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UNITED STATES

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, 2004

Commission File No. 1-3660

Owens Corning

One Owens Corning Parkway

Toledo, Ohio 43659

Area Code (419) 248-8000

A Delaware Corporation

I.R.S. Employer Identification No. 34-4323452

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Common Stock - $.10 Par Value

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 an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ¨ No x

On June 30, 2004, the last business day of Registrant’s most recently completed second fiscal quarter, the aggregate market value of Registrant’s $.10 par value common stock (Registrant’s voting stock) held by non-affiliates was $32,652,428 (assuming for purposes of this computation only that the Registrant had no affiliates).

At January 31, 2005, there were outstanding 55,341,765 shares of Registrant’s $.10 par value common stock.

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(i)

INDEX

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(ii)

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PART I

ITEM 1. BUSINESS

Owens Corning, a global company incorporated in Delaware in 1938, serves consumers and industrial customers with building materials systems and composites systems. Owens Corning’s executive offices are at One Owens Corning Parkway, Toledo, Ohio 43659; telephone (419) 248-8000. Owens Corning’s web site provides information on our business and products, and assists our customers in various building projects. It is located at www.owenscorning.com. Owens Corning makes available, free of charge, through its website its 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 such material is electronically filed with or furnished to the Securities and Exchange Commission. Unless the context requires otherwise, the terms “Owens Corning”, “Company”, “we” and “our” in this report refer to Owens Corning and its subsidiaries.

PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

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

The Debtors are currently operating their businesses as debtors-in-possession in accordance with provisions of the Bankruptcy Code. The Chapter 11 cases of the Debtors (collectively, the “Chapter 11 Cases”) are being jointly administered under Case No. 00-3837 (JKF).

The referenced Chapter 11 cases do not include any other United States or foreign subsidiaries of Owens Corning (collectively, the “Non-Debtor Subsidiaries”). The Chapter 11 Cases are discussed in greater detail in Note 1 to the Consolidated Financial Statements included in this Annual Report on Form 10-K (the “Consolidated Financial Statements”).

The Debtors filed for relief under Chapter 11 to address the growing demands on Owens Corning’s cash flow resulting from its multi-billion dollar asbestos liability. This liability is discussed in greater detail in Note 19 to the Consolidated Financial Statements.

On January 17, 2003, the Debtors, together with the Official Committee of Asbestos Claimants and the Legal Representative for the class of future asbestos claimants, filed a proposed joint plan of reorganization in the USBC. The same proponents filed a proposed amended joint plan of reorganization

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ITEM 1. BUSINESS (continued)

in the USBC on March 28, 2003, a proposed second amended joint plan of reorganization in the USBC on May 23, 2003, a proposed third amended joint plan of reorganization in the USBC on August 8, 2003, and a proposed fourth amended joint plan of reorganization (as so amended through such fourth amendment, the “Plan”) in the USBC on October 24, 2003. The Plan is subject to confirmation by the Bankruptcy Court. The Plan is premised upon the substantive consolidation of Owens Corning and certain of its direct and indirect subsidiaries for the purposes of voting, determining which claims and interests will be entitled to vote to accept or reject the Plan, confirmation of the Plan, and the resultant discharge of and cancellation of claims and interests and distribution of assets, interests and other property under the Plan. Owens Corning believes that it is likely that the terms, conditions and provisions of the Plan will be the subject of continuing negotiations or litigation to resolve differences among the creditor constituencies as to their treatment. Accordingly, Owens Corning is unable to predict at this time what the treatment of creditors and equity holders of the respective Debtors will ultimately be under any plan or plans of reorganization finally confirmed. The current Plan provides for partial payment of all unsecured creditors’ allowed claims, in the form of distributions of new common stock and notes of the reorganized company, and cash. Additional distributions from potential insurance and other third-party claims may also be paid to certain classes of unsecured creditors, but it is expected that all classes of pre-petition unsecured creditors will be impaired. Therefore, the Plan also provides that the existing common stock of Owens Corning will be cancelled, and that current shareholders will receive no distribution or other consideration in exchange for their shares. It is impossible to predict at this time the terms and provisions of any plan or plans of reorganization that may ultimately be confirmed, when a plan or plans of reorganization will be confirmed, or the treatment of creditors thereunder. The Plan is discussed in greater detail in Note 1 to the Consolidated Financial Statements.

BUSINESS DESCRIPTION

Owens Corning operates in two segments - Building Materials Systems and Composite Solutions. In 2004, the Building Materials Systems segment accounted for approximately 80% of our total sales while Composite Solutions accounted for the remainder. The products and systems provided by our Building Materials Systems segment are used in residential remodeling and repair, commercial improvement, new residential and commercial construction, and other related markets. The products and systems offered by our Composite Solutions segment are used in end-use markets such as building construction, automotive, telecommunications, marine, aerospace, energy, appliance, packaging and electronics. Many of Owens Corning’s products are marketed under registered trademarks, including Cultured Stone^®, Propink^®, Advantex^®, and/or the color PINK.

Owens Corning has affiliate companies in a number of countries. Generally, affiliated companies’ sales, earnings and assets are not included in either operating segment unless we own more than 50% of the affiliate and the ownership is not considered temporary.

In April 2004, we acquired the outstanding 60% ownership interest in our Mexican joint venture, Vitro-Fibras, S.A. (“OC Mexico”). This acquisition strengthened our operating position in Mexico and provides a supply of low-cost manufacturing capacity to service the North American market for both fiberglass insulation and reinforcements.

Revenue from external customers, income from operations and total assets attributable to each of Owens Corning’s operating segments and geographic regions, as well as information concerning the dependence of our operating segments on foreign operations, for each of the years 2004, 2003, and 2002, are contained in Note 3 to the Consolidated Financial Statements.

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ITEM 1. BUSINESS (continued)

BUILDING MATERIALS SYSTEMS

Principal Products And Methods Of Distribution

Building Materials Systems operates primarily in the United States and Canada. It also has a growing presence in Asia Pacific and Mexico. Building Materials Systems sells a variety of products and systems in two major categories: (i) insulating systems, including thermal and acoustical insulation, air ducts formed from glass wool fibers, and foam insulation, and (ii) exterior systems for the home, including roofing shingles, vinyl siding and accessories, windows and doors, stone veneer building products, and branded housewrap. These products are used primarily in the home improvement, new residential construction, manufactured housing, and commercial construction markets.

We sell building insulation systems, roofing shingles and accessories, housewrap, and vinyl siding through home centers, lumberyards, retailers and distributors. Other channels of distribution for insulation systems in North America include insulation contractors, wholesalers, specialty distributors, metal building insulation laminators, mechanical insulation distributors and fabricators, manufactured housing producers, and appliance, office products and automotive manufacturers. Foam insulation and related products are sold to distributors and retailers who resell to residential builders, remodelers and do-it-yourself customers; commercial and industrial markets through specialty distributors; and, in some cases, large contractors, particularly in the agricultural and cold storage markets. Vinyl siding and accessories are also sold through the Company’s retail distribution centers.

Owens Corning sells asphalt products that are used internally in the manufacture of residential roofing products and are also sold to other shingle manufacturers. In addition, asphalt is sold to roofing contractors and distributors for Built-Up Roofing Asphalt (BURA) systems and to manufacturers in a variety of other industries, including automotive, chemical, rubber and construction. Owens Corning sells glass fiber and/or glass fiber mat directly to a small number of major shingle manufacturers, including our own roofing manufacturing facilities.

In Latin America, Owens Corning sells building and mechanical insulation primarily through OC Mexico, as well as exports from U.S. plants. In Asia Pacific, we sell primarily mechanical insulation through joint venture businesses, including two majority owned insulation plants and an insulation fabrication center in China, a minority owned joint venture in Saudi Arabia, and licensees.

Seasonality

Sales in the Building Materials Systems segment tend to follow seasonal home improvement, remodeling and renovation, and new construction industry patterns. The peak season for home construction and remodeling generally corresponds with the second and third calendar quarters. Sales levels for the segment, therefore, are typically higher during these quarters and lower in the winter months.

Major Customers

No customer in the Building Materials Systems segment accounted for more than 6% of the segment’s sales in 2004.

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ITEM 1. BUSINESS (continued)

COMPOSITE SOLUTIONS

Principal Products and Methods of Distribution

Composite Solutions operates in North America, Europe, Latin America and Asia Pacific, with affiliates and licensees around the world.

Owens Corning is a leading producer of glass fiber materials used in composites. Composites are made up of two or more components (e.g., plastic resin and a fiber, traditionally a glass fiber) and are used in various applications to replace traditional materials, such as aluminum, wood, and steel. We are increasingly providing systems that are designed for a specific end-use application, and entail a material, a proprietary process and a fully assembled part or system. The global composites industry has thousands of end-use applications. Owens Corning has selected strategic markets and end-users where we provide integral solutions, such as the building construction and transportation markets.

Tubs, showers and other related internal building components used for both remodeling and new construction are major applications of composite materials in the construction market. These end-use products are some of the first successful material substitution conversions normally encountered in developing countries. Glass fiber reinforcements and composite material solutions for these markets are sold to direct accounts and to distributors around the world, who in turn service thousands of customers.

A significant portion of transportation-related composite solutions are used in automotive applications. Non-automotive transportation applications include heavy trucks, rail cars, shipping containers, refrigerated containers, trailers and commercial ships. Growth continues in automotive applications, as composite systems create new applications or displace other materials in existing applications. There are hundreds of automotive composites applications, including body panels, door modules, integrated front-end systems, instrument panels, chassis and underbody components and systems, pick-up truck beds, and heat and noise shields. These composite parts are either produced by original equipment manufacturers (“OEMs”) or are purchased by OEMs from first-tier suppliers.

The Composite Solutions segment also serves thousands of applications within the consumer, industrial and infrastructure markets, which include sporting goods and marine applications. Owens Corning sells composite materials to OEM’s and other finished goods manufacturers, both directly and through distributors.

Major Customers

No customer in the Composite Solutions segment accounted for more than 8% of the segment’s sales in 2004.

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ITEM 1. BUSINESS (continued)

GENERAL

Raw Materials and Patents

Owens Corning considers the sources and availability of raw materials, supplies, equipment and energy necessary for the conduct of business in each of our operating segments to be adequate.

Owens Corning has numerous United States and foreign patents issued and applied for relating to our products and processes in each operating segment, resulting from research and development efforts.

We have issued royalty-bearing patent licenses to companies in several foreign countries. The licenses cover technology relating to both operating segments.

