences between the carrying amounts and the tax bases of
assets and liabilities. Tax provisions include estimates of amounts that are
currently payable, plus changes in deferred tax assets and liabilities.

EARNINGS PER SHARE

Basic earnings per share are based on the weighted average number of common
shares outstanding. Diluted earnings per share are based on the weighted

average number of common shares outstanding and the dilutive effect of
restricted stock units, or RSUs, and the potential exercise of outstanding stock
options. Diluted earnings per share for the year ended December 31, 2006 exclude
RSUs and the potential exercise of stock options issued in 2006 because they
were anti-dilutive. Average common shares and average diluted common shares
outstanding are calculated in accordance with Statement of Financial Accounting
Standards, or SFAS, No. 128, "Earnings Per Share," and reflect the effect of the
Rights Offering described in Note 4.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of highly liquid investments with maturities
of three months or less at the time of purchase.

INVENTORY VALUATION

All of our inventories are stated at the lower of cost or market. Most of our
inventories in the United States are valued under the last-in, first-out (LIFO)
cost method. The remaining inventories are valued under the first-in, first-out
(FIFO) or average production cost methods. Inventories include material, labor
and applicable factory overhead costs.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost, except for those assets that
we revalued under fresh start accounting in May 1993. We determine provisions
for depreciation of property, plant and equipment on a straight-line basis over
the expected average useful lives of composite asset groups. We determine
estimated useful lives to be 50 years for buildings and improvements, a range of
10 years to 25 years for machinery and equipment, and five years for computer
software and systems development costs. We compute depletion on a basis
calculated to spread the cost of gypsum and other applicable resources over the
estimated quantities of material recoverable.

LONG-LIVED ASSETS

Long-lived assets include property, plant and equipment, goodwill (the excess of
cost over the fair value of net assets acquired) and other intangible assets. We
review goodwill annually for impairment or when indicators of a potential
impairment are present. We periodically review our other long-lived assets for
impairment by comparing the carrying value of the assets with their estimated
future undiscounted cash flows or fair value, as appropriate. If we determine an
impairment exists, the asset is written down to estimated fair value.

SHARE-BASED COMPENSATION

Effective January 1, 2006, we adopted SFAS No. 123(R), "Share-Based Payment,"
which requires companies to recognize in the income statement the grant-date
fair value of stock options and other equity-based compensation issued to
employees. See Note 14 for information regarding the impact of our adopting this
standard. Prior to January 1, 2006, we accounted for share-based compensation
under the intrinsic value method, which measures compensation cost as the quoted
market price of the stock at the date of grant less the amount, if any, that the
employee is required to pay.

In 2005 and 2004, if we had elected to recognize compensation cost for
share-based compensation grants consistent with the fair value method prescribed
by SFAS No. 123(R), "Accounting for Stock-Based Compensation," net earnings and
net earnings per common share would not have changed from the reported amounts.

DERIVATIVE INSTRUMENTS

We use derivative instruments to manage selected commodity price and foreign
currency exposures. We do not use derivative instruments for speculative trading
purposes. All derivative instruments must be recorded on the balance sheets at
fair value. For derivatives designated as fair value hedges, the changes in the
fair values of both the derivative instrument and the hedged item are recognized
in earnings in the current period. For derivatives designated as cash flow
hedges, the effective portion of changes in the fair value of the derivative is
recorded to accumulated other comprehensive income, or AOCI, and is reclassified
to earnings when the underlying transaction has an impact on earnings. The
ineffective portion of changes in the fair value of the derivative is reported
in cost of products sold. For derivatives designated as net investment hedges,
we record changes in value to AOCI.

Commodity Derivative Instruments: Currently, we are using swap contracts to
hedge a major portion of our anticipated purchases of natural gas to be used in
our manufacturing operations. Generally, we have a substantial majority of our
anticipated purchases of

natural gas over the next 12 months hedged; however, we review our positions
regularly and make adjustments as market conditions warrant. The current
contracts, all of which mature by December 31, 2009, are generally designated as
cash flow hedges.

Foreign Exchange Derivative Instruments: We have operations in a number of
countries and use forward contracts from time to time to hedge selected risk of
changes in cash flows resulting from forecasted intercompany and third-party
sales or purchases denominated in non-U.S. currencies, or to hedge selected risk
of changes in our net investment in foreign subsidiaries. These contracts are
generally designated as either cash flow hedges or hedges of net investment.

FOREIGN CURRENCY TRANSLATION

We translate foreign-currency-denominated assets and liabilities into U.S.
dollars at the exchange rates existing as of the respective balance sheet dates.
We record translation adjustments resulting from fluctuations in exchange rates
to AOCI on our consolidated balance sheets. We translate income and expense
items at the average exchange rates during the respective periods. The total
transaction (gain) loss was $(2) million in 2006, $3 million in 2005 and $2
million in 2004.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the Financial Accounting Standards Board, or FASB, issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of Financial Accounting Standards Board Statement No. 109." This
interpretation clarifies the accounting and disclosure for uncertain income tax
positions, relating to the uncertainty about whether a tax return position will
ultimately be sustained by the respective tax authorities. This interpretation
is effective for fiscal years beginning after December 15, 2006. The adoption of
this interpretation is expected to have an impact of between zero and $15
million on our reported amounts of income tax liabilities and retained earnings
when recorded.

In October 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans." This statement amends
certain requirements of SFAS Nos. 87, 88, 106 and 132(R). Under SFAS No. 158,
companies are required to report the plan's funded status on their balance
sheets. The difference between the plan's funded status and its current balance
sheet position is recognized, net of tax, as a component of AOCI. This statement
is effective for fiscal years ending after December 15, 2006. We adopted SFAS
No. 158 effective December 31, 2006, and the incremental effect of applying it
on individual line items on our consolidated balance sheet as of December 31,
2006 is as follows:

Before After
Application Application
of SFAS of SFAS
No. 158 Adjustments No. 158
----------- ----------- -----------

(millions)
Other assets $ 213 $(106) $ 107
Long-term deferred
income tax asset 101 86 187
Total assets 5,385 (20) 5,365
Accrued expenses 344 14 358
Long-term deferred
income tax liability 22 (11) 11
Other liabilities 518 99 617
Total liabilities 3,729 102 3,831
AOCI (15) (121) (136)
Total stockholders' equity 1,655 (121) 1,534

2. RESOLUTION OF USG'S REORGANIZATION PROCEEDINGS

As part of the plan, the following important events have occurred:

- On the Effective Date, we paid $890 million to the Asbestos Trust and
issued to the Trust an interest-bearing note in the amount of $10 million,
which we paid on December 21, 2006.

- Pursuant to the plan of reorganization, allowed claims of all other
creditors have been, or will be, paid in full, with interest where agreed
or required.

Company; La Mirada Products Co., Inc.; Stocking Specialists, Inc.; USG
Industries, Inc.; and USG Pipeline Company. The plan of reorganization resolving
the debtors' asbestos personal injury liabilities and the injunction channeling
those liabilities to the Trust do not include any of our non-U.S. subsidiaries,
any companies that L&W Supply acquired after we filed the bankruptcy petitions
or any companies that we may acquire in the future.

Additional information about funding the plan of reorganization is included
in Note 3. Additional information about the Rights Offering is included in Note
4. Asbestos property damage claims are discussed in Note 19.

CORPORATE PERFORMANCE PLAN

On January 10, 2006, the bankruptcy court approved the USG Corporation 2006
Corporate Performance Plan, or CPP. The terms of the CPP provided that it was to
be effective for eligible participants from January 1, 2006 through December 31,
2006, or through and including the effective date of a plan of reorganization in
the debtors' Chapter 11 proceedings, whichever came first. The CPP provided
participants who held key positions identified as eligible with two cash
payments equal to a specified percentage of their annual base salary. The second
payment will include a performance adjustment based on our 2006 results.

Because the plan of reorganization became effective on June 20, 2006,
awards earned under the CPP were prorated through that date. The total expense
associated with the CPP, as adjusted for 2006 results, amounted to $13 million.
Expenses associated with a comparable predecessor plan amounted to $23 million
in 2005.

FINANCIAL STATEMENT PRESENTATION

While the debtors were operating under the protection of Chapter 11 of the
United States Bankruptcy Code, our consolidated financial statements were
prepared in accordance with American Institute of Certified Public Accountants
Statement of Position, or SOP, 90-7 and on a going-concern basis, which
contemplated continuity of operations, realization of assets and liquidation of
liabilities in the ordinary course of business. During this period, subject to
bankruptcy court approval or otherwise as permitted in the ordinary course of
business, the debtors, or any of them, had the ability to sell or otherwise
dispose of assets and liquidate or settle liabilities for amounts other than
those reflected in the consolidated financial statements.

LIABILITIES SUBJECT TO COMPROMISE

While the debtors were operating under the protection of Chapter 11 of the
United States Bankruptcy Code, the debtors' estimates of known or potential
pre-petition claims and related post-petition amounts to be resolved in
connection with the Chapter 11 proceedings were reflected in the consolidated
financial statements as liabilities subject to compromise. As of June 30, 2006,
these liabilities were reclassified on the consolidated balance sheet.

CHAPTER 11 REORGANIZATION EXPENSES

Chapter 11 reorganization expenses in the consolidated statements of operations
consisted of the following:

2006 2005 2004
---- ---- ----

(millions)
Legal and financial advisory fees $ 34 $ 36 $ 24
Bankruptcy-related interest income (24) (32) (12)
---- ---- ----
Total 10 4 12
==== ==== ====

INTEREST EXPENSE

Interest expense for 2006 included charges for post-petition interest and fees
related to pre-petition obligations. For 2006, post-petition interest and fees
totaled $528 million ($325 million after-tax). In accordance with SOP 90-7,
virtually all of our outstanding debt had been classified as liabilities subject
to compromise in prior periods, and from the date on which we filed our Chapter
11 petition for reorganization through December 31, 2005, interest expense on
this debt and other pre-petition obligations had not been accrued or recorded.

3. DEBT

Total debt as of December 31 consisted of the following:

2006 2005*
------ -----

(millions)
Tax bridge term loan $1,065 --
Term loan 700 --
6.3% senior notes 500 --
Industrial revenue bonds 239 --
------ ---
Total 2,504 --
====== ===

* As of December 31, 2005, total debt of $1.005 billion was included in
liabilities subject to compromise.

CREDIT FACILITIES

On August 2, 2006, we entered into a $2.8 billion credit agreement with a
syndicate of banks. JPMorgan Chase Bank, N.A. serves as administrative agent
under the agreement. The credit agreement consists of (i) a $650 million
revolving credit facility with a $250 million sublimit for letters of credit,
(ii) a $1.0 billion term loan facility and (iii) a $1.15 billion tax bridge term
loan facility.

These credit facilities have been assigned credit ratings of Baa3 by
Moody's Investor Service Inc. and BB+ by Standard & Poor's Ratings Services.

