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2002 Annual Report and Form 10-K        PPG INDUSTRIES, INC.        9

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

Commission File Number 1-1687

PPG INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: 412-434-3131

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

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

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, 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 an accelerated filer (as defined in Rule 12b-2 of the Act). YES  x    NO  ¨

The aggregate market value of common stock held by non-affiliates at June 30, 2002 was $10,450 million.

As of January 31, 2003, 169,512,843 shares of the Registrant’s common stock, with a par value of $1.66 ²/3 per share, were outstanding. As of that date, the aggregate market value of common stock held by non-affiliates was $8,265 million.

DOCUMENTS INCORPORATED BY REFERENCE

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10         PPG INDUSTRIES, INC.        2002 Annual Report and Form 10-K

PPG INDUSTRIES, INC.

AND CONSOLIDATED SUBSIDIARIES

As used in this report, the terms “PPG,” “Company,” and “Registrant” mean PPG Industries, Inc. and its subsidiaries, taken as a whole, unless the context indicates otherwise.

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Note on Incorporation by Reference

Throughout this report, various information and data are incorporated by reference to the Company’s 2002 Annual Report (hereinafter referred to as “the Annual Report”). Any reference in this report to disclosures in the Annual Report shall constitute incorporation by reference only of that specific information and data into this Form 10-K.

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Part I

Item 1. Business

PPG Industries, Inc., incorporated in Pennsylvania in 1883, is comprised of three basic business segments: coatings, glass and chemicals. Within these business segments, PPG has followed a program of directing its resources of people, capital and technology into selected areas to build upon positions of leadership. Areas in which resources have been focused are automotive original, refinish, industrial, aerospace, packaging, and architectural coatings; flat glass, automotive original and replacement glass, continuous-strand fiber glass; and chlor-alkali and specialty chemicals. Each of the businesses in which PPG is engaged is highly competitive. However, the diversification of product lines and worldwide markets served tend to minimize the impact on total sales and earnings of changes in demand for a particular product line or in a particular geographic area. Reference is made to Note 22, “Business Segment Information,” under Item 8 of this Form 10-K for financial information relating to business segments.

Coatings

PPG is a major supplier of protective and decorative coatings. The coatings industry is highly competitive and consists of a few large firms with global presence and many smaller firms serving local or regional markets. PPG competes in its primary markets with the world’s largest coatings companies, most of which have global operations, and many smaller regional coatings companies. Product development, innovation, quality and customer service have been stressed by PPG and have been significant factors in developing an important supplier position.

The coatings business involves the supply of protective and decorative finishes for automotive original equipment, appliances, industrial equipment and packaging; factory-finished aluminum extrusions and coils; aircraft; and other industrial and consumer products. In addition to supplying finishes to the automotive original equipment market, PPG supplies automotive refinishes to the aftermarket, which are primarily sold through distributors. In addition to specific products, PPG supplies technical expertise, engineering and purchasing services to the automotive original and industrial portions of the business. In the automotive original and industrial portions of the coatings business, PPG sells directly to a variety of manufacturing companies. Automotive original and industrial coatings are formulated specifically for the customer’s needs and application methods. PPG also supplies adhesives and sealants for the automotive industry and metal pretreatments and related chemicals for automotive and industrial applications. The packaging portion of the coatings business supplies finishes for aerosol, food and beverage containers for consumer products. Product performance, technology, quality and customer service are major competitive factors.

The architectural finishes business consists primarily of coatings used by painting and maintenance contractors and by consumers for decoration and maintenance. PPG’s products are sold through independent distributors, paint dealers, mass merchandisers, home centers, PPG-operated outlets and directly to some customers. Price, quality and distribution are key competitive factors in the architectural finishes market.

The aerospace business primarily supplies coatings, sealants and transparencies for aircraft serving the commercial, military and general aviation industries as well as sealants for architectural insulating glass units. The aerospace business distributes products directly to aircraft maintenance and aftermarket customers around the world.

The principal production facilities of the coatings business are in North America and Europe. North American production facilities consist of 22 plants in the United States, two in Canada and one in Mexico. The three largest facilities in the United States are the Cleveland, Ohio, plant, which primarily produces automotive original coatings; the Oak Creek, Wis., plant, which primarily produces industrial coatings and certain automotive original coatings; and the Delaware, Ohio, plant, which primarily produces automotive refinishes and certain automotive original and industrial coatings. Outside North America, PPG operates six plants in Italy, three plants each in Germany and Spain, two plants each in Brazil, China, England and France, and one plant each in Argentina, Australia, Malaysia, the Netherlands, Thailand and Turkey. PPG owns equity interests in operations in Canada, India, South Korea and Taiwan. Additionally, the automotive coatings business operates seven service centers in the United States, two each in Mexico and Poland, and one each in Argentina, Canada, China, France and Portugal to provide just-in-time delivery and service to selected automotive assembly plants. Seventeen training centers in Europe, 15 in the United States, 10 in Asia, three in Canada and South America, and one in Mexico are in operation. These centers provide training for automotive aftermarket refinish customers. The aerospace business operates a global network of 13 application support centers that provide customer technical support, on-time delivery of products, and improvements to customer efficiency and productivity. Also, four automotive original coatings application centers throughout the world that provide testing facilities for customer paint processes and new products are in operation. The average number of persons employed by the coatings segment during 2002 was 16,400.

Glass

PPG is one of the major producers of flat glass, fabricated glass and continuous-strand fiber glass in the world. PPG’s major markets are automotive original equipment, automotive replacement, residential and commercial construction, the furniture and electronics industries and other markets. Most glass products are sold directly to manufacturing and construction companies, although in many instances products are sold directly to independent distributors and through PPG distribution outlets. PPG manufactures flat

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12         PPG INDUSTRIES, INC.        2002 Annual Report and Form 10-K

glass by the float process and fiber glass by the continuous-filament process. PPG also provides services to insurance companies and glass installers through its auto glass claims processor, LYNX Services^®.

The bases for competition are price, quality, technology, cost and customer service. The Company competes with six other major producers of flat glass, six other major producers of fabricated glass and two other major producers of fiber glass throughout the world.

PPG’s principal glass production facilities are in North America and Europe. Fourteen plants operate in the United States, of which six produce automotive original and replacement glass products, five produce flat glass, and three produce fiber glass products. There are three plants in Canada, two of which produce automotive original and replacement glass products and one produces flat glass. One plant each in England and the Netherlands produce fiber glass. PPG owns equity interests in operations in China, Mexico, Taiwan, the United States and Venezuela and a majority interest in a glass distribution company in Japan. Additionally, there are four satellite operations in the United States, two satellite operations in Canada and one in Mexico that provide limited fabricating or assembly and just-in-time product delivery to selected automotive customer locations, one satellite coating facility in the United States for flat glass products and one satellite tempering and fabrication facility in the United States for flat glass products. There are also two insurance claim management centers that serve the LYNX Services^® business. The average number of persons employed by the glass segment during 2002 was 11,800.