Including registered trademarks for the Owens Corning logo and the color PINK, Owens Corning has approximately 350 trademarks registered in the United States and approximately 1,400 trademarks registered in other countries.

We consider our patent and trademark positions to be adequate for the present conduct of business in each of our operating segments.

Working Capital

Owens Corning’s manufacturing operations in each operating segment are generally continuous in nature, and we warehouse much of our production prior to sale since we operate primarily with short delivery cycles.

Number of Employees

Owens Corning averaged approximately 18,000 employees during 2004 and had approximately 19,000 employees at December 31, 2004.

Research and Development

During 2004, 2003, and 2002, Owens Corning spent approximately $47 million, $43 million, and $42 million, respectively, for science and technology activities related to research and development. Customer-sponsored research and development was not material in any of the last three years.

Environmental Control

Owens Corning’s capital expenditures relating to compliance with environmental control requirements were approximately $2 million in 2004. We currently estimate that such capital expenditures will be approximately $7 million in 2005 and $3 million in 2006.

We have not experienced a material adverse effect upon our capital expenditures or competitive position as a result of environmental control legislation and regulations. Operating costs associated with environmental compliance were approximately $42 million in 2004. We continue to invest in equipment and process modifications to remain in compliance with applicable environmental laws and regulations worldwide.

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ITEM 1. BUSINESS (continued)

The 1990 Clean Air Act Amendments (“Act”) provide that the United States Environmental Protection Agency (“EPA”) will issue regulations on a number of air pollutants over a period of years. The EPA issued final regulations for wool fiberglass and mineral wool in June 1999, for amino/phenolic resin manufacturing in January 2000, for wet formed fiberglass mat manufacturing in April 2002, and for reinforced plastic composites manufacturing and asphalt roofing and processing in April 2003. The Company anticipates that other relevant sources to be regulated in the near future include large burners and boilers. Based on information now known by the Company, including the nature and limited number of regulated materials Owens Corning emits, we do not expect the Act to have a materially adverse effect on our results of operations, financial condition or long-term liquidity.

Competition

Owens Corning’s products compete with a broad range of products made from numerous basic, as well as high-performance, materials.

We compete with a number of manufacturers in the United States of glass fibers in primary forms, not all of which produce a broad line of glass fiber products. Approximately one-half of these producers compete with our Building Materials Systems operating segment in the sale of glass fibers in primary form. The other producers compete with our Composite Solutions operating segment. Companies in other countries export moderate quantities of glass fiber products to the United States. We also compete outside the United States with a number of manufacturers of glass fibers in primary forms.

We also compete with many manufacturers, fabricators and distributors in the sale of products made from glass fibers. In addition, we compete with many other manufacturers in the sale of roofing materials for sloped roofing, industrial asphalts, vinyl siding, windows and patio doors, and other products.

Methods of competition include brand recognition, product performance, price, terms, service and warranty.

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ITEM 2. PROPERTIES

PLANTS

Owens Corning’s principal plants, and certain other facilities, as of December 31, 2004, are listed below by operating segment and primary products, and are owned except as noted. We consider that these properties are in good condition and well maintained, and are suitable and adequate to carry on our business. The capacity of each plant varies depending upon product mix.

Certain of the facilities listed below are shown as “leased” properties. Pursuant to the Bankruptcy Code, Owens Corning and the other Debtors in the Chapter 11 Cases may elect to reject or assume unexpired pre-petition leases. The Debtors are currently reviewing the leases for which such an election exists to determine whether they should be assumed or rejected. The Bankruptcy Court has extended the time period within which the Debtors must make their elections through June 4, 2005, and may grant further extensions. In the process of their review, the Debtors may conclude that certain of the arrangements constitute secured financings rather than leases, in which event the Debtors may take action to obtain a court determination that the applicable facility is owned rather than leased.

BUILDING MATERIALS SYSTEMS

Thermal and Acoustical Insulation

Foam Insulation

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ITEM 2. PROPERTIES (continued)

OEM Solutions

Roofing

Asphalt Processing

Glass Mat/Wet Chop

Manufactured Stone Veneer

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ITEM 2. PROPERTIES (continued)

Vinyl Siding

In addition, Owens Corning has approximately 170 distribution centers in 39 states in the United States, substantially all of which are leased. The Company also provides residential construction services through 22 leased locations in 12 states.

COMPOSITE SOLUTIONS

Textiles and Reinforcements

Manufactured Housing/Recreational Vehicles/Specialty Parts

Automotive

OTHER PROPERTIES

Owens Corning’s principal executive offices are located in the Owens Corning World Headquarters, Toledo, Ohio, a leased facility of approximately 400,000 square feet.

Owens Corning’s research and development activities are primarily conducted at our Science and Technology Center, located on approximately 500 acres of land outside Granville, Ohio. It consists of more than 20 structures totaling more than 600,000 square feet. In addition, we have Application Development and other product and market focused research and development centers in Novi, Michigan, Summit, Illinois, Tallmadge, Ohio, Apeldoorn, The Netherlands, Battice, Belgium, Mexico City, Mexico, Rio Claro, Brazil, and Shanghai, China.

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ITEM 3. LEGAL PROCEEDINGS

Note 19 to the Consolidated Financial Statements, entitled “Contingent Liabilities and Other Matters”, is incorporated here by reference.

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

The Debtors are currently operating their businesses as debtors-in-possession in accordance with provisions of the Bankruptcy Code. The Chapter 11 cases of the Debtors (collectively, the “Chapter 11 Cases”) are being jointly administered under Case No. 00-3837 (JKF).

The referenced Chapter 11 cases do not include any other United States or foreign subsidiaries of Owens Corning (collectively, the “Non-Debtor Subsidiaries”).

In late 2001, the asbestos-related Chapter 11 cases pending in the District of Delaware (the Chapter 11 Cases of Owens Corning and the cases of Armstrong World Industries, Inc., W.R. Grace & Co., Federal-Mogul Global, Inc., and USG Corporation) were ordered transferred to the United States District Court for the District of Delaware (the “District Court”) before Judge Alfred M. Wolin to facilitate development and implementation of a coordinated plan for management (the “Administrative Consolidation”). The District Court entered an order referring the Chapter 11 Cases back to the USBC, where they were previously pending, subject to its ongoing right to withdraw such referral with respect to any proceedings or issues (the applicable court from time to time responsible for any particular aspect of the Chapter 11 Cases being hereinafter referred to as the “Bankruptcy Court”).

On May 27, 2004, the United States Court of Appeals for the Third Circuit (the “Third Circuit”) assigned Judge John P. Fullam of the United States District Court, Eastern District of Pennsylvania, to replace Judge Wolin in the Chapter 11 Cases. In addition, the Third Circuit assigned other judges to sit on other of the cases that had previously been consolidated under the terms of the Administrative Consolidation, effectively terminating the consolidation.

Consequence of the Filing

As a consequence of the Filing, all pending litigation against the Debtors was stayed automatically by section 362 of the Bankruptcy Code and, absent further order of the Bankruptcy Court, no party may take any action to recover on pre-petition claims against the Debtors. See Note 1 to the Consolidated Financial Statements.

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ITEM 3. LEGAL PROCEEDINGS (continued)

Two creditors’ committees, one representing asbestos claimants and the other representing unsecured creditors, have been appointed as official committees in the Chapter 11 Cases. In addition, the Bankruptcy Court has appointed James J. McMonagle as Legal Representative for the class of future asbestos personal injury claimants against one or more of the Debtors. The two committees and the Legal Representative have the right to be heard on all matters that come before the Bankruptcy Court.

Owens Corning anticipates that substantially all liabilities of the Debtors as of the date of the Filing will be resolved under one or more Chapter 11 plans of reorganization to be proposed and voted on in the Chapter 11 Cases in accordance with the provisions of the Bankruptcy Code. On January 17, 2003, the Debtors, together with the Official Committee of Asbestos Claimants and the Legal Representative for the class of future asbestos claimants, filed a proposed joint plan of reorganization in the USBC. The same proponents filed a proposed amended joint plan of reorganization in the USBC on March 28, 2003, a proposed second amended joint plan of reorganization in the USBC on May 23, 2003, a proposed third amended joint plan of reorganization in the USBC on August 8, 2003, and a proposed fourth amended joint plan of reorganization (as so amended through such fourth amendment, the “Plan”) in the USBC on October 24, 2003.

On June 7, 2004, Owens Corning announced that an agreement in principle (the “Agreement in Principle”) had been reached with the Official Committee of Asbestos Claimants, the Legal Representative for the class of future asbestos claimants, and the official representatives of the Company’s pre-petition bondholders and trade creditors. Among other things, the Agreement in Principle provides that all holders of bonds, bank debt and senior trade debt would receive a recovery equal to 38.5% of their claims upon Owens Corning’s successful emergence from Chapter 11. The recoveries of all creditors are based on certain agreed and assumed values and would be comprised of cash, debt and equity. However, their actual recoveries could ultimately be higher or lower based on the value of the equity to be issued by Owens Corning upon emergence from Chapter 11 and other factors.

The holders of the debt under the Pre-Petition Credit Facility, and certain other members of the major creditor groups, have indicated that they continue to oppose the Plan, including a group identifying itself as an “Ad Hoc Committee of Bondholders” that claims to have a blocking position that will allow them to prevent a vote in favor of the Plan by Owens Corning’s bondholders.

The Plan is subject to confirmation by the Bankruptcy Court. There can be no assurance that the Plan will not be further amended prior to confirmation, nor can there be any assurance that such Plan will be confirmed by the Bankruptcy Court and consummated.

The Plan is premised upon the substantive consolidation of Owens Corning and certain of its direct and indirect subsidiaries (but not the Fibreboard Settlement Trust (see Note 20 to the Consolidated Financial Statements)) for the purposes of voting, determining which claims and interests will be entitled to vote to accept or reject the Plan, confirmation of the Plan, and the resultant discharge of and cancellation of claims and interests and distribution of assets, interests and other property under the Plan. On October 5, 2004, the District Court issued a Memorandum and Order Concerning Substantive Consolidation. In that Memorandum and Order, the District Court granted the Debtors’ motion for substantive consolidation and ordered that counsel for the participating parties meet for the purpose of attempting to achieve an agreed-upon plan of reorganization. On October 13, 2004, the holders of the debt under the Pre-Petition Credit

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ITEM 3. LEGAL PROCEEDINGS (continued)

Facility filed an appeal of the Memorandum and Order with the Third Circuit. On November 2, 2004, the Debtors, the Official Committee of Asbestos Claimants, the Legal Representative for the class of future asbestos claimants, and the official representatives of the Company’s pre-petition bondholders and trade creditors filed a joint motion to dismiss such appeal on the grounds that the Memorandum and Order is not a final judgment or otherwise appealable. The Third Circuit denied the motion to dismiss on January 26, 2005, and heard oral arguments on the appeal of the Memorandum and Order on February 7, 2005. Because our currently proposed Plan of Reorganization is based upon substantive consolidation, a Third Circuit reversal of the District Court’s Order could potentially result in significant delays in our case.