The revolving credit facility is available to fund working capital needs
and for other general corporate purposes. Borrowings under the revolving credit
facility bear interest, at our option, at either an alternative base rate or at
LIBOR plus a margin, to be determined based on the credit facilities' credit
rating. Based on current credit ratings, the margin for LIBOR borrowings is
0.60%. We are also required to pay facility fees on the entire revolving credit
facility, whether drawn or undrawn, and fees on outstanding letters of credit.
These fees are also dependent on the credit facilities' credit rating. The
revolving credit facility matures on August 2, 2011, unless terminated earlier
in accordance with its terms. As of December 31, 2006, the revolving credit
facility had not been drawn upon except for approximately $86 million of
outstanding letters of credit.

The term loan facility was available to us in a single drawing of up to
$1.0 billion, and the tax bridge facility was available to us in a single
drawing of up to $1.15 billion, in each case to be made on or before January 31,
2007. In December 2006, we borrowed $700 million under the term loan and $1.065
billion under the tax bridge facility. These borrowings, along with cash on hand
and proceeds from the $500 million senior note offering described below, were
used to fund the $3.05 billion payment to the Asbestos Trust in December 2006.

The term loan and tax bridge facilities bear interest, at our option, at
either an alternative base rate or LIBOR, plus, in either case, a margin to be
determined based on the credit facilities' credit rating. Based on current
credit ratings, the margin is 0.75% for LIBOR borrowings and 0.00% for alternate
base-rate borrowings. As of December 31, 2006, the actual borrowing rate on
these facilities was 6.125%. The term loan facility matures on August 2, 2011.
The tax bridge facility matures on February 2, 2009.

We are required to repay the tax bridge facility upon receipt of federal
tax refunds that we expect to receive as a result of tax deductions generated by
the payments made to the Trust. We expect to receive the federal tax refund of
approximately $1.1 billion in 2007. Because we expect to repay the $1.065
billion borrowing on the tax bridge facility in 2007, we classified it as
short-term debt on the consolidated balance sheet as of December 31, 2006.

We have the ability under the terms of the credit facilities to repay
amounts outstanding under the revolving credit, term loan and tax bridge
facilities at any time prior to their maturities without paying any prepayment
premium or penalty. Paydowns under the term loan and tax bridge facilities would
be permanent reductions of those facilities. Our obligations under the credit
facilities are guaranteed by all of our material domestic subsidiaries.

The credit agreement requires that we meet and maintain certain financial
ratios and tests, including a maximum leverage ratio (as defined in the credit
agreement) of no more than 4.50-to-1.00 and a minimum interest coverage ratio
(as defined in the credit agreement) of not less than 2.00-to-1.00. The credit
agreement contains events of default and covenants that are customary for
similar transactions and may limit our ability to take various actions.

6.3% SENIOR NOTES

On November 17, 2006, we issued $500 million of 6.3% senior unsecured notes that
mature in November 2016. In accordance with a registration rights agreement, we
are required to file with the Securities and Exchange Commission, or SEC, a
registration statement relating to a registered exchange offer for the notes by
no later than April 16, 2007. If we fail to file the registration statement by

that date, or the registration statement does not become effective by June 15,
2007, the interest rate on the notes will increase until the specified event
occurs. These notes have been assigned credit ratings of Baa3 by Moody's
Investor Service Inc. and BB+ by Standard & Poor's Ratings Services. The
indenture under which these notes were issued contains events of default and
covenants that are customary for similar transactions and may limit our ability
to take specified actions. The notes also contain a provision requiring us to
offer to repurchase the notes at 101% of their principal amount (plus accrued
and unpaid interest) in the event of a change in control and a rating of the
notes at below investment grade by both Moody's Investor Service Inc. and
Standard & Poor's Ratings Services.

INDUSTRIAL REVENUE BONDS

Our industrial revenue bonds have fixed interest rates ranging from 5.5% to
6.4%. The weighted average rate of interest on our industrial revenue bonds is
5.875%. The average maturity of these bonds is 24 years.

PRE-PETITION DEBT

Pre-petition debt previously included in liabilities subject to compromise
amounted to $1.005 billion as of the date on which we filed our Chapter 11
petition for reorganization. During 2006, we repaid $766 million of this debt
and reinstated $239 million of industrial revenue bonds in accordance with the
plan of reorganization and reclassified the reinstated amount to long-term debt.

OTHER INFORMATION

The fair market value of our debt was $2.529 billion as of December 31, 2006 and
$1.268 billion as of December 31, 2005. The fair market values were based on
quoted market prices or, where quoted market prices were not available, on
instruments with similar terms and maturities. However, because debt as of
December 31, 2005 was subject to compromise, the fair market value of that debt
was not necessarily the ultimate settlement value that was determined by the
bankruptcy court.

The amounts of total debt outstanding as of December 31, 2006 maturing
during the next five years and beyond are:

(millions)
2007 $1,065
2008 --
2009 --
2010 --
2011 700
Thereafter 739

4. RIGHTS OFFERING

In the Rights Offering, we issued to our stockholders as of June 30, 2006 one
transferable right for each common share owned on that date, entitling the
holder to purchase one share of common stock for $40.00 in cash for each right.
The rights expired on July 27, 2006. In connection with the Rights Offering,
Berkshire Hathaway agreed through a backstop commitment to purchase from us, at
$40.00 per share, all of the shares of common stock offered pursuant to the
Rights Offering that were not issued pursuant to the exercise of rights. In the
first quarter of 2006, we paid Berkshire Hathaway a fee of $67 million for its
backstop commitment. On August 2, 2006, we issued 6.97 million shares of common
stock to Berkshire Hathaway in accordance with the backstop agreement. These
shares include 6.5 million shares underlying rights distributed to Berkshire
Hathaway in connection with the shares it beneficially owned as of June 30, 2006
and 0.47 million shares underlying rights distributed to other stockholders that
were not exercised in the Rights Offering. A total of 44.92 million shares of
our common stock were distributed in connection with the Rights Offering,
including the 6.97 million shares issued to Berkshire Hathaway. We received net
proceeds of approximately $1.7 billion in connection with the Rights Offering.
We used the net proceeds from the Rights Offering, together with other available
funds, to make payments required by the plan of reorganization and for general
corporate purposes.

In connection with the backstop commitment, we and Berkshire Hathaway
entered into a shareholder's agreement whereby Berkshire Hathaway agreed, among
other things, that for a period of seven years following completion of the
Rights Offering, except in limited circumstances, Berkshire Hathaway will not
acquire beneficial ownership of our voting securities if, after giving effect to
the acquisition, Berkshire Hathaway would own more than 40% of our voting
securities on a fully diluted basis. Berkshire Hathaway further agreed that,
during the

seven-year period, it will not solicit proxies with respect to USG's securities
or submit a proposal or offer involving a merger, acquisition or other
extraordinary transaction unless the proposal or offer (i) is requested by our
Board of Directors or (ii) is made to our Board of Directors confidentially, is
conditioned on approval by a majority of USG's voting securities not owned by
Berkshire Hathaway and a determination by our Board of Directors as to its
fairness to stockholders and, if the proposed transaction is not a tender offer
for all shares of our common stock or an offer for the entire company, is
accompanied by an undertaking to offer to acquire all shares of our common stock
outstanding after completion of the transaction at the same price per share as
was paid in the transaction. The shareholder's agreement also provides that,
with certain exceptions, any new shares of common stock acquired by Berkshire
Hathaway in excess of those owned on the date of the agreement (and shares
distributed on those shares, including in the Rights Offering) will be voted
proportionally with all voting shares.

Under the shareholder's agreement, for the same seven-year period, we
agreed to exempt Berkshire Hathaway from our existing or future stockholder
rights plans to the extent that Berkshire Hathaway complies with the terms and
conditions of the shareholder's agreement. If there is a stockholder vote on a
stockholder rights plan that does not contain this agreed exemption, Berkshire
Hathaway may vote without restriction all the shares it holds in a stockholder
vote to approve or disapprove the proposed stockholder rights plan. We also
agreed that, after the seven-year standstill period ends, during the time that
Berkshire Hathaway owns USG equity securities, Berkshire Hathaway will be
exempted from any stockholder rights plan, except that our Board of Directors
may adopt a stockholder rights plan that restricts Berkshire Hathaway from
acquiring (although it may continue to hold) beneficial ownership of more than
50% of USG's voting securities, on a fully diluted basis, other than pursuant to
an offer to acquire all shares of our common stock that is open for at least 60
calendar days.

The parties also entered into a registration rights agreement whereby we
granted Berkshire Hathaway registration rights with respect to its shares of our
common stock.

5. STOCKHOLDERS RIGHTS PLAN

On December 21, 2006, our Board of Directors approved the adoption of a new
stockholders rights plan to replace the reorganization rights plan that expired
on December 31, 2006. Under the new plan, if any person or group acquires
beneficial ownership of 15% or more of our then-outstanding voting stock,
stockholders other than the 15% triggering stockholder will have the right to
purchase additional shares of our common stock at half the market price, thereby
diluting the triggering stockholder. Stockholders who owned 15% or more of our
common stock as of December 21, 2006 will not trigger these rights so long as
they do not become the beneficial owner of an additional 1% or more of our
voting stock while the plan is in effect. The new plan also provides that,
during the seven-year standstill period under the shareholder's agreement
described in Note 4 above, Berkshire Hathaway Inc. (and certain of its
affiliates) will not trigger the rights so long as Berkshire Hathaway complies
with the terms of the shareholder's agreement and, following that seven-year
standstill period, the term "Acquiring Person" will not include Berkshire
Hathaway (and certain of its affiliates) unless Berkshire Hathaway and its
affiliates acquire beneficial ownership of more than 50% of our voting stock on
a fully diluted basis.

The rights issued pursuant to the new rights plan will expire on January 2,
2017. However, our Board of Directors has the power to accelerate or extend the
expiration date of the rights. In addition, a Board committee composed solely of
independent directors will review the rights plan at least once every three
years to determine whether to modify the plan in light of all relevant factors.

6. EARNINGS PER SHARE

The reconciliation of basic earnings per share to diluted earnings per share is
shown in the following table:

Weighted
Net Average
Earnings Shares Per-Share
(Loss) (000) Amount
-------- ------ ---------

(millions, except share data)
2006:
Basic earnings $ 288 66,476 $ 4.34
Dilutive effect of stock options 87
------- ------ -------
Diluted earnings 288 66,563 4.33
======= ====== =======
2005:
Basic loss (1,436) 56,342 (25.49)
------- ------ -------
Diluted loss (1,436) 56,342 (25.49)
======= ====== =======
2004:
Basic earnings 312 55,570 5.62
------- ------ -------
Diluted earnings 312 55,570 5.62
======= ====== =======

Restricted stock units with respect to 0.5 million common shares and options to
purchase 1.0 million common shares as of December 31, 2006 were not included in
the computation of diluted earnings per share because they were anti-dilutive.
Options to purchase 0.2 million common shares as of December 31, 2005 and 2.6
million common shares as of December 31, 2004 were not included in the
computation of diluted earnings per share because the exercise price was greater
than the average market price of our common stock.