Chemicals

PPG is a major producer and marketer of chlor-alkali chemicals and a supplier of specialty chemicals. The primary chlor-alkali products are chlorine, caustic soda, vinyl chloride monomer, chlorinated solvents, chlorinated benzenes and calcium hypochlorite. Most of these products are sold directly to manufacturing companies in the chemical processing, rubber and plastics, paper, minerals, metals, and water treatment industries. The primary products of PPG’s specialty chemicals businesses are Transitions^® lenses; optical monomers; precipitated silicas for tire, shoe, battery separator, and other industrial businesses and phosgene derivatives and other intermediates for the pharmaceutical and agricultural industries. Transitions^® lenses are manufactured and distributed by PPG’s majority-owned joint venture with Essilor International.

PPG competes with six other major producers of chlor-alkali products. Price, product availability, product quality and customer service are the key competitive factors. In the specialty chemicals area, PPG’s market share varies greatly by business; product quality and performance and technical service are the most critical competitive factors.

Chemicals’ principal production facilities are concentrated in North America, with five plants in the United States and one each in Canada and Mexico. The two largest facilities, located in Lake Charles, La., and Natrium, W. Va., primarily produce chlor-alkali products. Outside North America, PPG operates two plants each in China, France and Taiwan, and one each in Australia, Brazil, Ireland, the Netherlands and the Philippines. PPG owns equity interests in operations in Japan, Thailand and the United States. The average number of persons employed by the chemicals segment during 2002 was 4,700.

Raw Materials and Energy

The effective management of raw materials and energy is important to PPG’s continued success. The Company’s most significant raw materials are titanium dioxide and epoxy and other resins in the coatings segment; and sand, soda ash and polyvinyl butyral in the glass segment. Energy is a significant production cost in the chemicals and glass segments. Most of the raw materials and energy used in production are purchased from outside sources, and the Company has made, and will continue to make, supply arrangements to meet the planned operating requirements for the future. Supply of critical raw materials and energy is managed by establishing contracts, multiple sources, and identifying alternative materials or technology, whenever possible.

Research and Development

Research and development costs, including depreciation of research facilities, during 2002, 2001 and 2000 were $289 million, $283 million and $301 million, respectively. PPG owns and operates several research and development facilities to conduct research and development involving new and improved products and processes. Additional process and product research and development work is also undertaken at many of the Company’s manufacturing plants.

Patents

PPG considers patent protection to be important. The Company’s business segments are not materially dependent upon any single patent or group of related patents. PPG received $26 million in 2002 and 2001 and $27 million in 2000 from royalties and the sale of technical know-how.

Backlog

In general, PPG does not manufacture its products against a backlog of orders. Production and inventory levels are geared primarily to projections of future demand and the level of incoming orders.

Non-U.S. Operations

Although PPG has a significant investment in non-U.S. operations, based upon the magnitude and location of investments, management believes that the risk associated with its international operations is not significantly greater than that of domestic operations.

Employee Relations

The average number of persons employed worldwide by PPG during 2002 was 34,100. The Company has numerous collective bargaining agreements throughout the world and

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believes it will be able to renegotiate any such agreements on satisfactory terms. The Company believes it has good relationships with its employees.

Environmental Matters

Like other companies, PPG is subject to the existing and evolving standards relating to the protection of the environment. Capital expenditures for environmental control projects were $8 million in 2002 and $22 million in 2001 and 2000. It is expected that expenditures for such projects in 2003 will approximate $20 million. Although future capital expenditures are difficult to estimate accurately because of constantly changing regulatory standards and policies, it can be anticipated that environmental control standards will become increasingly stringent and costly.

PPG is negotiating with various government agencies concerning 94 current and former manufacturing sites, and offsite waste disposal locations, including 23 sites on the National Priority List (NPL). The number of sites is comparable with the prior year. While PPG is not generally a major contributor of wastes to these offsite waste disposal locations, each potentially responsible party may face governmental agency assertions of joint and several liability. Generally, however, a final allocation of costs is made based on relative contributions of wastes to the site. There is a wide range of cost estimates for cleanup of these sites, due largely to uncertainties as to the nature and extent of their condition and the methods that may have to be employed for their remediation. The Company has established reserves for those sites where it is probable that a liability has been incurred and the amount can be reasonably estimated. As of Dec. 31, 2002 and 2001, PPG had reserves for environmental contingencies totaling $87 million and $94 million, respectively. Pretax charges against income for environmental remediation costs in 2002, 2001 and 2000 totaled $15 million, $29 million and $18 million, respectively.

The Company’s experience to date regarding environmental matters leads PPG to believe that it will have continuing expenditures for compliance with provisions regulating the protection of the environment and for present and future remediation efforts at waste and plant sites. Management anticipates that such expenditures will occur over an extended period of time. Over the past 10 years the pretax charges against income have ranged between $10 million and $49 million per year. We anticipate that charges against income in 2003 will be within that range. It is possible, however, that technological, regulatory and enforcement developments, the results of environmental studies and other factors could alter this expectation. In management’s opinion, the Company operates in an environmentally sound manner, is well positioned, relative to environmental matters, within the industries in which it operates, and the outcome of these environmental contingencies will not have a material adverse effect on PPG’s financial position or liquidity. See “Commitments and Contingent Liabilities, including Environmental Matters” in Management’s Discussion and Analysis under Item 7 of this Form 10-K for additional information related to environmental matters.

Internet Access

The website address for the Company is www.ppg.com. The Company’s recent filings on Forms 10-K, 10-Q and 8-K and any amendments to those documents can be accessed without charge on that website under Financial, SEC Edgar.

Item 2. Properties

See “Item 1. Business” for information on PPG’s production and fabrication facilities.

Generally, the Company’s plants are suitable and adequate for the purposes for which they are intended, and overall have sufficient capacity to conduct business in the upcoming year.

Item 3. Legal Proceedings

PPG is involved in a number of lawsuits and claims, both actual and potential, including some that it has asserted against others, in which substantial monetary damages are sought. These lawsuits and claims, the most significant of which are described below, relate to product liability, contract, patent, environmental, antitrust and other matters arising out of the conduct of PPG’s business. To the extent that these lawsuits and claims involve personal injury and property damage, PPG believes it has adequate insurance; however, certain of PPG’s insurers are contesting coverage with respect to some of these claims, and other insurers, as they had prior to the asbestos settlement described below, may contest coverage with respect to some of the asbestos claims if the settlement is not implemented. PPG’s lawsuits and claims against others include claims against insurers and other third parties with respect to actual and contingent losses related to environmental, asbestos and other matters.

The result of any future litigation of such lawsuits and claims is inherently unpredictable. However, management believes that, in the aggregate, the outcome of all lawsuits and claims involving PPG, including asbestos-related claims in the event the settlement described below does not become effective, will not have a material effect on PPG’s consolidated financial position or liquidity; however, such outcome may be material to the results of operations of any particular period in which costs, if any, are recognized.

        The Company has been named as a defendant in a number of antitrust lawsuits filed in federal and state courts by various plaintiffs. These suits allege PPG was involved with competitors in fixing prices and allocating markets for the automotive refinish industry and for certain glass products. Twenty-nine glass antitrust cases were filed in federal courts, all of which have been consolidated in Federal District Court in Pittsburgh, Pa., and the court has ruled that the case may proceed as a class action. All of the initial defendants in the glass class action antitrust case, other than PPG, have entered into settlement agreements with the plaintiffs. In addition, approximately 65 cases alleging antitrust violations in the automotive refinish industry have been filed in various state and federal jurisdictions, and have been consolidated in Federal District Court in Philadelphia, Pa., but these proceedings are still at an early stage. The plaintiffs in these cases are seeking economic and treble

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14         PPG INDUSTRIES, INC.        2002 Annual Report and Form 10-K

damages and injunctive relief. PPG believes it has meritorious defenses in these lawsuits.

