UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

(Mark One)

X		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended December 31, 2009
OR
		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from                      to

Commission File Number 1-8864

USG CORPORATION

(Exact name of Registrant as Specified in its Charter)

Delaware		36-3329400
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)
550 W. Adams Street, Chicago, Illinois		60661-3676
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, Including Area Code: (312) 436-4000
Securities Registered Pursuant to Section 12(b) of the Act:

			Name of Exchange on
	Title of Each Class		Which Registered
			New York Stock Exchange
	Common Stock, $0.10 par value		Chicago Stock Exchange
	Preferred Stock Purchase Rights (subject to Rights		New York Stock Exchange
	Agreement dated December 21, 2006, as amended)		Chicago Stock Exchange

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

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

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

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

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

     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. o

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

Large accelerated filer x		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

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

     Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o No o Not applicable. Although the registrant was involved in bankruptcy proceedings during the preceding five years, it did not distribute securities under its confirmed plan of reorganization.

     The aggregate market value of the registrant’s common stock held by non-affiliates computed by reference to the New York Stock Exchange closing price on June 30, 2009 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $995,289,990.

     The number of shares of the registrant’s common stock outstanding as of January 31, 2010 was 99,300,247.

Documents Incorporated By Reference: Certain sections of USG Corporation’s definitive Proxy Statement for use in connection with its 2010 annual meeting of stockholders, to be filed subsequently, are incorporated by reference into Part III of this Form 10-K Report where indicated.

TABLE OF CONTENTS

PART I				Page
Item    1.		Business			1
Item    1A.		Risk Factors			7
Item    1B.		Unresolved Staff Comments			15
Item    2.		Properties			16
Item    3.		Legal Proceedings			18
Item    4.		Submission of Matters to a Vote of Security Holders			18
PART II
Item    5.		Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			18
Item    6.		Selected Financial Data			20
Item    7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item    7A.		Quantitative and Qualitative Disclosures About Market Risk			46
Item    8.		Financial Statements and Supplementary Data			47
Item    9.		Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			87
Item    9A.		Controls and Procedures			87
Item    9A(T)		Controls and Procedures			89
Item    9B.		Other Information			89
PART III
Item    10.		Directors, Executive Officers and Corporate Governance			89
Item    11.		Executive Compensation			91
Item    12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			91
Item    13.		Certain Relationships and Related Transactions, and Director Independence			91
Item    14.		Principal Accounting Fees and Services			91
PART IV
Item    15.		Exhibits and Financial Statement Schedules			92
Signatures					97
EX-10.15
EX-10.30
EX-10.31
EX-10.32
EX-10.43
EX-21
EX-23
EX-24
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I

Item 1. BUSINESS

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

General

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

     Our businesses are cyclical in nature and sensitive to changes in general economic conditions, including, in particular, conditions in the North American housing and construction-based markets. New home construction in the United States, a major source of demand for our businesses, was at an historically low level in 2009, but the level of housing starts stabilized towards the end of the year. Most industry analysts have forecast improvement in the level of new home construction in 2010, but new home construction may not improve much, if at all, from the 2009 level if high unemployment continues, the inventory of unsold homes and foreclosures remain at their current levels and tight mortgage lending policies continue or mortgage interest rates increase in 2010.

     Based on preliminary data issued by the U.S. Census Bureau, the rate of new home construction in the United States declined by approximately 39% in 2009 compared with 2008. This followed a 33% decrease in 2008 compared with 2007 and a 25% decrease in 2007 compared with 2006. As a result of these declines, the repair and remodel market, which includes renovation of both residential and nonresidential buildings, currently accounts for the largest portion of our sales, ahead of new home construction. Many buyers begin to remodel an existing home within two years of purchase. According to the National Association of Realtors, sales of existing homes in the United States decreased to 4.9 million units in 2008 from 5.7 million units in 2007 and 6.5 million units in 2006 before increasing to an estimated 5.2 million units in 2009. The declines in existing home sales in the prior years contributed to a decrease in demand for our products from the residential repair and remodel market in 2009. Nonresidential repair and remodel activity is driven by factors including lease turnover rates, discretionary business investment, job growth and governmental building-related expenditures. We estimate that residential and nonresidential repair and remodel activity in the United States declined approximately 15% in 2009 compared with the 2008 level. However, a number of industry analysts report that the declines in residential repair and remodel spending are beginning to moderate, and they forecast that spending will begin to increase in 2010. We are estimating that overall repair and remodel spending will increase approximately 3% in 2010.

     Demand for our products from new nonresidential construction is determined by floor space for which contracts are signed. Installation of gypsum and ceilings products typically follows signing of construction contracts by about a year. According to McGraw-Hill Construction, total floor space for which new nonresidential construction contracts were signed in the United States declined 43% in 2009 compared with 2008. This followed a 17% decrease in 2008 compared with 2007. McGraw-Hill Construction forecasts that new nonresidential construction starts in the United States will decline approximately 5% in 2010 from the 2009 level.

     We have been scaling back our operations in response to market conditions since the downturn began in 2006. Since mid-2006, we have temporarily idled or permanently closed approximately 3.1 billion square feet of our highest-cost wallboard manufacturing capacity. During 2009, we permanently closed gypsum wallboard and cement board production facilities in Santa Fe Springs, Calif., and a sealants and finishes production facility in La Mirada, Calif. We also temporarily idled a paper production facility in Clark, N.J. The closed gypsum wallboard and cement board production facilities had been idled since 2007 and 2008, respectively. In addition, we eliminated approximately 820 salaried and hourly positions and closed 37 distribution centers in 2009. During the three-year

period ended December 31, 2009, we have eliminated approximately 3,850 salaried and hourly positions and closed a total of 98 distribution centers. Our focus on costs and efficiencies, including capacity closures and overhead reductions, has helped to mitigate the effects of the downturn in all of our markets. If conditions in our markets and the broader economy do not improve significantly, we will evaluate plans to further reduce costs, further improve operational efficiency and maintain adequate liquidity.

     The effects of recent market conditions on our operations are discussed in this Item 1 and in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

SEGMENTS

Our operations are organized into three reportable segments: North American Gypsum, Building Products Distribution and Worldwide Ceilings, the net sales of which accounted for approximately 47%, 35% and 18%, respectively, of our 2009 consolidated net sales.

North American Gypsum

BUSINESS

North American Gypsum manufactures and markets gypsum and related products in the United States, Canada and Mexico. It includes United States Gypsum Company, or U.S. Gypsum, in the United States, the gypsum business of CGC Inc., or CGC, in Canada, and USG Mexico, S.A. de C.V., or USG Mexico, in Mexico. U.S. Gypsum is the largest manufacturer of gypsum wallboard in the United States and accounted for approximately 27% of total domestic gypsum wallboard sales in 2009. CGC is the largest manufacturer of gypsum wallboard in eastern Canada. USG Mexico is the largest manufacturer of gypsum wallboard in Mexico with more than 50% of the market share in 2009.

PRODUCTS

North American Gypsum’s products are used in a variety of building applications to finish the interior walls, ceilings and floors in residential, commercial and institutional construction and in certain industrial applications. These products provide aesthetic as well as sound-dampening, fire-retarding, abuse-resistance and moisture-control value. The majority of these products are sold under the SHEETROCK^® brand name. A line of joint compounds used for finishing wallboard joints is also sold under the SHEETROCK^® brand name. The DUROCK^® line of cement board and accessories provides water-damage-resistant and fire-resistant assemblies for both interior and exterior construction. The FIBEROCK^® line of gypsum fiber panels includes abuse-resistant wall panels and floor underlayment as well as sheathing panels usable as a substrate for most exterior systems. The SECUROCK^® line of products includes glass mat sheathing used for building exteriors and gypsum fiber panels used as roof cover board. The LEVELROCK^® line of poured gypsum underlayments provides surface leveling and enhanced sound performance for residential and commercial installations. We also produce a variety of construction plaster products used to provide a custom finish for residential and commercial interiors. Like SHEETROCK^® brand gypsum wallboard, these products provide aesthetic, sound-dampening, fire-retarding and abuse-resistance value. Construction plaster products are sold under the brand names RED TOP^®, IMPERIAL^®, DIAMOND^® and SUPREMO^®. We also produce gypsum-based products for agricultural and industrial customers to use in a number of applications, including soil conditioning, road repair, fireproofing and ceramics.

MANUFACTURING

North American Gypsum manufactures products at 41 plants. North American Gypsum’s plants are located throughout the United States, Canada and Mexico.

     Gypsum rock is mined or quarried at 15 company-owned locations in North America. In 2009, these locations provided approximately 62% of the gypsum used by our plants in North America. As of December 31, 2009, our geologists estimated that our recoverable rock reserves are sufficient for more than 29 years of operation based on our average annual production of crude gypsum during the past five years of 7.8 million tons. Proven reserves contain approximately 233 million tons. Additional reserves of approximately 157 million tons are found on four

properties not in operation.

     Some of our manufacturing plants purchase or acquire synthetic gypsum and natural gypsum rock from outside sources. In 2009, outside purchases or acquisitions of synthetic gypsum and natural gypsum rock accounted for approximately 34% and 4%, respectively, of the gypsum used in our plants.

     Synthetic gypsum is a byproduct of flue gas desulphurization carried out by electric generation or industrial plants that burn coal as a fuel. The suppliers of this kind of gypsum are primarily power companies, which are required to operate scrubbing equipment for their coal-fired generating plants under federal environmental regulations. We have entered into a number of long-term supply agreements to acquire synthetic gypsum. We generally take possession of the gypsum at the producer’s facility and transport it to our wallboard plants by ship, river barge, railcar or truck. The supply of synthetic gypsum continues to increase as more power generation plants are fitted with desulphurization equipment. Seven of our 22 gypsum wallboard plants in operation use synthetic gypsum for all of their needs, while another six use it for some of their needs. The U.S. Environmental Protection Agency, or EPA, classifies synthetic gypsum as a non-hazardous waste. However, the EPA is considering a regulation that could affect the use, storage and disposal of synthetic gypsum. See Item 1A, Risk Factors.

     We own eight paper mills located across the United States. Four of these paper mills have been idled due to the current market environment. Vertical integration in paper helps to ensure a continuous supply of high-quality paper that is tailored to the specific needs of our wallboard production processes. We augment our paper needs through purchases from outside suppliers when necessary. Less than 1% of our paper supply was purchased from outside suppliers during 2009.

MARKETING AND DISTRIBUTION

Our gypsum products are distributed through our wholly owned subsidiary, L&W Supply Corporation, and its subsidiaries, or L&W Supply, other specialty wallboard distributors, building materials dealers, home improvement centers and other retailers, and contractors. Sales of gypsum products are seasonal in the sense that sales are generally greater from spring through the middle of autumn than during the remaining part of the year. Based on our estimates using publicly available data, internal surveys and gypsum wallboard shipment data from the Gypsum Association, we estimate that during 2009

•		residential and nonresidential repair and remodel activity generated about 54% of volume demand for gypsum wallboard,
•		new residential construction generated about 27% of volume demand,
•		new nonresidential construction generated about 14% of volume demand, and
•		other activities, such as exports and temporary construction, generated the remaining 5% of volume demand.

COMPETITION

The Gypsum Association estimates that United States industry shipments of gypsum wallboard (including imports) in 2009 were 18.4 billion square feet. U.S. Gypsum shipped 4.72 billion square feet of wallboard in 2009, or approximately 27% of the total industry sales of gypsum wallboard in the United States.

     Our competitors in the United States are: National Gypsum Company, CertainTeed Corporation (a subsidiary of Compagnie de Saint-Gobain SA), Georgia-Pacific (a subsidiary of Koch Industries, Inc.), American Gypsum (a unit of Eagle Materials Inc.), Temple-Inland Forest Products Corporation, Lafarge North America Inc. and PABCO Gypsum. Our competitors in Canada include CertainTeed Corporation, Georgia-Pacific and Lafarge North America Inc. Our major competitors in Mexico are Panel Rey, S.A. and Comex-Lafarge. The principal methods of competition are quality of products, service, pricing, compatibility of systems and product design features.

Building Products Distribution

BUSINESS

Building Products Distribution consists of L&W Supply, the leading specialty building products distribution business in the United States. In 2009, L&W Supply distributed approximately 11% of all gypsum wallboard in the United States, including approximately 36% of U.S. Gypsum’s wallboard production. During 2009, approximately 50% of L&W Supply’s net sales were from new nonresidential construction.

MARKETING AND DISTRIBUTION

L&W Supply is a service-oriented business that stocks a wide range of construction materials. It delivers less-than-truckload quantities of construction materials to job sites and places them in areas where work is being done, thereby reducing the need for handling by contractors. L&W Supply specializes in the distribution of gypsum wallboard (which accounted for 33% of its 2009 net sales), joint compound and other gypsum products manufactured by U.S. Gypsum and others. It also distributes products manufactured by USG Interiors, Inc., such as acoustical ceiling tile and grid, as well as products of other manufacturers, including drywall metal, insulation, roofing products and accessories. L&W Supply leases approximately 90% of its facilities from third parties. Typical leases have terms of five years and include renewal options.

     In the current market environment, L&W Supply’s focus is on reducing its cost structure and optimizing its asset utilization. In response to weak market conditions, L&W Supply closed 37 distribution centers in 2009 and 54 centers in 2008. The closures have been widely dispersed throughout the markets that L&W Supply serves. As of December 31, 2009, L&W Supply continued to serve its customers from 164 centers in the United States. It operated 198 centers in the United States as of December 31, 2008 and 247 centers in the United States and Mexico as of December 31, 2007. L&W Supply continues to consider opportunities to grow its specialty distribution business taking into account the current market environment.

COMPETITION

L&W Supply competes with a number of specialty wallboard distributors, lumber dealers, hardware stores, home improvement centers and acoustical ceiling tile distributors. Its principal competitors include ProBuild Holdings Inc., a national supplier of building materials, Gypsum Management Supply with locations in the southern, central and western United States, KCG, Inc. in the southwestern and central United States, and Allied Building Products Corporation in the northeastern, central and western United States. Principal methods of competition are location, service, range of products and pricing.

Worldwide Ceilings

BUSINESS

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

PRODUCTS

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

MANUFACTURING

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

MARKETING AND DISTRIBUTION

Worldwide Ceilings sells products primarily in markets related to the construction and renovation of nonresidential buildings. During 2009, approximately 28% of Worldwide Ceilings’ net sales were from new nonresidential construction. Ceilings products are marketed and distributed through a network of distributors, installation contractors, L&W Supply locations and home improvement centers.

COMPETITION

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

Executive Officers of the Registrant

See Part III, Item 10, Directors, Executive Officers and Corporate Governance - Executive Officers of the Registrant (as of February 12, 2010).

Other Information

RESEARCH AND DEVELOPMENT

To contribute to our high standards and our leadership in the building materials industry, we perform extensive research and development at the USG Research and Technology Innovation Center in Libertyville, Ill. Research team members provide product support and new product development for our operating units. With unique fire, acoustical, structural and environmental testing capabilities, the research center can evaluate products and systems. Chemical analysis and materials characterization support product development and safety/quality assessment programs. Development activities can be taken to an on-site pilot plant before being transferred to a full-size plant. We also conduct research at a satellite location where industrial designers and fabricators work on new ceiling grid concepts and prototypes. Research and development activities were scaled back in 2009 and 2008 in response to market conditions. We charge research and development expenditures to earnings as incurred. These expenditures amounted to $13 million in 2009, $19 million in 2008 and $23 million in 2007.

SUSTAINABILITY

The adoption of green building codes and standards such as the Leadership in Energy and Environmental Design, or LEED, rating system established by the U.S. Green Building Council to encourage the design and construction of buildings that are environmentally friendly, combined with an increase in customer preference for products that can assist in obtaining LEED credit or are otherwise environmentally preferable, has increased demand for products, systems and services that contribute to building sustainable spaces. Many of our products meet the requirements for the awarding of LEED credits, and we are continuing to develop new products, systems and services to address market demand for products that enable construction of buildings that require fewer natural resources to build, operate and maintain. Our competitors also have developed and introduced to the market more environmentally responsible products.

     We expect that there will be increased demand over time for products, systems and services that meet regulatory and customer sustainability standards and preferences and decreased demand for products that produce significant greenhouse gas emissions. We also believe that our ability to continue to provide these products, systems and

services to our customers will be necessary to maintain our competitive position in the marketplace.