7. INVENTORIES

Inventories as of December 31 consisted of the following:

2006 2005
---- ----

(millions)
Finished goods and work in progress $231 $195
Raw materials 94 99
Supplies 23 21
---- ----
Total 348 315
==== ====

The LIFO value of our inventories in the United States was $256 million as of
December 31, 2006 and $240 million as of December 31, 2005. Inventories would
have been higher by $52 million as of December 31, 2006 and $38 million as of
December 31, 2005 if they were valued under the FIFO and average production cost
methods. The LIFO value of our inventories in the United States exceeded that
computed for United States federal income tax purposes by $15 million as of
December 31, 2006 and $17 million as of December 31, 2005. All of our
inventories outside the United States are valued under FIFO or average
production cost methods.

8. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment as of December 31 consisted of the following:

2006 2005
------- ------

(millions)
Land and mineral deposits $ 142 $ 107
Buildings and improvements 905 835
Machinery and equipment 2,198 1,919
Computer software and systems
development costs 73 67
------- ------
3,318 2,928
Reserves for depreciation and depletion (1,108) (982)
------- ------
Total 2,210 1,946
======= ======

9. GOODWILL AND OTHER INTANGIBLE ASSETS

All of our goodwill relates to the Building Products Distribution operating
segment. Goodwill increased in 2006 and 2005 as a result of acquisitions by L&W
Supply, which makes up the Building Products Distribution operating segment.
Goodwill as of December 31 was as follows:

2006 2005
---- ----

(millions)
Balance as of January 1 $ 64 $43
Acquisitions 90 21
---- ----
Balance as of December 31 154 64
==== ====

Other intangible assets, which are principally trade names, totaled $9 million
as of December 31, 2006 and $3 million as of December 31, 2005. As of each date,
$1 million of these other intangible assets was subject to amortization over a
five-year life concluding in 2009. Other intangible assets are included in other
assets on the consolidated balance sheets.

Based on identified other intangible assets recorded as of December 31,
2006, and assuming no subsequent impairment of the underlying assets, the amount
of annual amortization expense for each of the remaining three years is
immaterial.

10. ACCRUED EXPENSES

Accrued expenses as of December 31 consisted of the following:

2006 2005
---- ----

(millions)
Employee compensation $112 $102
Self-insurance reserves 62 57
Other 184 116
---- ----
Total 358 275
==== ====

11. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

AOCI as of December 31 consisted of the following:

2006 2005
----- -----

(millions)
(Loss) gain on derivatives, net of tax $ (26) $ 60
Foreign currency translation 24 21
Minimum pension liability, net of tax * -- (8)
Unrecognized pension and postretirement
benefit costs, net of tax * (134) --
Unrealized loss on marketable
securities, net of tax -- (1)
----- ----
Total (136) 72
===== ====

* Upon the adoption of SFAS No. 158, the concept of minimum pension liability
no longer exists. Accordingly, the minimum pension liability, net of tax,
as of December 31, 2005 of $(8) million plus the change in that amount that
occurred during 2006 of $(5) million is included in unrecognized pension
and postretirement benefit costs, net of tax, as of December 31, 2006.

During 2006, we reclassified accumulated net after-tax losses on derivatives of
$17 million ($28 million pretax) from AOCI to earnings. As of December 31, 2006,
we estimate the net after-tax loss that we will reclassify from AOCI to earnings
within the next 12 months to be $24 million.

12. ASSET RETIREMENT OBLIGATIONS

Changes in our liability for asset retirement obligations during 2006 and 2005
consisted of the following:

2006 2005
---- ----

(millions)
Balance as of January 1 $71 $43
Accretion expense 4 3
Liabilities incurred 4 7
Adoption of FIN 47 -- 18
Liabilities settled (1) --
--- ---
Balance as of December 31 78 71
=== ===

Our asset retirement obligations include reclamation requirements as regulated
by government authorities related principally to assets such as our mines,
quarries, landfills, ponds and wells. The accounting for asset retirement
obligations requires estimates by management about the timing of asset
retirements, the cost of retirement obligations, discount and inflation rates
used in determining fair values and the methods of remediation associated with
our asset retirement obligations. We generally use assumptions and estimates
that reflect the most likely remediation method on a site-by-site basis.

We adopted FASB Interpretation No. 47, or FIN 47, "Accounting for
Conditional Asset Retirements," effective December 31, 2005. This interpretation
clarifies that uncertainty about the timing and/or method of settlement of a
conditional asset retirement obligation should be factored into the measurement
of the liability when there is sufficient information to make a reasonable
estimate of the fair value of the obligation. In connection with the adoption of
this interpretation, a noncash, after-tax charge of $11 million ($18 million
pretax) was reflected in the consolidated statement of operations as a
cumulative effect of a change in accounting principle as of December 31, 2005.
If FIN 47 had been adopted effective January 1, 2004, net earnings and earnings
per share for 2004 would not be materially different, and the liability for
asset retirement obligations would have been approximately $51 million as of
January 1, 2004 and approximately $60 million as of December 31, 2004. Asset
retirement obligations are included in other liabilities on the consolidated
balance sheets.

13. EMPLOYEE RETIREMENT PLANS

We maintain defined benefit pension plans for most of our employees. Most of
these plans require employee contributions in order to accrue benefits. Benefits
payable under the plans are based on employees' years of service and
compensation during specified years of employment.

We also maintain plans that provide postretirement benefits (retiree health
care and life insurance) for eligible employees. Employees hired before January
1, 2002 generally become eligible for the postretirement benefit plans when they
meet minimum retirement age and service requirements. The cost of providing most
postretirement benefits is shared with retirees. In response to continuing
retiree health-care-cost pressure, effective January 1, 2005, we modified our
retiree medical cost-sharing strategy for existing retirees and eligible active
employees who may qualify for retiree medical coverage in the future. The plan
amendment resulted in participants paying a greater portion of their retiree
health-care costs and a reduction in our accumulated postretirement benefit
obligation.

The components of net pension and postretirement benefits costs are
summarized in the following table:

2006 2005 2004
---- ---- ----

(millions)
Pension Benefits:
Service cost of benefits earned $ 39 $ 34 $ 31
Interest cost on projected
benefit obligation 62 56 54
Expected return on plan assets (63) (56) (53)
Net amortization 18 20 19
---- ---- ----
Net pension cost 56 54 51
==== ==== ====
Postretirement Benefits:
Service cost of benefits earned 15 13 14
Interest cost on projected
benefit obligation 21 19 22
Net amortization (2) (4) 1
---- ---- ----
Net postretirement cost 34 28 37
==== ==== ====

We use a December 31 measurement date for our plans. The accumulated benefit
obligation, or ABO, for the defined benefit pension plans was $901 million as of
December 31, 2006 and $858 million as of December 31, 2005. The following table
summarizes projected pension and accumulated postretirement benefit obligations,
plan assets and funded status as of December 31:

Pension Postretirement
--------------- --------------
2006 2005 2006 2005
------ ------ ----- ------

(millions)
Change in Benefit Obligation:
Benefit obligation as of January 1 $1,077 $1,003 $ 354 $ 350
Service cost 39 34 15 13
Interest cost 62 56 21 19
Participant contributions 14 13 4 5
Benefits paid (63) (55) (16) (15)
Plan amendment (1) -- (1) 2
Actuarial (gain) loss 12 22 39 (21)
Foreign currency translation 2 4 -- 1
------ ------ ----- -----
Benefit obligation as of December 31 1,142 1,077 416 354
------ ------ ----- -----
Change in Plan Assets:
Fair value as of January 1 906 810 -- --
Actual return on plan assets 117 64 -- --
Employer contributions 81 71 12 10
Participant contributions 14 13 4 5
Benefits paid (63) (55) (16) (15)
Foreign currency translation 2 3 -- --
------ ------ ----- -----
Fair value as of December 31 1,057 906 -- --
------ ------ ----- -----
Funded status (85) (171) (416) (354)
====== ====== ===== =====
Components on the Consolidated Balance Sheets *:
Noncurrent assets 8 -- -- --
Current liabilities (1) -- (13) --
Noncurrent liabilities (92) -- (403) --
------ ------ ----- -----
Net liability as of December 31 (85) -- (416) --
====== ====== ===== =====
Pretax Components in AOCI *:
Net actuarial loss 176 -- 107 --
Prior service cost (credit) 16 -- (63) --
Net transition obligation 1 -- -- --
------ ------ ----- -----
Total as of December 31 193 -- 44 --
====== ====== ===== =====

* In accordance with SFAS No. 158, retrospective application is not required.

For the defined benefit pension plan, we estimate that during the 2007 fiscal
year we will amortize from AOCI into net pension cost a net actuarial loss of $7
million and prior service cost of $2 million. For the postretirement benefit
plan, we estimate that during the 2007 fiscal year we will amortize from AOCI
into net postretirement cost a net actuarial loss of $5 million and prior
service cost of $(7) million.

ASSUMPTIONS

The following tables reflect the assumptions used in the accounting for our
plans:

Pension Postretirement
----------- --------------
2006 2005 2006 2005
---- ---- ------ -----

Weighted-average assumptions used to
determine benefit obligations as of
December 31:
Discount rate 5.9% 5.75% 5.95% 5.8%
Compensation increase rate 4.0% 4.0% -- --

Weighted-average assumptions used to
determine net cost for years ended
December 31:
Discount rate 5.75% 5.75% 5.8% 5.75%
Expected return on plan assets 7.0% 7.0% -- --
Compensation increase rate 4.0% 4.2% -- --

The assumed health-care-cost trend rate used to measure the postretirement
plans' obligations as of December 31 were as follows:

2006 2005
---- ----

Health-care-cost trend rate assumed for next
year 9.25% 9.25%
Rate to which the cost trend rate is assumed
to decline (the ultimate trend rate) 5.25% 5.25%
Year that the rate reaches the ultimate
trend rate 2013 2011

A one-percentage-point change in the assumed health-care-cost trend rate for the
postretirement plans would have the following effects:

One-Percentage- One-Percentage-
Point Increase Point Decrease
--------------- ---------------

(millions)
Effect on total service and
interest cost $ 7 $ (6)
Effect on postretirement
benefit obligation 64 (53)

We established our assumption for the expected long-term rate of return on plan
assets for our pension plans by using a "building block" approach. In this
approach, we estimate ranges of long-term expected returns for the various asset
classes in which the plans invest. Our estimated ranges are primarily based upon
observations of historical asset returns and their historical volatility. In
determining expected returns, we also consider consensus estimates of certain
market and economic factors that influence returns such as inflation, gross
domestic product growth and dividend yields. We then calculate an overall range
of likely expected rates of return by applying the expected returns to the
plans' target asset allocation. We then determine the most likely rate of return
and adjust it for investment management fees.