A six-day claims estimation hearing was held before the District Court beginning January 13, 2005. The purpose of the claims estimation hearing was to establish the amount of current and future asbestos liability to be allowed in the Chapter 11 Cases. In general, the holders of the debt under the Pre-Petition Credit Facility argued that the amount of the Company’s current and future asbestos liability should be set at an amount significantly lower than the amounts reserved for asbestos claims on the financial statements of the Debtors, and the Official Committee of Asbestos Claimants and the Legal Representative for the class of future asbestos claimants argued that such asbestos liability should be set at a significantly higher level. Post-trial briefs in this matter were filed by February 18, 2005. The District Court has not indicated when it expects to render a decision on this matter, and no assurance can be given as to whether the amount of current and future asbestos liability established as a result of such claims estimation hearing will be more or less than the amounts reserved for asbestos claims on the financial statements of the Debtors or will be more or less than the $16 billion amount that the Official Committee of Asbestos Claimants and the Legal Representative for the class of future asbestos claimants have established as the level below which they have reserved the right to withdraw support of the Plan.

Owens Corning believes that it is likely that the terms, conditions and provisions of the Plan will remain the subject of continuing negotiations or litigation to resolve differences among the creditor constituencies as to their treatment. Accordingly, Owens Corning is unable to predict at this time what the treatment of creditors and equity holders of the respective Debtors will ultimately be under any plan or plans of reorganization finally confirmed. The current Plan provides for partial payment of all unsecured creditors’ allowed claims, in the form of distributions of new common stock and notes of the reorganized company, and cash. Additional distributions from potential insurance and other third-party claims may also be paid to certain classes of unsecured creditors, but it is expected that all classes of pre-petition unsecured creditors will be impaired. Therefore, the Plan also provides that the existing common stock of Owens Corning will be cancelled, and that current shareholders will receive no distribution or other consideration in exchange for their shares. It is impossible to predict at this time the terms and provisions of any plan or plans of reorganization that may ultimately be confirmed, when a plan or plans of reorganization will be confirmed, or the treatment of creditors thereunder. The Plan is discussed in greater detail in Note 1 to the Consolidated Financial Statements.

On or about October 17, 2003, the Official Committee of Unsecured Creditors filed a motion in the USBC requesting appointment of a Chapter 11 trustee to assume control of the Chapter 11 Cases due to alleged breach of the Debtors’ fiduciary duty of undivided loyalty to act in the best interest of all creditors. After such motion was dismissed by the USBC for failure to comply with local court rules, the Official Committee of Unsecured Creditors re-filed such motion on October 30, 2003. A supplement to the motion of the Official Committee of Unsecured Creditors was filed on May 28, 2004, and various filings in opposition to such supplemented motion were filed by the Debtors, the Legal Representative for the class of future asbestos claimants, and the Official Committee of Asbestos Claimants. Further proceedings on this matter have been continued until a status conference on the motion.

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ITEM 3. LEGAL PROCEEDINGS (continued)

On or about May 24, 2004, Credit Suisse First Boston, Kensington International Limited, Springfield Associates LLC and Angelo Gordon filed a motion in the USBC requesting the appointment of a Chapter 11 Examiner to examine (i) allegations of improper conduct by management of the Debtors, (ii) alleged breaches of fiduciary duty by management of the Debtors resulting from the influence of the Legal Representative for the class of future asbestos claimants and the Official Committee of Asbestos Claimants on the process of developing a Plan and the tort estimation process, (iii) alleged connections between the asbestos plaintiffs’ interests, a Court appointed mediator, and the Debtors’ asbestos liability estimation firm, and (iv) other alleged improper conduct. Owens Corning, the Legal Representative for the class of future asbestos claimants, and the Official Committee of Asbestos Claimants have each filed responsive pleadings to the motion. The USBC has continued further proceedings on the motion pending issuance of a final order on the motion (described in the preceding paragraph) requesting appointment of a Chapter 11 trustee.

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

Owens Corning has nothing to report under this Item.

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Executive Officers of Owens Corning

(as of January 31, 2005)

The name, age and business experience during the past five years of Owens Corning’s executive officers as of January 31, 2005 are set forth below. Each executive officer holds office until his or her successor is elected and qualified or until his or her earlier resignation, retirement or removal. All those listed have been employees of Owens Corning during the past five years except as indicated.

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PART II

ITEM 5. MARKET FOR OWENS CORNING’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Prior to December 19, 2002, Owens Corning’s common stock traded on the New York Stock Exchange (the “NYSE”) under the symbol “OWC”. On December 16, 2002, the NYSE determined that Owens Corning’s common stock should be suspended from trading on the NYSE before the opening of the trading session on December 19, 2002, because the Company had fallen below the NYSE’s continued listing standards requiring (a) average global market capitalization over a consecutive 30 trading-day period of not less than $50 million and total stockholders’ equity of not less than $50 million and (b) an average closing price of the Company’s common stock of not less than $1.00 over a consecutive 30 trading-day period. Pursuant to subsequent application of the NYSE, the Company’s common stock was removed from listing and registration on the NYSE effective January 30, 2003.

Effective December 19, 2002, Owens Corning’s common stock has been traded on the Over The Counter Bulletin Board (“OTCBB”) under the symbol “OWENQ”. During 2004 and 2003, the high and low bid prices on the OTCBB were as follows:

The number of stockholders of record of Owens Corning’s common stock on January 31, 2005 was 6,774.

As a result of the Filing on October 5, 2000, Owens Corning (1) did not pay any dividends during its two most recent fiscal years and (2) will not pay cash dividends for the foreseeable future.

NOTICE PROCEDURES AND TRANSFER RESTRICTIONS ON TRADING

On March 1, 2005, the USBC issued an order (the “Interim Order”) imposing certain notice procedures and transfer restrictions on the trading of equity securities of Owens Corning. The Interim Order was sought by Owens Corning and certain of its subsidiaries to avoid limitations on the use of their tax net operating loss carryforwards and certain other tax attributes. Under the Interim Order, all persons or entities who currently or in the future beneficially own at least 4.75% of the outstanding equity securities of Owens Corning, or who would own that amount upon completion of an acquisition of such securities, are required to provide notice of such status, or before effecting that transaction, as the case may be. The Debtors have the right to object in the USBC if the acquisition or sale would pose a material risk of adversely affecting the Debtors’ ability to utilize their tax net operating loss carryforwards or certain related tax attributes. Any purchase, sale or other transfer of Owens Corning equity securities in violation of the restrictions of the Interim Order would be null and void ab initio. A hearing on the Debtors’ motion to make the Interim Order a Final Order will be held in the USBC on April 25, 2005. Any objections to the interim relief granted in the Interim Order becoming final, or the entry of a Final Order granting the relief sought in the motion, must be filed with the USBC by 4:00 pm prevailing Eastern time on April 8, 2005. For the full text of the Order, see Exhibit 99 to this Annual Report.

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ITEM 5. MARKET FOR OWENS CORNING’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (continued)

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

Owens Corning has various pre-Filing equity compensation plans under which equity securities are authorized for issuance. Information regarding these securities as of December 31, 2004, is as follows:

For additional information concerning these plans, including the number of securities available for future issuance, please see Note 21 to the Consolidated Financial Statements. No securities were granted under these plans in 2004, and the Company does not anticipate additional grants for the foreseeable future.

ISSUER PURCHASES OF EQUITY SECURITIES

No purchase of Owens Corning equity securities was made by Owens Corning during the fourth quarter of 2004.

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ITEM 6. SELECTED FINANCIAL DATA

The following is a summary of certain financial information of the Company.

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ITEM 6. SELECTED FINANCIAL DATA (continued)

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I TEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(All per share information discussed below is on a diluted basis.)

OVERVIEW

General Business Overview

Owens Corning is a global producer of a variety of products to serve consumers and industrial customers with building materials and composite systems. Our purpose is to deliver solutions, transform markets and enhance lives. Our people have been focused on safety and the elimination of all injuries. We continued to make progress on this goal during 2004 as measured by reducing our incident rate by more than 7 percent. We are also focused on delivering value by improving operational efficiencies, effectively deploying capital to meet market demands, growing end use markets through application development and executing on our pricing strategies.

Owens Corning operates in two reportable business segments – Building Materials Systems and Composite Solutions. The Building Materials Systems segment operates primarily in the United States and Canada, with a growing presence in Asia Pacific and Mexico. This segment serves customers in the home improvement and new residential and new commercial construction markets. Our Composite Solutions segment has operations around the world, including several licensees and affiliates, serving customers in multiple markets, such as building construction, transportation, consumer, industrial, and infrastructure.

On October 5, 2000, Owens Corning and 17 of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in order to address the growing demands on our cash flow resulting from our multi-billion dollar asbestos liability. An overview of our bankruptcy proceedings appears below, and a more detailed review begins on page 29.

Chapter 11 Overview

In 2004, the Company marked the fourth anniversary of its filing under Chapter 11 to resolve our asbestos liability. Since our filing in 2000, we have worked diligently to formulate a Plan of Reorganization that deals fairly and equitably with all of our creditors and their claims. Our strategy has been to steadily advance our case while attempting to facilitate a Plan that could be supported by all of our creditors (“Consensual Plan”). Having a Consensual Plan would allow Owens Corning to move towards emergence from Chapter 11 without opposition from any of our major creditor groups. As a result, we would emerge sooner while still maximizing the value of our estate for all creditors. To date, we have been unable to reach a Consensual Plan, but we remain committed to emerging as soon as possible even if the Plan of Reorganization does not have the support of all creditor groups.

We are pleased with the progress that we made in 2004 in our Chapter 11 proceeding. We began the year with two primary issues that were preventing forward progress in our case. Those issues were (1) the substantive consolidation of Owens Corning and the other Debtor entities for purposes of the Chapter 11 proceedings and (2) estimation of the total amount of the Company’s asbestos liabilities. Both issues were advanced substantially during the year.

With respect to substantive consolidation, Judge Fullam, the Federal District Court Judge overseeing our case, issued an Order granting our motion requesting substantive consolidation. With substantive consolidation, the assets of our estate, whether held at the parent company or subsidiary level, would be consolidated for purposes of our Plan and all creditors that have claims against Owens Corning or any of its Debtor subsidiaries would then seek recovery from the consolidated estate. The holders of the Company’s bank debt have taken the position that the estate should not be substantively consolidated.