The Company has been a defendant since April 1994 in a suit filed by Marvin Windows and Doors (Marvin) alleging numerous claims, including breach of warranty. All of the plaintiff’s claims, other than breach of warranty, have been dismissed. However, on Feb. 14, 2002, a federal jury awarded Marvin $136 million on the remaining claim. Subsequently, the court added $20 million for interest bringing the total judgment to $156 million. PPG filed an appeal on July 8, 2002. PPG believes it has meritorious defenses to the plaintiff’s claims and has reasonable prospects of prevailing on appeal.

For over thirty years, PPG has been a defendant in lawsuits involving claims alleging personal injury from exposure to asbestos. For a description of asbestos litigation affecting the Company and the terms and status of the proposed settlement arrangement announced May 14, 2002, see Note 13, “Commitments and Contingent Liabilities,” under Item 8 of this Form 10-K.

Over the past ten years, the Company and others have been named as defendants in several cases in various jurisdictions claiming damages related to exposure to lead. PPG has been dismissed as a defendant from most of those lawsuits and has never been found liable in any of those cases.

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

None.

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Part II

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters

The information required by Item 5 regarding market information, including stock exchange listings and quarterly stock market prices, dividends and holders of common stock are included in Exhibit 99.1 filed with this Form 10-K and is incorporated herein by reference. This information is also included in the PPG Shareholder Information on page 59 of the Annual Report.

Directors who are not also Officers of the Company receive Common Stock Equivalents pursuant to the Deferred Compensation Plan for Directors and, through 2002, the Directors’ Common Stock Plan. Common Stock Equivalents are hypothetical shares of Common Stock having a value on any given date equal to the value of a share of Common Stock. Common Stock Equivalents earn dividend equivalents that are converted into additional Common Stock Equivalents but carry no voting rights or other rights afforded to a holder of Common Stock. The Common Stock Equivalents credited to Directors under both plans are exempt from registration under Section 4(2) of the Securities Act of 1933 as private offerings made only to Directors of the Company in accordance with the provisions of the plans. The plans are incorporated by reference into this Form 10-K as Exhibit 10.

Under the Company’s Deferred Compensation Plan for Directors, each Director must defer receipt of such compensation as the Board mandates. Currently, the Board mandates deferral of one-third of each payment of the basic annual retainer of each Director. Each Director may also elect to defer the receipt of (i) an additional one-third of each payment of the basic annual retainer, (ii) all of the basic annual retainer, or (iii) all compensation. All deferred payments are held in the form of Common Stock Equivalents. Payments out of the deferred accounts are made in the form of Common Stock of the Company (and cash as to any fractional Common Stock Equivalent). The Directors, as a group, were credited with 8,217; 8,545 and 7,584 Common Stock Equivalents in 2002, 2001 and 2000, respectively, under this plan. The values of the Common Stock Equivalents, when credited, ranged from $44.70 to $57.68 in 2002, $45.10 to $54.95 in 2001 and $39.69 to $55.06 in 2000.

Under the Directors’ Common Stock Plan, each Director who neither is nor was an employee of the Company was credited with Common Stock Equivalents worth one-half of the Director’s basic annual retainer. Effective Jan. 1, 2003, active Directors no longer participate in the Directors’ Common Stock Plan. On that date, the Common Stock Equivalents held in each active Directors’ account in the Directors’ Common Stock Plan were transferred to their accounts in the Deferred Compensation Plan for Directors. For retired Directors, the Common Stock Equivalents held in their account will be converted to and paid in Common Stock of the Company (and cash as to any fractional Common Stock Equivalent). The Directors, as a group, received 3,325; 3,820 and 3,603 Common Stock Equivalents in 2002, 2001 and 2000, respectively, under this plan. The values of those Common Stock Equivalents, when credited, ranged from $48.73 to $57.68 in 2002, $45.10 to $54.70 in 2001 and $40.00 to $52.25 in 2000.

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16         PPG INDUSTRIES, INC.        2002 Annual Report and Form 10-K

The following table provides information as of Dec. 31, 2002 regarding the number of shares of PPG Common Stock that may be issued under PPG’s equity compensation plans.

Equity Compensation Plan Information

Incentive Compensation and Management Award Plans – both annual bonus plans. The Incentive Compensation Plan applies to approved senior Company managers. The Management Award Plan covers additional approved managers who do not participate in the Incentive Compensation Plan. A participant may receive a bonus under the applicable plan based on individual performance and business unit and corporate financial performance. Bonuses can be paid in cash or shares of PPG stock or a combination of both. The Incentive Compensation Plan was approved by shareholders in 1980. The Management Award Plan has not been approved by shareholders. One pool of shares is available for issuance to pay awards under both Plans. As of Dec. 31, 2002, there were 235,960 shares available for future issuance under both plans.

PPG Deferred Compensation Plan – allows employees who participate in certain long-term incentive plans and annual bonus plans to defer the receipt of their awards under those plans as well as up to 50% of their salary. Deferrals are credited to phantom investment accounts, which include a phantom PPG stock account selected by the participant, which are similar to investments available under PPG’s Employee Savings Plan, which is a 401(k) plan. Amounts credited to the PPG stock account are held as Common Stock Equivalents which have the same characteristics as those described above for the Deferred Compensation Plan for Directors. Payments from the phantom PPG stock account are made in the form of PPG Common Stock (and cash as to any fractional Common Stock Equivalent). As of Dec. 31, 2002, there were 151,567 shares available for future issuance under this plan.

Challenge 2000 Stock Option Plan – a broad-based stock option plan under which on July 1, 1998, the Company granted to substantially all active employees of the Company and its majority owned subsidiaries the option to purchase 100 shares of common stock at its then fair market value of $70 per share under the Challenge 2000 Stock Option Plan. Options are exercisable beginning July 1, 2003 and expire on June 30, 2008.

Employee Recognition Program – provides a method to recognize and reward employees for special efforts or innovative actions. Officers and directors may not receive awards under this program. Awards can be made in the form of cash or stock. The Board of Directors has authorized a pool of shares of Common Stock, which can be used for awards under the program. As of Dec. 31, 2002, there were 47,784 shares available for future issuance under the program.

Employee Recruiting Program – allows the Officers-Directors Compensation Committee of the Board of Directors or the Company’s Compensation and Employee Benefits Committee to grant awards of shares of PPG Common Stock or cash, or a combination of both, to persons in order to attract them to work for the Company. The Board of Directors has authorized a pool of shares of Common Stock, which can be used for awards under the program. As of Dec. 31, 2002, there were 50,000 shares available for future issuance under the program.