PLAN ASSETS

Our pension plans' asset allocations by asset categories as of December 31 were
as follows:

Asset Categories 2006 2005
---------------- ---- ----

Equity securities 68% 69%
Debt securities 21% 22%
Other 11% 9%
--- ---
Total 100% 100%
=== ===

We established our investment policies and strategies for the pension plans'
assets with a goal of maintaining fully funded plans (on an ABO basis) and
maximizing returns on the plans' assets while prudently considering the plans'
tolerance for risk. Factors influencing the level of risk assumed include the
demographics of the plans' participants, the liquidity requirements of the plans
and our financial condition. Based upon these factors, we determined that our
plans can tolerate a moderate level of risk.

To maximize long-term returns, we invest our plans' assets primarily in a
diversified mix of equity and debt securities. The portfolio of equity
securities includes both foreign and domestic stocks representing a range of
investment styles and market capitalizations. Investments in domestic and
foreign equities and debt securities are actively and passively managed. Other
assets are managed by investment managers using strategies with returns normally
expected to have a low correlation to the returns of equities. As of December
31, 2006, the plans' target asset allocation percentages were 61% for equity
securities, 22% for debt securities and 17% for other. The actual allocations
for equity and debt securities exceeded their targets at year end. We are
identifying additional investment opportunities in the "other" category, which
are expected to bring actual allocations closer to target allocations in 2007.

We monitor investment risk on an ongoing basis, in part through the use of
quarterly investment portfolio reviews, compliance reporting by investment
managers, and periodic asset/liability studies and reviews of the plan's funded
status.

CASH FLOWS

Our defined benefit pension plans have no minimum funding requirements under the
Employee Retirement Income Security Act of 1974, commonly called ERISA. In
accordance with our funding policy, we expect to voluntarily contribute
approximately $70 million of cash to our pension plans in 2007. Total benefit
payments we expect to pay to participants, which include payments funded from
USG's assets as well as payments from our pension plans and the Medicare subsidy
we expect to receive, are as follows:

Years ended December 31
---------------------------------------
Health-Care
Expected benefit Pension Postretirement Subsidy
payments (millions) Benefits Benefits Receipts
------------------- -------- -------------- -----------

2007 $ 65 $ 13 $ (1)
2008 69 14 (2)
2009 76 16 (2)
2010 81 18 (2)
2011 88 19 (2)
2012 - 2016 568 126 (11)

14. SHARE-BASED COMPENSATION

Effective January 1, 2006, we adopted SFAS No. 123(R), "Share-Based Payment."
Under SFAS No. 123(R), a fair-value method is used to account for share-based
compensation. Our cost for share-based compensation was $17 million in 2006. The
total income tax benefit recognized for share-based compensation arrangements in
the consolidated statements of earnings was $6 million for 2006.

There were no stock options or other forms of share-based compensation
granted during our recent Chapter 11 proceedings. Prior to our Chapter 11
proceedings, we issued stock options to key employees under plans approved by
stockholders. All of those options became exercisable two years after the grant
date and generally expire 10 years from the date of grant, or earlier in the
event of death, disability or retirement. All stock options issued before our
Chapter 11 proceedings were fully vested prior to the adoption of SFAS No.
123(R). There are no common shares reserved for future grants under plans
approved prior to the Chapter 11 proceedings. In our consolidated statements of
cash flows, we presented tax benefits associated with the exercise of stock
options as operating cash flows prior to the adoption of SFAS No. 123(R) and as
financing cash flows following adoption.

During the second quarter of 2006, we adjusted the number of shares
underlying the then-outstanding stock options and the related exercise prices
pursuant to the terms of the options to account for the Rights Offering. We made
the adjustments in a way designed to preserve the value of the outstanding stock
options without triggering adverse tax consequences. In accordance with the
provisions of SFAS No.123(R), we accounted for the adjustments as a
modification. The adjustments did not have a material impact on our financial
position, cash flows or results of operations.

2006 LONG-TERM INCENTIVE PLAN

The USG Corporation Long-Term Incentive Plan, or LTIP, was approved by our Board
of Directors in March 2006 and by our stockholders at their annual meeting in
May 2006. There are 8.2 million shares of common stock authorized for grants
under the LTIP. The LTIP authorizes the Board, or the Board's Compensation and
Organization Committee, to provide equity-based compensation in the form of
stock options, stock appreciation rights, or SARs, restricted stock, restricted
stock units, or RSUs, performance shares and units, and other cash and
stock-based awards for the purpose of providing our officers and employees
incentives and rewards for performance.

During the third quarter of 2006, grants of stock options, SARs and RSUs
were made under the LTIP, as discussed below. We will recognize the cost of
these awards on a straight-line attribution basis over their respective vesting
periods, net of estimated forfeitures. As of December 31, 2006, a total of
6,692,400 common shares were reserved for future grants under the LTIP. We may
issue common shares upon option exercises and upon the vesting of RSUs from our
authorized but unissued shares or from treasury shares.

STOCK OPTIONS

We granted options to purchase 962,500 shares of common stock under the LTIP
during the third quarter of 2006 with an exercise price of $46.17 per share,
which was the closing price of USG common stock on the date of grant. The
options generally become exercisable in five equal annual installments,
beginning one year from the date of grant or earlier in the event of death,
disability or a change in control. The options generally expire 10 years from
the date of grant, or earlier in the event of death, disability or retirement.

We estimated the fair value of each stock option granted under the LTIP on
the date of grant using a Black-Scholes option valuation model that uses the
assumptions noted in the following table. We based expected volatility on a 50%
weighting of peer volatilities and 50% weighting of implied volatilities. We did
not consider historical volatility of our common stock price to be an
appropriate measure of future volatility because of the impact of our Chapter 11
proceedings on our historical stock price. The risk-free rate was based on zero
coupon U.S. government issues at the time of grant. The expected term was
developed using the simplified method, as permitted by the SEC's Staff
Accounting Bulletin No. 107.

Assumptions:
Fair value of options granted $23.36
Expected volatility 42.6%
Risk-free rate 4.87%
Expected term (in years) 6.5
Expected annual forfeitures 2.5%
Expected dividends --

A summary of stock option activity under the LTIP and our prior stock option
plans as of December 31, 2006 and during the fiscal year then ended, adjusted
for the Rights Offering where applicable, is presented below:

Weighted
Weighted Average Aggregate
Number of Average Remaining Intrinsic
Options Exercise Contractual Value
(thousands) Price Term (years) (millions)
----------- ---------- ------------ ----------

Outstanding at
January 1, 2006 808 $33.37
Granted * 980 46.17
Exercised (403) 33.60
Cancelled (155) 32.38
----- ------
Outstanding at
December 31, 2006 1,230 43.62 8.16 $14
----- ------ ---- ---
Exercisable at
December 31, 2006 252 33.70 2.28 5
----- ------ ---- ---

* Includes 17,900 SARs that are payable in cash upon vesting and, therefore,
are accounted for as a liability on the consolidated balance sheets.

Intrinsic value for stock options is defined as the difference between the
current market value of our common stock and the exercise price of the stock
option. The total intrinsic value of options exercised was $15 million in 2006,
$26 million in 2005 and $3 million in 2004.

As of December 31, 2006, there was $14 million of total unrecognized
compensation cost related to nonvested share-based compensation awards granted
under the LTIP. We expect that cost to be recognized over a weighted average
period of 4.6 years. No options vested during 2006 and 2005.

RESTRICTED STOCK UNITS

We granted RSUs with respect to 530,100 shares of common stock under the LTIP
during the third quarter of 2006. The RSUs generally vest in four equal annual
installments, beginning one year from the date of grant, except that they may
vest earlier in the case of death, disability or a change in control. The fair
value of each RSU granted is equal to the closing market price of our common
stock at the date of grant and is expensed using the straight-line method over
the vesting period of the award. The following is a summary of RSU activity
during 2006:

Number
of Shares Grant Date
(thousands) Fair Value
----------- ----------

Nonvested at January 1, 2006 -- $ --
Granted * 530 46.17
Vested -- --
Forfeited (1) 46.17
--- ------
Nonvested at December 31, 2006 * 529 46.17
=== ======

* Includes 9,600 RSUs that are payable in cash upon vesting and, therefore,
are accounted for as a liability on the consolidated balance sheets.

As of December 31, 2006, there was $15 million of total unrecognized
compensation cost related to nonvested share-based compensation awards
represented by RSUs granted under the LTIP. We expect that cost to be recognized
over a weighted average period of 3.6 years.

NON-EMPLOYEE DIRECTOR DEFERRED STOCK UNITS

Our non-employee directors may elect to take a portion of their compensation as
deferred stock units which increase or decrease in value in direct relation to
the market price of our common stock and are paid in cash upon termination of
board service. As of December 31, 2006, there were approximately 18,035 deferred
stock units held by non-employee directors. Amounts related to these units
recorded to expenses

in 2006 and 2005 were immaterial.

To account for the Rights Offering, we adjusted the deferred stock units
held by members of the board of directors. These adjustments, which were made in
a way that was designed to preserve the value of the deferred stock units
without triggering adverse tax consequences, had no impact on our financial
position, cash flows or results of operations.

Pursuant to our Stock Compensation Program for Non-Employee Directors, on
July 1, 2006, our non-employee directors were entitled to receive a $30,000
annual grant, payable at their election in cash or common stock with an
equivalent value. Pursuant to this provision, a total of 2,645 shares of common
stock were issued to five non-employee directors based on the closing market
price of a share of common stock on July 3, 2006.

15. INCOME TAXES

Earnings before income taxes and cumulative effect of accounting change
consisted of the following:

2006 2005 2004
---- ------- ----

(millions)
U.S. $368 $(2,457) $397
Foreign 108 108 112
---- ------- ----
Total 476 (2,349) 509
==== ======= ====

Income taxes consisted of the following:

2006 2005 2004
------- ------- ----

(millions)
Current:
Federal $(1,049) $ 189 $113
Foreign 29 33 29
State (16) 40 14
------- ------- ----
(1,036) 262 156
------- ------- ----
Deferred:
Federal 1,091 (1,033) 27
Foreign (3) -- 3
State 136 (153) 11
------- ------- ----
1,224 (1,186) 41
------- ------- ----
Total 188 (924) 197
======= ======= ====

Differences between actual provisions for income taxes and provisions for income
taxes at the U.S. federal statutory rate (35%) were as follows:

2006 2005 2004
----- ----- -----

(millions)
Taxes on income
at U.S. federal statutory rate $ 167 $(822) $ 178
Chapter 11 reorganization
expenses 4 2 1
Foreign earnings subject
to different tax rates (8) -- 2
State income tax, net of
federal benefit 20 (74) 17
Change in valuation allowance 7 -- --
Reduction of tax reserves (3) (34) --
Other, net 1 4 (1)
----- ----- -----
Provision for income
taxes 188 (924) 197
----- ----- -----
Effective income tax rate 39.5% 39.3% 38.6%
===== ===== =====

Significant components of deferred tax assets and liabilities as of December 31
were as follows:

2006 2005
---- ------

(millions)
Deferred Tax Assets:
Net operating loss and tax credit
carryforwards $438 $ 27
Pension and postretirement benefits 224 119
Reserves not deductible until paid:
Asbestos reserves 20 1,698
Other reserves 12 21
Self insurance 18 21
Capitalized interest 13 6
Derivative instruments 10 --
Share-based compensation 7 --
Other 15 9
---- ------
Deferred tax assets before valuation
allowance 757 1,901
Valuation allowance (73) (79)
---- ------
Total deferred tax assets 684 1,822
---- ------
Deferred Tax Liabilities:
Property, plant and equipment 280 310
State taxes 52 62
Derivative instruments -- 51
Inventories 7 8
---- ------
Total deferred tax liabilities 339 431
---- ------
Net deferred tax assets 345 1,391
==== ======

We have established a valuation allowance for deferred tax assets relating to
certain foreign and U.S. state net operating loss and tax credit carryforwards
because of uncertainty regarding their ultimate realization. Of the total
valuation allowance as of December 31, 2006, $61 million relates to U.S. state
net operating loss and tax credit carryforwards and $12 million relates to
foreign net operating loss and tax credit carryforwards.