ENERGY

Our primary supplies of energy have been adequate, and we have not been required to curtail operations as a result of insufficient supplies. Supplies are likely to remain sufficient for our projected requirements. Currently, we are using swap and option contracts to hedge a significant portion of our anticipated purchases of natural gas to be used in our manufacturing operations. Generally, we hedge the cost of a majority of our anticipated purchases of natural gas over the next 12 months. However, we review our positions regularly and make adjustments as market conditions warrant.

SIGNIFICANT CUSTOMER

On a worldwide basis, The Home Depot, Inc. accounted for approximately 14% of our consolidated net sales in 2009, approximately 10% in 2008 and approximately 11% in 2007.

OTHER

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

None of our segments has any special working capital requirements.

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

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

As of December 31, 2009, we had approximately 10,100 employees worldwide.

See Note 12 to the Consolidated Financial Statements for financial information pertaining to our segments and Item 1A, Risk Factors, for information regarding the possible effects that compliance with environmental laws and regulations and climate change may have on our businesses and operating results.

Available Information

We maintain a Web site at www.usg.com and make available at this Web site our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission, or SEC. If you wish to receive a paper copy of any exhibit to our reports filed with or furnished to the SEC, the exhibit may be obtained, upon payment of reasonable expenses, by writing to: Corporate Secretary, USG Corporation, 550 West Adams Street, Chicago, Illinois 60661.

Item 1A.   RISK FACTORS

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

Our businesses have been adversely affected by recent economic conditions, including the worldwide financial crisis and restrictive lending practices, and are cyclical in nature. Prolonged periods of weak product demand or excess product supply may have a material adverse effect on our business, financial condition and operating results.

The markets that we serve, including, in particular, the housing and construction-based markets, are affected by economic conditions, the availability of credit, lending practices, interest rates, the unemployment rate and consumer confidence. Higher interest rates, continued high levels of unemployment and continued restrictive lending practices could have a material adverse effect on our business, financial condition and operating results. Our businesses are also affected by a variety of other factors beyond our control, including the inventory of unsold homes, which remains at an historically high level, the level of foreclosures, home resale rates, housing affordability, office and retail vacancy rates and foreign currency exchange rates.

     Our businesses are cyclical in nature and sensitive to changes in general economic conditions, including, in particular, conditions in the North American housing and construction-based markets. Based on preliminary data issued by the U.S. Census Bureau, the rate of new home construction in the United States declined by approximately 39% in 2009 compared with 2008. This followed a 33% decrease in 2008 compared with 2007 and a 25% decrease in 2007 compared with 2006. Housing starts remain near the lowest levels recorded in the last 50 years. In December 2009, the annualized rate of housing starts was reported by the U.S. Census Bureau to be 557,000 units. Industry analysts’ forecasts for new home construction in the United States in 2010 are for a range of from 600,000 to 900,000 units. We are expecting housing starts to be near the low end of that range.

     As a result of the declines in new home construction, the repair and remodel market, which includes renovation of both residential and nonresidential buildings, currently accounts for the largest portion of our sales, ahead of new home construction. Many buyers begin to remodel an existing home within two years of purchase. According to the National Association of Realtors, sales of existing homes in the United States decreased to 4.9 million units in 2008 from 5.7 million units in 2007 and 6.5 million units in 2006 before increasing to an estimated 5.2 million units in 2009. The declines in existing home sales in the prior years contributed to a decrease in demand for our products from the residential repair and remodel market in 2009. Nonresidential repair and remodel activity is driven by factors including lease turnover rates, discretionary business investment, job growth and governmental building-related expenditures. We estimate that residential and nonresidential repair and remodel activity in the United States declined approximately 15% in 2009 compared with the 2008 level. However, a number of industry analysts report that the declines in residential repair and remodel spending are beginning to moderate, and they forecast that spending will begin to increase in 2010. We are estimating that overall repair and remodel spending will increase approximately 3% in 2010.

     Demand for our products from new nonresidential construction is determined by floor space for which contracts are signed. Installation of gypsum and ceilings products typically follows signing of construction contracts by about a year. According to McGraw-Hill Construction, total floor space for which new nonresidential construction contracts were signed in the United States declined 43% in 2009 compared with 2008. This followed a 17% decrease in 2008 compared with 2007. McGraw-Hill Construction forecasts that new nonresidential construction starts in the United States will decline approximately 5% in 2010 from the 2009 level.

     Prices for our products and services are affected by overall supply and demand in the markets for our products and our competitors’ products. Market prices of building products historically have been volatile and cyclical. Currently, there is significant excess wallboard production capacity industry-wide in the United States. Industry capacity in the United States was approximately 34.4 billion square feet as of December 31, 2009. Industry shipments of wallboard in the United States (including imports) were an estimated 18.4 billion square feet in 2009. We are estimating that industry shipments in the United States will increase approximately 3% in 2010. Prolonged continuation of weak demand or excess supply in any of our businesses may have a material adverse effect on our business, financial condition and operating results.

     We cannot predict the duration of the current market conditions, or the timing or strength of any future recovery of the North American housing and construction-based markets. We also cannot provide any assurances that those markets will not weaken further, or that further operational adjustments will not be required to address market conditions. Continued weakness in these markets and the homebuilding industry may have a material adverse effect on our business, financial condition and operating results.

     Since we operate in a variety of geographic markets, our businesses are subject to the economic conditions in each of these geographic markets. General economic downturns or localized downturns in the regions where we have operations may have a material adverse effect on our business, financial condition and operating results.

Our customers and suppliers are exposed to risks associated with the worldwide economic downturn and financial turmoil that could adversely affect their payment of our invoices or the continuation of their businesses at the same level.

The businesses of many of our customers and suppliers are exposed to risks related to the current economic environment. A number of our customers and suppliers have been and may continue to be adversely affected by the worldwide financial turmoil, disruptions to the capital and credit markets and decreased demand for their products and services. In the event that any of our large customers or suppliers, or a significant number of smaller customers and suppliers, are adversely affected by these risks, we may face disruptions in supply, further reductions in demand for our products and services, failure of customers to pay invoices when due and other adverse effects that may have a material adverse effect on our business, financial condition and operating results.

Our substantial indebtedness may adversely affect our business, financial condition and operating results.

As of December 31, 2009, we had approximately $1.962 billion of indebtedness. Our substantial indebtedness may have material adverse effects on our business, financial condition and operating results, including to

•		make it more difficult for us to satisfy our debt service obligations,
•		require us to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness, thereby reducing the availability of our cash flows to fund working capital, capital expenditures and other general operating requirements,
•		limit our ability to obtain additional financing to fund our working capital requirements, capital expenditures, acquisitions, investments, debt service obligations and other general corporate requirements,
•		restrict us from making strategic acquisitions or taking advantage of favorable business opportunities,
•		place us at a relative competitive disadvantage compared to our competitors that have proportionately less debt,
•		limit our flexibility to plan for, or react to, changes in our businesses and the industries in which we operate, which may adversely affect our operating results and ability to meet our debt service obligations,

•		increase our vulnerability to the current and potentially more severe adverse general economic and industry conditions, and
•		limit our ability, or increase the cost, to refinance our indebtedness.

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

We require a significant amount of liquidity to service our indebtedness and fund operations, capital expenditures, research and development efforts, acquisitions and other corporate expenditures.

Our ability to fund operations, capital expenditures, research and development efforts, acquisitions and other corporate expenditures, including repayment of our indebtedness, depends on our ability to generate cash through future operating performance, which is subject to economic, financial, competitive, legislative, regulatory and other factors. Many of these factors are beyond our control. We cannot ensure that our businesses will generate sufficient cash flow from operations or that future borrowings or other financing will be available to us in an amount sufficient to pay our indebtedness or to fund our other needs.

     We are required to post letters of credit or cash as collateral primarily in connection with our hedging transactions, insurance programs and bonding activities. The amounts of collateral we are required to post may vary based on our financial position and credit ratings. Use of letters of credit as collateral reduces our borrowing availability under our domestic revolving credit agreement and, therefore, like the use of cash as collateral, reduces our overall liquidity and our ability to fund other business activities.

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

•		curtail operations further,
•		reduce or delay planned capital expenditures, research and development or acquisitions,
•		seek additional financing or restructure or refinance all or a portion of our indebtedness at or before maturity,
•		sell assets or businesses, and
•		sell additional equity.

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

Covenant restrictions under the agreements governing our indebtedness may limit our ability to pursue business activities or otherwise operate our business.

The agreements governing our indebtedness contain covenants that may limit our ability to finance future operations or capital needs or to engage in other business activities, including, among other things, our ability to

•		incur additional indebtedness,
•		make guarantees,
•		sell assets or make other fundamental changes,

•		engage in mergers and acquisitions,
•		make investments,
•		enter into transactions with our affiliates,
•		change our business purposes, and
•		enter into sale and lease-back transactions.

In addition, we are subject to agreements that may require us to meet and maintain certain financial ratios and tests, which may require that we take action to reduce our debt or to act in a manner contrary to our current or future business plans. General business and economic conditions may affect our ability to comply with these covenants or meet those financial ratios and tests.

     A breach of any of our credit agreement or indenture covenants or failure to maintain a required ratio or meet a required test may result in an event of default under those agreements. This may allow the counterparties to those agreements to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. If this occurs, we may not be able to refinance the accelerated indebtedness on favorable terms, or at all, or repay the accelerated indebtedness.

The loss of sales to one or more of our major customers may have a material adverse effect on our business, financial condition and operating results.

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

We face competition in each of our businesses. If we cannot successfully compete in the marketplace, our business, financial condition and operating results may be materially and adversely affected.

We face competition in each of our businesses. Principal methods of competition include quality and range of products, service, location, pricing, compatibility of systems and product design features. Actions of our competitors, or the entry of new competitors in our markets, could lead to lower pricing by us in an effort to maintain market share and could also lead to lower sales volumes. To achieve and/or maintain leadership positions in key product categories, we must continue to develop brand recognition and loyalty, enhance product quality and performance, introduce new products and develop our manufacturing and distribution capabilities.

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

     We intend to continue making investments in research and development to develop new and improved products and more efficient production methods in order to maintain our market leadership position. If we do not make these investments, or our investments are not successful, our revenues, operating results and market share could be adversely affected. In addition, there can be no assurance that revenue from new products or enhancements will be sufficient to recover the research and development expenses associated with their development.

If costs of key raw materials, energy, fuel or employee benefits increase, or the availability of key raw materials and energy decreases, our cost of products sold will increase and our operating results may be materially and adversely affected.

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

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

     Approximately one third of the gypsum used in our plants is synthetic gypsum, which is a coal-combustion byproduct, or CCB, resulting primarily from flue gas desulphurization carried out by electric generation or industrial plants burning coal as a fuel. Seven of our 22 gypsum wallboard plants in operation use synthetic gypsum for all of their needs, while another six use it for some of their needs. The suppliers of synthetic gypsum are primarily power companies, which are required under federal environmental regulations to operate scrubbing equipment for their coal-fired generating plants.

     Environmental regulatory changes or changes in methods used to comply with environmental regulations could adversely affect the price and availability of synthetic gypsum. The EPA classifies synthetic gypsum as a non-hazardous waste. Recently, following a release of fly ash, another CCB, from a storage facility in Tennessee, the EPA stated that it is developing a regulation to address the storage and disposal of CCBs. No regulation has yet been published, and, if a regulation is proposed, it will be subject to notice and public comment before it can become final. A regulation that would affect the use, storage, or disposal of synthetic gypsum could have a material adverse effect on our results of operations, financial position or cash flows. This effect would depend on, among other things, the regulation’s impact, if any, on the demand for wallboard made with synthetic gypsum and the cost of using synthetic gypsum in manufacturing wallboard.

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

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

these assumptions and may affect our estimated and actual employee benefit plan costs and our business, financial condition and operating results.

If the market price of natural gas declines, it may have a material adverse effect on our business, financial condition and operating results as a result of our hedging agreements for natural gas.

We use natural gas extensively in the production of gypsum and interior systems products in the United States, Canada and Mexico. As a result, our profitability, operating cash flows and future rate of growth are highly dependent on the price of natural gas, which historically has been very volatile and is affected by numerous factors beyond our control. We are not always able to pass on increases in energy costs to our customers through increases in product prices. In an attempt to reduce our price risk related to fluctuations in natural gas prices, we periodically enter into hedging agreements. We benefit from the hedge agreements when spot prices exceed contractually specified prices. During 2009, however, the market price for natural gas declined, and we were more limited in our ability to take advantage of decreasing market prices than some of our competitors. We have recently included options as part of our hedging strategy to provide protection if gas prices increase significantly while allowing us to take advantage of lower gas prices. Any substantial or extended decline in prices of, or demand for, natural gas could cause our production costs to be greater than those of our competitors. A significant production cost differential could have a material adverse effect on our business, financial condition and operating results.

     In addition, the results of our hedging agreements could be positive, neutral or negative in any period depending on price changes in the hedged exposures. Further, changes to the price of natural gas could result in changes to the value of our hedging contracts, which could impact our results of operations for a particular period. Our hedging activities are not designed to mitigate long-term natural gas price fluctuations and, therefore, will not protect us from long-term natural gas price increases.

Certain of our customers have been expanding and may continue to expand through consolidation and internal growth, thereby possibly developing increased buying power, which may materially and adversely affect our revenues, results of operations and financial position.

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

We are subject to environmental and safety laws and regulations that may change. These laws and regulations could cause us to make modifications to how we manufacture and price our products. They and the effects of climate change could also require that we make significant capital investments or otherwise increase our costs.

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

     Environmental laws and regulations tend to become more stringent over time, and we could incur material expenses relating to compliance with future environmental laws. As noted above, the EPA is considering a regulation that could affect the use, storage and disposal of synthetic gypsum. In addition, the price and availability

of certain of the raw materials that we use may vary in the future as a result of environmental laws and regulations affecting our suppliers. An increase in the price of our raw materials, a decline in their availability or future costs relating to our compliance with environmental laws and regulations may materially and adversely affect our operating margins or result in reduced demand for our products.

     The U.S. Congress and several states are considering proposed legislation to reduce emission of “greenhouse gases,” including carbon dioxide and methane. Some states have already adopted greenhouse gas regulation or legislation. In December 2009, the EPA issued its findings that certain greenhouse gases, including carbon dioxide, endanger the public health and welfare, laying the groundwork for the possible regulation of carbon dioxide emissions under the Clean Air Act. Earlier in 2009, the EPA proposed a rule that would require facilities emitting over 25,000 tons of greenhouse gases annually to obtain permits demonstrating that they are using best practices and technologies to minimize greenhouse gas emissions. If adopted, that rule would affect all of our U.S. wallboard and ceiling tile plants and paper mills and could require that we incur significant costs to satisfy permitting requirements. Enactment of climate control legislation or other regulatory initiatives by Congress or various states, or the adoption of regulations by the EPA and analogous state or foreign governmental agencies that restrict emissions of greenhouse gases in areas in which we conduct business, could have an adverse effect on our operations and demand for our services or products. Our manufacturing processes, particularly the manufacturing process for wallboard, use a significant amount of energy, especially natural gas. Increased regulation of energy use to address the possible emission of greenhouse gases and climate change could materially increase our manufacturing costs. For example, if so-called “cap and trade” legislation is enacted, it is likely that we would be required to purchase “carbon credits” for our manufacturing facilities, and those credits could become more expensive or increasingly difficult to obtain over time. Energy could also become more expensive, and we may not be able to pass these increased costs on to purchasers of our products.

     We cannot predict if or when currently proposed or additional laws and regulations regarding emissions and other environmental concerns will be enacted or what capital expenditures might be required as a result of them. Stricter regulation of emissions might require us to install emissions control or other equipment at some or all of our manufacturing facilities, requiring significant additional capital investments.

     Some of our manufacturing plants are located in coastal areas to receive ocean shipments of gypsum rock. If sea levels rise or storm severity increases significantly because of climate change, significant capital investments could be required to structurally reinforce some of these plants and/or to upgrade their dock facilities. Also, climate change could cause drought conditions and increase the cost of securing water for use in our manufacturing processes, although the increase, if any, likely would vary significantly from location to location.

If the downturn in the markets for our businesses does not reverse or is significantly extended, we may incur material impairment charges.