Item 6. Selected Financial Data

The information required by Item 6 regarding the selected financial data for the five years ended Dec. 31, 2002 is included in Exhibit 99.2 filed with this Form 10-K and is incorporated herein by reference. This information is also reported in the Eleven-Year Digest on page 58 of the Annual Report under the captions net sales, (loss) income before accounting changes, cumulative effect of accounting changes, net (loss) income, (loss) earnings per common share before accounting changes, cumulative effect of accounting changes on (loss) earnings per common share, (loss) earnings per common share, (loss) earnings per common share – assuming dilution, dividends per share, total assets and long-term debt for the years 1998 through 2002.

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2002 Annual Report and Form 10-K        PPG INDUSTRIES, INC.        17

Management’s Discussion and Analysis

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

Performance in 2002 Compared with 2001

Overall Performance

Our sales decreased 1% to $8.1 billion from $8.2 billion in 2001. Sales declined 2% due to lower selling prices in our glass and chemicals segments. This decline was partially offset by higher volumes in our coatings and chemicals segments, net of lower volumes in our glass segment.

The gross profit percentage increased slightly to 37.2% in 2002 from 37.1% in 2001. The increase in gross profit percentage was due to improved manufacturing efficiencies across all of our business segments, lower raw material costs in our coatings segment and lower energy costs. These improvements were substantially offset by lower selling prices in our glass and chemicals segments and higher pension and postretirement medical costs.

Reported net (loss) income and (loss) earnings per share – diluted in 2002 and 2001 is summarized in the following table. We have also identified significant non-recurring items in 2002 and 2001.

The note references in the above table are found under Item 8 of this Form 10-K.

Aside from the factors described above, the increase in net income was also due to lower overhead costs in our coatings and glass businesses, lower environmental remediation expenses, higher insurance recoveries, lower interest expense due to the lower debt levels in 2002 and the favorable effects of foreign currency translation primarily from our European operations. These favorable factors were substantially offset by an increase in pension and postretirement medical costs across all of our businesses, the negative effects of inflation and lower equity earnings primarily in our glass segment. Also, as a result of the Company’s adoption as of Jan. 1, 2002 of the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” the carrying value of goodwill and certain trademarks will no longer be amortized and will instead be tested for impairment annually. Such amortization reduced earnings in 2001 by $32 million after-tax or $0.20 a share.

Results of Business Segments

Coatings sales increased $72 million or 2% to $4.5 billion in 2002. Sales increased 1% from improved volumes primarily in our architectural, North American and Asian automotive original equipment and industrial businesses offset, in part, by lower sales volumes in our aerospace and refinish businesses. Sales also increased 1% due to the positive effects of foreign currency translation. Operating income increased to $605 million in 2002 compared to $495 million in 2001. Operating income in 2002 and 2001 included pretax restructuring and other related costs of $73 million and $83 million, respectively. Excluding these charges, operating income in 2002 was $678 million compared to $578 million in 2001. The increase in operating income is attributable to higher sales volume, lower raw material and overhead costs, improved manufacturing efficiencies and the benefit of goodwill and certain trademarks no longer being amortized due to the Company’s adoption of SFAS No. 142. These were offset, in part, by higher selling costs in our architectural business, higher pension and postretirement medical costs, inflationary cost increases and $3 million in lower equity earnings primarily due to the write-off of a receivable from a customer by one of our Asian joint ventures.

Glass sales decreased 7% to $2.1 billion in 2002 from $2.2 billion in 2001. Sales volumes declined 5% principally in our automotive replacement glass, flat glass and fiber glass businesses. Sales also decreased 2% due to lower selling prices principally in our North American automotive original glass, flat glass and fiber glass businesses. Operating income decreased to $143 million in 2002 compared to $255 million in 2001. Operating income in 2002 and 2001 included pretax restructuring and other related costs of $1 million and $10 million, respectively. Excluding these charges, operating income in 2002 was $144 million compared to $265 million in 2001. The decrease in operating income is attributable to lower sales volume and selling prices described above. Operating income also decreased due to lower equity earnings, a shift in sales mix to lower margin products and higher pension and postretirement medical costs offset, in part, by improved manufacturing efficiencies and lower energy and overhead costs.

Chemicals sales were $1.5 billion in 2002 and 2001. Sales volumes increased 9% principally from our chlor-alkali, fine chemicals and optical products, offset by a 9% decrease in selling prices principally for our chlor-alkali products. Operating income increased to $124 million in 2002 from $91 million in 2001. Operating income in 2002

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18         PPG INDUSTRIES, INC.        2002 Annual Report and Form 10-K

Management’s Discussion and Analysis

and 2001 included pretax restructuring and other related costs of $1 million and $7 million, respectively. Excluding these charges, operating income in 2002 was $125 million compared to $98 million in 2001. The increase in operating income is attributable to improved sales volume, improved manufacturing efficiencies across all of our businesses, lower energy costs, and lower environmental remediation expenses, partially offset by lower selling prices for our chlor-alkali products and higher pension and postretirement medical costs.

Other Significant Factors

The Company’s pretax loss in 2002 included net periodic pension expense of $54 million as compared to net periodic pension income of $53 million in 2001. The increase in net periodic pension expense is due primarily to a decrease in the market value of pension plan assets, a reduction of the expected return on plan assets assumption for 2002 and the amortization of actuarial losses.

Additionally at Dec. 31, 2002, the majority of the Company’s defined benefit pension plans had an accumulated benefit obligation (ABO) in excess of plan assets. As a result, the Company recorded an additional minimum pension liability adjustment in 2002. This adjustment reduced the prepaid pension asset by $912 million, increased the intangible pension asset by $96 million and the minimum pension liability by $326 million and reflected a deferred tax benefit of $416 million with a resulting reduction in shareholders’ equity through an increase in the accumulated other comprehensive loss of $726 million.

In 2002, the Company resolved all matters related to its federal income tax returns for the years 1994 to 1998, including matters that were on appeal related to the 1994 to 1996 tax returns. In connection with the resolution of these matters, the Company surrendered in July 2002 certain company-owned life insurance policies and received proceeds of $32 million, which are included in “Reductions of other property and investments” in the investing activities section in the Statement of Cash Flows under Item 8 of this Form 10-K. The effective tax rate for 2003 is expected to approximate 36%.

The decrease in short-term debt during 2002 is due principally to the repayment of various U.S. and non-U.S. debt obligations.

Outlook

During 2002, we continued to experience mixed economic signals in the United States. Although we saw strong consumer spending and housing starts, we also saw increased unemployment and low demand in the commercial construction sector. Additionally, increases in industrial production, which trended up for much of the year, fell back in the fourth quarter. Business investment declined in 2002 for the second straight year. Economic results in 2002 also reflect the positive influence of the extension of sales incentive programs by the North American automobile manufacturers which were on and off throughout 2002, offsetting weaker European automotive markets.

As we begin the new year, the economic reports indicate that the growth in the U.S. economy appears to have stalled in the fourth quarter of 2002. Factory orders and industrial production in the U.S. declined in December, the U.S. dollar weakened against the Euro and our trade deficit grew. This news creates further uncertainty concerning the outlook for our economy in 2003. The consensus view calls for modest growth in consumer spending and a gradual rise in business investment that would lead to moderate growth in the U.S. economy in the second half of the year. The outlook for the global economy generally lags behind that of the U.S., with some exceptions such as China. That outlook is clouded by uncertainties such as the threat of terrorism or war with Iraq.