As a result of the federal income tax deduction for amounts paid to the
Asbestos Trust in 2006, we incurred a federal and state net operating loss, or
NOL, in 2006. While most of the federal NOL will be carried back and offset
against the federal taxable income we reported in the 10 preceding taxable
years, approximately $400 million of the NOL will be carried forward and offset
against federal taxable income arising in future years. In addition, the
carryback of the 2006 federal NOL will result in the carryforward of
approximately $77 million of federal tax credits (primarily alternative minimum
tax and foreign tax credits) that can be offset against federal income tax in
future years. The federal NOL can be carried forward for 20 years, beginning in
2007; the alternative minimum tax credits can be carried forward indefinitely;
and the foreign tax credits can be carried forward for 10 years from the date of
origin. At the state level, most of the 2006 state NOL will be carried forward
since most states do not allow the carryback of a NOL in any significant amount.
The 2006 state NOL, as well as other NOL and tax credit carryforwards arising in
prior years in various state and foreign jurisdictions, will expire over periods
ranging from five to 20 years from the date of origin.

During the fourth quarter of 2006, the Internal Revenue Service finalized
its audit of our federal income tax returns for the years 2003 and 2004. As a
result of the audit, our federal income tax liability for the years 2003 and
2004 was increased by $33 million in the aggregate, most of which resulted in an
increase in the amount of our deferred tax assets as of December 31, 2006.

During the third quarter of 2005, the Internal Revenue Service finalized
its audit of our federal income tax returns for the years 2000 through 2002. As
a result of the audit, our federal income tax liability for the years 2000
through 2002 was increased by $60 million in the aggregate, which was covered by
liabilities previously recorded on our financial statements. In addition, due to
the results of the audit, a portion of our recorded income tax contingency
reserves became unnecessary. Consequently, our income tax provision was reduced
(and consolidated net earnings increased) in 2005 by $25 million.

Our financial statements include amounts recorded for contingent tax
liabilities with respect to loss contingencies that are deemed probable of
occurrence. These loss contingencies relate primarily to tax disputes with
various state tax authorities, costs incurred with respect to the Chapter 11
proceedings and the taxable status of certain foreign income in the U.S. Our
U.S. income tax returns for 2004 and prior years have been audited by the IRS.

We do not provide for U.S. income taxes on the portion of undistributed
earnings of foreign subsidiaries that is intended to be permanently reinvested.
The cumulative amount of such undistributed earnings totaled approximately $423
million as of December 31, 2006. These earnings would become taxable in the
United States upon the sale or liquidation of these foreign subsidiaries or upon
the remittance of dividends. It is not practicable to estimate the amount of the
deferred tax liability on such earnings.

On October 22, 2004, the President signed the American Jobs Creation Act of
2004. This act created a temporary incentive for U.S. corporations to repatriate
accumulated income earned abroad by providing an 85% dividends-received
deduction for certain dividends from controlled foreign corporations. During the
fourth quarter of 2005, we decided to take advantage of the one-time opportunity
under the act to reduce future taxes by repatriating $91 million of foreign
earnings. This resulted in $4 million of tax expense that was recognized in the
fourth quarter of 2005.

Our income tax receivable of $1.102 billion as of December 31, 2006 relates
primarily to refunds of federal and state income taxes paid in prior years that
we expect to receive as a result of the carryback of our 2006 net operating loss
due to amounts paid to the Asbestos Trust in 2006 and the temporary overpayment
of taxes in various jurisdictions. We expect the amount recorded as income taxes
receivable as of December 31, 2006 to be refunded to us in 2007.

16. DERIVATIVE INSTRUMENTS

COMMODITY DERIVATIVE INSTRUMENTS

As of December 31, 2006, we had swap contracts to exchange monthly payments on
notional amounts of natural gas amounting to $225 million. These contracts
mature by December 31, 2009. As of December 31, 2006, the fair value of these
swap contracts, which remained in AOCI, was a $43 million ($26 million
after-tax) unrealized loss.

FOREIGN EXCHANGE DERIVATIVE INSTRUMENTS

As of December 31, 2006 and 2005, we had no outstanding forward contracts to
hedge selected risk of changes in cash flows resulting from forecasted
intercompany and third-party sales or purchases denominated in non-U.S.
currencies, or to hedge selected risk of changes in our net investment in
foreign subsidiaries.

COUNTERPARTY RISK

We are exposed to credit losses in the event of nonperformance by the
counterparties on our financial instruments. All counterparties have investment
grade credit standing; accordingly, we anticipate that these counterparties will
be able to fully satisfy their obligations under the contracts. We receive
collateral from our counterparties based on the provisions in certain credit
support agreements. Similarly, we may be required to post collateral if
aggregate payables exceed certain limits. Currently, we have no collateral
requirement. We enter into master agreements which contain netting arrangements
that minimize counterparty credit exposure.

17. SEGMENTS AND ACQUISITIONS

OPERATING SEGMENTS

2006 2005 2004
------- ------- ------

(millions)
Net Sales:
North American Gypsum $ 3,621 $ 3,222 $2,753
Worldwide Ceilings 756 707 688
Building Products Distribution 2,477 2,048 1,738
Eliminations (1,044) (838) (670)
------- ------- ------
Total 5,810 5,139 4,509
======= ======= ======

2006 2005 2004
------ ------- ------

(millions)
Operating Profit (Loss):
North American Gypsum $ 836 $(2,466) $ 428
Worldwide Ceilings 77 62 62
Building Products Distribution 203 149 103
Corporate (117) (90) (73)
Chapter 11 reorganization
expenses (10) (4) (12)
Eliminations (4) (5) --
------ ------- ------
Total 985 (2,354) 508
====== ======= ======
Depreciation, Depletion
and Amortization:
North American Gypsum 111 100 94
Worldwide Ceilings 18 19 18
Building Products Distribution 4 3 3
Corporate 5 3 5
------ ------- ------
Total 138 125 120
====== ======= ======
Capital Expenditures:
North American Gypsum 336 174 120
Worldwide Ceilings 18 19 14
Building Products Distribution 2 3 2
Corporate 37 2 2
------ ------- ------
Total 393 198 138
====== ======= ======
Assets:
North American Gypsum 2,348 3,664 2,042
Worldwide Ceilings 416 415 438
Building Products Distribution 590 487 417
Corporate 2,124 1,748 1,513
Eliminations (113) (172) (132)
------ ------- ------
Total 5,365 6,142 4,278
====== ======= ======

GEOGRAPHIC SEGMENTS

2006 2005 2004
------ ------- ------

(millions)
Net Sales:
United States $5,227 $ 4,626 $4,065
Canada 442 420 384
Other Foreign 386 333 291
Geographic transfers (245) (240) (231)
------ ------- ------
Total 5,810 5,139 4,509
====== ======= ======

Long-Lived Assets:
United States 1,939 1,812 1,684
Canada 169 187 174
Other Foreign 209 148 123
------ ------- ------
Total 2,317 2,147 1,981
====== ======= ======

OTHER SEGMENT INFORMATION

Segment operating profit (loss) includes all costs and expenses directly related
to the segment involved and an allocation of expenses that benefit more than one
segment. An operating loss of $2.466 billion in 2005 for the North American
Gypsum segment resulted from a $3.1 billion charge for asbestos claims recorded
in the fourth quarter of 2005. Operating profit of $836 million in 2006 for
North American Gypsum included the reversal of $44 million of our reserve for
asbestos-related liabilities.

Transactions between operating and geographic segments are accounted for at
transfer prices that are approximately equal to market value. Intercompany
transfers between operating segments (shown above as eliminations) largely
reflect intercompany sales from U.S. Gypsum to L&W Supply.

On a worldwide basis, The Home Depot, Inc. accounted for approximately 11%
of our consolidated net sales in each of 2006, 2005 and 2004. Net sales to The
Home Depot, Inc. were reported by all three operating segments.

Revenues are attributed to geographic areas based on the location of the
assets producing the revenues.

ACQUISITIONS

During 2006, L&W Supply, which makes up the Building Products Distribution
operating segment, purchased the outstanding stock of several companies
principally located in the midwestern and southeastern United States and minor
operations in South America for approximately $128 million, net of cash
acquired. These acquisitions were part of L&W Supply's strategy to profitably
grow its specialty dealer business. We accounted for these acquisitions under
the purchase method of accounting and, accordingly, included their results of
operations in our accompanying consolidated results of operations from the dates
of acquisition. Pro forma combined results of operations for 2005 and 2006 would
not be materially different as a result of these acquisitions and therefore are
not presented.

The allocation of the purchase price of the acquisitions is still
preliminary because final purchase price adjustments are subject to final
closing balance sheet audit and review procedures which are still in progress as
of the date of this report. L&W Supply has preliminarily recorded the total
purchase price of the acquisitions, based on their estimated fair values, as
follows:

(millions)
Accounts receivable $ 26
Inventories 14
Goodwill 90
Other assets acquired 13
----
Total assets acquired 143
----
Total liabilities assumed 15
----
Total net assets acquired 128
----

The amounts recorded to goodwill and intangible assets are not subject to
amortization.

L&W Supply paid $29 million for two acquisitions in 2005 and $5 million for
three acquisitions in 2004.

As of December 31, 2006, L&W Supply operated 220 locations in 36 states,
compared with 192 locations as of December 31, 2005 and 186 locations as of
December 31, 2004.

18. COMMITMENTS AND CONTINGENCIES

We lease some of our offices, buildings, machinery and equipment, and autos
under noncancelable operating leases. These leases have various terms and
renewal options. Lease expense amounted to $112 million in 2006, $93 million in
2005 and $86 million in 2004. Future minimum lease payments required under
operating leases with initial or remaining noncancelable terms in excess of one
year as of December 31, 2006 were $82 million in 2007, $73 million in 2008, $57
million in 2009, $45 million in 2010 and $32 million in 2011. The aggregate
obligation after 2011 was $149 million.

As of December 31, 2006, capital expenditure commitments were $494 million.