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They argue that certain pre-petition loan guarantees provided to the bank lenders by subsidiaries of Owens Corning should entitle them to a preferred recovery over all other unsecured creditors. They have therefore appealed Judge Fullam’s Order, and that appeal is currently pending before the Third Circuit Court of Appeals. Because our currently proposed Plan of Reorganization is based upon substantive consolidation, a Third Circuit reversal of Judge Fullam’s Order could potentially result in significant delays in our case.

The other primary issue in our Chapter 11 proceeding is the determination of the value of the Company’s current and future asbestos liability. The greater the amount of that liability, the lower the recovery will likely be for the Company’s non-asbestos creditors. Judge Fullam conducted a six-day asbestos estimation hearing in mid-January of 2005, and all post-trial briefs were filed by February 18, 2005. The holders of our bank debt have argued that Owens Corning’s asbestos liability is lower than the amount that we have currently reserved, and our Asbestos Claimants Committee and Asbsetos Futures Representative have argued that it is higher. We look forward to Judge Fullam’s decision on this important issue. We are hopeful that eliminating the uncertainty around the amount of the Company’s asbestos liability will serve as a catalyst for productive settlement discussions among our creditors.

While the Company will look for any opportunity to engage our creditors in settlement discussions, we believe that it will be difficult to reach a Consensual Plan until the issues of substantive consolidation and the value of our asbestos liability are finally resolved.

An external factor that also has weighed heavily upon the negotiations among our various creditor groups was the proposed Federal asbestos reform legislation that was pending in the Senate for much of 2003 and 2004 (the “FAIR Act”). The Company’s non-asbestos creditors have believed that the FAIR Act would reduce the amount of asbestos liability owed by the Company, and would therefore potentially increase the recoveries of non-asbestos creditors. While the FAIR Act did not pass in 2004, there have been ongoing discussions within the Senate regarding the possible introduction of a new version of the Fair Act in 2005. We cannot currently predict whether the FAIR Act will ultimately be enacted or, if enacted, what impact it would have on our creditors. However, as long as it remains possible that it could be enacted into law, it is likely to remain a factor in the negotiations among our various creditor groups.

Our going forward strategy continues to be two-fold: (1) look for a compromise that will result in a Consensual Plan supported by all of our creditors and (2) in the absence of a Consensual Plan, proceed as quickly as possible to confirm our Plan of Reorganization even if it does not have the support of all creditor groups and emerge from Chapter 11.

The Asbestos Claimants Committee and the Asbestos Futures Representative continue to be co-plan proponents with Owens Corning with respect to our Plan of Reorganization. While there are other non-asbestos creditors who also support our Plan, there continues to be those who have objections to it, including the holders of our bank debt. While we can emerge from Chapter 11 and discharge our current and future asbestos liability without the support of non-asbestos creditors, we continue to believe that a Consensual Plan will allow us to emerge more quickly. At this time, however, we cannot predict when the Company will be able to confirm its Plan of Reorganization and successfully emerge.

Throughout 2004, we profitably grew our business while operating in Chapter 11. For the foreseeable future, we do not believe that continuing to operate in Chapter 11 will inhibit our ability to successfully run and grow our business.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Operations Overview

The table below provides a summary of our sales and income from operations for the last three years.

Our operating performance in 2004 improved significantly. Compared to 2003, we grew revenue 13.6% and improved income from operations by 59.9%. However, because of the nature of certain costs and expenses related to our Chapter 11 proceedings, asbestos liability, and restructuring activities as we move towards emergence from bankruptcy, management does not find reported income from operations to be the most useful financial measure of the Company’s year-to-year operational performance. Rather, when management reviews the Company’s year-to-year operational performance, we find it useful to exclude such items. The table below provides detail of the items management excludes when evaluating year-to-year operating performance.

Excluding these items, operating performance improved approximately 18.6% in 2004 compared to 2003 and 27% in 2003 compared to 2002. In addition to this measure of operating performance, management evaluates operating results through other financial metrics including cash flow and return on net assets.

Our operating performance led to a strong cash flow performance during 2004. Cash flow provided by operations was $449 million while our cash provided by operations net of capital spending for plant and equipment was $217 million. We ended the year with a cash balance of $1.125 billion.

A key performance measure used internally by Owens Corning, including as the performance measure for outstanding cycles of the Company’s Long Term Incentive Plan, is a Company defined measure of return on net assets. The measure the Company uses adjusts both income from operations and average net assets for certain items to determine how effectively management is utilizing Company net assets to produce results. For example, because of our Chapter 11 proceedings, cash and bankruptcy related items are excluded from the Company’s calculation. This Company defined performance measure improved approximately 16% as of December 31, 2004 compared to 2003 and 42% as of December 31, 2003 compared to 2002.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Major factors affecting the performance of our Building Materials Systems segment during 2004 include:

Major factors affecting the performance of our Composite Solutions segment during 2004 include:

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Safety

We believe that safety is everyone’s responsibility and that all accidents are preventable. Consequently, in 2003, we made safety a top Company priority. We measure our progress on safety based on two measures, the OSHA Recordable Incidents Rate (“ORIR”) and the Combined Occupational Disability Index (“CODI”). CODI is a subset of ORIR and includes the more severe incidents that involve lost or restricted time. The table below provides our performance on these measures for the past three years.

Our goal for 2005 and beyond continues to be the elimination of all injuries.

Outlook for 2005

During 2005, we plan to continue to invest to improve the manufacturing efficiency of our current plants while expanding our manufacturing capacity both domestically and internationally, with a focus on Asia Pacific. We have already announced investments in additional capacity for our laminated shingle, manufactured stone veneer, and insulation product lines, including plans for a new greenfield facility for fiberglass insulation. While most all of our markets were strong as we ended 2004, we continue to closely monitor these markets for any sign of a potential downturn.

For 2005, we expect interest rates to increase somewhat but remain low compared to historical averages. The continuing low interest rates should allow the United States housing market to remain strong through at least the first half of 2005. While the current interest rate environment is advantageous to our performance, we are concerned about a potential environment of rising interest rates as we look ahead.

We believe that demand for energy related commodities is likely to continue to exert an upward pressure on the costs of energy related commodities and services, which we must continue to mitigate through improved performance and increased prices for our products. While our goal for 2005 is to continue to focus on eliminating waste and inefficiencies in our business and manufacturing processes, we anticipate that we will still need to realize price increases with our customers to offset cost inflation. Inability to do so may adversely impact our operating results. However, we are coming off an excellent operating performance in 2004 and look forward to carrying this momentum through 2005.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

RESULTS OF OPERATIONS

Sales and Profitability for the Years ended December 31, 2004 and 2003

NET SALES

Net sales for the year ended December 31, 2004, were $5.675 billion, a 14% increase from the 2003 level of $4.996 billion. This increase was primarily the result of increased volumes in both of our segments and improved pricing in our Building Materials Systems segment. The increased volumes are a result of growth in the United States housing and remodeling markets and an improving global economy. Our Building Materials Systems segment was able to achieve some price increases in 2004 which, on a consolidated basis, more than offset the price lost in our Composite Solutions segment. The effect of foreign currency, principally in our Composite Solutions segment, was favorable and contributed approximately $42 million to the $679 million sales increase.

Sales outside the United States represented 16% of total sales in 2004, compared to 15% during 2003. This increase was primarily attributable to our expansion in Mexico through the acquisition of the outstanding interest in OC Mexico in 2004 and the sale of our U.S.-based metal systems assets and the exiting of certain other U.S.-based product lines in 2003. We expect the percentage of sales outside the United States to continue to increase as our investments in Asia Pacific begin to mature.

PROFITABILITY

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GROSS MARGIN

Gross margin as a percent of sales improved by 1.6% during 2004. Strong demand in the markets in which we operate enabled us to gain operating efficiencies which improved our margin. Contributing to the increase in margin was an increase in pricing for some of our products. However, the price increases we were able to achieve were substantially offset by higher costs associated with energy related commodities (particularly oil, natural gas, and resin) and transportation. We have a process to monitor these costs and have partially hedged our near term exposures to increases in the cost of energy and some energy-related commodities. While the higher energy-related costs are currently being offset by higher prices for some of our products and operating efficiencies, they represent a potential risk to future results.

MARKETING AND ADMINISTRATIVE EXPENSES

Marketing and administrative expenses were $530 million for the year ended December 31, 2004, compared to $459 million for the year ended December 31, 2003. As a percent of sales, these expenses were essentially flat for the two years.

INCOME FROM OPERATIONS

Income from operations increased $160 million, or 59.9%, during 2004 compared to 2003. Approximately $89 million of this increase was due to a $39 million decrease in restructuring and other charges, a $31 million decrease in Chapter 11 related charges, and an additional $19 million of recoveries for asbestos litigation claims in 2004 compared to 2003. Additionally, during the fourth quarter of 2004 we finalized our recoveries of insurance proceeds related to the December 2003 flood at our L’Ardoise, France facility. As a result, we recognized $7 million in gains on the replacement of equipment and $21 million of other income representing business interruption losses (primarily attributable to the first half of 2004). The balance of the improvement in income from operations was primarily driven by increased sales and improved operating efficiencies derived from the strong demand for our residential insulation products. Partially offsetting our improvement in income from operations compared to 2003 were foreign exchange losses of approximately $4 million in 2004 compared to gains of $12 million in 2003, and an additional allowance for doubtful accounts of $5 million in 2004 compared to a reduction of $6 million in 2003.

INCOME TAXES

During 2004, we reached an agreement in principle with the Internal Revenue Service to settle all issues from open tax years from 1986-1999 for approximately $99 million. The recording of the settlement resulted in several balance sheet reclassifications between various deferred, accrued, and subject to compromise tax related accounts. We also adjusted our tax reserves based on our review of the likelihood of the deductibility of Chapter 11 related reorganization items, as well as new legislation and other developments during 2004 related to the deductibility of certain items at the state tax level. Due in part to these tax adjustments, our effective tax rate for 2004 was 52%. During 2004, we utilized a large portion of our net operating loss carryforward, and we expect cash payments for taxes to increase in 2005.