We have been scaling back our operations in response to market conditions since the downturn began in 2006. Since mid-2006, we have temporarily idled or permanently closed approximately 3.1 billion square feet of our highest-cost wallboard manufacturing capacity. As a result, during the three-year period ended December 31, 2009, we recorded asset impairment charges aggregating $9 million for two permanently closed and two temporarily idled gypsum wallboard production facilities.

     Historically, the housing and other construction markets that we serve have been deeply cyclical. Downturns in demand are typically steep and last several years, but they have typically been followed by periods of strong recovery. If the recovery from this cycle is similar to the recoveries from past cycles, we believe we will generate significant cash flows when our markets recover. As a result, we currently expect to realize the carrying value of all facilities that are not permanently closed through future cash flows. We regularly monitor forecasts prepared by external economic forecasters and review our facilities and other assets to determine which of them, if any, are impaired under applicable accounting rules.

     However, if the downturn in our markets does not reverse or the downturn is significantly further extended, additional material write-downs or impairment charges may be required in the future. If these conditions were to materialize or worsen, or if there is a fundamental change in the housing and other construction markets we serve, which individually or collectively lead to a significantly extended downturn or permanent decrease in demand, we may permanently close production and distribution facilities and material impairment charges may be necessary. The magnitude and timing of those charges would be dependent on the severity and duration of the downturn and cannot be determined at this time. Any material cash or noncash impairment charges related to property, plant and equipment would have a material adverse effect on our financial condition and operating results.

A small number of our stockholders could significantly influence our business and affairs.

Based on filings made with the SEC and other information available to us, we believe that, as of January 31, 2010, six organizations collectively controlled over 50% of our common stock. Also, all of our 10% convertible senior notes are currently held by two of our largest stockholders. At the current conversion price of $11.40 per share, the notes are convertible into approximately 35.1 million shares of our common stock, or approximately 25% of the shares that would be outstanding if all of the notes were converted at that price. Accordingly, a small number of our stockholders could affect matters requiring approval by stockholders, including the election of directors and the approval of potential business combination transactions.

If we experience an “ownership change” within the meaning of the Internal Revenue Code, utilization of our net operating loss, or NOL, carryforwards would be subject to an annual limitation.

The Internal Revenue Code imposes limitations on a corporation’s ability to utilize NOLs to reduce its federal income taxes if it experiences an “ownership change.” In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percentage points over a three-year period. If we were to experience an ownership change, utilization of our NOLs would be subject to an annual limitation determined by multiplying the market value of our outstanding shares of stock at the time of the ownership change by the applicable long-term tax-exempt rate (which was 4.16% for December 2009). Any unused annual limitation may be carried over to later years within the allowed NOL carryforward period. The amount of the limitation may, under certain circumstances, be increased or decreased by built-in gains or losses held by us at the time of the change that are recognized in the five-year period after the change. Many states have similar limitations. If an ownership change had occurred as of December 31, 2009, our annual U.S. federal NOL utilization would have been limited to approximately $58 million per year.

We may pursue acquisitions, joint ventures and other transactions that complement or expand our businesses. We may not be able to complete proposed transactions, and even if completed, the transactions may involve a number of risks that may result in a material adverse effect on our business, financial condition and operating results.

During the past several years, we have completed a number of acquisitions and joint venture arrangements. As business conditions warrant and our financial resources permit, we may pursue opportunities to acquire businesses or technologies and to form joint ventures that we believe could complement, enhance or expand our current businesses or product lines or that might otherwise offer us growth opportunities. We may have difficulty identifying appropriate opportunities, or if we do identify opportunities, we may not be successful in completing transactions for a number of reasons. Any transactions that we are able to identify and complete may involve one or more of a number of risks, including

•		the diversion of management’s attention from our existing businesses to integrate the operations and personnel of the acquired or combined business or joint venture,
•		possible adverse effects on our operating results during the integration process,

•		failure of the acquired business or joint venture to achieve expected operational, profitability and investment return objectives, and
•		inability to achieve other intended objectives of the transaction.

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

The seasonal nature of our businesses may materially and adversely affect the trading prices of our securities.

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

We depend on our senior management team for their expertise and leadership, and the unexpected loss of any member could adversely affect the implementation of our business strategy or our operations.

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

We do not expect to pay cash dividends on our common stock for the foreseeable future.

We have not paid a dividend on our common stock since the first quarter of 2001 and have no plans to do so in the foreseeable future. Further, our credit agreement limits our ability to pay a dividend or repurchase our stock unless specified borrowing availability and fixed charge coverage ratio tests are met, and it prohibits payment of a dividend if a default exists under the agreement. Because we do not expect to pay dividends on our common stock in the foreseeable future, investors in our common stock will have to rely on the possibility of stock appreciation for a return on their investment.

Item 1B.   UNRESOLVED STAFF COMMENTS

None

Item 2.   PROPERTIES

We operate plants, mines, quarries, transport ships and other facilities in North America, Europe and the Asia-Pacific region. U.S. Gypsum’s SHEETROCK^® brand gypsum wallboard plants operated at approximately 47% of capacity during 2009. USG Interiors’ AURATONE^® brand ceiling tile plants operated at approximately 74% of capacity during 2009. The locations of our production properties in operation as of December 31, 2009, grouped by reportable segment, are as follows (plants are owned unless otherwise indicated):

North American Gypsum

GYPSUM WALLBOARD AND OTHER GYPSUM PRODUCTS
Aliquippa, Pa.*		Plaster City, Calif.		Sweetwater, Texas
Baltimore, Md.**		Rainier, Ore.		Washingtonville, Pa.*
Bridgeport, Ala.*		Shoals, Ind.**		Hagersville, Ontario, Canada**
East Chicago, Ind.*		Sigurd, Utah		Montreal, Quebec, Canada *
Empire, Nev.		Southard, Okla.		Monterrey, Nuevo Leon, Mexico
Galena Park, Texas*		Sperry, Iowa**		Puebla, Puebla, Mexico
Jacksonville, Fla.**		Stony Point, N.Y.**		Tecoman, Colima, Mexico
Norfolk, Va.*

JOINT COMPOUND (SURFACE PREPARATION AND JOINT TREATMENT PRODUCTS)
Auburn, Wash.		Galena Park, Texas		Calgary, Alberta, Canada (leased)
Baltimore, Md.		Gypsum, Ohio		Hagersville, Ontario, Canada
Bridgeport, Ala.		Jacksonville, Fla.		Montreal, Quebec, Canada
Chamblee, Ga.		Phoenix (Glendale), Ariz. (leased)		Surrey, British Columbia, Canada
Dallas, Texas		Port Reading, N.J.		Monterrey, Nuevo Leon, Mexico
East Chicago, Ind.		Sigurd, Utah		Puebla, Puebla, Mexico
Fort Dodge, Iowa		Torrance, Calif.
CEMENT BOARD
Baltimore, Md.		New Orleans, La.		Monterrey, Nuevo Leon, Mexico
Detroit (River Rouge), Mich.
GYPSUM ROCK (MINES AND QUARRIES)
Alabaster (Tawas City), Mich.		Sigurd, Utah		Little Narrows, Nova Scotia, Canada
Empire, Nev.		Southard, Okla.		Windsor, Nova Scotia, Canada
Fort Dodge, Iowa		Sperry, Iowa		Monterrey, Nuevo Leon, Mexico
Plaster City, Calif.		Sweetwater, Texas		San Luis Potosi, San Luis Potosi, Mexico
Shoals, Ind.		Hagersville, Ontario, Canada		Tecoman, Colima, Mexico
PAPER FOR GYPSUM WALLBOARD
Galena Park, Texas		Oakfield, N.Y.		Otsego, Mich.
North Kansas City, Mo.

OTHER PRODUCTS

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

FACILITY SHUTDOWNS

During 2009, we permanently closed gypsum wallboard and cement board production facilities in Santa Fe Springs, Calif., and a sealants and finishes production facility in La Mirada, Calif. We also temporarily idled a paper production facility in Clark, N.J. The closed gypsum wallboard and cement board production facilities had been idled since 2007 and 2008, respectively.

OCEAN VESSELS

Gypsum Transportation Limited, our wholly owned subsidiary headquartered in Bermuda, owns and operates three self-unloading ocean vessels, including a new 40,000 ton ship that was delivered in May 2009. Under a contract of affreightment, these vessels transport gypsum rock from Nova Scotia to our East Coast plants. We offer excess ship time, when available, for charter on the open market to back haul cargo such as coal, aggregates and other free-flowing bulk materials.

Worldwide Ceilings

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

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

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

OTHER PRODUCTS

We manufacture mineral fiber products at Red Wing, Minn., and Walworth, Wis., metal specialty systems at Oakville, Ontario, Canada, and joint compound at Dreux, France, Port Klang, Malaysia (leased), St. Petersburg, Russia (leased), Thessaloniki, Greece (leased), Viersen, Germany, and Lima, Peru.

Item 3.   LEGAL PROCEEDINGS

See Part II, Item 8, Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements, Note 16, Litigation, for information on legal proceedings, which information is incorporated herein by reference.

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

None

PART II

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

Our common stock trades on the New York Stock Exchange, or NYSE, and the Chicago Stock Exchange under the symbol USG. The NYSE is the principal market for our common stock. As of January 31, 2010, there were 3,180 record holders of our common stock. We currently do not pay dividends on our common stock.

     We did not purchase any of our equity securities during the fourth quarter of 2009.

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

     Pursuant to our Non-Employee Director Compensation Program, on December 31, 2009, our non-employee directors were entitled to receive an $80,000 annual grant, payable at their election in cash or common stock with an equivalent value. Pursuant to this program, on December 31, 2009, a total of 5,550 shares of common stock were issued to one non-employee director based on the average closing sales prices of a share of USG common stock on December 30, 2009. The issuance of these shares was effected through a private placement under Section 4(2) of the Securities Act of 1933, as amended, or the Securities Act, and was exempt from registration under Section 5 of the Securities Act.

     Pursuant to our Deferred Compensation Program for Non-Employee Directors, three of our non-employee directors deferred their $80,000 annual grant, and two of our non-employee directors deferred their quarterly retainers for service as directors that were payable on December 31, 2009, into a total of approximately 19,859 deferred stock units. These units will increase or decrease in value in direct proportion to the market value of our common stock and will be paid in cash or shares of common stock, at each director’s option, following termination of service as a director. The issuance of these deferred stock units was effected through a private placement under Section 4(2) of the Securities Act and was exempt from registration under Section 5 of the Securities Act.

COMMON STOCK PRICES

The high and low sales prices of our common stock in 2009 and 2008 were as follows:

		2009								2008
		High				Low				High				Low
First quarter		$	12.47			$	4.16			$	38.38			$	29.71
Second quarter			17.88				7.17				40.25				29.48
Third quarter			19.88				8.71				35.00				23.12
Fourth quarter			17.93				12.45				26.39				5.50

PERFORMANCE GRAPH

The following graph and table compare the cumulative total stockholder return on our common stock with the Standard and Poor’s 500 Index, or S&P 500, and the Dow Jones U.S. Construction and Materials Index, or DJUSCN, in each case assuming an initial investment of $100 and full dividend reinvestment, for the five-year period ended December 31, 2009.

		Value of Investment as of December 31
		2004				2005				2006				2007				2008				2009
USG		$	100			$	161			$	136			$	104			$	23			$	41
S&P 500			100				105				121				128				81				102
DJUSCN			100				112				131				161				92				105

All amounts are rounded to the nearest dollar.

Item 6.   SELECTED FINANCIAL DATA

USG CORPORATION
FIVE-YEAR SUMMARY

(dollars in millions, except per-share data)		Years Ended December 31,
		2009				2008				2007(a)				2006(a)				2005(a)
Statement of Operations Data:
Net sales		$	3,235			$	4,608			$	5,202			$	5,810			$	5,139
Cost of products sold			3,090				4,416				4,601				4,426				4,030
Gross profit			145				192				601				1,384				1,109
Selling and administrative expenses			304				380				408				419				352
Litigation settlement income (b)			(97)				-				-				-				-
Restructuring and long-lived asset impairment charges			80				98				26				-				-
Goodwill and other intangible asset impairment charges			43				226				-				-				-
Asbestos claims provision (reversal) (c)			-				-				-				(44)				3,100
Chapter 11 reorganization expenses			-				-				-				10				4
Operating profit (loss)			(185)				(512)				167				999				(2,347)
Interest expense (c)			165				86				105				555				5
Interest income			(4)				(7)				(22)				(43)				(10)
Other income, net			(9)				(10)				(4)				(3)				-
Income taxes (benefit) (d)			450				(118)				11				193				(921)
Earnings (loss) before cumulative effect of accounting change			(787)				(463)				77				297				(1,421)
Cumulative effect of accounting change			-				-				-				-				(11)
Net earnings (loss)			(787)				(463)				77				297				(1,432)
Net Earnings (Loss) Per Common Share:
Cumulative effect of accounting change			-				-				-				-				(0.20)
Basic			(7.93)				(4.67)				0.80				4.47				(25.42)
Diluted			(7.93)				(4.67)				0.79				4.46				(25.42)
Balance Sheet Data (as of the end of the year):
Working capital		$	939			$	738			$	717			$	975			$	1,602
Current ratio			2.91				1.98				2.26				1.55				3.60
Cash and cash equivalents			690				471				297				565				936
Property, plant and equipment, net			2,427				2,562				2,596				2,210				1,946
Total assets			4,097				4,719				4,654				5,397				6,180
Long-term debt (c)			1,955				1,642				1,238				1,439				-
Liabilities subject to compromise (c)			-				-				-				-				5,340
Total stockholders’ equity (deficit)			930				1,550				2,226				1,566				(279)
Other Information:
Capital expenditures		$	44			$	238			$	460			$	393			$	198
Closing stock price per common share as of December 31			14.05				8.04				35.79				54.80				65.00
Average number of employees (e)			10,800				13,600				14,650				14,700				14,100

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

Overview

SEGMENTS

Through our subsidiaries, we are a leading manufacturer and distributor of building materials. We produce a wide range of products for use in new residential, new nonresidential, and residential and nonresidential repair and remodel construction as well as products used in certain industrial processes. We estimate that during 2009

•		new residential construction accounted for approximately 20% of our net sales,
•		residential and nonresidential repair and remodel activity accounted for approximately 47% of our net sales,
•		new nonresidential construction accounted for approximately 31% of our net sales, and
•		other activities accounted for approximately 2% of our net sales.

Our operations are organized into three reportable segments: North American Gypsum, Building Products Distribution and Worldwide Ceilings.

North American Gypsum: North American Gypsum manufactures and markets gypsum and related products in the United States, Canada and Mexico. It includes United States Gypsum Company, or U.S. Gypsum, in the United States, the gypsum business of CGC Inc., or CGC, in Canada, and USG Mexico, S.A. de C.V., or USG Mexico, in Mexico. North American Gypsum’s products are used in a variety of building applications to finish the walls, ceilings and floors in residential, commercial and institutional construction and in certain industrial applications. Its major product lines include SHEETROCK^® brand gypsum wallboard, a line of joint compounds used for finishing wallboard joints also sold under the SHEETROCK^® brand name, DUROCK^® brand cement board and FIBEROCK^® brand gypsum fiber panels.

Building Products Distribution: Building Products Distribution consists of L&W Supply Corporation and its subsidiaries, or L&W Supply, the leading specialty building products distribution business in the United States. It is a service-oriented business that stocks a wide range of construction materials. It delivers less-than-truckload quantities of construction materials to job sites and places them in areas where work is being done, thereby reducing the need for handling by contractors.

Worldwide Ceilings: Worldwide Ceilings manufactures and markets interior systems products worldwide. It includes USG Interiors, Inc., or USG Interiors, the international interior systems business managed as USG International, and the ceilings business of CGC. Worldwide Ceilings is a leading supplier of interior ceilings products used primarily in commercial applications. Worldwide Ceilings manufactures ceiling tile in the United States and ceiling grid in the United States, Canada, Europe and the Asia-Pacific region. It markets ceiling tile and ceiling grid in the United States, Canada, Mexico, Europe, Latin America and the Asia-Pacific region. It also manufactures and markets joint compound in Europe, Latin America and the Asia-Pacific region.

Geographic Information: In 2009, approximately 80% of our net sales were attributable to the United States. Canada accounted for approximately 10% of our net sales, and other foreign countries accounted for the remaining 10%.