Despite the challenges of weaker economic conditions in 2002 and 2001, we were able to take several important steps to strengthen our Company as a result of our commitment to financial discipline. First, we elevated our focus on cash flow and were able to pay down over $400 million in debt in 2002 and over $500 million in 2001. Second, as a result of the workforce reductions and other restructuring actions undertaken in 2002 and 2001 and our continued focus on cost reductions and improvements to business processes, we reduced our manufacturing and overhead costs by $140 million in 2002. In 2003, we will continue to focus on reducing costs and improving productivity. We will also continue our efforts to improve our customers’ results through the delivery of cost effective solutions. These efforts will include developing new products and integrated product/service offerings to meet our customers’ needs.

While the steps taken above will translate into improved profitability, costs for employee benefits continue to grow. We expect our pension and other postretirement benefit costs to increase by about $130 million in 2003, which will reduce earnings per share by about $0.50. This is due to the decline in the market value of the Company’s pension plan assets, due primarily to negative investment returns in the U.S. equity market during the last three years, a reduction in our expected rate of return on plan assets assumption to approximately 8.75% for 2003, rising medical costs, particularly for prescription drugs and a lower discount rate assumption. Despite the expected increase in these costs, we do not believe that we will have a mandatory funding requirement under Pension Benefit Guarantee Corporation (PBGC) or Internal Revenue Service (IRS) regulations in the near-term, so there will only be a minor impact on cash flows in 2003 as a result of these factors.

        Another potential risk in 2003 will be increases in energy and raw material costs, particularly for natural gas and petroleum-based materials. The factors driving these costs upward have historically created favorable market conditions for pricing in our chlor-alkali business. During 2002, we benefited from lower raw material costs, primarily associated with our coatings businesses, as well as from lower natural gas costs. However, in the fourth quarter we began to see this benefit diminish and our natural gas costs in the fourth quarter of 2002 exceeded those for the same period of the prior year. Changes in natural gas prices have a significant impact on the operating performance of our chemicals and glass segments. Each one-dollar change in the price of natural gas per mmbtu (million British thermal units) could have a direct impact of

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2002 Annual Report and Form 10-K        PPG INDUSTRIES, INC.        19

Management’s Discussion and Analysis

approximately $60 million on our annual operating costs. It has become increasingly more difficult to predict future natural gas prices, which are expected to continue to be volatile over the next few years. In order to reduce the risks associated with volatile prices, we use a number of techniques, which include hedging, reducing consumption through improved manufacturing processes and switching to alternative fuels. As of Dec. 31, 2002, we hedged approximately one-third of our anticipated natural gas requirements for 2003 at an average price of $3.25 per mmbtu.

We also expect the continuing consolidation of companies within our customer and competitor groups, excess global automotive production capacity and the availability of imported products from low labor cost markets to lead to continued downward pressure on our selling prices.

For 2003, we expect slow and perhaps erratic expansion in our North American markets and gains in our Asian markets. We expect continued softness in our European and South American markets. There are several developments that would signal a more solid economic environment for 2003, the most important of which would be steady growth in industrial production.

We expect that 2003 will be another challenging year due to the combination of worldwide political and economic uncertainties, but we are confident that the steps we have taken put us on solid footing to reap the benefits of improved market conditions, both in the U.S. and abroad, whenever they occur.

Newly Adopted Accounting Standards

Note 1, “Summary of Significant Accounting Policies,” under Item 8 of this Form 10-K describes and quantifies the Company’s adoption of the provisions of the Financial Accounting Standards Board’s (FASB) standards on accounting for goodwill and other intangible assets, effective Jan. 1, 2002.

Other New Accounting Standards

In August 2001, the FASB issued SFAS No. 143. “Accounting for Asset Retirement Obligations” which is effective Jan. 1, 2003. The cumulative effect of this change in accounting will decrease our 2003 net income by less than $10 million and will not have a material impact on future results of operations or financial condition.

During 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” and Interpretation No. 46, “Consolidation of Variable Interest Entities.” See Note 1, “Summary of Significant Accounting Policies,” under Item 8 of this Form 10-K for an expanded description of these new standards. Additionally, the disclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” have been implemented in Note 18, “Stock-Based Compensation,” under Item 8 of this Form 10-K.

Performance in 2001 Compared with 2000

Overall Performance

Our sales decreased 5% in 2001 to $8.2 billion from $8.6 billion in 2000. The majority of this sales decrease, 4%, is attributable to decreased volumes across all of our business segments. Sales for 2001 also declined 2% from foreign currency translation primarily within our coatings segment due to the strengthening of the U.S. dollar against other currencies. These sales decreases were partially offset by a 1% increase in prices within our coatings and glass segments.

The gross profit percentage decreased to 37.1% in 2001 from 38.2% in 2000. Increased raw material costs, including natural gas, particularly in our glass and chemicals segments, along with unfavorable sales mix across our glass and chemicals segments were offset slightly by the benefits realized from improved manufacturing efficiencies in our coatings and glass segments.

Reported net income and earnings per share – diluted in 2001 and 2000 is summarized in the following table. We have also identified significant non-recurring items in 2001 and 2000.

The note references in the above table are found under Item 8 of this Form 10-K.

The decrease in earnings is largely attributable to the lower sales volume and gross profit percentage described above. In addition, selling, general and administrative expenses were up $31 million as the savings from our restructuring actions of about $35 million were more than offset by the additional overhead costs of businesses acquired during 2000, higher pension and other benefit costs, higher growth related overhead in our architectural coatings business and the impact of inflation. Additional cost reductions of $25 million related to our restructuring actions are reflected in research and development costs and costs of sales.

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20         PPG INDUSTRIES, INC.        2002 Annual Report and Form 10-K

Management’s Discussion and Analysis

Results of Business Segments

Coatings sales decreased 5% to $4.4 billion in 2001 from $4.7 billion in 2000. Sales decreased 4% from decreased volumes primarily in our North American automotive original equipment, refinish and industrial businesses. Sales also decreased 2% due to negative effects of foreign currency translation. These decreases were offset slightly by a 1% increase from higher selling prices primarily in our refinish business. Operating income decreased to $495 million in 2001 compared to $685 million in 2000. Operating income in 2001 included pretax restructuring and other related costs of $83 million. Excluding these pretax charges, operating income in 2001 was $578 million. The decrease in operating income is attributable to lower sales volumes and higher environmental, pension and other benefit costs offset, in part, by improved manufacturing efficiencies and lower research and development costs.

Glass sales decreased 5% to $2.2 billion in 2001 from $2.4 billion in 2000. Sales decreased 6% from decreased volumes primarily in our North American automotive original and fiber glass businesses and 1% due to the negative effects of foreign currency translation. These declines were offset by a 2% increase in selling prices, due in part to more profitable product mix, in our flat glass, automotive replacement glass and fiber glass businesses. Operating income decreased to $255 million in 2001 compared to $377 million in 2000. Operating income in 2001 included pretax restructuring and other related costs of $10 million and operating income in 2000 included pretax charges of $6 million for restructuring and one-time integration costs related to PPG Auto Glass. Excluding these pretax charges, operating income in 2001 was $265 million compared to $383 million in 2000. The decrease in operating income is attributable to lower sales volumes primarily in our North American automotive original and fiber glass businesses, the effects of higher natural gas costs and lower equity earnings, partially offset by improved manufacturing efficiencies, higher selling prices and the inclusion of a full year’s results of PPG Auto Glass.