On October 22, 2004, the President signed the American Jobs Creation Act of 2004 (the “Act”). The Act creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85 percent dividend received deduction for certain dividends from controlled foreign corporations. The deduction is subject to a number of limitations, and uncertainty remains as to how to interpret numerous provisions of the Act. As such, we are not yet in a position to reevaluate whether, and to what extent, we might repatriate foreign earnings that have not yet been remitted to the United States. Based on our analysis of this incentive to date, however, it appears possible that we might reevalute the

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repatriation of between $150 million and $200 million of earnings currently considered as permanently reinvested, resulting in a respective tax liability ranging from $7 million to $11 million. We expect to be in a position to finalize our assessment in the first half of 2005.

As stated above under Item 5, “Market for Owens Corning’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities”, on March 1, 2005, the USBC issued an Interim Order imposing certain notice procedures and transfer restrictions on the trading of equity securities of Owens Corning. The Interim Order was sought by Owens Corning and certain of its subsidiaries to avoid limitations on the use of their tax net operating loss carryforwards and certain other tax attributes. Under the Interim Order, all persons or entities who currently or in the future beneficially own at least 4.75% of the outstanding equity securities of Owens Corning, or who would own that amount upon completion of an acquisition of such securities, are required to provide notice of such status, or before effecting that transaction, as the case may be. The Debtors have the right to object in the USBC if the acquisition or sale would pose a material risk of adversely affecting the Debtors’ ability to utilize their tax net operating loss carryforwards or certain related tax attributes. Under applicable U.S. tax rules, such tax attributes are generally subject to significant limitations if Owens Corning were to experience a greater than 50 percentage point change in its equity ownership during a rolling three-year period. A hearing on the Debtors’ motion to make the Interim Order a Final Order will be held in the USBC on April 25, 2005. For the full text of the Order, see Exhibit 99 to this Annual Report.

NET INCOME

Net income for the year ended December 31, 2004 was $204 million, or $3.40 per share, compared to $115 million, or $1.92 per share, for the prior year. In addition to the items discussed above, the 2004 results included $16 million in income related to the release of certain guaranteed subsidiary debt. During 2004, we finalized a settlement with certain holders of third party debt by allowing the releasing debtholders various claims in our Chapter 11 proceedings. This settlement resulted in the reversal of $16 million of accrued interest which we recorded as interest income during 2004. This settlement also resulted in approximately $32 million of short-term debt and $35 million of long-term debt being reclassified as liabilities subject to compromise on our Consolidated Balance Sheet.

As a result of the Filing, contractual interest expense has not been accrued or recorded on pre-petition debt of the Debtors since the Petition Date. From the Petition Date through December 31, 2004, contractual interest expense not accrued or recorded on pre-petition debt (calculated using ordinary, non-default interest rates and without regard to debt maturity) totaled approximately $658 million, of which $142 million relates to 2004, $138 million relates to 2003, and $148 million relates to 2002. Of the total calculated amount, approximately $223 million relates to the Pre-Petition Credit Facility, which is the subject of pre-petition guarantees issued by certain of Owens Corning’s Debtor and non-Debtor subsidiaries. Actual post-petition interest determined under the terms of pre-petition debt may vary from the calculated amounts, perhaps significantly. See Note 1 to the Consolidated Financial Statements for further information concerning the Chapter 11 proceedings.

Sales and Profitability for the Years ended December 31, 2003 and 2002

NET SALES

Sales during 2003 increased 3% from 2002, to $4.996 billion. In Building Materials Systems, sales were up 3%, with volume increasing in our insulation and manufactured stone veneer businesses, reflecting growth in the housing and remodeling markets. In addition, sales in our residential roofing business improved as the result of a continuation of product mix shifts to higher-end and premium roofing shingles.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Prices in Building Materials in 2003 compared to 2002 reflected increases in residential roofing and asphalt product lines, largely driven by higher material costs. These increases were partially offset by lower insulation prices during 2003. In Composite Solutions, 2003 sales were up 2% from 2002, reflecting increased volume in our core business, partially offset by the effects of exiting certain non-strategic product lines. During 2003, composite material pricing was lower than 2002, generally as a result of lower industry capacity utilization and competitive pressures. However, this pricing decrease was more than offset by changes in foreign currency exchange rates, which increased net sales in 2003 by 6% in Composite Solutions, primarily reflecting the benefit of the weaker U.S. dollar relative to the Euro.

Sales outside the United States represented 15% of total sales in 2003, compared to 14% during 2002. This increase was primarily attributable to the impact of favorable changes in foreign currency exchange rates, which positively impacted sales outside the United States, and the sale of our metal systems assets, and the exiting of other product lines, which negatively impacted sales in the United States.

PROFITABILITY

GROSS MARGIN

Gross margin as a percent of sales improved by 1.3% during 2003. Results for 2003 reflect charges to cost of sales of $28 million for the write-down of assets, compared to charges of $110 million in 2002 for the write-down of assets and charges in connection with the realignment of our Newark, Ohio manufacturing facility. Gross margin in 2003 benefited from previous restructuring actions but was negatively impacted by higher raw material costs, mainly attributable to asphalt, PVC and polystyrene, and higher energy costs, principally attributable to natural gas.

MARKETING AND ADMINISTRATIVE EXPENSES

Marketing and administrative expenses were $459 million and 9.2% of net sales during the year ended December 31, 2003, compared to $522 million and 10.7% during the year ended December 31, 2002. The decreases in both dollar amount and as a percent of sales were primarily attributable to cost-cutting measures entered into during 2002 and the beginning of 2003. Please see Restructuring of Operations and Other Charges below for further information on the cost-cutting measures taken.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

INCOME FROM OPERATIONS

The increase in income from operations in 2003 compared to 2002 was primarily attributable to the $2.356 billion provision for asbestos litigation claims taken in the third quarter of 2002. Other factors contributing to the increase were reduced marketing and administrative expenses, lower restructuring costs, lower Chapter 11 related reorganization expenses, the beneficial effect of foreign currency exchange rates, and a gain of $10 million in our Composite Solutions business from the sale of fixed assets (recorded as Other in the Consolidated Statement of Income (Loss)). Income from operations for 2003 was negatively impacted by approximately $5 million in expense for an insurance deductible associated with the flood of our L’Ardoise, France manufacturing facility.

INCOME TAXES

The Company’s effective tax rate for 2003 was approximately 56%, compared to 1% for 2002. The 2003 rate reflects tax reserves in connection with the deductibility of certain Chapter 11 related reorganization expenses. The 2002 rate reflects valuation reserves in connection with the Company’s increase, in the third quarter of 2002, of its asbestos-related reserves through charges to income of $1.381 billion for Owens Corning asbestos-related liabilities and $975 million for Fibreboard asbestos-related liabilities, for an aggregate charge of $2.356 billion (see Note 19 to the Consolidated Financial Statements for further information concerning the Company’s asbestos-related liabilities). In connection with such charges, management evaluated the likelihood of allowable tax deductions in light of the Company’s financial position and the Chapter 11 proceedings. As the result of such assessment, management determined that a valuation allowance was required for the full amount of the increase in the asbestos reserves. As a result, no tax benefit was recorded in connection with the third quarter 2002 asbestos-related charges discussed above.

NET INCOME

For the year ended December 31, 2003, Owens Corning reported net income of $115 million, or $1.92 per share, compared to a net loss of $2.809 billion, or $(51.02) per share, for the prior year. In addition to the items discussed above, 2002 results reflected a non-cash charge of $491 million ($441 million net of tax) recorded in the first quarter of 2002 as the result of the Company’s adoption of Statement of Financial Accounting Standards No. 142, effective January 1, 2002. Please see “Accounting Changes” below for additional information.

VOLUNTARY PETITION FOR RELIEF UNDER CHAPTER 11

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

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The Debtors are currently operating their businesses as debtors-in-possession in accordance with provisions of the Bankruptcy Code. The Chapter 11 cases of the Debtors (collectively, the “Chapter 11 Cases”) are being jointly administered under Case No. 00-3837 (JKF).

The referenced Chapter 11 cases do not include any other United States or foreign subsidiaries of Owens Corning (collectively, the “Non-Debtor Subsidiaries”). As described more fully below under the heading “The Plan of Reorganization”, Owens Corning may cause certain of such Non-Debtor Subsidiaries that issued guarantees with respect to Owens Corning’s $1.8 billion pre-petition bank credit facility (the “Pre-Petition Credit Facility”, which is in default) to file petitions for relief under Chapter 11 of the Bankruptcy Code under certain circumstances.

The Debtors filed for relief under Chapter 11 to address the growing demands on Owens Corning’s cash flow resulting from its multi-billion dollar asbestos liability. This liability is discussed in greater detail in Note 19 to the Consolidated Financial Statements.

Overseeing Federal District Court

In late 2001, the asbestos-related Chapter 11 cases pending in the District of Delaware (the Chapter 11 Cases of Owens Corning and the cases of Armstrong World Industries, Inc., W.R. Grace & Co., Federal-Mogul Global, Inc., and USG Corporation) were ordered transferred to the United States District Court for the District of Delaware (the “District Court”) before Judge Alfred M. Wolin to facilitate development and implementation of a coordinated plan for management (the “Administrative Consolidation”). The District Court entered an order referring the Chapter 11 Cases back to the USBC, where they were previously pending, subject to its ongoing right to withdraw such referral with respect to any proceedings or issues (the applicable court from time to time responsible for any particular aspect of the Chapter 11 Cases being hereinafter referred to as the “Bankruptcy Court”).

On May 27, 2004, the United States Court of Appeals for the Third Circuit (the “Third Circuit”) assigned Judge John P. Fullam of the United States District Court, Eastern District of Pennsylvania, to replace Judge Wolin in the Chapter 11 Cases. In addition, the Third Circuit assigned other judges to sit on other of the cases that had previously been consolidated under the terms of the Administrative Consolidation, effectively terminating the consolidation.

Consequence of the Filing

As a consequence of the Filing, all pending litigation against the Debtors was stayed automatically by section 362 of the Bankruptcy Code and, absent further order of the Bankruptcy Court, no party may take any action to recover on pre-petition claims against the Debtors. In addition, pursuant to section 365 of the Bankruptcy Code, the Debtors may reject or assume pre-petition executory contracts and unexpired leases, and other parties to contracts or leases that are rejected may assert rejection damages claims as permitted by the Bankruptcy Code.

Two creditors’ committees, one representing asbestos claimants and the other representing unsecured creditors, have been appointed as official committees in the Chapter 11 Cases. In addition, the Bankruptcy Court has appointed James J. McMonagle as Legal Representative for the class of future asbestos personal injury claimants against one or more of the Debtors. The two committees and the Legal Representative have the right to be heard on all matters that come before the Bankruptcy Court.