FINANCIAL INFORMATION

Consolidated net sales in 2009 were $3.235 billion, down 30% from 2008. An operating loss of $185 million and a net loss of $787 million, or $7.93 per diluted share, were incurred in 2009. These results compared with an operating loss of $512 million and a net loss of $463 million, or $4.67 per diluted share, in 2008.

     Results for 2009 included restructuring and long-lived asset impairment charges of $80 million and goodwill and other intangible asset impairment charges of $43 million, partially offset by the favorable impact of income, net of fees, of $97 million from a settlement of our lawsuit against Lafarge North America Inc. and its parent, Lafarge S.A., or together Lafarge, discussed under Legal Contingencies below. The net loss for 2009 also reflected a recording of a deferred tax asset valuation allowance of $575 million for all of our U.S. federal deferred tax assets and virtually all of our state deferred tax assets related to 2009 and previous years.

     Results for 2008 included restructuring and long-lived asset impairment charges of $98 million, goodwill and other intangible asset impairment charges of $226 million and start-up costs for new manufacturing facilities totaling $26 million. The net loss for 2008 also reflected an increase in the valuation allowance, primarily on certain state net operating loss and tax credit carryforwards, that had the impact of reducing our income tax benefit by $71 million, net of tax.

     The restructuring and long-lived asset impairment charges in 2009 and 2008 primarily related to salaried workforce reductions, facility shutdowns and the closure of distribution centers.

     As of December 31, 2009, we had cash and cash equivalents of $690 million compared with $471 million as of December 31, 2008. During 2009, we received net proceeds of $287 million from an offering of $300 million of 9.75% senior notes due 2014 and $80 million ($74 million net of fees) of the $105 million payable to us as a result of the settlement of our lawsuit against Lafarge, borrowed an additional $25 million under our ship mortgage facility and repaid the $190 million of outstanding borrowings under our revolving credit facility in connection with its amendment and restatement in January.

MARKET CONDITIONS AND OUTLOOK

Our businesses are cyclical in nature and sensitive to changes in general economic conditions, including, in particular, conditions in the North American housing and construction-based markets. Housing starts in the United States, which are a major source of demand for our products and services, declined in each of the last three years. Based on data issued by the U.S. Census Bureau, U.S. housing starts were an estimated 553,800 units in 2009 compared with housing starts of 905,500 units in 2008, 1.355 million units in 2007 and 1.801 million units in 2006. Housing starts remain near the lowest levels recorded in the last 50 years. In December 2009, the annualized rate of housing starts was reported by the U.S. Census Bureau to be 557,000 units. Industry analysts’ forecasts for new home construction in the United States in 2010 are for a range of from 600,000 to 900,000 units. We are expecting housing starts to be near the low end of that range.

     As a result of the declines in new home construction, the repair and remodel market, which includes renovation of both residential and nonresidential buildings, currently accounts for the largest portion of our sales, ahead of new home construction. Many buyers begin to remodel an existing home within two years of purchase. According to the National Association of Realtors, sales of existing homes in the United States decreased to 4.9 million units in 2008 from 5.7 million units in 2007 and 6.5 million units in 2006 before increasing to an estimated 5.2 million units in 2009. The declines in existing home sales in the prior years contributed to a decrease in demand for our products from the residential repair and remodel market in 2009. Nonresidential repair and remodel activity is driven by factors including lease turnover rates, discretionary business investment, job growth and governmental building-related expenditures. We estimate that residential and nonresidential repair and remodel activity in the United States declined approximately 15% in 2009 compared with the 2008 level. However, a number of industry analysts report that the declines in residential repair and remodel spending are beginning to moderate, and they forecast that spending will begin to increase in 2010. We are estimating that overall repair and remodel spending will increase

approximately 3% in 2010.

     Demand for our products from new nonresidential construction is determined by floor space for which contracts are signed. Installation of gypsum and ceilings products typically follows signing of construction contracts by about a year. According to McGraw-Hill Construction, total floor space for which new nonresidential construction contracts were signed in the United States declined 43% in 2009 compared with 2008. This followed a 17% decrease in 2008 compared with 2007. McGraw-Hill Construction forecasts that new nonresidential construction starts in the United States will decline approximately 5% in 2010 from the 2009 level.

     The markets that we serve, including, in particular, the housing and construction-based markets, are affected by economic conditions, the availability of credit, lending practices, interest rates, the unemployment rate and consumer confidence. Higher interest rates, continued high levels of unemployment and continued restrictive lending practices could have a material adverse effect on our business, financial condition and results of operations. Our businesses are also affected by a variety of other factors beyond our control, including the inventory of unsold homes, which remains at an historically high level, the level of foreclosures, home resale rates, housing affordability, office and retail vacancy rates and foreign currency exchange rates. Since we operate in a variety of geographic markets, our businesses are subject to the economic conditions in each of these geographic markets. General economic downturns or localized downturns in the regions where we have operations may have a material adverse effect on our business, financial condition and results of operations.

     Our results of operations have been adversely affected by the economic downturn and uncertainty in the financial markets. In 2009, our North American Gypsum segment continued to be adversely affected by the sharp drop in the residential housing market and other construction activity. Our Building Products Distribution segment, which serves both the residential and commercial markets, and our Worldwide Ceilings segment, which primarily serves the commercial markets, have been adversely affected by lower product shipments resulting from the significant reduction in commercial construction activity.

     Industry shipments of gypsum wallboard in the United States (including imports) were an estimated 18.4 billion square feet in 2009, down approximately 27% compared with 25.2 billion square feet in 2008, which was down approximately 18% compared with 30.7 billion square feet in 2007. Overall, demand was down 49% from 2006. U.S. Gypsum shipped 4.72 billion square feet of SHEETROCK^® brand gypsum wallboard in 2009, a 34% decrease from 7.16 billion square feet in 2008, which was down 20% from 9.0 billion square feet in 2007. The percentage decline of U.S. Gypsum’s wallboard shipments in each of 2009 and 2008 exceeded the declines for the industry primarily due to our continuing efforts to improve profitability. U.S. Gypsum’s share of the gypsum wallboard market in the United States declined to approximately 27% for 2009 from approximately 29% for 2008.

     Currently, there is significant excess wallboard production capacity industry-wide in the United States. Industry capacity in the United States was approximately 34.4 billion square feet as of December 31, 2009. We estimate that the industry capacity utilization rate was approximately 52% during both the full year and the fourth quarter of 2009. Based on current industry trends and forecasts, demand for gypsum wallboard may increase in 2010, but the magnitude of any increase will be dependent primarily on the levels of housing starts and repair and remodel activity. We project that the industry capacity utilization rate will remain at approximately the 2009 level in 2010. At such a low level of capacity utilization, we expect there to be continued pressure on gypsum wallboard selling prices and gross margins.

RESTRUCTURING AND OTHER INITIATIVES

We have been scaling back our operations in response to market conditions since the downturn began in 2006. During 2009, we permanently closed gypsum wallboard and cement board production facilities in Santa Fe Springs, Calif., and a sealants and finishes production facility in La Mirada, Calif. We also temporarily idled a paper production facility in Clark, N.J. The closed gypsum wallboard and cement board production facilities in Santa Fe Springs had been idled since 2007 and 2008, respectively. Since mid-2006, we have temporarily idled or

permanently closed approximately 3.1 billion square feet of our highest-cost wallboard manufacturing capacity.

     As part of L&W Supply’s ongoing efforts to reduce its cost structure in light of market conditions, it closed 37 distribution centers during 2009 and a total of 98 distribution centers since the downturn began. These closures have been widely dispersed throughout the markets L&W Supply serves. L&W Supply served its customers from 164 centers in the United States as of December 31, 2009.

     We eliminated approximately 820 salaried and hourly positions during 2009. During the three-year period ended December 31, 2009, we have eliminated approximately 3,850 salaried and hourly positions. We will continue to adjust our operations to the conditions in our markets.

     Historically, the housing and other construction markets that we serve have been deeply cyclical. Downturns in demand are typically steep and last several years, but they have typically been followed by periods of strong recovery. If the recovery from this cycle is similar to the recoveries from past cycles, we believe we will generate significant cash flows when our markets recover. As a result, we currently expect to realize the carrying value of all facilities that are not permanently closed through future cash flows. We regularly monitor forecasts prepared by external economic forecasters and review our facilities and other assets to determine which of them, if any, are impaired under applicable accounting rules. During 2009, we recorded asset impairment charges related to write-downs of the value of machinery and equipment at the closed Santa Fe Springs, Calif., and La Mirada, Calif., production facilities and temporarily idled production facilities in Delevan, Wis., and Detroit, Mich. Because we believe that a significant recovery in the housing and other construction markets we serve will begin in the next two to three years, we determined that there were no other material impairments of our long-lived assets during 2009.

     However, if the downturn in our markets does not reverse or the downturn is significantly further extended, additional material write-downs or impairment charges may be required in the future. If these conditions were to materialize or worsen, or if there is a fundamental change in the housing and other construction markets we serve, which individually or collectively lead to a significantly extended downturn or permanent decrease in demand, we may permanently close production and distribution facilities and material impairment charges may be necessary. The magnitude and timing of those charges would be dependent on the severity and duration of the downturn and cannot be determined at this time. Any material cash or noncash impairment charges related to property, plant and equipment would have a material adverse effect on our financial condition and operating results.

     Our focus on costs and efficiencies, including capacity closures and overhead reductions, has helped to mitigate the effects of the downturn in all of our markets. As economic and market conditions warrant, we will evaluate alternatives to further reduce costs, improve operational efficiency and maintain adequate liquidity. Actions to reduce costs and improve efficiencies could require us to record additional restructuring charges. See the discussion under Liquidity and Capital Resources below for information regarding our cash position and credit facilities. See Part I, Item 1A, Risk Factors, for additional information regarding the conditions affecting our businesses, the possibility that additional capital investment would be required to address future environmental laws and regulations and the effects of climate change and other risks and uncertainties that affect us.

KEY OBJECTIVES

While adjusting our operations during this challenging business cycle, we are continuing to focus on the following key objectives:

•		extend our customer satisfaction leadership;
•		improve operating efficiencies and achieve significant cost reductions; and
•		maintain financial flexibility.

Consolidated Results of Operations

														Increase				Increase
														(Decrease)				(Decrease)
(dollars in millions, except per-share data)		2009				2008				2007				2009 vs. 2008				2008 vs. 2007
Net sales		$	3,235			$	4,608			$	5,202				(30)%				(11)%
Cost of products sold			3,090				4,416				4,601				(30)%				(4)%
Gross profit			145				192				601				(24)%				(68)%
Selling and administrative expenses			304				380				408				(20)%				(7)%
Litigation settlement income			(97)				-				-				-				-
Restructuring and long-lived asset impairment charges			80				98				26				(18)%				277%
Goodwill and other intangible asset impairment charges			43				226				-				(81)%				-
Operating profit (loss)			(185)				(512)				167				(64)%				-
Interest expense			165				86				105				92%				(18)%
Interest income			(4)				(7)				(22)				(43)%				(68)%
Other income, net			(9)				(10)				(4)				(10)%				150%
Income taxes (benefit)			450				(118)				11				-				-
Net earnings (loss)			(787)				(463)				77				70%				-
Diluted earnings (loss) per share			(7.93)				(4.67)				0.79				70%				-

NET SALES

Consolidated net sales were $3.235 billion in 2009, $4.608 billion in 2008 and $5.202 billion in 2007. Net sales declined for the third consecutive year in 2009 primarily due to the continued downturn in the United States residential and other construction markets.

     Consolidated net sales in 2009 were down $1.373 billion, or 30%, compared with 2008. This decrease reflected a 25% decline in net sales for North American Gypsum, a 35% decline in net sales for Building Products Distribution and a 22% decline in net sales for Worldwide Ceilings. The lower level of net sales in 2009 for North American Gypsum was largely attributable to a 34% decline in U.S. Gypsum’s SHEETROCK^® brand gypsum wallboard volume, partially offset by a 5% increase in average gypsum wallboard selling prices compared with 2008. Net sales for Building Products Distribution were down primarily due to a 33% decrease in gypsum wallboard volume and a 3% decrease in gypsum wallboard selling prices. Net sales for Worldwide Ceilings were down primarily due to lower volumes in the United States for ceiling grid (down 28%) and ceiling tile (down 17%) and lower demand for ceilings and other products in the European, Asia-Pacific and Latin American markets.

     Consolidated net sales for 2008 were down $594 million, or 11%, compared with 2007. This decrease reflected a 17% decline in net sales for North American Gypsum and a 13% decline in net sales for Building Products Distribution. The lower level of net sales in 2008 for North American Gypsum was largely attributable to declines in U.S. Gypsum’s SHEETROCK^® brand gypsum wallboard volume (down 20%) and selling prices (down 18%) compared with 2007. Net sales for Building Products Distribution were down also due primarily to lower volume (down 23%) and selling prices (down 13%) for gypsum wallboard. Worldwide Ceilings’ net sales increased 4% compared with 2007, primarily reflecting USG Interiors’ higher selling prices for ceiling grid (up 9%) and ceiling tile (up 2%). However, demand from the commercial construction market that Worldwide Ceilings serves began to deteriorate in the second half of 2008 resulting in lower volume levels for USG Interiors’ ceiling grid (down 4%) and ceiling tile (down 1%) in 2008 compared with 2007.

COST OF PRODUCTS SOLD

Cost of products sold totaled $3.090 billion in 2009, $4.416 billion in 2008 and $4.601 billion in 2007.

     Cost of products sold for 2009 decreased $1.326 billion, or 30%, compared with 2008. This decline primarily reflected lower product volumes. Manufacturing costs per unit for U.S. Gypsum’s SHEETROCK^® brand gypsum wallboard were down 2% in 2009 compared with 2008, reflecting a 13% decrease in per unit costs for wastepaper and other raw materials, which more than offset per unit increases of 18% in fixed costs due to lower gypsum wallboard production volume and 1% in energy costs. Cost of products sold in 2009 also reflects a $21 million reduction in start-up costs related to U.S. Gypsum’s gypsum wallboard plants in Washingtonville, Pa., and Norfolk, Va., and its paper mill in Otsego, Mich. For USG Interiors, manufacturing costs per unit increased for ceiling grid, primarily due to higher steel costs, while manufacturing costs per unit for ceiling tile were virtually unchanged, compared to 2008.

     Cost of products sold decreased $185 million, or 4%, in 2008 compared with 2007, primarily reflecting lower product volumes, partially offset by higher raw materials and energy costs and higher fixed costs due to lower production volumes. Manufacturing costs per unit for U.S. Gypsum’s SHEETROCK^® brand gypsum wallboard increased 11% in 2008 compared with 2007 reflecting an 8% increase in per unit costs for wastepaper and other raw materials, a 10% increase in per unit costs for energy and a 28% increase in per unit fixed costs due to lower gypsum wallboard production volume. Cost of products sold in 2008 also included $26 million in start-up costs related to U.S. Gypsum’s facilities mentioned above. For USG Interiors, manufacturing costs per unit increased for ceiling tile primarily due to higher raw materials costs, but decreased for ceiling grid primarily due to lower steel costs.

GROSS PROFIT

Gross profit was $145 million in 2009, $192 million in 2008 and $601 million in 2007. Gross profit as a percentage of net sales was 4.5% in 2009, 4.2% in 2008 and 11.6% in 2007. The increase in the percentage for 2009 compared to 2008 was due principally to increased average selling prices and lower costs for gypsum wallboard for U.S. Gypsum.

SELLING AND ADMINISTRATIVE EXPENSES

Selling and administrative expenses totaled $304 million in 2009, $380 million in 2008 and $408 million in 2007. The decreases in selling and administrative expenses year-over-year primarily reflected the continued company-wide emphasis on reducing expenses, including the impact of salaried workforce reductions. As a percentage of net sales, selling and administrative expenses were 9.4% in 2009, 8.2% in 2008 and 7.8% in 2007. The year-over-year increases in the percentages were attributable to the lower levels of net sales compared to prior years.

LITIGATION SETTLEMENT INCOME

In the fourth quarter of 2009, U.S. Gypsum recorded income, net of fees, of $97 million from the settlement of our lawsuit against Lafarge. Pursuant to the settlement agreement, Lafarge agreed to pay U.S. Gypsum $105 million and the lawsuit was dismissed. Lafarge paid U.S. Gypsum $80 million ($74 million net of fees) in December 2009 and will pay U.S. Gypsum an additional $25 million no later than December 1, 2010. See Legal Contingencies below for additional information related to this settlement.