Chemicals sales decreased 6% to $1.5 billion in 2001 from $1.6 billion in 2000. Sales volumes declined 4% primarily from our chlorine, caustic soda, chlor-alkali derivative and silica products. Sales also decreased 1% due to lower selling prices for our chlor-alkali derivative products and 1% due to the negative effects of foreign currency translation. Operating income decreased to $91 million in 2001 from $174 million in 2000. Operating income in 2001 included pretax restructuring and other related costs of $7 million. Excluding these pretax charges, operating income in 2001 was $98 million. The decrease in operating income is attributable to lower sales volumes, higher natural gas and environmental costs and decreased manufacturing efficiencies.

Other Significant Factors

Earnings in 2001 and 2000 included pension income of $53 million and $86 million, respectively. This decline in pension income is due primarily to a decline in the market value of pension plan assets during 2000. The market value of our pension plan assets continued to decrease during 2001 due primarily to the declines in the U.S. equity markets. See Note 12, “Pensions and Other Postretirement Benefits,” under Item 8 of this Form 10-K for information concerning the pension plan assets and the components of pension income.

Other unallocated corporate expense—net, was $21 million in 2001 as compared to $54 million in 2000. Included in 2001 is a pretax charge of $1 million for restructuring and other related costs. Included in 2000 are pretax charges of $39 million representing the write-off of a 50% owned equity investment in Pittsburgh Corning Corporation, which has filed for reorganization under the federal bankruptcy code and $14 million representing an other than temporary decline in the market value of an investment in marketable equity securities, previously recorded, net of tax, as an unrealized loss in other comprehensive loss.

The tax rate for ongoing operations was 36% in both 2001 and 2000. However, the overall effective tax rate in 2001 was 37.07% as the geographic spread of the restructuring charges taken in the first quarter provided a tax benefit of only 30%.

The decrease in short-term and long-term debt during 2001 is due principally to the repayment of various U.S. and non-U.S. debt obligations.

Business Restructuring

During the first quarter of 2002, the Company finalized plans to reduce costs, increase efficiencies and accelerate performance improvement and took a pretax charge of $81 million for restructuring and other related activities, including severance and other costs of $66 million and asset dispositions of $15 million. It is expected that these activities will be completed by June 2003. The details of this charge were as follows:

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2002 Annual Report and Form 10-K        PPG INDUSTRIES, INC.        21

Management’s Discussion and Analysis

During the first quarter of 2001, the Company finalized plans to reduce costs, increase efficiencies and accelerate performance improvement and took a pretax charge of $101 million for restructuring and other related activities, including severance and other costs of $67 million and asset dispositions of $34 million. As of Dec. 31, 2002, these actions are complete. The details of this charge were as follows:

In conjunction with the 2001 first quarter charge, an additional $2 million of restructuring costs were recorded in 2001 as incurred and during the second quarter of 2002, $4 million of the initial $101 million charge related to the coatings segment was reversed to income.

During 2002 and 2001, we paid $2 million and $17 million, respectively, related to restructuring reserves accrued in 2000 and 1999. See Note 2, “Acquisitions and Business Restructuring,” under Item 8 of this Form 10-K for an expanded description of these restructuring actions.

Commitments and Contingent Liabilities, including Environmental Matters

PPG is involved in a number of lawsuits and claims, both actual and potential, including some that it has asserted against others, in which substantial monetary damages are sought. See Note 13, “Commitments and Contingent Liabilities,” under Item 8 of this Form 10-K for an expanded description of certain of these lawsuits, including the proposed settlement of asbestos claims announced on May 14, 2002. As discussed in Note 13, although the result of any future litigation of such lawsuits and claims is inherently unpredictable, management believes that, in the aggregate, the outcome of all lawsuits and claims involving PPG, including asbestos-related claims in the event the settlement described in Note 13 does not become effective, will not have a material effect on PPG’s consolidated financial position or liquidity; however, such outcome may be material to the results of operations of any particular period in which costs, if any, are recognized.

It is PPG’s policy to accrue expenses for environmental contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Reserves for environmental contingencies are exclusive of claims against third parties and are generally not discounted. As of Dec. 31, 2002 and 2001, PPG had reserves for environmental contingencies totaling $87 million and $94 million, respectively. Pretax charges against income for environmental remediation costs in 2002, 2001 and 2000 totaled $15 million, $29 million and $18 million, respectively, and are included in “Other charges” in the Statement of Income under Item 8 of this Form 10-K. Cash outlays related to such environmental remediation aggregated $22 million, $19 million and $16 million in 2002, 2001 and 2000, respectively.

Management anticipates that the resolution of the Company’s environmental contingencies will occur over an extended period of time. Over the past 10 years the pretax charges against income have ranged between $10 million and $49 million per year. We anticipate that charges against income in 2003 will be within that range. It is possible, however, that technological, regulatory and enforcement developments, the results of environmental studies and other factors could alter this expectation. In management’s opinion, the Company operates in an environmentally sound manner and the outcome of the Company’s environmental contingencies will not have a material effect on PPG’s financial position or liquidity.

        In addition to the amounts currently reserved, the Company may be subject to loss contingencies related to environmental matters estimated to be as much as $200 million to $400 million, which range is unchanged from the prior year end. Such unreserved losses are reasonably possible but are not currently considered to be probable of occurrence. The Company’s environmental contingencies are expected to be resolved over an extended period of time.

        Although the unreserved exposure to future loss relates to all sites, a significant portion of such exposure involves three operating plant sites in our chemicals segment. Initial remedial actions are occurring at these sites. Studies to determine the nature of the contamination are reaching completion and the need for additional remedial actions, if any, is presently being evaluated. The loss contingencies related to the remaining portion of such unreserved exposure include significant unresolved issues such as the nature and extent of contamination, if any, at these other sites and the methods that may have to be employed should remediation be required. The most significant of these sites is the Calcasieu River estuary, near our Lake Charles, La. chemicals plant. The U.S. Environmental Protection Agency (USEPA) has been investigating contamination levels in the Calcasieu River estuary. During 2002, the USEPA issued draft Human Health and Ecological Risk Assessments indicating that elevated levels of risk exist in the estuary. It is expected that USEPA could issue final risk assessments in 2003 followed by a Remedial Investigation report. PPG would then have discussions with the USEPA and other parties to determine what, if any, role PPG would have in addressing estuary issues.

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22         PPG INDUSTRIES, INC.        2002 Annual Report and Form 10-K

Management’s Discussion and Analysis

With respect to certain waste sites, the financial condition of any other potentially responsible parties also contributes to the uncertainty of estimating PPG’s final costs. Although contributors of waste to sites involving other potentially responsible parties may face governmental agency assertions of joint and several liability, in general, final allocations of costs are made based on the relative contributions of wastes to such sites. PPG is generally not a major contributor to such sites.

The impact of evolving programs, such as natural resource damage claims, industrial site reuse initiatives and state voluntary remediation programs, also adds to the present uncertainties with regard to the ultimate resolution of this unreserved exposure to future loss. The Company’s assessment of the potential impact of these environmental contingencies is subject to considerable uncertainty due to the complex, ongoing and evolving process of investigation and remediation, if necessary, of such environmental contingencies.