Owens Corning anticipates that substantially all liabilities of the Debtors as of the date of the Filing will be resolved under one or more Chapter 11 plans of reorganization to be proposed and voted on in the Chapter 11 Cases in accordance with the provisions of the Bankruptcy Code. On January 17, 2003, the

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Debtors, together with the Official Committee of Asbestos Claimants and the Legal Representative for the class of future asbestos claimants, filed a proposed joint plan of reorganization in the USBC. The same proponents filed a proposed amended joint plan of reorganization in the USBC on March 28, 2003, a proposed second amended joint plan of reorganization in the USBC on May 23, 2003, a proposed third amended joint plan of reorganization in the USBC on August 8, 2003, and a proposed fourth amended joint plan of reorganization (as so amended through such fourth amendment, the “Plan”) in the USBC on October 24, 2003.

On June 7, 2004, Owens Corning announced that an agreement in principle (the “Agreement in Principle”) had been reached with the Official Committee of Asbestos Claimants, the Legal Representative for the class of future asbestos claimants, and the official representatives of the Company’s pre-petition bondholders and trade creditors. Among other things, the Agreement in Principle provides that all holders of bonds, bank debt and senior trade debt would receive a recovery equal to 38.5% of their claims upon Owens Corning’s successful emergence from Chapter 11. The recoveries of all creditors are based on certain agreed and assumed values and would be comprised of cash, debt and equity. However, their actual recoveries could ultimately be higher or lower based on the value of the equity to be issued by Owens Corning upon emergence from Chapter 11 and other factors.

The holders of the debt under the Pre-Petition Credit Facility, and certain other members of the major creditor groups, have indicated that they continue to oppose the Plan, including a group identifying itself as an “Ad Hoc Committee of Bondholders” that claims to have a blocking position that will allow them to prevent a vote in favor of the Plan by Owens Corning’s bondholders.

Certain terms, conditions and provisions of the Plan are discussed below. The Plan is subject to confirmation by the Bankruptcy Court. There can be no assurance that the Plan will not be further amended prior to confirmation, nor can there be any assurance that such Plan will be confirmed by the Bankruptcy Court and consummated. Owens Corning is unable to predict what impact the disposition of any of the litigation and other matters described below will have on the timing of the confirmation of a plan or plans of reorganization or its effect, if any, on the terms thereof.

As described more fully below under the heading “The Plan of Reorganization”, the Plan is premised upon the substantive consolidation of Owens Corning and certain of its direct and indirect subsidiaries (but not the Fibreboard Settlement Trust (see Note 20 to the Consolidated Financial Statements)) for the purposes of voting, determining which claims and interests will be entitled to vote to accept or reject the Plan, confirmation of the Plan, and the resultant discharge of and cancellation of claims and interests and distribution of assets, interests and other property under the Plan. On October 5, 2004, the District Court issued a Memorandum and Order Concerning Substantive Consolidation. In that Memorandum and Order, the District Court granted the Debtors’ motion for substantive consolidation and ordered that counsel for the participating parties meet for the purpose of attempting to achieve an agreed-upon plan of reorganization. On October 13, 2004, the holders of the debt under the Pre-Petition Credit Facility filed an appeal of the Memorandum and Order with the Third Circuit. On November 2, 2004, the Debtors, the Official Committee of Asbestos Claimants, the Legal Representative for the class of future asbestos claimants, and the official representatives of the Company’s pre-petition bondholders and trade creditors filed a joint motion to dismiss such appeal on the grounds that the Memorandum and Order is not a final judgment or otherwise appealable. The Third Circuit denied the motion to dismiss on January 26, 2005, and heard oral arguments on the appeal of the Memorandum and Order on February 7, 2005. Because our currently proposed Plan of Reorganization is based upon substantive consolidation, a Third Circuit reversal of the District Court’s Order could potentially result in significant delays in our case.

A six-day claims estimation hearing was held before the District Court beginning January 13, 2005. The purpose of the claims estimation hearing was to establish the amount of current and future asbestos

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liability to be allowed in the Chapter 11 Cases. In general, the holders of the debt under the Pre-Petition Credit Facility argued that the amount of the Company’s current and future asbestos liability should be set at an amount significantly lower than the amounts reserved for asbestos claims on the financial statements of the Debtors, and the Official Committee of Asbestos Claimants and the Legal Representative for the class of future asbestos claimants argued that such asbestos liability should be set at a significantly higher level. Post-trial briefs in this matter were filed by February 18, 2005. The District Court has not indicated when it expects to render a decision on this matter, and no assurance can be given as to whether the amount of current and future asbestos liability established as a result of such claims estimation hearing will be more or less than the amounts reserved for asbestos claims on the financial statements of the Debtors or will be more or less than the $16 billion amount that the Official Committee of Asbestos Claimants and the Legal Representative for the class of future asbestos claimants have established as the level below which they have reserved the right to withdraw support of the Plan.

Related Developments

PROPOSED ASBESTOS LEGISLATION

The United States Senate introduced proposed asbestos reform legislation (the “FAIR Act”) in the prior session of Congress on May 22, 2003 and April 7, 2004 (known as the Fairness in Asbestos Injury Resolution Act of 2003 and the Fairness in Asbestos Injury Resolution Act of 2004, respectively), each of which lapsed upon the adjournment of such Congress. While the FAIR Act did not pass in 2004, there have been ongoing discussions within the Senate regarding the possible introduction of a new version of the FAIR Act in 2005.

If enacted into law as previously proposed, the FAIR Act would establish an administrative claims resolution structure through which all asbestos personal injury claims would be channeled and reviewed. The FAIR Act would also establish a national trust fund, funded through mandated contributions from defendant companies, insurance companies and existing trusts, that would be the source of compensation of all approved claims. Under the terms of the previously introduced FAIR Act, companies like Owens Corning and Fibreboard, that have filed for bankruptcy but have not yet emerged through a confirmed plan of reorganization, would be included as participants in the resolution structure.

The fate of the FAIR Act remains uncertain, and Owens Corning is unable to make any prediction as to whether the FAIR Act will be enacted or, if it is enacted, what its final form would be or what the effect, if any, would be on Owens Corning and Fibreboard or their plan or plans of reorganization. The provisions of any legislation ultimately enacted may have a material effect on the amount of liability that Owens Corning and Fibreboard ultimately have for asbestos-related claims, which could be more or less than the amounts reserved for in Owens Corning’s financial statements.

OTHER MATTERS FILED IN THE USBC

On or about October 17, 2003, the Official Committee of Unsecured Creditors filed a motion in the USBC requesting appointment of a Chapter 11 trustee to assume control of the Chapter 11 Cases due to alleged breach of the Debtors’ fiduciary duty of undivided loyalty to act in the best interest of all creditors. After such motion was dismissed by the USBC for failure to comply with local court rules, the Official Committee of Unsecured Creditors re-filed such motion on October 30, 2003. A supplement to the motion of the Official Committee of Unsecured Creditors was filed on May 28, 2004, and various filings in opposition to such supplemented motion were filed by the Debtors, the Legal Representative for the class of future asbestos claimants, and the Official Committee of Asbestos Claimants. Further proceedings on this matter have been continued until a status conference on the motion.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

On or about May 24, 2004, Credit Suisse First Boston, Kensington International Limited, Springfield Associates LLC and Angelo Gordon filed a motion in the USBC requesting the appointment of a Chapter 11 Examiner to examine (i) allegations of improper conduct by management of the Debtors, (ii) alleged breaches of fiduciary duty by management of the Debtors resulting from the influence of the Legal Representative for the class of future asbestos claimants and the Official Committee of Asbestos Claimants on the process of developing a Plan and the tort estimation process, (iii) alleged connections between the asbestos plaintiffs’ interests, a Court appointed mediator, and the Debtors’ asbestos liability estimation firm, and (iv) other alleged improper conduct. Owens Corning, the Legal Representative for the class of future asbestos claimants, and the Official Committee of Asbestos Claimants have each filed responsive pleadings to the motion. The USBC has continued further proceedings on the motion pending issuance of a final order on the motion (described in the preceding paragraph) requesting appointment of a Chapter 11 trustee.

The Debtors believe that the two motions described above are without merit and intend to continue to vigorously oppose them in appropriate proceedings.

The Plan of Reorganization

Owens Corning believes that it is likely that the terms, conditions and provisions of the Plan will remain the subject of continuing negotiations or litigation to resolve differences among the creditor constituencies as to their treatment. Accordingly, Owens Corning is unable to predict at this time what the treatment of creditors and equity holders of the respective Debtors will ultimately be under any plan or plans of reorganization finally confirmed. The current Plan provides for partial payment of all unsecured creditors’ allowed claims, in the form of distributions of new common stock and notes of the reorganized company, and cash. Additional distributions from potential insurance and other third-party claims may also be paid to certain classes of unsecured creditors, but it is expected that all classes of pre-petition unsecured creditors will be impaired. Therefore, the Plan also provides that the existing common stock of Owens Corning will be cancelled, and that current shareholders will receive no distribution or other consideration in exchange for their shares. It is impossible to predict at this time the terms and provisions of any plan or plans of reorganization that may ultimately be confirmed, when a plan or plans of reorganization will be confirmed, or the treatment of creditors thereunder.

The Plan is premised upon the substantive consolidation of Owens Corning and certain of its direct and indirect subsidiaries (but not the Fibreboard Settlement Trust (see Note 20 to the Consolidated Financial Statements)) for the purposes of voting, determining which claims and interests will be entitled to vote to accept or reject the Plan, confirmation of the Plan, and the resultant discharge of and cancellation of claims and interests and distribution of assets, interests and other property under the Plan. For these purposes, the Plan would treat all assets and liabilities of each substantively consolidated entity (excluding the Fibreboard Settlement Trust) as though they were merged into one consolidated estate with the assets and liabilities of the other substantively consolidated entities. Substantive consolidation under the Plan will not result in the merger of or the transfer or commingling of any assets of any of the Debtors or Non-Debtor Subsidiaries. Certain creditor constituencies have asserted that substantive consolidation is not appropriate and continue to challenge that approach.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

As described above, on October 5, 2004, the District Court issued a Memorandum and Order Concerning Substantive Consolidation. In that Memorandum and Order, the District Court granted the Debtors’ motion for substantive consolidation and ordered that counsel for the participating parties meet for the purpose of attempting to achieve an agreed-upon plan of reorganization. On October 13, 2004, the holders of the debt under the Pre-Petition Credit Facility filed an appeal of the Memorandum and Order with the Third Circuit. The Third Circuit heard oral arguments on the appeal of the Memorandum and Order on February 7, 2005. Because our currently proposed Plan of Reorganization is based upon substantive consolidation, a Third Circuit reversal of the District Court’s Order could potentially result in significant delays in our case.