As of December 31, 2006, restricted cash totaled $6 million. Restricted
cash primarily represents collateral to support outstanding letters of credit.

LEGAL CONTINGENCIES

See Note 19 below for information on asbestos and environmental litigation.

19. LITIGATION

ASBESTOS LITIGATION

Asbestos Personal Injury Litigation: Our plan of reorganization resolves the
debtors' liability for all present and future asbestos personal injury and
related claims. At the time we filed for reorganization in June 2001, U.S.
Gypsum was a defendant in more than 100,000 pending asbestos personal injury
claims. In addition, L&W Supply and Beadex had been named as defendants in a
small number of asbestos personal injury claims.

As part of our plan of reorganization, we created and funded a trust under
Section 524(g) of the Bankruptcy Code for the payment of all of the present and
future asbestos personal injury liabilities of the debtors. The Trust is
administered by independent trustees appointed under the plan. The Trust will
pay qualifying asbestos personal injury and related claims against the debtors
pursuant to trust distribution procedures that are part of the confirmed plan.
As of the end of the fourth quarter of 2006, our obligations to fund the Trust
have been met, and we have no further payment obligations to the Trust.

Our plan of reorganization also contains a channeling injunction which
provides that all present and future asbestos personal injury claims against the
debtors must be brought against the Trust and no one may bring such a claim
against the debtor companies. This channeling injunction applies to all present
and future asbestos personal injury claims for which any debtor is alleged to be
liable, including any asbestos personal injury claims against U.S. Gypsum, L&W
Supply or Beadex, as well as any asbestos personal injury claims against the
debtors relating to A.P. Green Refractories Co., which was formerly one of our
subsidiaries.

Asbestos Property Damage Litigation: Asbestos property damage claims against the
debtors are not part of the Trust or the channeling injunction. Our plan of
reorganization provides that all settled or otherwise resolved asbestos property
damage claims that were timely filed in our reorganization proceedings will be
paid in full. During our reorganization proceedings, the court entered an order
requiring that asbestos property damage claims against the debtors be filed by
January 15, 2003. In response to that deadline, approximately 1,400 asbestos
property damage claims were timely filed in the debtors' Chapter 11 proceedings
with an additional 70 claims being filed after the deadline. During our
reorganization proceedings, more than 950 claims were disallowed or withdrawn,
leaving approximately 520 claims pending.

We have now reached agreements to settle all of the remaining asbestos
property damage claims, with the exception of one small claim brought by a
homeowner. The estimated cost of resolving the asbestos property damage claims,
as well as the cost of funding the asbestos personal injury trust, is discussed
below.

Cost and Payments Relating to Our Asbestos Claims: In the fourth quarter of
2005, we recorded a pretax charge of $3.1 billion for all asbestos-related
claims. This pretax charge increased U.S. Gypsum's reserve for all
asbestos-related claims, both personal injury and property damage, to $4.161
billion. This reserve included our obligations to fund the Trust established
under our plan of reorganization. The reserve also included our estimate of the
cost of resolving asbestos property damage claims filed in our reorganization
proceedings, including estimated legal fees associated with those claims, as
well as our estimate of resolving other additional asbestos-related claims.

In 2006, we made payments totaling $3.95 billion to the Trust as required
by our plan of reorganization. These payments included the $890 million payment
to the Trust on the Effective Date, a $10 million payment in December on the
interest-bearing note we issued to the Trust on the Effective Date and a $3.05
billion payment in December. This additional $3.05 billion payment was due in
accordance with the plan of reorganization because the 109th Congress adjourned
in December 2006 without passing the Fairness in Asbestos Injury Resolution Act
of 2005 or substantially similar legislation. We have fully funded the Trust and
have no further payment obligations to the Trust.

During the second quarter of 2006, we also paid $19 million for the
settlement of other asbestos-related claims included within the asbestos
reserve.

With regard to asbestos property damage claims, we have reached agreements
to resolve all of the asbestos property damage claims filed in our
reorganization proceedings that have not been disallowed or withdrawn, with the
exception of one small claim brought by a homeowner. Based on our evaluation of
these settlements, we reversed $44 million of our reserve for asbestos-related
claims in 2006. This reversal was reflected as income in our

consolidated statement of operations for 2006. In the fourth quarter of 2006, we
made total payments of approximately $99 million for asbestos property damage
settlements. Our estimate of the cost of asbestos property damage settlements
that have not been paid, and associated legal fees, is approximately $48 million
and is included in accrued expenses.

In summary, in 2006, we made total payments of approximately $4.07 billion
for asbestos-related claims, including the payments to fund the Trust and the
payments for settlements of asbestos property damage claims and other
asbestos-related claims.

ENVIRONMENTAL LITIGATION

We have been notified by state and federal environmental protection agencies of
possible involvement as one of numerous "potentially responsible parties" in a
number of so-called "Superfund" sites in the United States. In most of these
sites, our involvement is expected to be minimal. We believe that appropriate
reserves have been established for our potential liability in connection with
all Superfund sites, but we continue to review our accruals as additional
information becomes available. Our reserves take into account all known or
estimated undiscounted costs associated with these sites, including site
investigations and feasibility costs, site cleanup and remediation, legal costs,
and fines and penalties, if any. In addition, environmental costs connected with
site cleanups on property we own are covered by reserves we establish based on
these same considerations. We believe that none of these matters or any other
known governmental proceedings regarding environmental matters will have a
material adverse effect upon our financial position, cash flows or results of
operations.

20. QUARTERLY FINANCIAL DATA (UNAUDITED)

Quarter
-----------------------------------------
First Second Third Fourth
------ ------ ------ -------

(millions, except share data)

2006:
Net sales $1,465 $1,573 $1,478 $ 1,294
Gross profit 357 400 346 267
Operating profit 256 318(c) 258(d) 153
Net earnings (loss) (141)(b) 176(c) 153(d) 100
Per Common Share:
Basic (a) (2.44)(b) 3.03(c) 1.71(d) 1.11
Diluted (a) (2.44)(b) 3.03(c) 1.71(d) 1.11

2005:
Net sales 1,173 1,287 1,344 1,335
Gross profit 214 267 301 320
Operating profit (loss) 124 181 211 (2,870)(e)
Net earnings (loss) 77 110 158 (1,781)(e)
Per Common Share:
Basic (a) 1.37 1.97 2.77 (30.92)(e)
Diluted (a) 1.37 1.96 2.77 (30.92)(e)

(a) Earnings per common share for the third and fourth quarters of 2006 reflect
the issuance of 44.92 million shares of common stock in the third quarter
of 2006 in connection with the Rights Offering. Earnings per common share
for the first and second quarters of 2006 and all four quarters of 2005
have been adjusted to reflect the effect of the Rights Offering. The sum of
the four quarters is not necessarily the same as the total for the year.

(b) First quarter 2006 net loss and loss per common share include an after-tax
charge of $300 million, or $5.19 per common share, for post-petition
interest and fees related to pre-petition obligations.

(c) Second quarter 2006 operating profit, net earnings and earnings per common
share include income of $27 million pretax ($17 million after-tax, or $0.29
per common share) for the reversal of a reserve for asbestos-related
claims. Net earnings and earnings per common share also include an
after-tax charge of $21 million, or $0.36 per common share, for
post-petition interest and fees related to pre-petition obligations.

(d) Third quarter 2006 operating profit, net earnings and earnings per common
share include income of $17 million pretax ($10 million after-tax, or $0.11
per common share) for the reversal of a reserve for asbestos-related
claims. Net earnings and earnings per common share also include an
after-tax charge of $5 million, or $0.06 per common share, for
post-petition interest and fees related to pre-petition obligations.

(e) Fourth quarter 2005 operating loss, net loss and loss per common share
include a provision of $3.1 billion pretax ($1.935 billion after-tax, or
$33.59 per share) for asbestos claims. Net loss and loss per common share
also include an after-tax charge of $11 million, or $0.19 per share, for
the cumulative effect of an accounting change.

Fourth quarter 2005 operating loss, net loss and loss per common share also
include a $37 million pretax ($23 million after-tax) noncash adjustment
that should have been recorded in the third quarter 2005. The adjustment
relates to certain of our natural gas derivative instruments, which no
longer qualified for hedge accounting in the third quarter 2005. If we had
recorded the adjustment in the third quarter of 2005, consolidated net
earnings for that quarter would have been $181 million.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of USG Corporation:

We have audited the accompanying consolidated balance sheets of USG Corporation
(a Delaware Corporation) and subsidiaries as of December 31, 2006 and 2005 and
the related consolidated statements of operations, cash flows and stockholders'
equity (deficit) for each of the three years in the period ended December 31,
2006. Our audits also included the accompanying financial statement schedule,
Schedule II - Valuation and Qualifying Accounts. These financial statements and
financial statement schedule are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of USG Corporation and
subsidiaries as of December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2006, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

As discussed in Note 12, effective December 31, 2005, the Corporation
adopted Financial Accounting Standards Board Interpretation No. 47, "Accounting
for Conditional Asset Retirements," and as discussed in Note 1, the Corporation
adopted Statement of Financial Accounting Standards No. 123(R), "Share-Based
Payment" effective January 1, 2006 and Statement of Financial Accounting
Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans" effective December 31, 2006.

We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Corporation's internal control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated February 13, 2007, expressed an unqualified opinion on management's
assessment of the effectiveness of the Corporation's internal control over
financial reporting and an unqualified opinion on the effectiveness of the
Corporation's internal control over financial reporting.

DELOITTE & TOUCHE LLP
Chicago, Illinois
February 13, 2007

USG CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

Beginning Ending
Balance Additions (a) Deductions (b) Balance
--------- ------------- -------------- -------

(millions)

YEAR ENDED DECEMBER 31, 2006:
Doubtful accounts $10 $ 6 $ (5) $11
Cash discounts 4 57 (56) 5

YEAR ENDED DECEMBER 31, 2005:
Doubtful accounts 11 3 (4) 10
Cash discounts 3 49 (48) 4

YEAR ENDED DECEMBER 31, 2004:
Doubtful accounts 12 5 (6) 11
Cash discounts 3 43 (43) 3

(a) Reflects provisions charged to earnings

(b) Reflects receivables written off as related to doubtful accounts and
discounts allowed as related to cash discounts

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Our Chief Executive Officer and Chief Financial Officer, after evaluating the
effectiveness of our "disclosure controls and procedures" (as defined in Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934, or the Act),
have concluded that, as of the end of the fiscal year covered by this report,
our disclosure controls and procedures were effective to provide reasonable
assurance that information required to be disclosed by us in the reports that we
file or submit under the Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by an issuer in the reports that it files or submits under the Act is
accumulated and communicated to the issuer's management, including its principal
executive officer or officers and principal financial officer or officers, or
persons performing similar functions, as appropriate to allow timely decisions
regarding required disclosure.

(A) MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control system was designed to
provide reasonable assurance to management and our board of directors regarding
the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.