Impact of Inflation

PPG’s financial statements are prepared on the historical cost basis, which does not completely account for the effects of inflation.

In 2002, the decline in selling prices and the negative effects of inflation on our production costs were not fully recovered through improved manufacturing efficiencies across all of our businesses and lower raw material and natural gas costs. In 2001, the increase in production costs due to the negative effects of inflation was not fully recovered through price increases and manufacturing efficiencies, which were adversely impacted by lower production volumes. In 2000, the negative effects of inflation, including the impact of higher natural gas costs, were substantially offset in the aggregate by the impact of higher selling prices in our glass and chemicals businesses and manufacturing efficiencies in all of our businesses.

While inflationary and market pressures on costs are expected to be experienced in 2003, we anticipate that ongoing improvements in manufacturing efficiencies, improvement in sales volume as well as increases in selling prices for certain products will more than offset the negative effect of inflation on 2003 operating income.

Financial Resources, Capital Spending

During the past three years, we continued to have sufficient financial resources to meet operating requirements, to fund our capital spending and share repurchase programs and to pay increased dividends to shareholders. Cash from operating activities was $872 million, $1,060 million and $870 million in 2002, 2001 and 2000, respectively. Dividends paid to shareholders totaled $287 million, $283 million and $276 million in 2002, 2001 and 2000, respectively.

During 2002, the Company did not repurchase any shares of its common stock nor does it anticipate, in the near term, that any shares will be repurchased. However, during 2001 and 2000, the Company repurchased approximately 0.1 million and 5.8 million shares of common stock at a cost of $5 million and $234 million, respectively, under various share repurchase programs. The program initiated in November 1998 authorized the repurchase of 10 million shares of common stock. As of Dec. 31, 2002, 9.1 million shares of common stock had been repurchased under this program at a cost of $421 million. In October 2000, we authorized a program to repurchase an additional 10 million shares of common stock. The repurchase of common stock was financed principally by cash from operations and proceeds from long-term debt. Additional shares were repurchased from the PPG Employee Savings Plan.

Capital spending was $260 million, $301 million and $676 million in 2002, 2001 and 2000, respectively. This spending related to business acquisitions totaling $22 million, $10 million and $115 million, in 2002, 2001 and 2000, respectively, modernization and productivity improvements, expansion of existing businesses, and environmental control projects. Capital spending in 2000 also included $83 million for marketable securities relating to the deferred compensation plan. Capital spending, excluding acquisitions, is expected to be in the range of $250 million to $300 million during 2003.

We periodically review our array of businesses in comparison to our overall strategic and performance objectives. As part of this review, we may acquire or divest of certain businesses. During 2003, we anticipate that any acquisitions completed will be funded through a combination of cash generated from operations or from the sale of other businesses and, to a lesser extent, external funding sources or the issuance of stock.

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Management’s Discussion and Analysis

The ratio of total debt, including capital leases, to total debt and equity was 49% and 44% at Dec. 31, 2002 and 2001, respectively. While we reduced our debt by over $400 million during 2002, this ratio was negatively impacted as equity was reduced by the after-tax impact of the asbestos settlement charge and the minimum pension liability adjustment recorded in 2002. Cash from operations and the Company’s debt capacity are expected to continue to be sufficient to fund capital spending, dividend payments, contributions to pension plans, amounts due under the asbestos settlement and operating requirements, including PPG’s significant contractual obligations, which are presented in the following table:

The unconditional purchase commitments are principally take-or-pay obligations related to the purchase of certain materials, including industrial gases and natural gas, consistent with customary industry practice. These also include PPG’s commitment to purchase electricity and steam from the RS Cogen joint venture discussed in Note 5, “Investments,” under Item 8 of this Form 10-K.

See Note 7, “Debt and Bank Credit Agreements and Leases,” under Item 8 of this Form 10-K for details regarding the use and availability of committed and uncommitted lines of credit, letters of credit, guarantees, and debt covenants.

In addition to the lines of credit, the Company may issue up to $500 million aggregate principal amount of debt securities under a shelf registration statement filed with the Securities and Exchange Commission (SEC) in July 1999.

Critical Accounting Policies

Management has evaluated the accounting policies used in the preparation of the financial statements and related notes under Item 8 of this Form 10-K and believes those policies to be reasonable and appropriate. We believe that the most critical accounting policies applied in the preparation of our financial statements relate to accounting for contingencies, under which we accrue a loss when it is probable that a liability has been incurred and the amount can be reasonably estimated, and to accounting for pensions, other postretirement benefits, goodwill and other identifiable intangible assets with indefinite lives because of the importance of management judgment in making the estimates necessary to apply these policies.

Contingencies, by their nature, relate to uncertainties that require management to exercise judgment both in assessing the likelihood that a liability has been incurred as well as in estimating the amount of potential loss. The most important contingencies impacting our financial statements are those related to the collectibility of accounts receivable, environmental remediation, pending litigation against the Company and the resolution of matters related to open tax years. For more information on these matters, see Note 3, “Working Capital Detail,” Note 11, “Income Taxes” and Note 13, “Commitments and Contingent Liabilities” under Item 8 of this Form 10-K.

Accounting for pensions and other postretirement benefits involves estimating the cost of benefits to be provided well into the future and attributing that cost over the time period each employee works. To accomplish this, extensive use is made of assumptions about inflation, investment returns, mortality, turnover, medical costs and discount rates. These assumptions are reviewed annually. In determining the expected return on plan asset assumption, the Company evaluates long-term actual return information, the mix of investments that comprise plan assets and future estimates of long-term investment returns. In selecting rates for current and long-term health care assumptions, the Company takes into consideration a number of factors including the Company’s actual health care cost increases, the design of the Company’s benefit programs, the demographics of the Company’s active and retiree populations and expectations of inflation rates out into the future. See Note 12, “Pensions and Other Postretirement Benefits,” under Item 8 of this Form 10-K for information on these plans.

As discussed in Note 1, “Summary of Significant Accounting Policies,” under Item 8 of this Form 10-K, the Company tests goodwill and identifiable intangible assets with indefinite lives for impairment at least annually by comparing the fair value of such assets to their carrying values. Fair values are estimated using discounted cash flow methodologies that are based on projections of the amounts and timing of future revenues and cash flows.

As part of our ongoing financial reporting process, a collaborative effort is undertaken involving PPG managers with functional responsibility for financial, credit, environmental, legal, tax and benefit matters and outside advisors such as consultants, engineers, lawyers and actuaries. The results of this effort provide management with the necessary information on which to base their judgments on these contingencies and to develop the estimates and assumptions used to prepare the financial statements.

We believe that the amounts recorded in the financial statements under Item 8 of this Form 10-K related to these contingencies, pensions, postretirement benefits, goodwill and other identifiable intangible assets with indefinite lives are based on the best estimates and judgments of the appropriate PPG management, although actual outcomes could differ from our estimates.

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Management’s Discussion and Analysis

Currency

The Euro and the British Pound Sterling strengthened against the U.S. dollar 18% and 11%, respectively, during 2002. The effects of translating the net assets and net earnings of our operations denominated in these currencies to the U.S. dollar increased consolidated net assets by approximately $140 million but did not have a significant impact on the results of operations.