RESTRUCTURING AND LONG-LIVED ASSET IMPAIRMENT CHARGES

In response to adverse market conditions, we implemented restructuring activities in 2009, 2008 and 2007. In 2009, we recorded restructuring and long-lived asset impairment charges totaling $80 million primarily associated with salaried workforce reductions, the closure of 37 distribution centers and the temporary idling or permanent closure of production facilities.

     In 2008, we recorded restructuring and impairment charges totaling $98 million associated with salaried workforce reductions, the temporary idling or permanent closure of production facilities and the closure of 54 distribution centers.

     In 2007, we recorded restructuring and impairment charges totaling $26 million associated with salaried workforce reductions and the temporary idling or permanent closure of production facilities.

     Total cash payments charged against the restructuring reserve in 2009 amounted to $60 million. We expect future payments to be approximately $21 million in 2010, $8 million in 2011 and $11 million after 2011. All restructuring-related payments in 2009 were funded with cash from operations. We expect that the future payments also will be funded with cash from operations. Annual savings from the 2009 restructuring initiatives are estimated to be approximately $100 million beginning in 2010.

     See Note 2 to the Consolidated Financial Statements for additional information related to restructuring and long-lived asset impairment charges and restructuring reserves.

GOODWILL AND OTHER INTANGIBLE ASSET IMPAIRMENT CHARGES

In 2009, we recorded goodwill and other intangible asset impairment charges totaling $43 million. Of this amount, $29 million related to intangible assets associated with trade names of the L&W Supply reporting unit that comprises the Building Products Distribution segment, and $12 million was L&W Supply’s remaining goodwill balance. An additional $2 million related to intangible assets associated with trade names of the Latin America reporting unit within our Worldwide Ceilings segment. As of December 31, 2009, the remaining amount of intangible assets associated with trade names was $22 million, all of which related to L&W Supply.

     In 2008, we recorded impairment charges of $226 million associated with goodwill and other intangible assets. Of the total charge for goodwill impairment, $201 million related to Building Products Distribution, $12 million to Worldwide Ceilings and $1 million to North American Gypsum. We also recorded an impairment charge of $12 million for the partial write-off of certain trade names related to L&W Supply.

     See Note 3 to the Consolidated Financial Statements for additional information related to these charges and remaining other intangible asset balances as of December 31, 2009.

INTEREST EXPENSE

Interest expense was $165 million in 2009, $86 million in 2008 and $105 million in 2007. Interest expense increased in 2009 compared with 2008 primarily due to a higher level of borrowings, a lower level of capitalized interest in 2009 and a charge of $7 million to write off deferred financing fees in connection with the first-quarter amendment and restatement of our credit agreement. Interest expense in 2007 included charges totaling $14 million to write-off deferred financing fees primarily due to the first-quarter repayment of our tax bridge loan and the third-quarter repayment of our bank term loan.

INTEREST INCOME

Interest income was $4 million in 2009, $7 million in 2008 and $22 million in 2007. The lower levels of interest income in 2009 and 2008 primarily reflected lower interest rates.

OTHER INCOME, NET

Other income, net was $9 million in 2009, $10 million in 2008 and $4 million in 2007. The 2009 amount included the reversal of the remaining $10 million of the embedded derivative liability related to our $400 million of 10% convertible senior notes as a result of the approval of the conversion feature of the notes by our stockholders in February 2009. The 2008 amount included $11 million of income for a change in the fair value of the embedded derivative liability related to those notes.

INCOME TAXES (BENEFIT)

Income tax expense was $450 million in 2009. Income tax benefit was $118 million in 2008. Income tax expense was $11 million in 2007. The 2009 tax expense reflected the recording of a valuation allowance against all of our U.S. federal deferred tax assets and virtually all of our state deferred tax assets as explained below under Realization of Deferred Tax Asset.

NET EARNINGS (LOSS)

A net loss of $787 million, or $7.93 per diluted share, was recorded in 2009. These amounts included the charges of $80 million, or $0.81 per diluted share, for restructuring and long-lived asset impairment, $43 million, or $0.43 per diluted share, for goodwill and other intangible asset impairment and $575 million, or $5.79 per diluted share, for the tax valuation allowance, partially offset by the income, net of fees, of $97 million, or $0.98 per diluted share, from the settlement of our lawsuit against Lafarge.

     A net loss of $463 million, or $4.67 per diluted share, was recorded in 2008. These amounts included the after-tax charges of $177 million, or $1.78 per diluted share, for goodwill and intangible asset impairment, $61 million, or $0.62 per diluted share, for restructuring and long-lived asset impairment and $71 million, or $0.72 per diluted share, for the tax valuation allowance.

     Net earnings in 2007 were $77 million, or $0.79 per diluted share. These amounts included after-tax charges of $16 million, or $0.16 per diluted share, for restructuring and long-lived asset impairment and $9 million, or $0.09 per diluted share, for the write-off of deferred financing fees.

Core Business Results of Operations

		Net Sales												Operating Profit (Loss)
(millions)		2009				2008				2007				2009(a)				2008(b)				2007(c)
North American Gypsum:
United States Gypsum Company		$	1,432			$	1,933			$	2,417			$	(20)			$	(261)			$	30
CGC Inc. (gypsum)			267				332				324				7				(8)				15
USG Mexico, S.A. de C.V.			142				201				193				12				20				26
Other (d)			40				74				83				(8)				8				13
Eliminations			(111)				(182)				(180)				–				–				–
Total			1,770				2,358				2,837				(9)				(241)				84
Building Products Distribution:
L&W Supply Corporation			1,289				1,993				2,291				(172)				(243)				91
Worldwide Ceilings:
USG Interiors, Inc.			429				531				523				53				61				54
USG International			222				304				273				2				(4)				12
CGC Inc. (ceilings)			56				61				61				7				11				9
Eliminations			(44)				(50)				(44)				–				–				–
Total			663				846				813				62				68				75
Corporate			–				–				–				(71)				(97)				(110)
Eliminations			(487)				(589)				(739)				5				1				27
Total USG Corporation		$	3,235			$	4,608			$	5,202			$	(185)			$	(512)			$	167

(a)

Consolidated operating loss in 2009 included:

	•		restructuring and long-lived asset impairment charges of $80 million, of which $39 million related to Building Products Distribution, $25 million to North American Gypsum, $5 million to Worldwide Ceilings and $11 million to Corporate;
	•		goodwill and other intangible asset impairment charges of $43 million, of which $41 million related to Building Products Distribution and $2 million to Worldwide Ceilings; and
	•		litigation settlement income, net of fees, of $97 million from our lawsuit against Lafarge, all of which related to North American Gypsum.

(b)

Consolidated operating loss in 2008 included:

	•		restructuring and long-lived asset impairment charges of $98 million, of which $48 million related to North American Gypsum, $34 million to Building Products Distribution, $5 million to Worldwide Ceilings and $11 million to Corporate; and
	•		goodwill and other intangible asset impairment charges of $226 million, of which $213 million related to Building Products Distribution, $12 million to Worldwide Ceilings and $1 million to North American Gypsum.

(c)		Consolidated operating profit in 2007 included restructuring and long-lived asset impairment charges of $26 million, of which $18 million related to North American Gypsum, $1 million to Building Products Distribution, $2 million to Worldwide Ceilings and $5 million to Corporate.
(d)		Includes a shipping company in Bermuda and a mining operation in Nova Scotia, Canada

NORTH AMERICAN GYPSUM

Net sales for North American Gypsum were $1.770 billion in 2009, $2.358 billion in 2008 and $2.837 billion in 2007. Net sales in 2009 were down 25% from 2008 following a decline of 17% in 2008 compared with 2007. An operating loss of $9 million was incurred in 2009. This loss included the litigation settlement income, net of fees, of $97 million from the settlement of our lawsuit against Lafarge and restructuring and long-lived asset impairment charges of $25 million. An operating loss of $241 million in 2008 included restructuring and long-lived asset impairment charges of $48 million. Operating profit of $84 million in 2007 included restructuring and long-lived asset impairment charges of $18 million.

United States Gypsum Company - 2009 Compared With 2008: Net sales in 2009 declined $501 million, or 26%, compared with 2008. Approximately $271 million of the decrease was attributable to a 34% decline in SHEETROCK^® brand gypsum wallboard volume, which was partially offset by a $28 million increase attributable to a 5% increase in average gypsum wallboard selling prices. Net sales for SHEETROCK^® brand joint treatment products declined $60 million and net sales of other products declined $198 million compared with 2008, principally due to lower volumes.

     An operating loss of $20 million was recorded in 2009 compared with an operating loss of $261 million in 2008. The $241 million favorable change in operating loss included the litigation settlement income, net of fees, of $97 million from the settlement of our lawsuit against Lafarge and a higher gypsum wallboard gross margin, which accounted for $38 million of the improvement, partially offset by a $4 million decrease due to the lower gypsum wallboard volume. Gross profit for SHEETROCK^® brand joint treatment products increased $17 million compared with 2008. A net gross profit increase for other product lines and lower plant start-up costs, selling and administrative expenses and information technology and other expenditures contributed $74 million in operating profit improvement. Restructuring and long-lived asset impairment charges were $24 million in 2009 compared with $43 million in 2008.

     New housing construction remained very weak in 2009, resulting in reduced demand for gypsum wallboard, as discussed above. U.S. Gypsum shipped 4.72 billion square feet of SHEETROCK^® brand gypsum wallboard in 2009, a 34% decrease from 7.16 billion square feet in 2008. U.S. Gypsum’s gypsum wallboard shipments declined 10% in the fourth quarter of 2009 compared to the third quarter of 2009 after remaining relatively stable during the second and third quarters. We estimate that industry capacity utilization rates were approximately 52%, while U.S. Gypsum’s capacity utilization rate averaged 47%, during 2009. For the fourth quarter of 2009, we estimate that the industry operated at 52% of capacity, while U.S. Gypsum’s wallboard plants operated at approximately 42% of capacity.

     In 2009, our nationwide average realized selling price for SHEETROCK^® brand gypsum wallboard was $117.16 per thousand square feet, up 5% from $111.15 in 2008. During the fourth quarter of 2009, our average realized selling price for SHEETROCK^® brand gypsum wallboard was $109.86 per thousand square feet, down 5% from the third quarter of 2009 and down 8% compared with the fourth quarter of 2008.

     Manufacturing costs per unit for U.S. Gypsum’s SHEETROCK^® brand gypsum wallboard were down 2% in 2009 compared with 2008 reflecting a 13% decrease in per unit costs for wastepaper and other raw materials, which more than offset per unit increases of 18% in fixed costs due to lower gypsum wallboard production volume and 1% in energy costs.

     Net sales of SHEETROCK^® brand joint treatment products declined by $60 million, while gross profit increased $17 million, for 2009 compared with 2008. These results reflected 19% lower joint compound volume, partially offset by 7% higher average realized selling prices and 4% lower per unit manufacturing costs. Net sales for DUROCK^® brand cement board were down in 2009 compared with 2008 primarily due to a 20% decrease in volume, partially offset by 1% higher selling prices. Manufacturing costs per unit for cement board decreased 2% in 2009 compared with 2008, but gross profit was adversely affected by the lower volume. Net sales and gross profit for FIBEROCK^® brand gypsum fiber panels declined in 2009 compared with 2008 reflecting a 35% decrease in

volume and 3% higher per unit manufacturing costs, partially offset by 4% higher selling prices.

United States Gypsum Company - 2008 Compared With 2007: Net sales in 2008 declined $484 million, or 20%, from 2007. Approximately $253 million of the decrease in net sales was attributable to a 20% decrease in SHEETROCK^® brand gypsum wallboard volume and $170 million was attributable to an 18% decrease in average gypsum wallboard selling prices. Net sales for SHEETROCK^® brand joint treatment products declined $67 million and net sales of other products increased $6 million compared with 2007.

     An operating loss of $261 million was recorded in 2008 compared with operating profit of $30 million in 2007. The $291 million decline in operating profit was primarily attributable to a 95% decrease in gypsum wallboard gross margin, which lowered operating profit by $248 million, and the decline in gypsum wallboard volume, which lowered operating profit by $68 million. Gross profit for SHEETROCK^® brand joint treatment products declined $34 million. Restructuring and long-lived asset impairment charges of $43 million were recorded in 2008 compared with charges of $15 million in 2007. The factors that contributed to the lower level of operating profit in 2008 were partially offset by a net gross profit increase for other product lines, lower information technology, promotional and other expenditures and lower selling and administrative expenses, which aggregated $87 million in operating profit improvement.

     Lower demand from the new residential construction market throughout 2008 resulted in reduced demand for gypsum wallboard and lower selling prices. U.S. Gypsum shipped 7.16 billion square feet of SHEETROCK^® brand gypsum wallboard in 2008, a 20% decrease from 9.0 billion square feet in 2007. We estimate that industry capacity utilization rates were approximately 62%, while U.S. Gypsum’s capacity utilization rate averaged 65%, during 2008.

     In 2008, our nationwide average realized selling price for SHEETROCK^® brand gypsum wallboard was $111.15 per thousand square feet, down 18% from $134.93 in 2007.

     Manufacturing costs per unit for U.S. Gypsum’s SHEETROCK^® brand gypsum wallboard increased 11% in 2008 compared with 2007 reflecting an 8% increase in per unit costs for wastepaper and other raw materials, a 10% increase in per unit costs for energy and a 28% increase in per unit fixed costs due to lower gypsum wallboard production volume.

     Net sales and gross profit for SHEETROCK^® brand joint treatment products declined by $67 million and $34 million, respectively, in 2008 compared with 2007 primarily due to lower joint compound volume (down 17%), partially offset by higher average realized selling prices (up 4%). Gross profit for joint compound products also was adversely affected by higher per unit manufacturing costs (up 11%). Net sales for DUROCK^® brand cement board were down in 2008 compared with 2007 primarily due to a 17% decrease in volume. Gross profit for cement board was adversely affected by higher per unit manufacturing costs (up 3%). Net sales and gross profit for FIBEROCK^® brand gypsum fiber panels improved in 2008 compared with 2007 reflecting higher selling prices (up 5%) and slightly lower per unit manufacturing costs (down 1%), while volume was down 2%.

CGC Inc.: Net sales declined $65 million, or 20%, in 2009 compared with 2008. Sales of SHEETROCK^® brand gypsum wallboard decreased $27 million, reflecting a 17% decline in volume. The unfavorable effects of currency translation resulting from a stronger U.S. dollar reduced net sales by $20 million and lower sales of other products and lower outbound freight reduced net sales by $18 million. Operating profit of $7 million was recorded in 2009 compared with an operating loss of $8 million in 2008. This improvement in operating profit despite lower net sales primarily reflected lower selling and administrative, information technology and other expenditures, which contributed $14 million in operating profit improvement, partially offset by a $2 million decrease in gross profit for gypsum wallboard and other products primarily due to lower volumes. Restructuring charges related to salaried workforce reductions totaled $1 million in 2009 compared with $4 million in 2008.

     Comparing 2008 with 2007, net sales increased $8 million, or 2%, primarily due to increased sales of joint treatment and other nonwallboard products, increased sales for CGC’s distribution subsidiary, higher outbound

freight and the favorable effects of currency translation (together up $13 million), partially offset by a $5 million decrease in sales of SHEETROCK^® brand gypsum wallboard due to a 12% decline in selling prices, partially offset by a 10% increase in volume. An operating loss of $8 million was recorded in 2008 compared with operating profit of $15 million in 2007. This $23 million decline in operating profit primarily reflected a $19 million decrease in gross profit for gypsum wallboard. Operating profit also was adversely affected by a higher cost of imported gypsum products (up $10 million) due to the decline of the Canadian dollar versus the U.S. dollar in the fourth quarter of 2008. Restructuring charges related to salaried workforce reductions totaled $4 million in 2008 compared with $3 million in 2007. Gross profit for joint treatment and other products increased $5 million and selling and administrative expenses decreased $2 million in 2008 compared with 2007.