Management assessed the effectiveness of our internal control over
financial reporting as of December 31, 2006. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission, or COSO, in Internal Control -
Integrated Framework. Based on its assessment, management believes that, as of
December 31, 2006, our internal control over financial reporting is effective
based on those criteria.

Our independent auditors have issued an audit report on management's
assessment of internal control over financial reporting. This report appears
below.

February 13, 2007

(B) REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of USG Corporation:

We have audited management's assessment, included in the accompanying Management
Report on Internal Control Over Financial Reporting, that USG Corporation and
subsidiaries (the "Corporation") maintained effective internal control over
financial reporting as of December 31, 2006, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO"). The Corporation's management
is responsible for maintaining effective internal control over financial

reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Corporation's internal
control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.

A corporation's internal control over financial reporting is a process
designed by, or under the supervision of, the corporation's principal executive
and principal financial officers, or persons performing similar functions, and
effected by the corporation's board of directors, management, and other
personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A corporation's
internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the corporation; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the corporation are being made only in accordance with authorizations of
management and directors of the corporation; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the corporation's assets that could have a material
effect on the financial statements.

Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

In our opinion, management's assessment that the Corporation maintained
effective internal control over financial reporting as of December 31, 2006, is
fairly stated, in all material respects, based on the criteria established in
COSO. Also in our opinion, the Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006,
based on the criteria established in COSO.

We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the accompanying
consolidated financial statements and financial statement schedule of USG
Corporation and subsidiaries as of December 31, 2006 and our report dated
February 13, 2007 expressed an unqualified opinion and included an explanatory
paragraph regarding the Corporation's adoption of Statement of Financial
Accounting Standards No. 123(R), "Share-Based Payment" and Statement of
Financial Accounting Standards No. 158, "Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans."

DELOITTE & TOUCHE LLP
Chicago, Illinois
February 13, 2007

On October 1, 2005, we began to roll out a new enterprise resource planning
system in the United States and Canada. The rollout is being undertaken in
phases and is currently planned to be substantially completed in 2007.
Management expects that the new system will enhance operational efficiencies and
help us better serve our customers. The changes related to the new system
represented the only change in our "internal control over financial reporting"
(as defined in Rule 13a-15(f) promulgated under the Act) identified in
connection with the evaluation required by Rule 13a-15(d) promulgated under the
Act that occurred during the fiscal quarter ended December 31, 2006 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.

ITEM 9B. OTHER INFORMATION

Not applicable

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

EXECUTIVE OFFICERS OF THE REGISTRANT (AS OF FEBRUARY 16, 2007):

NAME, AGE AND PRESENT POSITION
PRESENT POSITION BUSINESS EXPERIENCE DURING THE LAST FIVE YEARS HELD SINCE
---------------- ---------------------------------------------- ----------------

William C. Foote, 55 Chairman, Chief Executive Officer and January 2006
Chairman and Chief Executive President to January 2006.
Officer

James S. Metcalf, 49 President and Chief Executive Officer, L&W January 2006
President and Chief Operating Supply Corporation, to March 2002; Senior Vice
Officer President; President, Building Systems, to
February 2004; Executive Vice President;
President, Building Systems, to January 2006.

Edward M. Bosowski, 52 Senior Vice President, Marketing and Corporate January 2006
Executive Vice President and Chief Strategy; President, USG International, to
Strategy Officer; President, USG February 2004; Executive Vice President,
International Marketing and Corporate Strategy; President,
USG International, to January 2006.

Stanley L. Ferguson, 54 Senior Vice President and General Counsel to March 2004
Executive Vice President and February 2004.
General Counsel

Richard H. Fleming, 59 Same position. February 1999
Executive Vice President and
Chief Financial Officer

Brian J. Cook, 49 Vice President, Human Resources, to February February 2005
Senior Vice President, Human 2005.
Resources

NAME, AGE AND PRESENT POSITION
PRESENT POSITION BUSINESS EXPERIENCE DURING THE LAST FIVE YEARS HELD SINCE
---------------- ---------------------------------------------- ----------------

Marcia S. Kaminsky, 48 Vice President, Communications, to February February 2005
Senior Vice President, 2005.
Communications

Dominic A. Dannessa, 50 Senior Vice President, CRM and Global Supply January 2006
Vice President; Executive Vice Chain, U.S. Gypsum Company, to August 2003;
President, Manufacturing, Building Senior Vice President, Manufacturing, U.S.
Systems Gypsum Company, to January 2006.

Brendan J. Deely, 41 Vice President, Operations, L&W Supply June 2005
Vice President; President and Chief Corporation, to April 2004; Senior Vice
Operating Officer, L&W Supply President and Chief Operating Officer, L&W
Corporation Supply Corporation, to June 2005.

Fareed A. Khan, 41 Vice President, Marketing & Business January 2006
Vice President; Executive Development, L&W Supply Corporation, to May
Vice President, Sales and 2002; Vice President, Marketing, U.S. Gypsum
Marketing, Building Systems Company, to October 2003; Senior Vice
President, Supply Chain & CRM and IT, U.S.
Gypsum Company, to January 2006.

Karen L. Leets, 50 Assistant Treasurer, McDonald's Corporation, March 2003
Vice President and Treasurer to March 2003.

D. Rick Lowes, 52 Vice President and Treasurer to October 2002. October 2002
Vice President and Controller

Peter K. Maitland, 65 Same position. February 1999
Vice President, Compensation,
Benefits and Administration

Donald S. Mueller, 59 Vice President of Research and Chief May 2006
Vice President, Research and Technology Officer, Ashland Specialty Chemical
Technology Innovation Co., to October 2003; Director, Industrial and
State Relations for Environmental Science
Institute, Ohio State University, to
December 2004; Vice President, Research
and Technology, to May 2006.

Clarence B. Owen, 58 Vice President, International and Technology, January 2003
Vice President and Chief to January 2003
Technology Officer

Ellis A. Regenbogen, 60 Chairman, Corporate and Securities Section, October 2006
Corporate Secretary and Godwin, Gruber L.P., law firm, to September
Associate General Counsel 2002; Law Offices of Ellis A. Regenbogen to
March 2004; Assistant General Counsel -
Corporate and Securities, Sears, Roebuck and
Co., to April 2005; Associate General Counsel
- Securities and Governance, Sears Holdings
Corporation, to April 2006; Associate General
Counsel and Assistant Secretary to
October 2006.

COMMITTEE CHARTERS AND CODE OF BUSINESS CONDUCT

Our Code of Business Conduct (applicable to directors, officers and employees),
our Corporate Governance Guidelines and the charters of the committees of our
Board of Directors, including the Audit Committee, Governance Committee and
Compensation and Organization Committee, are available in the "Investor
Information" section on our website at www.usg.com. Stockholders may request a
copy of these documents by writing to: Corporate Secretary, USG Corporation,
P.O. Box 6721, Chicago, IL 60680-6721. Any waivers of, or changes to, our Code
of Business Conduct applicable to executive officers, directors or persons
performing similar functions will be promptly disclosed in the "Investor
Information" section of our website.

Following the annual meeting of stockholders held on May 10, 2006, our
Chief Executive Officer filed a certificate with the NYSE certifying that he was
not aware of any violation by us of the NYSE's Corporate Governance Listing
Standards.

Other information required by this Item 10 is included under the headings
"Director Nominees and Directors Continuing in Office," "Committees of the Board
of Directors," "Audit Committee" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the definitive Proxy Statement for our annual meeting
of stockholders scheduled to be held on May 9, 2007, which information is
incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Information required by this Item 11 is included under the heading "Compensation
of Executive Officers and Directors" in the definitive Proxy Statement for our
annual meeting of stockholders scheduled to be held on May 9, 2007, which
information is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The following table sets forth information about our common stock that may be
issued upon exercise of options under all of our equity compensation plans as of
December 31, 2006, including the Long-Term Incentive and Omnibus Management
Incentive Plans, both of which were approved by our stockholders.

NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES TO WEIGHTED AVERAGE EQUITY COMPENSATION
BE ISSUED UPON EXERCISE EXERCISE PRICE OF PLANS (EXCLUDING
OF OUTSTANDING OPTIONS OUTSTANDING OPTIONS SECURITIES REPORTED
PLAN CATEGORY AND RIGHTS AND RIGHTS IN COLUMN ONE)
------------- ----------------------- ------------------- -----------------------

Equity compensation plans
approved by stockholders 1,212,144 $43.62 6,692,400
Equity compensation
plans not approved by
stockholders -- -- --
--------- ------ ---------
Total 1,212,144 $43.62 6,692,400
========= ====== =========

Other information required by this Item 12 is included under the headings
"Principal Stockholders" and "Security

Ownership of Directors and Executive Officers" in the definitive Proxy Statement
for our annual meeting of stockholders scheduled to be held on May 9, 2007,
which information is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE

Information required by this Item 13 is included under the heading "Certain
Relationships and Related Transactions" in the definitive Proxy Statement for
our annual meeting of stockholders scheduled to be held on May 9, 2007, which
information is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required by this Item 14 is included under the heading "Fees Paid to
the Independent Registered Public Accountant" in the definitive Proxy Statement
for our annual meeting of stockholders to be held on May 9, 2007, which
information is incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) 1. and 2. See Part II, Item 8, Financial Statements and Supplementary Data,
for an index of our consolidated financial statements and supplementary
data schedule.

3. EXHIBITS

EXHIBIT
NUMBER EXHIBIT
------- ----------------------------------------------------------------------

ARTICLES OF INCORPORATION AND BY-LAWS:

2.1 First Amended Joint Plan of Reorganization of USG Corporation and its
Debtor Subsidiaries (incorporated by reference to Exhibit 2.01 to USG
Corporation's Current Report on Form 8-K filed June 21, 2006, or the
June Form 8-K)

2.2 Order Confirming First Amended Joint Plan of Reorganization
(incorporated by reference to Exhibit 2.02 to the June Form 8-K)

3.1 Restated Certificate of Incorporation of USG Corporation (incorporated
by reference to Exhibit 3.0 to the June Form 8-K)

3.2 Certificate of Designation of Junior Participating Preferred Stock,
Series D, of USG Corporation (incorporated by reference to Exhibit A
of Exhibit 4 to USG Corporation's Current Report on Form 8-K
dated March 27, 1998)

3.3 Amended and Restated By-Laws of USG Corporation, dated as of January
1, 2007 **

INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES:

4.1 Form of Common Stock certificate **

4.2 Rights Agreement, dated as of December 21, 2006, between USG
Corporation and Computershare Investor Services, LLC, as Rights Agent
(incorporated by reference to Exhibit 4.1 to USG Corporation's
Registration Statement on Form 8-K, dated December 21, 2006)

4.3 Indenture, dated as of November 1, 2006, by and between USG
Corporation and Wells Fargo Bank, National Association, as trustee
(incorporated by reference to Exhibit 4.01 to USG Corporation's
Current Report on Form 8-K, dated November 20, 2006)

4.4 Supplemental Indenture No. 1, dated as of November 17, 2006, by and
between USG Corporation and Wells Fargo Bank, National Association, as
trustee (incorporated by reference to Exhibit 4.02 to USG
Corporation's Current Report on Form 8-K, dated November 20, 2006)

The Corporation and certain of its consolidated subsidiaries are
parties to long-term debt instruments under which the total amount of
securities authorized does not exceed 10% of the total assets of the
Corporation and its subsidiaries on a consolidated basis. Pursuant to
paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K, the
Corporation agrees to furnish a copy of such instruments to the
Securities and Exchange Commission upon request.

MATERIAL CONTRACTS:

10.1 Management Performance Plan of USG Corporation (incorporated by
reference to Annex C of Amendment No. 8 to USG Corporation's
Registration Statement No. 33-40136 on Form S-4, dated February 3,
1993) *

10.2 First Amendment to Management Performance Plan, effective November 15,
1993, and dated February 1, 1994 (incorporated by reference to Exhibit
10(aq) to Amendment No. 1 of USG Corporation's Registration Statement
No. 33-51845 on Form S-1) *

10.3 Second Amendment to Management Performance Plan, dated June 27, 2000
(incorporated by reference to Exhibit 10(a) to USG Corporation's Form
10-Q, dated November 6, 2000) *

10.4 Amendment and Restatement of USG Corporation Supplemental Retirement
Plan, effective July 1, 1997, and dated August 25, 1997 (incorporated
by reference to Exhibit 10(c) to USG Corporation's Annual Report on
Form 10-K, dated February 20, 1998) *

10.5 First Amendment to Supplemental Retirement Plan, effective July 1,
1997 (incorporated by reference to Exhibit 10(d) to USG Corporation's
Annual Report on Form 10-K, dated February 26, 1999) *

10.6 Second Amendment to Supplemental Retirement Plan, effective November
8, 2000 (incorporated by reference to Exhibit 10(f) to USG
Corporation's Annual Report on Form 10-K, dated March 5, 2001) *

10.7 Third Amendment to Supplemental Retirement Plan, effective November 8,
2000 (incorporated by reference to Exhibit 10(g) to USG Corporation's
Annual Report on Form 10-K, dated March 5, 2001) *

10.8 Fourth Amendment to Supplemental Retirement Plan, effective April 11,
2001 (incorporated by reference to Exhibit 10(a) to USG Corporation's
Quarterly Report on Form 10-Q, dated March 31, 2001) *

10.9 Fifth Amendment to Supplemental Retirement Plan, effective December
21, 2001 (incorporated by reference to Exhibit 10(i) to USG
Corporation's Annual Report on Form 10-K, dated March 1, 2002) *

10.10 Sixth Amendment to Supplemental Retirement Plan, effective January 1,
2005 (incorporated by reference to Exhibit 10.3 to USG Corporation's
Current Report on Form 8-K, dated November 17, 2004) *

10.11 Form of Employment Agreement * **

10.12 Form of Change in Control Severance Agreement (Tier 1 Benefits) * **

10.13 Form of Change in Control Severance Agreement (Tier 2 Benefits) * **

10.14 Form of Indemnification Agreement (incorporated by reference to
Exhibit 10(g) of Amendment No. 1 to USG Corporation's Registration
Statement No. 33-51845 on Form S-1) *

10.15 Stock Compensation Program for Non-Employee Directors (as Amended and
Restated Effective as of January 1, 2005) of USG Corporation
(incorporated by reference to Exhibit 10.2 to USG Corporation's
Current Report on Form 8-K, dated November 14, 2005) *

10.16 Amendment No. 1 to the USG Corporation Stock Compensation Program for
Non-Employee Directors (as Amended and Restated as of January 1, 2005)
(incorporated by reference to Exhibit 10.1 to USG Corporation's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, or
the second quarter 10-Q) *

10.17 Contingent Non-Negotiable Promissory Note of USG Corporation and its
Debtor Subsidiaries payable to the Asbestos Personal Injury Trust
dated June 20, 2006 in the principal amount of $3,050,000,000
(incorporated by reference to Exhibit 10.2 to the second quarter 10-Q)

10.18 Non-Negotiable Promissory Note of USG Corporation and its Debtor
Subsidiaries payable to the Asbestos Personal Injury Trust dated June
20, 2006 in the principal amount of $10,000,000 (incorporated by
reference to Exhibit 10.3 to the second quarter 10-Q)

10.19 Pledge Agreement Regarding Contingent Payment Note dated as of June
20, 2006 by and among USG Corporation and certain individuals in their
capacities as the Asbestos Personal Injury Trustees (the "Trustees")
(incorporated by reference to Exhibit 10.4 to the second quarter 10-Q)

10.20 Pledge Agreement Regarding Non-Contingent Note dated as of June 20,
2006 by and between USG Corporation and the Trustees (incorporated by
reference to Exhibit 10.5 to the second quarter 10-Q)

10.21 Credit Agreement, dated as of August 2, 2006 among USG Corporation,
the Lenders Party thereto, JPMorgan Chase Bank, N.A., as
Administrative Agent, and Goldman Sachs Credit Partners L.P., as
Syndication Agent, or the Credit Agreement (incorporated by reference
to Exhibit 10.6 to the second quarter 10-Q)

10.22 Guarantee Agreement dated as of August 2, 2006 among the Subsidiaries
of USG Corporation identified therein and JPMorgan Chase Bank, N.A.,
as Administrative Agent (incorporated by reference to Exhibit 10.7 to
the second quarter 10-Q)

10.23 Amendment No. 1 to the Credit Agreement, dated as of November 10,
2006 **

10.24 1995 Long-Term Equity Plan of USG Corporation (incorporated by
reference to Annex A to USG Corporation's Proxy Statement and Proxy,
dated March 31, 1995) *

10.25 First Amendment to 1995 Long-Term Equity Plan of USG Corporation,
dated June 27, 2000 (incorporated by reference to Exhibit 10(b) to USG
Corporation's Quarterly Report on Form 10-Q, dated November 6, 2000) *

10.26 2006 Annual Management Incentive Program of USG Corporation, as
amended (incorporated by reference to Exhibit 10.1 to USG
Corporation's Current Report on Form 8-K, dated February 13, 2006) *

10.27 Omnibus Management Incentive Plan (incorporated by reference to Annex
A to USG Corporation's Proxy Statement and Proxy, dated March 28,
1997) *

10.28 First Amendment to Omnibus Management Incentive Plan, dated November
11, 1997 (incorporated by reference to Exhibit 10(p) to USG
Corporation's Annual Report on Form 10-K, dated February 20, 1998) *

10.29 Second Amendment to Omnibus Management Incentive Plan, dated as of
June 27, 2000 (incorporated by reference to Exhibit 10(c) to USG
Corporation's Quarterly Report on Form 10-Q, dated November 6, 2000) *

10.30 Third Amendment to Omnibus Management Incentive Plan, dated as of
March 25, 2004 (incorporated by reference to Exhibit 10.24 to USG
Corporation's Annual Report on Form 10-K, dated February 18, 2005) *

10.31 USG Corporation Deferred Compensation Plan * **

10.32 Key Employee Retention Plan (July 1, 2004 - December 31, 2005), dated
July 1, 2004 (incorporated by reference to Exhibit 10 to USG
Corporation's Quarterly Report on Form 10-Q, dated July 30, 2004) *

10.33 USG Corporation Long-Term Incentive Plan (incorporated by reference to
Annex C to the Proxy Statement for the Annual Meeting of Stockholders
of USG Corporation held on May 10, 2006, or the 2006 Proxy
Statement) *

10.34 Amendment No. 1 to the USG Corporation Long-Term Incentive Plan
(incorporated by reference to Exhibit 10.8 to the second quarter
10-Q) *

10.35 Form of USG Corporation Nonqualified Stock Option Agreement
(incorporated by reference to Exhibit 10.9 to the second quarter
10-Q) *

10.36 Form of USG Corporation Restricted Stock Units Agreement (incorporated
by reference to Exhibit 10.10 to the second quarter 10-Q) *

10.37 USG Corporation Management Incentive Plan (incorporated by reference
to Annex B to the 2006 Proxy Statement) *

10.38 USG Corporation 2006 Corporate Performance Plan, dated January 25,
2006 (incorporated by reference to Exhibit 10 to USG Corporation's
Current Report on Form 8-K, dated January 25, 2006) *

10.39 Equity Commitment Agreement, dated January 30, 2006, by and between
USG Corporation and Berkshire Hathaway Inc. (incorporated herein by
reference to USG Corporation's Current Report on Form 8-K, dated
January 30, 2006)

10.40 Shareholder's Agreement, dated January 30, 2006, by and between USG
Corporation and Berkshire Hathaway Inc. (incorporated herein by
reference to USG Corporation's Current Report on Form 8-K, dated
January 30, 2006)

10.41 Registration Rights Agreement, dated January 30, 2006, by and between
USG Corporation and Berkshire Hathaway Inc. (incorporated herein by
reference to USG Corporation's Current Report on Form 8-K, dated on
January 30, 2006)

10.42 Registration Rights Agreement, dated as of November 17, 2006, by and
among USG Corporation and Banc of America Securities LLC and Citigroup
Global Markets, as representatives for the initial purchasers
(incorporated herein by reference to Exhibit 10.01 to USG
Corporation's Current Report on Form 8-K, dated November 20, 2006)

OTHER:

21 Subsidiaries **

23 Consents of Experts and Counsel **

24 Power of Attorney **

31.1 Rule 13a - 14(a) Certifications of USG Corporation's Chief Executive
Officer **

31.2 Rule 13a - 14(a) Certifications of USG Corporation's Chief Financial
Officer **

32.1 Section 1350 Certifications of USG Corporation's Chief Executive
Officer **

32.2 Section 1350 Certifications of USG Corporation's Chief Financial
Officer **

* Management contract or compensatory plan or arrangement

** Filed or furnished herewith

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

USG CORPORATION
February 16, 2007

By: /s/ Richard H. Fleming
------------------------------------
Richard H. Fleming
Executive Vice President and
Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.

/s/ William C. Foote February 16, 2007
-------------------------------------
WILLIAM C. FOOTE
Director, Chairman and Chief
Executive Officer
(Principal Executive Officer)

/s/ Richard H. Fleming February 16, 2007
-------------------------------------
RICHARD H. FLEMING
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)

/s/ D. Rick Lowes February 16, 2007
-------------------------------------
D. RICK LOWES
Vice President and Controller
(Principal Accounting Officer)

JOSE ARMARIO, ROBERT L. BARNETT, ) By: /s/ Richard H. Fleming
KEITH A. BROWN, JAMES C. COTTING, ) ---------------------------------
LAWRENCE M. CRUTCHER, W. DOUGLAS FORD, ) Richard H. Fleming
DAVID W. FOX, VALERIE B. JARRETT, ) Attorney-in-fact
STEVEN F. LEER, MARVIN E. LESSER, ) February 16, 2007
JOHN B. SCHWEMM, JUDITH A. SPRIESER )
Directors )