As part of the Plan, Owens Corning intends to effect an internal restructuring in order to adopt a holding company structure. This internal restructuring is expected to be refined further as steps are taken to implement it.

The percentage recovery and value of the payments ultimately made under the Plan to each class of creditors will depend upon a number of factors. Those factors include the value of the shares of new common stock and notes to be issued by the Company, the amount of cash available for distribution, the resolution of certain inter-creditor issues, and the ultimate aggregate asbestos liability.

The Plan provides that liability for current and future asbestos personal injury claims against Owens Corning and Fibreboard would be determined by the Bankruptcy Court as part of the confirmation hearing on the Plan. A six-day claims estimation hearing was held before the District Court beginning January 13, 2005. The purpose of the claims estimation hearing was to establish the amount of current and future asbestos liability to be allowed in the Chapter 11 Cases. In general, the holders of the debt under the Pre-Petition Credit Facility argued that the amount of the Company’s current and future asbestos liability should be set at an amount significantly lower than the amounts reserved for asbestos claims on the financial statements of the Debtors, and the Official Committee of Asbestos Claimants and the Legal Representative for the class of future asbestos claimants argued that such asbestos liability should be set at a significantly higher level. The Official Committee of Asbestos Claimants and the Legal Representative for the class of future asbestos claimants have reserved the right to withdraw support of the Plan if such liability is determined to be less than $16 billion in the aggregate. Post-trial briefs in this matter were filed by February 18, 2005. The District Court has not indicated when it expects to render a decision on this matter, and no assurance can be given as to whether the amount of current and future asbestos liability established as a result of such claims estimation hearing will be more or less than the amounts reserved for asbestos claims on the financial statements of the Debtors or will be more or less than the $16 billion amount established by the Official Committee of Asbestos Claimants and the Legal Representative for the class of future asbestos claimants as the level below which they have reserved the right to withdraw support of the Plan.

Any disagreements raised by creditors with the terms of the Plan are expected to be handled through negotiation or litigation as part of the confirmation process. Owens Corning is unable to predict the timing or outcome of such negotiation or litigation.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Under the Plan, a majority of the newly issued common stock, together with notes, and cash, as well as the assets of the existing Fibreboard Settlement Trust (see Note 20 to the Consolidated Financial Statements), will fund a new trust created under the Plan intended to qualify under Section 524(g) of the Bankruptcy Code. The Section 524(g) trust will assume all obligations of Owens Corning, Fibreboard, and their respective subsidiaries and affiliates, for current and future asbestos personal injury claims and demands, and will, through Owens Corning and Fibreboard sub-accounts, make payments to claimants in accordance with the trust distribution procedures included as part of the Plan. In addition, the Plan provides for an injunction by the Bankruptcy Court pursuant to Section 524(g) of the Bankruptcy Code that will enjoin actions against the reorganized Debtors for the purpose of, directly or indirectly, collecting, recovering or receiving payment of, on, or with respect to any claims resulting from asbestos-containing products allegedly manufactured, sold or installed by Owens Corning or Fibreboard, which claims will be paid in whole or in part by the Section 524(g) trust. Similar plans of reorganization have been confirmed in the Chapter 11 cases of other companies involved in asbestos-related litigation. Section 524(g) of the Bankruptcy Code provides that, if certain specified conditions are satisfied, a court may issue a supplemental permanent injunction barring the assertion of asbestos-related claims or demands against the reorganized company and channeling those claims to an independent trust.

Among other things, the Plan provides that (1) except as otherwise provided in the Plan, no distributions will be made under the Plan on account of inter-company claims among any of the Debtors, and (2) all guarantees of the Debtors of the obligations of any other Debtor will be deemed eliminated. Since, as described above, it is likely that the Plan will be the subject of continuing negotiations or litigation, Owens Corning is unable to predict at this time what the treatment of such matters, and other inter-company and intra-company arrangements, transactions and relationships that were entered into prior to the Petition Date, will ultimately be under any plan or plans of reorganization finally confirmed. Such matters and other arrangements, transactions and relationships may be challenged by various parties in the Chapter 11 Cases and payments and other obligations in respect thereof may be restricted or modified by order of, or subject to review and approval by, the Bankruptcy Court. The outcome of such challenges and other actions, if any, may have an impact on the treatment of various claims under the plan or plans ultimately confirmed and on the respective assets, liabilities and results of operations of Owens Corning and its direct and indirect subsidiaries. For example, Owens Corning is unable to predict at this time what the treatment will ultimately be under any such plan or plans with respect to (1) the guarantees issued by certain of Owens Corning’s U.S. subsidiaries, including Owens-Corning Fiberglas Technology Inc. (“OCFT”) and IPM Inc., a Non-Debtor Subsidiary that holds Owens Corning’s ownership interest in a majority of Owens Corning’s foreign subsidiaries (“IPM”), with respect to Owens Corning’s Pre-Petition Credit Facility or (2) OCFT’s license agreements with Owens Corning and Exterior Systems, Inc., an indirect wholly-owned subsidiary of Owens Corning (“Exterior”), pursuant to which OCFT licenses intellectual property to Owens Corning and Exterior. In the event that (1) the major creditor constituencies do not approve the Plan and (2) no other acceptable alternative arrangement is reached to release such entities from their guaranty obligations, Owens Corning may cause IPM as well as Vytec Corporation and Owens-Corning Fiberglas Sweden Inc., two other Non-Debtor Subsidiaries that have issued guarantees in connection with the Pre-Petition Credit Facility, to file for relief under Chapter 11 of the Bankruptcy Code, and to join in the proposal of the Plan.

The Bankruptcy Court may confirm a plan of reorganization only upon making certain findings required by the Bankruptcy Code, and a plan may be confirmed over the dissent of non-accepting creditors and equity security holders if certain requirements of the Bankruptcy Code are met. In this respect, unless a consensual arrangement among all impaired creditor classes is agreed to, the Plan is expected to be amended to provide for certain “cramdown” provisions, whereby the Plan could be confirmed over the objections of one or more classes of unapproving creditors in the event that certain percentages in dollar amount and in number of specified classes of creditors accept the Plan and vote in favor of it.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

The payment rights and other entitlements of pre-petition creditors and Owens Corning’s shareholders may be substantially altered by any plan or plans of reorganization confirmed in the Chapter 11 Cases, and the pre-petition creditors of some Debtors may be treated differently than those of other Debtors.

Pursuant to the Bankruptcy Code, schedules have been filed by the Debtors with the Bankruptcy Court setting forth the assets and liabilities of the Debtors as of the date of the Filing. Differences between amounts recorded by the Debtors and claims filed by creditors will be investigated and resolved as part of the proceedings in the Chapter 11 Cases.

Bar Dates for Filing Claims

GENERAL BAR DATE

In connection with the Chapter 11 Cases, the Bankruptcy Court set April 15, 2002 as the last date by which holders of certain pre-petition claims against the Debtors must file their claims (the “General Bar Date”). The General Bar Date does not apply to asbestos-related personal injury claims and asbestos-related wrongful death claims (other than claims for contribution, indemnity, reimbursement, or subrogation). Any holder of a claim that was required to file a claim by the General Bar Date and did not do so will be barred from asserting such claim against any of the Debtors and will not participate in any distribution in any of the Chapter 11 Cases on account of such claim.

Approximately 25,000 proofs of claim (including late-filed claims), totaling approximately $16.6 billion, alleging a right to payment from a Debtor were filed with the Bankruptcy Court in response to the General Bar Date. Owens Corning continues to investigate these claims to determine their validity. The Bankruptcy Court will ultimately determine liability amounts that will be allowed for claims in the Chapter 11 Cases.

In its review of the filed claims, Owens Corning identified approximately 16,000 claims, totaling approximately $8.6 billion, which it believed should be disallowed by the Bankruptcy Court, primarily because they appeared to be duplicate claims or claims that were not related to the indicated Debtor (the “Objectionable Claims”). Owens Corning filed omnibus objections to certain of these Objectionable Claims and likely will file additional objections. As of December 31, 2004, approximately 6,400 of the Objectionable Claims, totaling approximately $5.3 billion, had either been withdrawn by the claimants or disallowed by the Bankruptcy Court, and other of such claims had been reduced by the claimants by approximately $1.8 billion. While the Bankruptcy Court will ultimately determine liability amounts, if any, that will be allowed as part of the Chapter 11 Cases, Owens Corning believes that all or substantially all of the remaining Objectionable Claims will be disallowed.

In addition to the Objectionable Claims described above, the remaining filed proofs of claim included approximately 9,000 claims, totaling approximately $8.0 billion. As of December 31, 2004, approximately 1,000 of these claims, totaling approximately $0.3 billion, had either been withdrawn by the claimants, disallowed by the Bankruptcy Court, or otherwise resolved, and other of such claims had been reduced by the claimants by approximately $0.3 billion. The remaining claims consist of:

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Owens Corning has recorded liability amounts for those claims that can be reasonably estimated and which it believes are probable of being allowed by the Bankruptcy Court. At this time, it is impossible to reasonably estimate the value of all the claims that will ultimately be allowed by the Bankruptcy Court, due to the uncertainties of the Chapter 11 process, the in-progress state of Owens Corning’s investigation of submitted claims, and the lack of documentation submitted in support of many claims. Owens Corning continues to evaluate claims filed in the Chapter 11 Cases and will make such adjustments as may be appropriate. Any such adjustments could be material to the Company’s consolidated financial position and results of operations in any given period. For a discussion of liability amounts in respect of asbestos personal injury claims, see Note 19 to the Consolidated Financial Statements.

ASBESTOS BAR DATE

A bar date for filing proofs of claim against the Debtors with respect to asbestos-related personal injury claims and asbestos-related wrongful death claims (other than claims for contribution, indemnity, reimbursement, or subrogation) has not been set. On April 11, 2003, the Official Committee of Unsecured Creditors filed a motion seeking establishment of a bar date for such asbestos-related claims. On April 25, 2003, the District Court entered an order withdrawing the reference of the Chapter 11 Cases to the USBC with respect to such motion, and staying all proceedings on such motion pending further order of the District Court. As described above, the District Court held a claims estimation hearing beginning January 13, 2005 to establish the amount of current and future asbestos liability to be allowed in the Chapter 11 Cases.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

As indicated above, the General Bar Date does not apply to asbestos-related personal injury claims and asbestos-related wrongful death claims (other than claims for contribution, indemnity, reimbursement, or subrogation). Despite this, approximately 3,200 proofs of claim (in addition to claims described above under “General Bar Date”), totaling approximately $2.5 billion, with respect to asbestos-related personal injury or wrongful death were filed with the Bankruptcy Court in response to the General Bar Date. Of these claims, Owens Corning has identified approximately 1,200, totaling approximately $0.5 billion, as Objectionable Claims. Of the remaining claims, Owens Corning believes that a substantial majority represent claimants that had previously asserted asbestos-related claims against the Company.