USG Mexico, S.A. de C.V.: Net sales in 2009 for our Mexico-based subsidiary were down $59 million, or 29%, compared with 2008. Sales of gypsum wallboard declined $19 million primarily due to a 25% decrease in volume. Sales declined $12 million for drywall steel, while the aggregate net sales of other products were down $17 million due to lower volumes. The unfavorable effects of currency translation resulting from a stronger U.S. dollar reduced net sales by $11 million. Operating profit was $12 million in 2009 compared with $20 million in 2008. This decline primarily reflected a $10 million decrease in gross profit for gypsum wallboard as a result of the lower volume. Lower levels of gross profit for other product lines were offset by reductions in selling and administrative expenses and other costs. There were no restructuring or goodwill impairment charges in 2009, while charges aggregating $2 million were recorded in 2008.

     Comparing 2008 with 2007, net sales for USG Mexico were up $8 million, or 4%, largely due to increased sales of drywall steel (up $6 million), DUROCK^® brand cement board (up $2 million) and other products (up $3 million), partially offset by lower sales of gypsum wallboard (down $3 million). However, operating profit declined $6 million, or 23%, compared with 2007 principally due to a 24% decrease in gross profit for gypsum wallboard as a result of lower selling prices and higher manufacturing costs. Gross profits for other product lines also were adversely affected by higher manufacturing costs. A restructuring charge of $1 million related to salaried workforce reductions was recorded in 2008. A goodwill impairment charge of $1 million also was recorded in 2008.

BUILDING PRODUCTS DISTRIBUTION

L&W Supply’s net sales in 2009 were $1.289 billion, down $704 million, or 35%, compared with 2008. Net sales in 2009 reflected lower volumes for all major product categories as a result of weaker residential and commercial construction demand. A 33% decrease in gypsum wallboard shipments adversely affected net sales by $218 million, and a 3% decrease in average gypsum wallboard selling prices lowered net sales by $11 million. Net sales of construction metal products decreased $240 million, or 46%, and net sales of ceilings products decreased $57 million, or 20%. Net sales of all other non-wallboard products decreased $178 million, or 34%. As a result of lower product volumes, same-location net sales for 2009 were down 31% compared with 2008. L&W Supply’s gypsum wallboard volume fell 19% and average selling prices were down 3% in the fourth quarter of 2009 compared with the third quarter of 2009.

     An operating loss of $172 million was incurred in 2009 compared with an operating loss of $243 million in 2008. The $71 million improvement was primarily due to a $172 million decrease in goodwill and other intangible asset impairment charges in 2009 compared with 2008. The lower gypsum wallboard shipments in 2009 adversely affected operating profit by $53 million, and a 20% decline in gypsum wallboard gross margin, including the impact of rebates, adversely affected operating profit by $27 million. Gross profit for other product lines decreased $133 million. These unfavorable factors were partially offset by a $117 million decrease in operating expenses attributable to L&W Supply’s cost reduction programs designed to mitigate the effects of the lower product volumes and resultant gross profit declines. Those programs included the closure of selected distribution centers, a fleet reduction program and decreases in discretionary spending. Restructuring and long-lived asset impairment charges were $39 million in 2009 compared with $34 million in 2008.

     Comparing 2008 with 2007, L&W Supply’s net sales were down $298 million, or 13%, primarily due to a 23%

decrease in gypsum wallboard shipments and a 13% decline in average gypsum wallboard selling prices as a result of the weak residential construction market. The lower shipments adversely affected net sales by $225 million and the lower selling prices adversely affected net sales by $101 million. Net sales of construction metal products increased $90 million, or 21%, and net sales of ceilings products increased $27 million, or 10%. However, net sales of all other nonwallboard products fell $89 million, or 14%. As a result of lower product volumes and gypsum wallboard selling prices, same-location net sales for 2008 were down 18% compared with 2007.

     An operating loss of $243 million was incurred in 2008 compared with operating profit of $91 million in 2007. The $334 million decline in operating results reflected goodwill and other intangible asset impairment charges of $213 million and restructuring and long-lived asset impairment charges of $34 million primarily related to the closure of 54 distribution centers and salaried workforce reductions. In addition, the decline in gypsum wallboard shipments adversely affected operating profit by $63 million and a 24% decline in gypsum wallboard gross margin and the impact of rebates adversely affected operating profit by $59 million. Gross profit from other product lines increased $4 million and center overhead and delivery expense decreased $31 million.

     In the current market environment, L&W Supply is focusing on reducing its cost structure and optimizing its asset utilization. It closed 37 distribution centers in 2009 and 54 centers in 2008. The closures have been widely dispersed throughout the markets that L&W Supply serves. As of December 31, 2009, L&W Supply continued to serve its customers from 164 centers in the United States. It operated 198 centers in the United States as of December 31, 2008 and 247 centers in the United States and Mexico as of December 31, 2007.

WORLDWIDE CEILINGS

Worldwide Ceilings had net sales of $663 million in 2009, which represented a decrease of $183 million, or 22%, compared with 2008’s record results. Operating profit in 2009 was $62 million, a decrease of $6 million, or 9%, compared with 2008. Operating profit in 2009 was adversely affected by restructuring charges of $5 million related to salaried workforce reductions and intangible asset impairment charges of $2 million. Operating profit in 2008 was adversely affected by a goodwill impairment charge of $12 million and restructuring charges of $5 million related to salaried workforce reductions. Net sales in 2008 of $846 million represented an increase of $33 million, or 4%, compared with 2007. Operating profit in 2008 was $68 million, a decrease of $7 million, or 9%, compared with 2007.

USG Interiors, Inc.: Net sales in 2009 for our U.S. ceilings business fell to $429 million, a decrease of $102 million, or 19%, compared with 2008 primarily due to lower volumes for ceiling grid and tile. Operating profit declined to $53 million, a decrease of $8 million, or 13%, compared with 2008 primarily due to the lower volumes, partially offset by lower selling and administrative expenses.

     Net sales in 2009 declined $44 million for ceiling grid, $25 million for ceiling tile and $33 million for other products compared with 2008 due to reduced commercial construction activity. Net sales for ceiling grid were down as a result of 28% lower volume, which adversely affected sales by $48 million, partially offset by 3% higher selling prices that contributed a $4 million increase in net sales. Net sales for ceiling tile were down as a result of 17% lower volume, which adversely affected sales by $30 million, partially offset by 4% higher selling prices that contributed a $5 million increase in net sales. Net sales for other products also were down primarily as a result of lower volumes.

     Gross profit for ceiling grid declined $16 million in 2009 compared with 2008 primarily due to the lower volume. A slightly higher gross margin for ceiling grid reflected higher grid selling prices, partially offset by higher per unit manufacturing costs, primarily due to higher steel costs. Gross profit for ceiling tile declined $1 million in 2009 compared with 2008. The lower volume for ceiling tile adversely affected gross profit by $6 million. This decline was largely offset by the 4% increase in ceiling tile selling prices that contributed a $5 million increase in gross profit, while per unit manufacturing costs were virtually unchanged. Lower selling and administrative expenses, partially offset by lower gross profit for other products, resulted in a $7 million favorable impact on

operating profit. There were no restructuring charges in 2009, while restructuring charges of $2 million were recorded in 2008.

     Comparing 2008 with 2007, net sales for USG Interiors were $531 million, an increase of $8 million, or 2%, and operating profit was $61 million, an increase of $7 million, or 13%. These results primarily reflected higher selling prices for ceiling grid and tile in 2008. However, demand from the commercial construction market that USG Interiors serves began to deteriorate in the second half of 2008, resulting in lower volume levels for ceiling grid and ceiling tile compared with 2007.

     Net sales in 2008 increased $8 million for ceiling grid and $1 million for ceiling tile while sales of other products declined $1 million compared with 2007. Net sales for ceiling grid benefited from higher selling prices (up 9%) that contributed a $14 million increase in sales and more than offset a 4% decrease in volume, which adversely affected sales by $6 million. Net sales for ceiling tile benefited from higher selling prices (up 2%) that contributed a $3 million increase in sales and more than offset a 1% decrease in volume, which adversely affected sales by $2 million.

     A 37% increase in gross margin for ceiling grid in 2008 increased gross profit by $17 million, reflecting the higher selling prices and lower per unit manufacturing costs compared with 2007. The decrease in costs primarily reflected lower steel costs. This increase in gross profit for ceiling grid more than offset a $2 million decline as a result of the lower volume. An 11% decrease in gross margin for ceiling tile in 2008 decreased gross profit by $5 million, reflecting higher per unit manufacturing costs, partially offset by the higher selling prices compared with 2007. The increase in ceiling tile costs primarily reflected higher per unit raw materials costs. Gross profits for other products were down $2 million in 2008. Restructuring charges of $2 million were recorded in 2008 compared with $1 million in 2007.

USG International: Net sales of $222 million in 2009 declined $82 million, or 27%, compared with 2008 primarily due to lower demand for ceiling grid and joint treatment in Europe, lower demand for ceiling grid and tile in the Asia-Pacific region, lower demand for gypsum products in Latin America and the unfavorable effects of currency translation resulting from a stronger U.S. dollar. Operating profit was $2 million in 2009 compared with an operating loss of $4 million in 2008. Operating profit in 2009 included charges of $5 million for restructuring and $2 million for intangible asset impairment. The operating loss in 2008 included charges of $12 million for goodwill impairment and $3 million for restructuring.

     Net sales in 2008 for USG International increased $31 million, or 11%, compared with 2007. However, an operating loss of $4 million was recorded in 2008 compared with operating profit of $12 million in 2007. The improvement in net sales primarily reflected increased demand for ceiling grid and joint treatment in Europe and ceiling tile in the Asia-Pacific region as well as the favorable effects of currency translation. However, demand for ceiling grid and joint treatment in Europe decreased in the fourth quarter of 2008 compared with prior 2008 quarters and the fourth quarter of 2007. Operating profit fell in 2008 largely due to goodwill and other intangible asset impairment charges of $12 million and restructuring charges of $3 million related to salaried workforce reductions.

CGC Inc.: Net sales of $56 million in 2009 were down $5 million, or 8%, compared with 2008. Operating profit was $7 million in 2009 compared with $11 million for 2008. These results primarily reflected lower demand for ceiling grid and tile in Canada.

     Net sales of $61 million in 2008 were unchanged from 2007. However, operating profit increased $2 million to $11 million primarily due to higher selling prices for ceiling grid and ceiling tile.

Liquidity and Capital Resources

LIQUIDITY

As of December 31, 2009, we had cash and cash equivalents of $690 million compared with $471 million as of December 31, 2008. During 2009, we received net proceeds of $287 million from an offering of $300 million of 9.75% senior notes due 2014 and $80 million ($74 million net of fees) of the $105 million payable to us as a result of the settlement of our lawsuit against Lafarge, borrowed an additional $25 million under our ship mortgage facility and repaid the $190 million of outstanding borrowings under our revolving credit facility in connection with its amendment and restatement in January. Our total liquidity as of December 31, 2009 was $808 million, comprised of the $690 million of cash and cash equivalents and $118 million in borrowing availability under our revolving credit facilities.

     Our amended and restated credit facility, which is guaranteed by, and secured by trade receivables and inventory of, our significant domestic subsidiaries, matures in 2012 and provides for revolving loans of up to $500 million based upon a borrowing base determined by reference to the levels of trade receivables and inventory securing the facility. Availability under the credit facility will increase or decrease depending on changes to the borrowing base over time. The amended and restated facility has a single financial covenant – a minimum fixed charge coverage ratio – that will only apply if borrowing availability under the facility is less than $75 million. We do not satisfy the fixed charge coverage ratio as of the date of this report. As of the most recent borrowing base report delivered under the credit facility, which reflects trade receivables and inventory as of December 31, 2009, our borrowing availability under the revolving credit facility, taking into account outstanding letters of credit of $84 million and the $75 million availability requirement for the minimum fixed charge coverage ratio not to apply, was $90 million. We also have Can. $30 million available for borrowing under CGC’s credit facility, which is secured by substantially all of CGC’s assets other than its intellectual property. The U.S. dollar equivalent of borrowings available under CGC’s credit facility as of December 31, 2009 was $28 million.

     We have taken significant actions to reduce the cash needed to operate our businesses. Operating cash inflows improved in 2009 from 2008 levels as a result of cost savings from our 2008 restructuring actions, additional cost reduction actions taken during 2009 and working capital initiatives. Operating cash inflows are expected to partially fund our cash requirements on an ongoing basis. Any shortfall is expected to be funded by cash on hand, borrowings under our revolving credit facilities, other potential borrowings and potential sales of surplus property.

     Our total capital expenditures for 2009 were $44 million, a $194 million reduction from 2008, reflecting the substantial completion of a number of strategic investments. We expect that our total capital expenditures for 2010 will be approximately $50 million. Interest payments totaled $139 million in 2009 and are expected to be $167 million in 2010 due to the higher level of debt outstanding. We have no term debt maturities until 2014, other than approximately $7 million of annual debt amortization under our ship mortgage facility.

     We believe that cash on hand, cash available from future operations and our credit facilities will provide sufficient liquidity to fund our operations for at least the next 12 months. However, operating cash flows are expected to be negative and reduce our liquidity in 2010. Cash requirements include, among other things, capital expenditures, working capital needs, debt amortization, interest and other contractual obligations. Additionally, we may consider selective strategic transactions and alliances that we believe create value, including mergers and acquisitions, joint ventures, partnerships or other business combinations, restructurings and dispositions. Transactions of these types, if any, may result in material cash expenditures or proceeds.

     Despite our present liquidity position, an uncertainty exists as to whether we will have sufficient cash flows to weather a significantly extended downturn or further significant decrease in demand for our products. As discussed above, during the last three years, we took actions to reduce costs and increase our liquidity. We will continue our efforts to maintain our financial flexibility, but there can be no assurance that our efforts will be sufficient to withstand the impact of extended negative economic conditions. Under those conditions, our funds from operations

and the other sources referenced above may not be sufficient to fund our operations or pursue strategic transactions, and we may be required to seek alternative sources of financing. There is no assurance, however, that we will be able to obtain financing on acceptable terms, or at all. See Part I, Item 1A, Risk Factors.

CASH FLOWS

The following table presents a summary of our cash flows:

(millions)		2009				2008				2007
Net cash provided by (used for):
Operating activities		$	139			$	(165)			$	1,307
Investing activities			(36)				(252)				(730)
Financing activities			109				608				(853)
Effect of exchange rate changes on cash			7				(17)				8
Net increase (decrease) in cash and cash equivalents		$	219			$	174			$	(268)

Operating Activities: The variation between 2009 and 2008 was largely attributable to cash flows of $186 million provided by working capital in 2009 compared with the use of $17 million in 2008. This variation reflected the net impact of a lower level of business on receivables, inventories and payables during 2009 and an increased emphasis on working capital management. The improvement in 2009 cash flows from operating activities also reflected the receipt of $80 million ($74 million net of fees) of the $105 million payable to us as a result of the settlement of our lawsuit against Lafarge.

Investing Activities: The variation between 2009 and 2008 primarily reflected a $194 million reduction in the level of capital expenditures in 2009, as explained below, and the receipt of net proceeds of $16 million from asset dispositions in 2009.

Financing Activities: The variation between 2009 and 2008 primarily reflected our debt financing initiatives in each of these years. In 2009, we completed an offering of $300 million of 9.75% senior notes, borrowed an additional $25 million under our ship mortgage facility and repaid $190 million of outstanding borrowings under our revolving credit facility. In 2008, we completed the private placement of $400 million aggregate principal amount of 10% convertible senior notes, borrowed a net $190 million under our revolving credit facility and borrowed $29 million under our ship mortgage facility.

CAPITAL EXPENDITURES

Capital spending amounted to $44 million in 2009 compared with $238 million in 2008. Because of the high level of investment that we made in our operations from 2006 through 2008 and the current market environment, our capital spending in 2009 was down $194 million compared with 2008. We plan to continue to limit our capital spending in 2010 to approximately $50 million. Approved capital expenditures for the replacement, modernization and expansion of operations totaled $242 million as of December 31, 2009 compared with $263 million as of December 31, 2008. The approved expenditures as of December 31, 2009 included $210 million for construction of a new, low-cost gypsum wallboard plant in Stockton, Calif. Because of the current market environment, commencement of construction of this plant has been delayed until 2012, with production targeted to begin in 2014. We expect to fund our capital expenditures program with cash from operations and, if determined to be appropriate and they are available, borrowings under our revolving credit facilities or other alternative financings.

WORKING CAPITAL

As of December 31, 2009, working capital (current assets less current liabilities) amounted to $939 million, and the ratio of current assets to current liabilities was 2.91-to-1. As of December 31, 2008, working capital amounted to $738 million, and the ratio of current assets to current liabilities was 1.98-to-1.

Cash and Cash Equivalents: As of December 31, 2009, we had cash and cash equivalents of $690 million compared with $471 million as of December 31, 2008. During 2009, we received net proceeds of $287 million from an offering of $300 million of 9.75% senior notes due 2014 and $80 million ($74 million net of fees) of the $105 million payable to us as a result of the settlement of our lawsuit against Lafarge, borrowed an additional $25 million under our ship mortgage facility and repaid the $190 million of outstanding borrowings under our revolving credit facility in connection with its amendment and restatement in January.

Receivables: As of December 31, 2009, receivables were $357 million, down $110 million, or 24%, from $467 million as of December 31, 2008. This decline was primarily attributable to (1) a $103 million decrease in customer receivables as a result of a 24% decline in consolidated net sales for December 2009 compared with December 2008, (2) a $24 million decrease in collateral that we were required to provide to our derivative counterparties as a result of changes in the fair value of our derivatives and (3) the receipt of an $11 million cross-currency swap settlement in 2009. These decreases were partially offset by a receivable of $25 million for the remaining amount due from the Lafarge settlement.

Inventories: As of December 31, 2009, inventories were $289 million, down $115 million, or 28%, from $404 million as of December 31, 2008. This decrease primarily reflected reductions of $80 million in finished goods and work in progress and $35 million in raw materials as a result of our inventory management initiatives and the weak market conditions.

Accounts Payable: As of December 31, 2009, accounts payable were $205 million, down $15 million, or 7%, from $220 million as of December 31, 2008. The lower level of accounts payable was primarily due to a reduction in spending, largely offset by our efforts to extend payment terms with a substantial number of our suppliers.

Accrued Expenses: As of December 31, 2009, accrued expenses were $273 million, down $65 million, or 19%, from $338 million as of December 31, 2008. The lower level of accrued expenses primarily reflected (1) a $29 million decrease in restructuring-related accruals, (2) the reversal of the remaining $10 million of embedded derivative liability related to our $400 million of 10% convertible senior notes as a result of approval of the conversion feature of the notes by our stockholders in February 2009 and (3) a $32 million decrease in accruals related to the fair value of our outstanding hedge portfolio.

DEBT

Total debt, consisting of senior notes, convertible senior notes, industrial revenue bonds and outstanding borrowings under our revolving credit facility and our ship mortgage facility, amounted to $1.962 billion as of December 31, 2009 and $1.836 billion as of December 31, 2008. During 2009, we completed an offering of $300 million of 9.75% senior notes due 2014, borrowed an additional $25 million under our ship mortgage facility and repaid the $190 million of outstanding borrowings under our revolving credit facility in connection with its amendment and restatement in January. There were no borrowings outstanding under our revolving credit facility or CGC’s credit facility as of December 31, 2009. See Note 4 to the Consolidated Financial Statements for additional information about our debt.

Realization of Deferred Tax Asset

As of December 31, 2009, we had federal net operating loss, or NOL, carryforwards of approximately $1.161 billion that are available to offset future federal taxable income and will expire in the years 2026-2029. In addition, as of that date, we had federal alternative minimum tax credit carryforwards of approximately $53 million that are available to reduce future regular federal income taxes over an indefinite period. In order to fully realize the U.S. federal net deferred tax assets, taxable income of approximately $1.311 billion would need to be generated during the period before their expiration. In addition, we have federal foreign tax credit carryforwards of $6 million that will expire in 2015.

     As of December 31, 2009, we had a gross deferred tax asset related to our state NOLs and tax credit

carryforwards of $250 million, of which $11 million expire in years 2010-2011, $14 million expire in 2012-2014, $31 million expire in 2015-2017, $17 million expire in 2018-2020, $49 million expire in 2021-2025, $105 million expire in 2026-2027, $12 million expire in 2028, $10 million expire in 2029 and $1 million does not expire. To the extent that we do not generate sufficient state taxable income within the statutory carryforward periods to utilize the NOL and tax credit carryforwards in these states, they will expire unused.

     Accounting rules require a reduction of the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. The need to establish valuation allowances for deferred tax assets is assessed periodically. In assessing the requirement for, and amount of, a valuation allowance in accordance with the more-likely-than-not standard, we give appropriate consideration to all positive and negative evidence related to the realization of the deferred tax assets. Under the accounting rules, this assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, our experience with operating loss and tax credit carryforwards not expiring unused and tax planning alternatives. A history of cumulative losses for a certain threshold period is a significant form of negative evidence used in the assessment, and the accounting rules require that we have a policy regarding the duration of the threshold period. If a cumulative loss threshold is met, forecasts of future profitability may not be used as positive evidence related to the realization of the deferred tax assets in the assessment. Consistent with practices in the home building and related industries, we have a policy of four years as our threshold period for cumulative losses.

     Based on our assessment, the uncertain and volatile market conditions in which we currently operate and the fact that we are now in a four-year cumulative loss position, we recorded a noncash deferred tax asset valuation allowance of $575 million in the year ended December 31, 2009. Recording this allowance will have no impact on our ability to utilize our U.S. federal and state NOL and tax credit carryforwards to offset future U.S. profits. We continue to believe that we ultimately will have sufficient U.S. profitability during the remaining NOL and tax credit carryforward periods to realize substantially all of the economic value of the federal NOLs and some of the state NOLs before they expire. In future periods, the valuation allowance can be reversed based on sufficient evidence indicating that it is more likely than not that a portion of our deferred tax assets will be realized. Our net deferred tax liabilities were $15 million as of December 31, 2009, and net deferred tax assets were $435 million as of December 31, 2008.

     We also had NOL and tax credit carryforwards in various foreign jurisdictions in the amount of $4 million as of December 31, 2009, against a portion of which we have historically maintained a valuation allowance.

     The Internal Revenue Code imposes limitations on a corporation’s ability to utilize NOLs if it experiences an “ownership change.” In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percentage points over a three-year period. If we were to experience an ownership change, utilization of our NOLs would be subject to an annual limitation determined by multiplying the market value of our outstanding shares of stock at the time of the ownership change by the applicable long-term tax-exempt rate, which was 4.16% for December 2009. Any unused annual limitation may be carried over to later years within the allowed NOL carryforward period. The amount of the limitation may, under certain circumstances, be increased or decreased by built-in gains or losses held by us at the time of the change that are recognized in the five-year period after the change. Many states have similar limitations. If an ownership change had occurred as of December 31, 2009, our annual U.S. federal NOL utilization would have been limited to approximately $58 million per year.

Contractual Obligations and Other Commitments

CONTRACTUAL OBLIGATIONS

As of December 31, 2009, our contractual obligations and commitments were as follows:

		Payments Due by Period
										2011-				2013-				There-
(millions)		Total				2010				2012				2014				after
Debt obligations (a)		$	1,988			$	7			$	14			$	308			$	1,659
Other long-term liabilities (b)			696				4				26				5				661
Interest payments (c)			1,449				167				332				325				625
Purchase obligations (d)			487				52				89				97				249
Capital expenditures (e)			242				13				32				188				9
Operating leases			369				79				113				65				112
Unrecognized tax benefits (f)			35				6				8				15				6
Total		$	5,266			$	328			$	614			$	1,003			$	3,321

     For 2010, our defined benefit pension plans have no minimum funding requirements under the Employee Retirement Income Security Act of 1974. We are evaluating our level of funding for pension plans and currently estimate that we will contribute approximately $45 million to our pension plans in 2010.

     The above table excludes liabilities related to postretirement benefits (retiree health care and life insurance). We voluntarily provide postretirement benefits for eligible employees and retirees. The portion of benefit claim payments we made in 2009 was $16 million. See Note 7 to the Consolidated Financial Statements for additional information on future expected cash payments for pension and other postretirement benefits.

OFF-BALANCE-SHEET ARRANGEMENTS

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

GUARANTEES

USG is party to a variety of agreements under which it may be obligated to indemnify a third party with respect to certain matters. We do not consider the maximum potential amount of future payments that we could be required to make under these agreements to be material.

Legal Contingencies

We are named as defendants in litigation arising from our operations, including claims and lawsuits arising from the operation of our vehicles, product warranties, personal injury and commercial disputes. This litigation includes multiple lawsuits, including class actions, filed principally in Florida and Louisiana in 2009, relating to Chinese-manufactured drywall distributed by L&W Supply Corporation. In those cases, the plaintiffs allege that the Chinese-manufactured drywall is defective and emits excessive sulfur compounds which have caused, among other things, property damage to the homes in which the drywall was installed and potential health hazards to the residents of those homes.

     We have also been notified by state and federal environmental protection agencies of possible involvement as one of numerous “potentially responsible parties” in a number of Superfund sites in the United States. As a potentially responsible party, we may be responsible to pay for some part of the cleanup of hazardous waste at those sites. In most of these sites, our involvement is expected to be minimal. In addition, we are involved in environmental cleanups of other property that we own or owned.

     We believe that appropriate reserves have been established for our potential liability in connection with these matters, taking into account the probability of liability, whether our exposure can be reasonably estimated and, if so, our estimate of our liability or the range of our liability. However, we continue to review these accruals as additional information becomes available and revise them as appropriate. We do not expect the environmental matters or any other litigation matters involving USG to have a material adverse effect upon our results of operations, financial position or cash flows.

     U.S. Gypsum was the plaintiff in a lawsuit against Lafarge. The lawsuit, filed in 2003 in the federal district court for the Northern District of Illinois, alleged that Lafarge misappropriated our trade secrets and other information through hiring certain U.S. Gypsum employees (a number of whom were also defendants), and that Lafarge infringed one of our patents regarding a method for producing gypsum wallboard. On December 4, 2009, U.S. Gypsum entered into a settlement agreement with Lafarge to resolve the lawsuit. Pursuant to the settlement agreement, Lafarge agreed to pay U.S. Gypsum $105 million, the lawsuit was dismissed, and U.S. Gypsum granted Lafarge a fully paid-up license to use certain technology. Lafarge paid U.S. Gypsum $80 million ($74 million net of fees) in December 2009 and will pay U.S. Gypsum an additional $25 million no later than December 1, 2010.

     See Note 16 to the Consolidated Financial Statements for additional information regarding litigation matters. See, also, Part I, Item 1A, Risk Factors, for information regarding the possible effects of environmental laws and regulations on our businesses.

Critical Accounting Policies

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

OTHER INTANGIBLE ASSETS

We have both indefinite and definite lived other intangible assets. Other intangible assets determined to have indefinite useful lives, primarily comprised of trade names, are not amortized. We perform impairment tests for intangible assets with indefinite useful lives annually, or more frequently if events or circumstances indicate they might be impaired. The impairment tests consist of a comparison of the fair value of an intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. An income approach is used for valuing trade names. Assumptions used in the income approach include projected revenues and assumed royalty, long-term growth and discount rates.

     In 2009, our impairment tests for trade names resulted in $31 million of impairment charges that were included in goodwill and other intangible asset impairment charges in the 2009 consolidated statement of operations. These charges were primarily related to our Building Products Distribution segment. Key assumptions used in the impairment tests were (1) a pretax royalty rate of 0.5% based on comparable royalty agreements, (2) a long-term growth rate of 2.5% based on our historical revenue growth and (3) a discount rate of 15.0% based on our current cost of capital of 13.5% plus an adjustment of 1.5% for risk related to trade name valuation. Changes in the key assumptions used in the impairment tests for our trade names would not have a material impact on our results of operations in future periods.

     In 2008, our impairment tests for trade names resulted in $13 million of impairment charges, $12 million of which were included in goodwill and other intangible asset impairment charges in the 2008 consolidated statement of operations. These charges related to our Building Products Distribution segment. Key assumptions used in the impairment tests were (1) a pretax royalty rate of 1.25% based on comparable royalty agreements, (2) a long-term growth rate of 2.5% based on our historical revenue growth and (3) a discount rate of 15.5% based on our then current cost of capital of 14.0% plus an adjustment of 1.5% for risk related to trade name valuation.

     In 2007, we recorded impairment charges of $3 million related to trade names.

     Other intangible assets with definite lives, primarily customer relationships, are amortized over their useful lives. Judgment is used in assessing whether the carrying amount is not expected to be recoverable over the assets’ estimated remaining useful lives and whether conditions exist to warrant a revision to the remaining periods of amortization. An asset impairment would be indicated if the sum of the expected future net pretax cash flows from the use of an asset group (undiscounted and without interest charges) is less than the carrying amount of the asset group. An impairment loss would be measured based on the difference between the fair value of the asset group and its carrying value. Customer relationships are currently being amortized over 10 years using annualized attrition rates. We periodically compare the current attrition rate of existing customers with the attrition rates assumed in the initial determination of the useful life to ensure that the useful life is still appropriate. As of December 31, 2009, we determined that no impairment of customer relationships existed nor was a revision to the remaining useful life necessary.

PROPERTY, PLANT AND EQUIPMENT

We assess our property, plant and equipment for possible impairment whenever events or changes in circumstances indicate that the carrying values of the assets may not be recoverable or a revision of remaining useful lives is necessary. Such indicators may include economic and competitive conditions, changes in our business plans or management’s intentions regarding future utilization of the assets or changes in our commodity prices. An asset impairment would be indicated if the sum of the expected future net pretax cash flows from the use of an asset (undiscounted and without interest charges) is less than the carrying amount of the asset. An impairment loss would be measured based on the difference between the fair value of the asset and its carrying value. The determination of fair value is based on an expected present value technique, in which multiple cash flow scenarios that reflect a range of possible outcomes and a risk-free rate of interest are used to estimate fair value, or on a market appraisal.

     Determination as to whether and how much an asset is impaired involves significant management judgment involving highly uncertain matters, including estimating the future success of product lines, future sales volumes, future selling prices and costs, alternative uses for the assets, and estimated proceeds from disposal of the assets. However, the impairment reviews and calculations are based on estimates and assumptions that take into account our business plans and long-term investment decisions.

     We regularly evaluate the recoverability of assets idled or at risk of being idled. In most cases, the idled assets are relatively older and higher-cost production plants or lines, which we refer to as facilities, that have relatively low carrying values. The last downturn during which we idled production facilities occurred in 1981 and 1982. At that time, we idled three facilities, all of which were restarted during the subsequent recovery. We consider idled facilities to be unimpaired if we plan to reopen them to meet future demand and the estimated future undiscounted cash flows exceed the carrying values of those facilities. We record impairment charges for facilities that we permanently close and for idled facilities with estimated future undiscounted cash flows that do not exceed the carrying values of those facilities. Because we believe that a recovery in the housing and other construction markets we serve will begin in the next two to three years and result in higher demand than today’s conditions, it is our current intention to restart all facilities that are currently idled. As a result, estimated future undiscounted cash flows for the idled facilities exceed their carrying values.

     In 2009, we permanently closed a gypsum wallboard production facility, a cement board production facility and

a sealants and finishes production facility, and we temporarily idled a paper production facility. The closed gypsum wallboard and cement board production facilities had been idled since 2007 and 2008, respectively. U.S. Gypsum recorded impairment charges totaling $10 million in 2009 related to the three production facilities permanently closed in 2009, as well as a structural cement panel production facility that we temporarily idled in 2008 and a gypsum wallboard production facility that we temporarily idled in 2007, both of which remain temporarily idled as of the date of this report.

     In 2008, we permanently closed two gypsum wallboard production facilities and one plaster production facility, and we temporarily idled four gypsum wallboard production facilities, two paper production facilities and two facilities that produced other products. U.S. Gypsum recorded impairment charges totaling $9 million in 2008 related to the permanent closing of one gypsum wallboard production facility, one plaster production facility and a plant site. The impairment charge for one of the gypsum wallboard production facilities closed in 2008 was recorded in 2007.

     In 2007, we permanently closed one framing products facility and temporarily idled four gypsum wallboard production facilities and one paper production facility. U.S. Gypsum recorded impairment charges totaling $6 million in 2007 related to one gypsum wallboard production facility that was permanently closed in the first quarter of 2008 and the framing products facility.

     On a segment basis, all of the permanently closed and temporarily idled facilities and impairment charges relate to U.S. Gypsum within the North American Gypsum segment, and U.S. Gypsum’s business is currently generating negative cash flows. As of December 31, 2009, the total carrying value of U.S. Gypsum’s net property, plant and equipment was $1.773 billion, including the aggregate carrying value of $69 million, after impairment charges, of its production facilities permanently closed and temporarily idled.

     Our gypsum wallboard business is cyclical in nature, and prolonged periods of weak product demand or excess product supply may have a material adverse effect on our business, financial condition and operating results. This business is also sensitive to changes in general economic conditions, including, in particular, conditions in the North American housing and construction-based markets. The rate of new home construction in the United States declined by approximately 39% in 2009 compared with 2008. This followed a 33% decrease in 2008 compared with 2007 and a 25% decrease in 2007 compared with 2006.

     Currently, there is significant excess wallboard production capacity industry-wide in the United States. We estimate that the industry capacity utilization rate was approximately 52% during both the full year and the fourth quarter of 2009. Based on current industry trends and forecasts, demand for gypsum wallboard may increase in 2010, but the magnitude of any increase will be dependent primarily on the levels of housing starts and repair and remodel activity. We project that the industry capacity utilization rate will remain at approximately the 2009 level in 2010. At such a low level of capacity utilization, we expect there to be continued pressure on gypsum wallboard selling prices and gross margins.

     The markets that we serve, including, in particular, the housing and construction-based markets, are affected by economic conditions, the availability of credit, lending practices, interest rates, the unemployment rate and consumer confidence. Higher interest rates, continued high levels of unemployment and continued restrictive lending practices could have a material adverse effect on our business, financial condition and results of operations. Our businesses are also affected by a variety of other factors beyond our control, including the inventory of unsold homes, which remains at an historically high level, the level of foreclosures, home resale rates, housing affordability, office and retail vacancy rates and foreign currency exchange rates. Since we operate in a variety of geographic markets, our businesses are subject to the economic conditions in each of these geographic markets. General economic downturns or localized downturns in the regions where we have operations may have a material adverse effect on our business, financial condition and results of operations.

     If the downturn in these markets does not reverse or the downturn is significantly further extended, additional

material write-downs or impairment charges may be required in the future. If these conditions were to materialize or worsen, or if there is a fundamental change in the housing and other construction markets we serve, which individually or collectively lead to a significantly extended downturn or permanent decrease in demand, we may permanently close production and distribution facilities and material impairment charges may be necessary. The magnitude and timing of those charges would be dependent on the severity and duration of the downturn and cannot be determined at this time. Any material cash or noncash impairment charges related to property, plant and equipment would have a material adverse effect on our financial condition and operating results.

EMPLOYEE RETIREMENT PLANS

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

     We determined the assumed discount rate based on a hypothetical AA yield curve represented by a series of annualized individual discount rates. Each underlying bond issue is required to have a credit rating of Aa or better by Moody’s Investors Service or a credit rating of AA or better by Standard & Poor’s Financial Services LLC. We consider the underlying types of bonds and our projected cash flows of the plans in evaluating the yield curve selected. The use of a different discount rate would impact net pension and postretirement benefit costs and benefit obligations. In determining the expected return on plan assets, we use a “building block” approach, which incorporates historical experience, our pension plan investment guidelines and expectations for long-term rates of return. The use of a different rate of return would impact net pension costs. A one-half percentage point change in the assumed discount rate and return on plan asset rate would have the following effects (dollars in millions):

						Increase (Decrease) in
										2009
						2010				Projected
		Percentage				Net Annual				Benefit
Assumptions		Change				Benefit Cost				Obligation
Pension Benefits:
Discount rate		0.5% increase				$	(7)			$	(64)
Discount rate		0.5% decrease					8				70
Asset return		0.5% increase					(5)				–
Asset return		0.5% decrease					5				–
Postretirement Benefits:
Discount rate		0.5% increase				$	(1)			$	(17)
Discount rate		0.5% decrease					1				19

     Compensation increase rates are based on historical experience and anticipated future management actions. Retirement rates are based primarily on actual plan experience, while standard actuarial tables are used to estimate mortality rates. We developed health care cost trend rate assumptions based on historical cost data and an assessment of likely long-term trends. During 2009, we modified our postretirement medical plan in response to continuing retiree health care cost increases. Effective January 1, 2011, the increase in the annual amount we will pay for retiree health care coverage will be limited to no more than 3% per year.

     Results that differ from these assumptions are accumulated and amortized over future periods and, therefore, generally affect the net benefit cost of future periods. The sensitivity of assumptions reflects the impact of changing one assumption at a time and is specific to conditions at the end of 2009. Economic factors and conditions could

affect multiple assumptions simultaneously, and the effects of changes in assumptions are not necessarily linear.

     See Note 7 to the Consolidated Financial Statements for additional information regarding costs, plan obligations, plan assets and discount rate and other assumptions, including the health care cost trend rate.

SELF-INSURANCE RESERVES

We use a combination of insurance, self insurance and self-insured retentions for certain claims, including workers’ compensation, automobile, product and general liability claims. Our estimated liability associated with self-insured incurred and incurred-but-not-reported losses is not discounted and is estimated using our historical data related to the frequency and severity of our claims and losses and other actuarial assumptions. On an annual basis, an actuarial review is performed to ensure that our reserve for our estimated liability is appropriate. While we believe our self-insured liability estimates are reasonable based on the current information available, if actual experience differs from our estimates, our results of operations or financial position could be impacted.

INCOME TAXES

We record income taxes (benefit) under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the future tax consequences to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and attributable to operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which the temporary differences are expected to be recovered or paid. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the change is enacted.

     Accounting rules require a reduction of the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. The need to establish valuation allowances for deferred tax assets is assessed periodically. In assessing the requirement for, and amount of, a valuation allowance, in accordance with the more-likely-than-not standard, we give appropriate consideration to all positive and negative evidence related to the realization of the deferred tax assets. Under the accounting rules, this assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, our experience with operating loss and tax credit carryforwards not expiring unused and tax planning alternatives. A history of cumulative losses for a certain threshold period is a significant form of negative evidence used in the assessment, and the accounting rules require that we have a policy regarding the duration of the threshold period. If a cumulative loss threshold is met, forecasts of future profitability may not be used as positive evidence related to the realization of the deferred tax assets in the assessment. Consistent with practices in the home building and related industries, we have a policy of four years as our threshold period for cumulative losses. The 2009 tax expense reflected the recording of a valuation allowance against all of our U.S. federal deferred tax assets and virtually all of our state deferred tax assets.

     We recognize the tax benefits of an uncertain tax position only if those benefits are more likely than not to be sustained upon examination by the relevant taxing authorities. Unrecognized tax benefits are subsequently recognized at the time the more-likely-than-not recognition threshold is met, the tax matter is effectively settled or the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired, whichever is earlier.

Recent Accounting Pronouncements

In December 2008, the Financial Accounting Standards Board, or FASB, issued an update to Accounting Standards Codification, or ASC, 715 “Compensation – Retirement Benefits.” This update requires additional disclosures about assets held in an employer’s defined benefit pension or other postretirement plan. This update replaces the requirement to disclose the percentage of the fair value of total plan assets for each major category of plan assets, such as equity securities, debt securities, real estate and all other assets, with the fair value of each major asset category as of each annual reporting date for which a financial statement is presented. It also requires disclosure of

the level within the fair value hierarchy in which each major category of plan assets falls. This update is applicable to employers that are subject to the disclosure requirements and is effective for fiscal years ending after December 15, 2009. We are complying with the disclosure provisions of this update. See Note 7 to the Consolidated Financial Statements.

     In June 2009, the FASB issued an update to ASC 810 “Consolidation.” This update addresses (1) the effects on certain provisions of previous accounting guidance related to the consolidation of variable interest entities as a result of the elimination of the qualifying special-purpose entity concept in ASC 860 “Transfers and Servicing” and (2) constituent concerns about the application of certain key provisions of ASC 810, including those in which the accounting and disclosures under the standard do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. This update is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. We have adopted this update effective January 1, 2010 and do not anticipate any impact on our financial statements.

Forward-Looking Statements

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

•

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

•

capital markets conditions and the availability of borrowings under our credit agreement or other financings;

•

competitive conditions, such as price, service and product competition;

•

shortages in raw materials;

•

changes in raw material, energy, transportation and employee benefit costs;

•

the loss of one or more major customers and our customers’ ability to meet their financial obligations to us;

•

capacity utilization rates;

•

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

•

the outcome in contested litigation matters;

•

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

•

acts of God.

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

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We use derivative instruments to manage selected commodity price and foreign currency exposures. We do not use derivative instruments for speculative trading purposes, and we typically do not hedge beyond five years.

COMMODITY PRICE RISK

We use swap and option contracts to manage our exposure to fluctuations in commodity prices associated with anticipated purchases of natural gas. Currently, a portion of our anticipated purchases of natural gas are hedged for 2010, 2011 and 2012. We review our positions regularly and make adjustments as market and business conditions warrant. A sensitivity analysis was prepared to estimate the potential change in the fair value of our natural gas hedge contracts assuming a hypothetical 10% change in market prices. Based on the results of this analysis, which may differ from actual results, the potential change in the fair value of our natural gas hedge contracts as of December 31, 2009 was $6 million. This analysis does not consider the underlying exposure.

FOREIGN CURRENCY EXCHANGE RISK

We have foreign exchange forward contracts in place to hedge changes in the value of intercompany loans to certain foreign subsidiaries due to changes in foreign exchange rates. The notional amount of these hedges is $33 million, and they all mature by December 31, 2010. As of December 31, 2009, the fair value of these hedges was immaterial.

     We also have foreign exchange forward contracts to hedge purchases of our products denominated in non-functional currencies. The notional amount of these contracts is $23 million and they mature by September 27, 2010. The fair value of these contracts was immaterial as of December 31, 2009. A sensitivity analysis was prepared to estimate the potential change in the fair value of our foreign exchange forward contracts assuming a hypothetical 10% change in foreign exchange rates. Based on the results of this analysis, which may differ from actual results, the potential change in the fair value of our foreign exchange forward contracts as of December 31, 2009 was $2 million. This analysis does not consider the underlying exposure.

INTEREST RATE RISK

As of December 31, 2009, most of our outstanding debt was fixed-rate debt. A sensitivity analysis was prepared to estimate the potential change in interest expense assuming a hypothetical 100-basis-point increase in interest rates. Based on the results of this analysis, which may differ from actual results, the potential change in interest expense would be immaterial.

See Notes 1 and 5 to the Consolidated Financial Statements for additional information regarding our financial exposures.

Item 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

								Page
CONSOLIDATED FINANCIAL STATEMENTS:
		Statements of Operations							48
		Balance Sheets							49
		Statements of Cash Flows							50
		Statements of Stockholders’ Equity							51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
		1.				Significant Accounting Policies			52
		2.				Restructuring and Long-Lived Asset Impairment Charges			55
		3.				Goodwill and Other Intangible Assets			57
		4.				Debt			59
		5.				Derivative Instruments			62
		6.				Fair Value Measurements			64
		7.				Employee Retirement Plans			64
		8.				Share-Based Compensation			69
		9.				Supplemental Balance Sheet Information			72
		10.				Income Taxes			74
		11.				Earnings (Loss) Per Share			77
		12.				Segments			78
		13.				Acquisitions			80
		14.				Stockholder Rights Plan			80
		15.				Commitments and Contingencies			81
		16.				Litigation			81
		17.				Quarterly Financial Data (unaudited)			84
Report of Independent Registered Public Accounting Firm									85
Schedule II - Valuation and Qualifying Accounts									86

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

USG CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(millions, except per-share data)		Years Ended December 31,
		2009				2008				2007
Net sales		$	3,235			$	4,608			$	5,202
Cost of products sold			3,090				4,416				4,601
Gross profit			145				192				601
Selling and administrative expenses			304				380				408
Litigation settlement income			(97)				-				-
Restructuring and long-lived asset impairment charges			80				98				26
Goodwill and other intangible asset impairment charges			43				226				-
Operating profit (loss)			(185)				(512)				167
Interest expense			165				86				105
Interest income			(4)				(7)				(22)
Other income, net			(9)				(10)				(4)
Earnings (loss) before income taxes			(337)				(581)				88
Income taxes (benefit)			450				(118)				11
Net earnings (loss)		$	(787)			$	(463)			$	77
Basic earnings (loss) per common share		$	(7.93)			$	(4.67)			$	0.80
Diluted earnings (loss) per common share		$	(7.93)			$	(4.67)			$	0.79

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

USG CORPORATION

CONSOLIDATED BALANCE SHEETS

(millions, except share data)			As of December 31,
		2009				2008
Assets
Current Assets:
Cash and cash equivalents		$	690			$	471
Restricted cash			2				1
Receivables (net of reserves: 2009 - $16; 2008 - $15)			357				467
Inventories			289				404
Income taxes receivable			20				15
Deferred income taxes			2				68
Other current assets			71				68
Total current assets			1,431				1,494
Property, plant and equipment, net			2,427				2,562
Deferred income taxes			-				374
Goodwill			-				12
Other assets			239				277
Total assets		$	4,097			$	4,719
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable		$	205			$	220
Accrued expenses			273				338
Short-term debt			-				190
Current portion of long-term debt			7				4
Income taxes payable			7				4
Total current liabilities			492				756
Long-term debt			1,955				1,642
Deferred income taxes			17				7
Other liabilities			703				764
Commitments and contingencies
Stockholders’ Equity:
Preferred stock (000) - $1 par value, $1.80 convertible preferred stock (initial series);
authorized 36,000 shares; outstanding - none			-				-
Common stock (000) - $0.10 par value; authorized 200,000 shares;
issued: 2009 - 103,972 shares; 2008 - 103,972 shares			10				10
Treasury stock at cost (000) -2009 - 4,672 shares; 2008 - 4,793 shares			(194)				(199)
Capital received in excess of par value			2,640				2,625
Accumulated other comprehensive (loss) income			(80)				(227)
Retained earnings (deficit)			(1,446)				(659)
Total stockholders’ equity			930				1,550
Total liabilities and stockholders’ equity		$	4,097			$	4,719

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

USG CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(millions)			Years Ended December 31,
		2009				2008				2007
Operating Activities
Net earnings (loss)		$	(787)			$	(463)			$	77
Adjustments to Reconcile Net Earnings (Loss) to Net Cash:
Goodwill and other intangible asset impairment charges			43				226				-
Depreciation, depletion and amortization			203				182				176
Share-based compensation expense			21				24				20
Deferred income taxes			453				(111)				5
(Gain) loss on asset dispositions			(10)				1				-
Convertible debt embedded derivative			(10)				(11)				-
(Increase) Decrease in Working Capital (net of acquisitions):
Receivables			108				(37)				91
Income taxes receivable			(4)				22				1,063
Inventories			113				27				5
Payables			(8)				(78)				(60)
Accrued expenses			(23)				49				(59)
Decrease (increase) in other assets			25				(23)				(29)
Increase in other liabilities			2				25				33
Reorganization distribution - other			-				-				(40)
Other, net			13				2				25
Net cash provided by (used for) operating activities			139				(165)				1,307
Investing Activities
Capital expenditures			(44)				(238)				(460)
Investment in joint venture			(7)				(12)				-
(Deposit) return of restricted cash			(1)				(1)				6
Net proceeds from asset dispositions			16				-				3
Acquisitions of businesses, net of cash acquired			-				(1)				(279)
Net cash used for investing activities			(36)				(252)				(730)
Financing Activities
Issuance of debt			319				1,950				499
Repayment of debt			(195)				(1,331)				(1,765)
Payment of debt issuance fees			(15)				(10)				(4)
Excess tax benefits from share-based compensation			-				(1)				(5)
Proceeds from equity offering, net of fees			-				-				422
Net cash provided by (used for) financing activities			109				608				(853)
Effect of exchange rate changes on cash			7				(17)				8
Net increase (decrease) in cash and cash equivalents			219				174				(268)
Cash and cash equivalents at beginning of period			471				297				565
Cash and cash equivalents at end of period		$	690			$	471			$	297
Supplemental Cash Flow Disclosures:
Interest paid		$	139			$	83			$	90
Income taxes (refunded), net			(1)				(21)				(1,046)
Payables adjustment for capital expenditures			(4)				(32)				39