This was offset, in part, by the continued devaluation of the Argentine peso, which reduced our net investment in Argentina by $39 million to a total of $29 million at Dec. 31, 2002. Any reduction in the value of these net assets resulting from a further devaluation of the Argentine peso will result in a direct charge to the accumulated other comprehensive loss component of shareholders’ equity.

Research and Development

Innovation and technology have been a hallmark of our Company’s success throughout its history. Research and development costs totaled over 3% of sales in each of the past three years, representing a level of expenditure that we expect to continue in 2003. These costs include technology-driven improvements to our manufacturing processes and customer technical service, as well as the costs of developing new products. Because of our broad array of products and customers, we are not materially dependent upon any single technology platform.

Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the Company. Management’s Discussion and Analysis and other sections of this Annual Report contain forward-looking statements that reflect the Company’s current views with respect to future events and financial performance.

Forward-looking statements are identified by the use of the words “aim,” “believe,” “expect,” “anticipate,” “intend,” “estimate” and other expressions that indicate future events and trends. Any forward-looking statement speaks only as of the date on which such statement is made and the Company undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our reports to the SEC. Also, note the following cautionary statements.

Many factors could cause actual results to differ materially from the Company’s forward-looking statements. Among these factors are increasing price and product competition by foreign and domestic competitors, fluctuations in the cost and availability of raw materials, the ability to maintain favorable supplier relationships and arrangements, economic and political conditions in international markets, the ability to penetrate existing, developing and emerging foreign and domestic markets, which also depends on economic and political conditions, foreign exchange rates and fluctuations in those rates, and the unpredictability of possible future litigation, including litigation that could result if the asbestos settlement does not become effective. Further, it is not possible to predict or identify all such factors. Consequently, while the list of factors presented here is considered representative, no such list should be considered to be a complete statement of all potential risks and uncertainties. Unlisted factors may present significant additional obstacles to the realization of forward-looking statements.

The consequences of material differences in the results as compared to those anticipated in the forward-looking statements could include, among other things, business disruption, operational problems, financial loss, legal liability to third parties and similar risks, any of which could have a material adverse effect on the Company’s consolidated financial condition, operations or liquidity.

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Item 7a. Quantitative and Qualitative Disclosures About Market Risk

PPG is exposed to market risks related to changes in foreign currency exchange rates, interest rates and natural gas prices arising from transactions that are entered into in the normal course of business. The Company may enter into derivative financial instrument transactions in order to manage or reduce this market risk. A detailed description of these exposures and the Company’s risk management policies are provided in Note 9, “Derivative Financial Instruments,” under Item 8 of this Form 10-K.

Foreign currency forward and option contracts outstanding as of Dec. 31, 2002 and 2001 were used to hedge PPG’s exposure to foreign currency transaction and translation risk. The fair value of these contracts was an asset of $1 million as of Dec. 31, 2002 and 2001. The potential reduction in PPG’s earnings resulting from adverse changes in the exchange rates on the fair value of its outstanding foreign currency hedge contracts of 10% for European currencies and 20% for Asian and South American currencies would have totaled approximately $1 million and $4 million as of Dec. 31, 2002 and 2001, respectively.

PPG had non-U.S. dollar-denominated debt of $317 million and $409 million as of Dec. 31, 2002 and 2001, respectively. A weakening of the U.S. dollar by 10% against European currencies and by 20% against Asian and South American currencies would have resulted in unrealized translation losses of approximately $46 million and $59 million as of Dec. 31, 2002 and 2001, respectively.

Interest rate swaps are used to manage a portion of PPG’s interest rate risk and, as of Dec. 31, 2002 and 2001, the fair value of the interest rate swaps was an asset of $23 million and a liability of $20 million, respectively. The fair value of these swaps would have decreased by $7 million as of Dec. 31, 2002 and increased by $11 million as of Dec. 31, 2001, if variable interest rates changed unfavorably by 10%. A 10% increase in interest rates in the U.S., Canada, Mexico and Europe and a 20% increase in interest rates in Asia and South America would have affected PPG’s variable rate debt obligations by increasing interest expense by approximately $3 million and $6 million as of Dec. 31, 2002 and 2001, respectively. Further, a 10% reduction in interest rates would have increased the present value of the Company’s fixed rate debt by approximately $53 million and $62 million as of Dec. 31, 2002 and 2001, respectively. Such changes would not have had a material effect on PPG’s annual earnings or cash flows.

The fair value of natural gas swap and option contracts was an asset of $24 million and a liability of $12 million as of Dec. 31, 2002 and 2001, respectively. These contracts were entered into to reduce PPG’s exposure to rising prices of natural gas. A 10% reduction in the price of natural gas would result in a loss in the fair value of the underlying natural gas swap and option contracts outstanding as of Dec. 31, 2002 and 2001 of approximately $8 million and $12 million, respectively.

In November 2002, an equity forward arrangement was entered into to hedge the Company’s exposure to changes in fair value of its future obligation to contribute PPG stock into an asbestos settlement trust (see Note 9, “Derivative Financial Instruments” and Note 13, “Commitments and Contingent Liabilities,” under Item 8 of this Form 10-K). The fair value of this instrument as of Dec. 31, 2002 was an asset of $1 million. A 10% unfavorable change in PPG’s stock price would have reduced the value of this instrument to a liability of $2 million.

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26         PPG INDUSTRIES, INC.        2002 Annual Report and Form 10-K

Financial and Operating Review

Item 8. Financial Statements and Supplementary Data

Independent Auditors’ Report

To the Board of Directors and Shareholders of PPG Industries, Inc.:

We have audited the accompanying consolidated balance sheet of PPG Industries, Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, shareholders’ equity, comprehensive income and cash flows for each of the three years in the period ended December 31, 2002 set forth on pages 27 to 50. Our audits also included the financial statement schedule listed in Item 15 on page 52. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 PPG Industries, Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 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 1 to the consolidated financial statements, on January 1, 2002 the Company changed its method of accounting for goodwill and other intangible assets to adopt Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”

/s/ Deloitte & Touche LLP

Deloitte & Touche LLP

Pittsburgh, Pennsylvania

January 16, 2003

Management Statement

Responsibility for Preparation of the Financial Statements

The management of PPG Industries, Inc. is responsible for the preparation of the financial statements included in this Annual Report.

To ensure the reliability of financial data, PPG has established, and maintains, an internal control system. We believe the internal controls in use give reasonable assurance that financial reports do not contain any material misstatement.

We believe that the financial statements and related notes in this report are accurate in all material respects, and that they were prepared according to accounting principles generally accepted in the United States of America. The financial statements include amounts that are based on the best estimates and judgments of management.

We believe, further, that the other financial information contained in this Annual Report is consistent with the financial statements.

/s/ Raymond W. LeBoeuf

Raymond W. LeBoeuf

Chairman of the Board

and Chief Executive Officer

/s/ William H. Hernandez

William H. Hernandez

Senior Vice President, Finance

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Statement of Income

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

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28         PPG INDUSTRIES, INC.        2002 Annual Report and Form 10-K

Balance Sheet

Shares outstanding were 169,442,193 and 168,488,256 at Dec. 31, 2002 and 2001, respectively.

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

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Statement of Shareholders’ Equity