As noted above, under the Plan all asbestos-related personal injury and wrongful death claims will be channeled to the Section 524(g) trust, subject to approval by the Bankruptcy Court. See Note 19 to the Consolidated Financial Statements for additional information concerning asbestos-related liabilities.

RESTRUCTURING OF OPERATIONS AND OTHER CHARGES

2004 Charges

During 2004, the Company recorded a pretax credit to cost of sales in the Consolidated Statement of Income of approximately $5 million, representing a gain realized on the sale of a manufacturing facility during the first quarter of 2004. The assets associated with this sale were previously written down when the facility was shutdown in 2002.

2003 Charges

During 2003, the Company recorded $34 million in pretax charges, as the Company continued a comprehensive strategic review of its businesses in connection with the Chapter 11 proceedings and development of a plan or plans of reorganization. The $34 million pretax charge was comprised of $36 million of pretax other charges and a $2 million pretax restructure credit. The Company recorded $(10) million in the fourth quarter of 2003, $1 million in the third quarter, $13 million in the second quarter, and $30 million in the first quarter.

The $36 million in other pretax charges were recorded as a $23 million charge to cost of sales and a $13 million pretax charge in the Consolidated Statement of Income (Loss) under the caption “Other”. The $23 million charge to cost of sales includes a $28 million charge for the additional write-down of two groups of assets in the Building Materials Systems segment to net realizable value based on valuations of the future cash flows of the assets using assumptions consistent with current market conditions, offset by a credit of $5 million to reduce the reserve for certain facility closure costs to the current estimate. The $13 million pretax charge consisted of a $15 million loss on the sale of the Company’s metal systems assets, offset by a $1 million gain on the sale of the Company’s mineral wool business and a $1 million credit for the revision of previous estimates of the costs associated with closures of non-strategic facilities.

The $2 million credit to restructure charges was recorded as a $2 million additional non-cash asset write-down of previously closed facilities and a $4 million credit as the result of the completion of previous restructure actions at a lower than estimated cost.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

2002 Charges

As a result of its comprehensive strategic review and actions taken, the Company recorded approximately $166 million in pretax charges during 2002, comprised of a $61 million pretax restructure charge and $105 million of pretax other charges. The Company recorded $113 million in the fourth quarter of 2002, $44 million in the third quarter, $(3) million in the second quarter, and $12 million in the first quarter.

The $61 million restructure charge included $17 million of severance costs associated with the elimination of 830 positions due to plant closures in the United States and the United Kingdom and $18 million of severance costs associated with the elimination of 349 other positions, primarily impacting administrative personnel. The remaining $26 million restructure charge represented the cost of closure of non-strategic facilities, comprised of $24 million in non-cash asset write-downs to fair value and $2 million of other exit cost liabilities.

The $105 million in other pretax charges was recorded as a $110 million charge to cost of sales and a credit of $5 million to other operating expenses. The $110 million charge to cost of sales includes: (1) charges of $66 million to write-down assets to net realizable value; (2) a $19 million charge for obsolete inventory; (3) a charge of $6 million associated with realignment of the Company’s Newark, Ohio manufacturing facility; and (4) $19 million of other charges.

RENEGOTIATION OF WORLD HEADQUARTERS LEASE

During the second quarter of 2003, the Company completed actions to reduce the effective cost of occupying its World Headquarters facility, including (1) renegotiation of the lease structure of the facility, including extension of the lease term, reduction of the payments and modification of the end-of-term purchase option, resulting in a classification change from an operating lease to a capital lease, (2) purchase of certain bonds issued by the lessor (the “Bonds”) in connection with the initial financing of the facility, and (3) obtaining a legal right of offset, which allows the Company to apply interest and principal receipts due under the Bonds toward its lease liability. Classifying the lease as a capital lease resulted in (1) the recording of a lease liability of approximately $39 million, (2) the reduction of the previously recorded prepaid rent attributable to the original operating lease by approximately $45 million, and (3) the recording of building and equipment at a total value of approximately $84 million.

The Bonds, which had a par value at the purchase date of approximately $53 million, were purchased in exchange for cash payments totaling approximately $32 million. Such payments resulted in the Company reducing the lease liability by the $32 million. Also, as part of the agreement, the Company allowed the selling bondholders a claim in its Chapter 11 proceedings of approximately $21 million related to the discount on the purchase of the Bonds. The Company recorded a liability subject to compromise in its Consolidated Balance Sheet and a Chapter 11 related reorganization item in its Consolidated Statement of Income (Loss) related to this claim.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

LIQUIDITY, CAPITAL RESOURCES AND OTHER RELATED MATTERS

We ended 2004 with a cash balance of $1.125 billion, an increase of $120 million from December 31, 2003. The following table provides information regarding our liquidity.

The increase in cash flow from operations in 2004 compared to 2003 was primarily the result of improved income from operations. Net working capital and the current ratio increased to $1,177 million and 2.24, respectively, for 2004. We were able to decrease our overall cash collection cycle (defined as days sales outstanding plus days of inventory on hand less days payable outstanding) to 43 days, from 47 days in 2003. Cash flow from operations was also impacted by contributions of $231 million to the Company’s pension plans during 2004, compared to contributions of $185 million in 2003.

Investing activities consumed $320 million in cash during 2004, compared to $145 million during 2003. The increase in net cash used in investing activities during 2004 is primarily attributable to:

Spending for capital and investments was $328 million in 2004 and $233 million in 2003. Under expected market conditions, we anticipate that 2005 spending for capital investments will be approximately $350 million, substantially all of which is uncommitted. We expect these expenditures will be funded from the Company’s operations and existing cash on hand.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Financing activities during 2004 resulted in a use of cash of $24 million in 2004 compared to $43 million in 2003. The use of cash in 2004 primarily relates to payments of $20 million to reduce outstanding debt in India. The cash usage in 2003 includes payments of approximately $32 million to purchase bonds underlying the Company’s World Headquarters facility, which was accounted for as a reduction of debt discussed above under “Renegotiation of World Headquarters Lease”, and payments of $20 million to reduce outstanding debt in India.

At December 31, 2004, we had $2.958 billion of debt subject to compromise and $80 million of other debt. At December 31, 2003, we had $2.896 billion of debt subject to compromise and $170 million of other debt. Of the other debt amounts for 2004 and 2003, $7 million and $75 million, respectively, was in default as a consequence of the Filing and therefore classified as current on the Consolidated Balance Sheet. The increase in debt subject to compromise and corresponding decrease in other debt relates to a settlement entered into with certain holders of third party debt during 2004 whereby such holders released a non-Debtor subsidiary from all obligations related to such debt, including $16 million of accrued post-petition interest, and Owens Corning allowed the releasing debtholders various claims in its Chapter 11 proceedings with respect to its guarantees of such debt and its indebtedness to the subsidiary. Prior to this settlement, the guaranteed debt was recorded on the Consolidated Balance Sheet as components of “Short-term debt” and “Long-term debt – current portion”, $32 million and $35 million, respectively. As a result of this settlement, the Company reclassified the guaranteed debt to “Liabilities subject to compromise” on the Consolidated Balance Sheet.

The Company has significant liabilities related to pension plans for its employees. The Company contributed $231 million to the pension plans in 2004. The Company currently projects additional contributions, in the range of $100 million to $150 million, during 2005. The Company’s pension-related assets increased to $499 million at December 31, 2004, from $338 million at December 31, 2003, primarily due to contributions to the pension plans and return on plan assets, partially offset by additional service costs, interest cost accrued and amortization of prior actuarial losses. The Company’s recorded long-term pension plan liability increased to $731 million at December 31, 2004, from $697 million at December 31, 2003. The ultimate cash flow impact to the Company, if any, of the pension plan liability, and the timing of any such impact, will depend on numerous variables, including future changes in actuarial assumptions and market conditions.

In connection with the Filing, the Debtors obtained a $500 million debtor-in-possession credit facility from a group of lenders led by Bank of America, N.A. (the “DIP Financing”), which was originally scheduled to expire November 15, 2002. Effective October 31, 2002, the DIP Financing was amended to, among other things, reduce the maximum available credit amount to $250 million and extend the scheduled expiration to November 15, 2004. Effective September 20, 2004, the DIP Financing was further amended by a Second Amendment which, among other things, extended the scheduled expiration to November 15, 2006. There were no borrowings outstanding under the DIP Financing at December 31, 2004; however, approximately $137 million of the availability under this credit facility was utilized as a result of the issuance of standby letters of credit and similar uses.

As a consequence of the Filing and the impact of certain provisions of the Company’s DIP Financing and in a cash management order entered by the Bankruptcy Court, the Company and its subsidiaries are now subject to certain restrictions, including on their ability to pay dividends and to transfer cash and other assets to each other and to affiliates.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

The Company believes, based on information currently available to it, that its cash and cash equivalents, and cash available from operations, will provide sufficient liquidity to allow it to continue as a going concern for the foreseeable future. However, the ability of the Company to continue as a going concern (including its ability to meet post-petition obligations of the Debtors and to meet obligations of the Non-Debtor Subsidiaries) and the appropriateness of using the going concern basis for its financial statements are dependent upon, among other things, (i) the Company’s ability to comply with the terms of any cash management order entered by the Bankruptcy Court in connection with the Chapter 11 Cases, (ii) the ability of the Company to maintain adequate cash on hand, (iii) the ability of the Company to generate cash from operations, (iv) the ability of the Non-Debtor Subsidiaries to obtain necessary financing, (v) confirmation of a plan or plans of reorganization under the Bankruptcy Code, and (vi) the Company’s ability to achieve profitability following such confirmation.

OFF BALANCE SHEET ARRANGEMENTS

The Company enters into certain off balance sheet arrangements, as defined under Securities and Exchange Commission rules, in the ordinary course of business. These arrangements include securitization of accounts receivable and guarantees with respect to unconsolidated affiliates and other entities (see Notes 4, 10, and 22 to the Consolidated Financial Statements for further information regarding these arrangements). The Company does not believe these arrangements will have a material effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

CONTRACTUAL OBLIGATIONS

In the ordinary course of business, the Company enters into contractual obligations to make payments to third parties. The Company’s known contractual obligations as of December 31, 2004 are as follows: