UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2006

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

For the transition period from _________ to _________

Commission File Number 1-8864

USG CORPORATION
(Exact name of registrant as specified in its charter)

Delaware 36-3329400
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

125 South Franklin Street, Chicago, Illinois 60606-4678
(Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code (312) 606-4000

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

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. Large
accelerated filer X Accelerated filer Non-accelerated filer
----- ----- -----

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

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
----- -----

The number of shares outstanding of the registrant's common stock was 44,794,046
as of March 31, 2006.

TABLE OF CONTENTS

Page
----

PART I FINANCIAL INFORMATION

Item 1. Financial Statements:

Consolidated Statements of Operations:
Three Months Ended March 31, 2006 and 2005 3

Consolidated Balance Sheets:
As of March 31, 2006 and December 31, 2005 4

Consolidated Statements of Cash Flows:
Three Months Ended March 31, 2006 and 2005 5

Notes to Consolidated Financial Statements 6

Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 43

Item 4. Controls and Procedures 64

Report of Independent Registered Public Accounting Firm 66

PART II OTHER INFORMATION

Item 1. Legal Proceedings 68

Item 1a. Risk Factors 68

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 68

Item 6. Exhibits 68

Signatures 69

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PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

USG CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS EXCEPT PER-SHARE DATA)
(UNAUDITED)

THREE MONTHS
ENDED MARCH 31,
-------------------------
2006 2005
----------- -----------

Net sales $ 1,465 $ 1,173
Cost of products sold 1,108 959
----------- -----------
Gross profit 357 214
Selling and administrative expenses 99 89
Chapter 11 reorganization expenses 2 1
----------- -----------
Operating profit 256 124
Interest expense 486 1
Interest income (3) (2)
----------- -----------
Earnings (loss) before income taxes (227) 125
Income tax expense (benefit) (86) 48
----------- -----------
Net earnings (loss) (141) 77
=========== ===========
Basic earnings (loss) per common share (3.15) 1.77
Diluted earnings (loss) per common share (3.15) 1.77
Average common shares 44,729,100 43,327,008
Average diluted common shares 44,729,100 43,506,597

See accompanying Notes to Consolidated Financial Statements.

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USG CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
(UNAUDITED)

AS OF AS OF
MARCH 31, DECEMBER 31,
2006 2005
--------- ------------

ASSETS
Current Assets:
Cash and cash equivalents $1,083 $ 936
Short-term marketable securities 280 234
Restricted cash 95 78
Receivables (net of reserves - $15 and $14) 639 453
Inventories 341 315
Income taxes receivable 6 6
Deferred income taxes 31 2
Other current assets 157 155
------ ------
Total current assets 2,632 2,179

Long-term marketable securities -- 329
Property, plant and equipment (net of accumulated
depreciation and depletion - $1,013 and $982) 1,966 1,946
Deferred income taxes 1,625 1,423
Goodwill 105 64
Other assets 194 201
------ ------
Total Assets 6,522 6,142
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable 321 281
Accrued expenses 227 275
Deferred income taxes -- 6
Income taxes payable 128 38
------ ------
Total current liabilities 676 600

Deferred income taxes 30 28
Other liabilities 481 476
Liabilities subject to compromise 5,831 5,340
Commitments and contingencies

Stockholders' Equity (Deficit):
Preferred stock -- --
Common stock 5 5
Treasury stock (213) (219)
Capital received in excess of par value 439 435
Accumulated other comprehensive income 9 72
Retained earnings (deficit) (736) (595)
------ ------
Total stockholders' equity (deficit) (496) (302)
------ ------
Total Liabilities and Stockholders' Equity (Deficit) 6,522 6,142
====== ======

See accompanying Notes to Consolidated Financial Statements.

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USG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)

THREE MONTHS
ENDED MARCH 31,
---------------
2006 2005
------ -----

OPERATING ACTIVITIES:
Net earnings (loss) $ (141) $ 77
Adjustments to reconcile net earnings (loss) to net cash:
Depreciation, depletion and amortization 33 30
Deferred income taxes (196) 15
(Increase) decrease in working capital:
Receivables (165) (110)
Income taxes receivable -- 1
Inventories (16) (8)
Payables 123 17
Accrued expenses (51) (26)
Increase in other assets (11) (9)
Increase in other liabilities 2 2
Increase (decrease) in liabilities subject to compromise 491 (1)
Other, net (6) (2)
------ -----
Net cash provided by (used for) operating activities 63 (14)
------ -----
INVESTING ACTIVITIES:
Capital expenditures (52) (33)
Purchases of marketable securities (81) (184)
Sales or maturities of marketable securities 365 144
Net proceeds from asset dispositions 1 --
Acquisitions of businesses, net of cash acquired (74) --
(Deposit) return of restricted cash (17) 1
------ -----
Net cash provided by (used for) investing activities 142 (72)
------ -----
FINANCING ACTIVITIES:
Payment of rights offering backstop commitment fee (67) --
Issuances of common stock upon exercise of stock options 7 1
Tax benefit of share-based payments 2 --
------ -----
Net cash provided by (used for) financing activities (58) 1
------ -----
Effect of exchange rate changes on cash -- (2)
Net increase (decrease) in cash and cash equivalents 147 (87)
Cash and cash equivalents at beginning of period 936 756
------ -----
Cash and cash equivalents at end of period 1,083 669
====== =====
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid -- 1
Income taxes paid, net 12 15

See accompanying Notes to Consolidated Financial Statements.

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USG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(1) PREPARATION OF FINANCIAL STATEMENTS

The accompanying unaudited consolidated financial statements of USG
Corporation ("the Corporation") have been prepared in accordance with
applicable United States Securities and Exchange Commission guidelines
pertaining to interim financial information. The preparation of financial
statements in conformity with accounting principles generally accepted in
the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Actual results could differ from those estimates. In
the opinion of management, the financial statements reflect all
adjustments, which are of a normal recurring nature, necessary for a fair
presentation of the Corporation's financial results for the interim
periods. These financial statements and notes are to be read in conjunction
with the financial statements and notes included in the Corporation's
Annual Report on Form 10-K for the fiscal year ended December 31, 2005,
which was filed on February 14, 2006.

(2) VOLUNTARY REORGANIZATION UNDER CHAPTER 11

On June 25, 2001 (the "Petition Date"), the Corporation and the 10 United
States subsidiaries listed below (collectively, the "Debtors") filed
voluntary petitions for reorganization (the "Filing") under chapter 11 of
the United States Bankruptcy Code (the "Bankruptcy Code") in the United
States Bankruptcy Court for the District of Delaware (the "Bankruptcy
Court"). This action was taken to resolve asbestos claims in a fair and
equitable manner, to protect the long-term value of the Debtors'
businesses, and to maintain the Debtors' leadership positions in their
markets.

The chapter 11 cases of the Debtors (collectively, the "Chapter 11 Cases")
are jointly administered as In re: USG Corporation et al. (Case No.
01-2094). The following subsidiaries filed chapter 11 petitions: United
States Gypsum Company ("U.S. Gypsum"); USG Interiors, Inc. ("USG
Interiors"); USG Interiors International, Inc.; L&W Supply Corporation
("L&W Supply"); Beadex Manufacturing, LLC ("Beadex"); B-R Pipeline Company;
La Mirada Products Co., Inc.; Stocking Specialists, Inc.; USG Industries,
Inc.; and USG Pipeline Company. The Chapter 11 Cases do not include any of
the Corporation's non-U.S. subsidiaries or companies that were acquired
post-petition by any of the Debtors.

In late January 2006, the Debtors reached an agreement with the committee
representing asbestos personal injury claimants (the "Official Committee of
Asbestos Personal Injury Claimants" or "ACC") and the legal representative
for future asbestos personal injury claimants (the "Futures
Representative") to resolve Debtors' present and future asbestos personal

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injury liabilities and to cooperate in the confirmation of a plan of
reorganization consistent with that resolution (the "Asbestos Agreement").
The Asbestos Agreement was approved by the Corporation's Board of Directors
on January 29, 2006, was executed by the Futures Representative and each
law firm representing a member of the ACC, and is supported by the
committee representing unsecured creditors (the "Official Committee of
Unsecured Creditors") and the committee representing the Corporation's
shareholders (the "Official Committee of Equity Security Holders"). The
Asbestos Agreement does not address asbestos property damage claims.

As contemplated by the Asbestos Agreement, the Debtors filed a First
Amended Joint Plan of Reorganization of USG Corporation and its Debtor
Subsidiaries (the "Plan") and Disclosure Statement describing the Plan with
the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court") in April 2006. Consistent with the Asbestos Agreement,
the Plan, which has not been confirmed by the court, provides for the
resolution of Debtors' asbestos personal injury liability and the
resolution and payment of all other claims or interests as follows:

- The Debtors' asbestos personal injury liability will be resolved by
the creation and funding of a trust under Section 524(g) of the
Bankruptcy Code that will pay all qualifying present and future
asbestos personal injury claims against the Debtors.

- The amount that Debtors will pay into the Section 524(g) trust depends
upon whether the Fairness in Asbestos Injury Resolution Act of 2005 or
substantially similar legislation creating a national trust or similar
fund (collectively the "FAIR Act") is enacted by the 10th day after
final adjournment of the term of the current Congress (currently
expected to occur no later than December 2006).

- On the effective date of the Plan, the Debtors will be required to pay
$900 million to the Section 524(g) asbestos trust and provide a
contingent payment note for an additional $3.05 billion to the trust.
If the FAIR ACT is enacted and survives subsequent constitutional
challenge, the contingent payment note will be cancelled and the
Debtors will owe no further payments to the Section 524(g) trust.

- If the FAIR Act is not enacted in the time specified, or is enacted
but declared unconstitutional, the Debtors will be required to make
the $3.05 billion payment to the Section 524(g) trust in two
installments pursuant to the contingent payment note, for a total
payment to the trust of $3.95 billion.

- Allowed claims of all other creditors, including allowed claims of
general unsecured creditors, will be paid in full, with interest as
provided in the Plan.

- Disputed claims, including disputed asbestos property damage claims,
will be resolved in the bankruptcy proceedings or other court, where
appropriate, and will be paid in full the amount, if any, determined
to

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be owed plus interest as required.

- Shareholders of the Corporation as of the effective date of the Plan
will retain their shares, and pursuant to a proposed rights offering,
will have the right to purchase, at $40.00 per share, one new share of
the Corporation's common stock for each share owned as of the record
date of the rights offering.

The amounts that the Debtors will be required to pay under the Asbestos
Agreement and the Plan are fixed amounts, depending only upon passage of
the FAIR Act, that were determined through settlement negotiations with the
ACC and the Futures Representative.

If confirmed by the courts, the Plan will contain an injunction channeling
all present and future asbestos personal injury and related claims against
the Debtors to the trust for payment and barring any individual or entity
from bringing an asbestos personal injury or related claim against Debtors.
This channeling injunction will include any asbestos personal injury claims
against Debtors relating to A.P. Green Refractories Co. ("A.P. Green"), a
former subsidiary of U.S. Gypsum and the Corporation.

On April 7, 2006, the Bankruptcy Court entered an order permitting Debtors
to solicit votes regarding the Plan from asbestos personal injury
claimants, the only class of creditors entitled to vote on the Plan. The
deadline for voting on the Plan is June 2, 2006. The Bankruptcy Court has
scheduled a hearing for June 15 and 16, 2006, before both the Bankruptcy
Court and the United States District Court for the District of Delaware
(the "District Court") to determine whether to confirm the Plan.

There are important conditions that must be met before the Plan can be
confirmed and become effective. One of the conditions is that the Plan must
be confirmed and have an effective date on or before August 1, 2006, absent
written agreement among all parties to the Asbestos Agreement to extend
that time. There can be no assurance that the Plan will be confirmed or, if
confirmed, become effective by August 1, 2006.

Additional information about the Plan, the Section 524(g) asbestos personal
injury trust contemplated by the Plan, funding relating to the Plan, the
rights offering and conditions and other factors relating to the
effectiveness of the Plan is set forth below in Developments in the
Reorganization Proceeding, and in Note 12, Litigation.

CONSEQUENCES OF THE FILING

As a consequence of the Filing, all asbestos lawsuits and other lawsuits
pending against the Debtors as of the Petition Date are stayed, and no
party may take any action to pursue or collect pre-petition claims except
pursuant to an order of the Bankruptcy Court. Since the Filing, the Debtors
have ceased making cash payments with respect to asbestos lawsuits. The
Debtors are operating their businesses without interruption as
debtors-in-possession subject to the provisions of the Bankruptcy Code, and
vendors are being paid for goods furnished and services provided after

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the Filing.

In connection with the Filing, the Corporation implemented a key employee
retention plan that was approved by the Bankruptcy Court and began on July
1, 2001, continuing until June 30, 2004. Effective July 1, 2004, the key
employee retention plan, in an amended form, was extended until December
31, 2005. Expenses associated with this plan amounted to $5.4 million in
the first quarter of 2005.

On January 10, 2006, the Bankruptcy Court approved the USG Corporation 2006
Corporate Performance Plan (the "CPP"). The CPP is effective for eligible
participants from January 1, 2006 through December 31, 2006, or through and
including the effective date of the Plan, whichever comes first. The CPP
provides participants, who hold key positions identified as eligible, with
two cash payments equal to a specified percentage of their annual base
salary. The second payment is subject to a performance adjustment based on
the Corporation's 2006 calendar-year results, which could increase the
second payment up to 50% or eliminate it altogether. If the Plan becomes
effective before December 31, 2006, the awards earned under the CPP will be
prorated based on the actual number of months the CPP was in effect. The
cost of the CPP is projected to be approximately $22 million for 2006
before taking into account proration or the performance feature. Expenses
associated with the CPP amounted to $6.1 million in the first quarter of
2006.

DEVELOPMENTS IN THE REORGANIZATION PROCEEDING

The Debtors' Chapter 11 Cases are assigned to Judge Judith K. Fitzgerald, a
bankruptcy court judge, and Judge Joy Flowers Conti, a federal district
court judge. Judge Conti hears matters relating to estimation of the
Debtors' liability for asbestos personal injury claims. Other matters are
heard by Judge Fitzgerald. Four official committees were appointed in the
Chapter 11 Cases - the Official Committee of Personal Injury Claimants (or
ACC), the Official Committee of Asbestos Property Damage Claimants, the
Official Committee of Unsecured Creditors and the Official Committee of
Equity Security Holders. In addition, the Bankruptcy Court appointed Dean
M. Trafelet as the Futures Representative.

Both Judge Conti and Judge Fitzgerald will preside over a hearing scheduled
for June 15 and 16, 2006, to determine whether to confirm the Plan. If
confirmed, as provided by the Plan, the Debtors will fund the Section
524(g) asbestos personal injury trust by making a $890 million cash payment
to the trust; issuing an interest-bearing promissory note in the principal
amount of $10 million payable on December 31, 2006; and issuing a
contingent payment note in the amount of $3.05 billion.

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contingent payment note will be cancelled if the FAIR Act is enacted and
made law by the Trigger Date. If the FAIR Act is not enacted and made law
by the Trigger Date, or is enacted but held unconstitutional, the Debtors
will be obligated to make payments under the $3.05 billion contingent
payment note to the Section 524(g) trust as follows: $1.9 billion of the
contingent payment note will be payable within 30 days after the Trigger
Date, and the remaining $1.15 billion of the contingent payment note will
be payable within 180 days after the Trigger Date. Interest will accrue on
the $1.15 billion payment beginning 30 days after the Trigger Date.

The Debtors will be co-obligors and jointly and severally liable under both
the $10 million note and the $3.05 billion contingent payment note. Each of
the notes will be secured by an obligation to pledge to the Section 524(g)
trust shares of the voting stock of the reorganized Corporation equal to 51
percent of the amount outstanding. The obligation to pledge those shares
would be triggered by a payment default under the applicable note.

Under the Plan, if the FAIR Act is enacted by the Trigger Date but is
ultimately held unconstitutional, the Debtors will be required to pay the
full amount of the $3.05 billion contingent payment note. Specifically, if
there is a constitutional challenge to the FAIR Act within 60 days of
enactment, the Debtors will be obligated to pay the $3.05 billion note if
the constitutional challenge results in a final, non-appealable order that
the FAIR Act is (i) unconstitutional in its entirety; or (ii)
unconstitutional insofar as it applies to debtors in chapter 11 cases whose
plans of reorganization had not yet been confirmed and become substantially
consummated as defined in the Asbestos Agreement. If the constitutional
challenge is resolved by a final, non-appealable order in any manner other
than as described in the preceding sentence, then the $3.05 billion
contingent payment, including the obligation to pledge the stock of the
reorganized Corporation, will be cancelled.

The Debtors' financial obligations under the Plan, if confirmed, will
depend upon, among other things, whether the $3.05 billion contingent
payment note becomes due. The Debtors propose to fund their obligations
under the Plan through (i) accumulated cash and marketable securities
(totaling $1.458 billion as of March 31, 2006), as well as future cash
available from operations; (ii) a rights offering to the Corporation's
stockholders that is expected to raise gross proceeds of approximately $1.8
billion in new equity funding; (iii) anticipated tax refunds; and (iv) new
debt financing.

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rights offering has not been established but the rights offering will not
commence until after confirmation and the effective date of the Plan. This
Quarterly Report on Form 10-Q does not constitute an offer to sell, or the
solicitation of an offer to buy, any securities.

The rights offering is supported by a backstop commitment from Berkshire
Hathaway Inc., a current stockholder of the Corporation, which has been
approved by the Bankruptcy Court. As part of the backstop commitment,
Berkshire Hathaway Inc. agrees that it will purchase from the Corporation,
at $40.00 per share, all of the shares of common stock offered pursuant to
the rights offering that are not issued pursuant to the exercise of rights
in the rights offering, up to a total commitment of $1.8 billion. In
consideration for Berkshire Hathaway Inc.'s commitment, in the first
quarter of 2006, the Corporation made a one-time, non-refundable payment of
$67 million to Berkshire Hathaway Inc.

Unless extended by the Corporation, the backstop commitment will expire if
the rights offering has not been concluded prior to September 30, 2006. If
the rights offering is not concluded by September 30, 2006, the Corporation
may extend the obligations of Berkshire Hathaway Inc. under the backstop
commitment until November 14, 2006 in specified circumstances, including
the payment to Berkshire Hathaway Inc. of an additional non-refundable $6.7
million fee.

In connection with the backstop commitment, the Corporation and Berkshire
Hathaway Inc. entered into a shareholder's agreement whereby Berkshire
Hathaway Inc. agrees, among other things, that for a period of seven years
following completion of the rights offering, except in limited
circumstances, Berkshire Hathaway Inc. will not acquire beneficial
ownership of the Corporation's voting securities if, after giving effect to
the acquisition, Berkshire Hathaway Inc. would own more than 40% of the
Corporation's voting securities on a fully diluted basis (or such higher
percentage of voting securities that Berkshire Hathaway Inc. owns after
making any purchases required under the backstop commitment described
above). Berkshire Hathaway Inc. further agrees that, during such seven-year
period, it will not solicit proxies with respect to securities of the
Corporation or submit a proposal or offer involving a merger, acquisition
or other extraordinary transaction unless such proposal or offer is (i)
requested by the Corporation's Board of Directors, or (ii) made to the
Board of Directors confidentially, is conditioned on approval by a majority
of the voting securities of the Corporation not owned by Berkshire Hathaway
Inc. and a determination by the Board of Directors as to its fairness to
stockholders and, if the proposed transaction is not a tender offer for all
shares of common stock or an offer for the entire company, is accompanied
by an undertaking to offer to acquire all shares of common stock of the
Corporation outstanding after completion of the transaction at the same
price per share as was paid in the transaction. The shareholder's agreement
also provides that, with certain exceptions, any new shares of common stock
acquired by Berkshire Hathaway Inc. in excess of those owned on the date of
the agreement (and shares distributed on those shares, including in the
rights offering) will be voted

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proportionally with all voting shares. Berkshire Hathaway Inc. also agrees
that if purchases or sales of common stock of the Corporation by it or
specified affiliates would prevent the Corporation from carrying back a net
operating loss attributable to a specified payment to the Section 524(g)
trust, Berkshire Hathaway Inc. will not, upon notice from the Corporation,
make such purchases or sales until the Corporation has made its first
payment under the contingent payment note issued to the Section 524(g)
trust or the Corporation notifies Berkshire Hathaway Inc. that this
limitation is no longer needed.

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

The parties also entered into a registration rights agreement whereby the
Corporation granted Berkshire Hathaway Inc. registration rights with
respect to its shares of the Corporation's common stock.

If the Debtors are required to pay the $3.05 billion contingent payment
note to the Section 524(g) trust, the Corporation expects to fund part of
these payment obligations by obtaining approximately $1 billion of new debt
financing (which excludes any necessary tax bridge financing) in the second
half of 2006. It is currently expected that the new debt financing will
also include a revolving credit facility as well as a $1.1 billion tax
bridge facility. The tax bridge facility could be used to make trust
payments if the proceeds from tax refunds generated from the Debtors'
contribution to the Section 524(g) trust are not received prior to the time
that those trust payments are due. Assuming that the $3.05 billion
contingent payment note becomes due and is payable to the Section 524(g)
asbestos trust, the Corporation expects to receive cash tax refunds of
about $1.1 billion based upon a net operating loss that would be created.
If these tax refunds have not been received by the Corporation when the
final payment is due to the trust, the Corporation may use the tax bridge
facility to make such payment. The Corporation is in the process of
negotiating the terms and conditions of those credit facilities. There can
be no assurance that financing will become available on terms currently
contemplated or otherwise on commercially reasonable terms.

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There are numerous factors and conditions that will affect whether the Plan
is confirmed and becomes effective. These include, among others, the
following requirements: the plan must be confirmed and effective no later
than August 1, 2006, absent written agreement of the parties to the
Asbestos Agreement to extend that date; the class or classes of claimants
whose claims are to be addressed by the Section 524(g) asbestos personal
injury trust must be established and vote in favor of the Plan by at least
75% of those voting; the Bankruptcy Court or the District Court must issue
various findings of fact and conclusions of law required to create a
Section 524(g) asbestos personal injury trust and issue an injunction
channeling all asbestos personal injury claims against Debtors to the
Section 524(g) trust, including the findings that the asbestos trust is
designed to pay present claims and future demands that involve similar
claims in substantially the same manner and that the trust own, or have the
right to acquire if specified contingencies occur, a majority of the voting
stock of a relevant Debtor, its parent corporation, or a subsidiary that is
also a Debtor; the Bankruptcy Court or the District Court must issue
various findings that the Plan complies with all other applicable
requirements of the Bankruptcy Code; the Bankruptcy Court or the District
Court must enter a confirmation order (and, if the Bankruptcy Court enters
the confirmation order, the District Court must affirm it); and the
Bankruptcy Court and the District Court, as required, must enter the
Section 524(g) injunction set forth in the Plan. The failure to resolve
disputes with any objectors to the Plan could materially hinder
satisfaction of the requirement that the Plan be confirmed and effective by
August 1, 2006.

If the Plan, or a substantially similar plan, is not confirmed, the amount
of Debtors' present and future asbestos personal injury liabilities will be
unresolved. In such a situation, the amount of those liabilities may be
resolved through litigation before Judge Conti which was pending at the
time the Asbestos Agreement was reached. In that litigation, there were
key, contested issues among the Debtors, on the one hand, and the ACC and
Futures Representative, on the other hand, relevant to estimation of the
amount of Debtors' asbestos personal injury liabilities. Those key issues
included: whether claimants who do not have objective evidence of
asbestos-related disease are entitled to be compensated by Debtors and
whether such claimants are entitled to vote on any plan of reorganization;
the characteristics and number of present and future claimants who are
likely to have had exposure to the Debtors' asbestos-containing products
sufficient to cause disease; whether the particular type of asbestos
present in certain of the Debtors' products during the relevant time has
been shown to cause cancer; the appropriate claim values to apply to
legitimate present and future asbestos personal injury claims; and whether
estimation of Debtors' liability should be based solely on its claims
settlement history and not on consideration of the underlying merits of the
claims.

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whether the Debtors have responsibility for the asbestos liabilities of
A.P. Green, a former subsidiary of U.S. Gypsum and the Corporation. In
those proceedings, the Debtors other than U.S. Gypsum requested a ruling
that the assets of the Debtors other than U.S. Gypsum are not available to
satisfy the asbestos liabilities of U.S. Gypsum. In opposition, the ACC,
the Futures Representative, and the Official Committee of Asbestos Property
Damage Claimants sought a contrary ruling that the assets of all Debtors
are available to satisfy the asbestos liabilities of U.S. Gypsum under
various asserted legal grounds, including successor liability, piercing the
corporate veil, and substantive consolidation.

In those same proceedings before Judge Fitzgerald, the ACC and the Futures
Representative alleged that the Debtors are liable for claims arising from
the sale of asbestos-containing products by A.P. Green. They alleged that
U.S. Gypsum is responsible for A.P. Green's asbestos liabilities due to
U.S. Gypsum's acquisition by merger of A.P. Green in 1967 and that,
pursuant to the merger documents, U.S. Gypsum assumed A.P. Green's
liabilities. They further allege that because the Debtors other than U.S.
Gypsum are liable for U.S. Gypsum's liabilities, all of the Debtors are
therefore liable for A.P. Green's liabilities. The Official Committee of
Asbestos Property Damage Claimants asserted similar claims.

At the time the Asbestos Agreement was reached, there was no resolution in
the litigation proceedings regarding whether the Debtors are responsible
for some or all of the asbestos liabilities of A.P. Green. A.P. Green,
which manufactured and sold refractory products, was acquired through a
merger of A.P. Green into U.S. Gypsum on December 29, 1967. On the next
business day after the merger, January 2, 1968, U.S. Gypsum conveyed A.P.
Green's assets and liabilities to a newly formed Delaware corporation and
wholly owned subsidiary of U.S. Gypsum, also called A.P. Green Refractories
Co. This newly formed corporation is also referred to herein as "A.P.
Green." A.P. Green was operated as a wholly owned subsidiary of U.S. Gypsum
until 1985, at which time A.P. Green became a wholly owned subsidiary of
the Corporation. In 1988, A.P. Green became a publicly traded company when
its shares were distributed to the stockholders of the Corporation.

In February 2002, A.P. Green (now known as A.P. Green Industries, Inc.) as
well as its parent company, Global Industrial Technologies, Inc., and other
affiliates filed voluntary petitions for reorganization through which A.P.
Green and its affiliates seek to resolve their asbestos liabilities through
creation and funding of a Section 524(g) trust. The A.P. Green
reorganization proceeding is pending in the United States Bankruptcy Court
for the Western District of Pennsylvania and is captioned In re: Global
Industrial Technologies, Inc. (Case No. 02-21626).

-14-

plan documents specifically exclude U.S. Gypsum from the protection of the
proposed channeling injunction. The A.P. Green plan documents state that
the asbestos personal injury trust to be created in that case will be
funded with approximately $334 million dollars in insurance proceeds and
21% of the stock of a corporate affiliate of A.P. Green. The plan documents
state that, as of A.P. Green's petition date, about 235,757
asbestos-related claims were pending against it and about 58,899 such
claims were pending against an affiliate. Although the A.P. Green plan
documents do not provide an estimate of the amount of A.P. Green's present
and future asbestos liabilities, available information indicates that the
assets to be provided to the asbestos trust in the A.P. Green case will not
be sufficient to pay in full the asbestos liability of A.P. Green. The A.P.
Green plan has been approved by vote of its creditors, and the bankruptcy
court presiding over the A.P. Green reorganization proceeding has scheduled
a hearing for June 5, 2006, to decide whether to confirm the A.P. Green
plan.

Since the announcement of the Asbestos Agreement in Debtors' Chapter 11
Cases, the litigation proceedings before Judge Fitzgerald, relating to
whether the Debtors are responsible for A.P. Green's liabilities, and the
litigation proceedings before Judge Conti, relating to estimation of
Debtors' asbestos personal injury liabilities, have been inactive.

The Plan filed by the Debtors in these Chapter 11 Cases provides that all
asbestos personal injury claims against the Debtors, including claims
relating to A.P. Green, will be channeled to the Debtors' Section 524(g)
trust. However, the Plan is subject to numerous conditions, and there can
be no assurance that the Plan will be confirmed. If the Plan is not
confirmed, the Debtors will remain in chapter 11, the amount of Debtors'
present and future asbestos personal injury liabilities will be unresolved,
and the terms and timing of any plan of reorganization ultimately confirmed
in Debtors' Chapter 11 Cases will be undetermined. In such a situation, it
cannot be known what amount will be necessary to resolve Debtors' present
and future asbestos personal injury liabilities, including alleged
liabilities relating to A.P. Green; how the plan of reorganization
ultimately approved will treat other pre-petition claims; whether there
will be sufficient assets to satisfy Debtors' pre-petition liabilities; and
what impact any plan of reorganization ultimately confirmed may have on the
value of the shares of the Corporation's common stock or other securities.
The interests of the Corporation's stockholders may be substantially
diluted or cancelled in whole or in part.

POTENTIAL FEDERAL LEGISLATION REGARDING ASBESTOS PERSONAL INJURY CLAIMS

On April 19, 2005, Senator Arlen Specter, R-Pa., introduced in the United
States Senate legislation addressing compensation and administration of
asbestos personal injury claims. The legislation is titled the Fairness in
Asbestos Injury Resolution Act of 2005 (Senate Bill 852, the "FAIR Act of
2005" or the "Act"). The FAIR Act of 2005 is co-sponsored by 17 Republican
Senators and three Democratic Senators. The Act was referred to the Senate
Committee on the Judiciary and was approved by the committee on May 27,
2005, by a majority vote of the Committee. The FAIR Act of 2005 has not

-15-

been approved by the full Senate, has not been considered by the House of
Representatives, is not law and may not become law.

The FAIR Act of 2005 approved by the Senate Judiciary Committee is intended
to establish a nationally administered trust fund to compensate asbestos
personal injury claimants. In the Act's current form, companies that have
made past payments for asbestos personal injury claims would be required to
contribute amounts on a periodic basis to a national trust fund that would
pay the claims of qualifying asbestos personal injury claimants. The
nationally administered trust fund would be the exclusive remedy for
asbestos personal injury claims, and such claims could not be brought in
state or federal court as long as such claims are being compensated under
the national trust fund. A copy of the FAIR Act of 2005 as introduced is
available at http://thomas.loc.gov (type in "S. 852" in the search field).

In the Act's current form, the amounts to be paid to the national trust
fund are based on an allocation methodology set forth in the Act. In
addition to the annual payments required under the allocation methodology,
defendant participants may be subject to surcharges under certain
circumstances, including but not limited to a failure of the scheduled
contributions to meet the defendant participants' guaranteed annual funding
requirements under the Act. The Act also provides, among other things, that
if it is determined that the money in the trust fund is not sufficient to
compensate eligible claimants, the claimants and defendants (including
current chapter 11 debtors) would return to the court system to resolve
claims not paid by the national trust fund.

As stated above, pursuant to the Plan, the amounts that Debtors will be
required to pay into the Section 524(g) asbestos personal injury trust
depend on whether the FAIR Act is enacted by the 10th day after final
adjournment of the term of the current Congress. Final adjournment is
currently expected to be no later than December 2006. Under the Plan, if
such legislation is enacted by that date and survives subsequent
constitutional challenge, the amount that the Debtors will be required to
contribute to the Section 524(g) trust will be $900 million. If the FAIR
Act is not enacted by the 10th day after final adjournment of the term of
the current Congress, or is enacted but declared unconstitutional, the
amount that the Debtors will be required to pay to the trust will total
$3.95 billion.

The outcome of the legislative process is inherently speculative, and it
cannot be known whether the FAIR Act will ever be enacted or, if enacted,
what the terms of the final legislation might be. In February 2006, the
Senate began debate on the FAIR Act. However, an objection to further
proceedings was raised based on the failure of the FAIR Act to comply with
federal budget rules. This objection could have been waived by the
affirmative vote of 60 Senators, but a motion to waive the budget objection
failed by a vote of 58 to 41 on February 14, 2006. As a result, the Senate
ceased debate on the FAIR Act and no additional action has been
subsequently taken or is scheduled at this time.

-16-

Whether the FAIR Act is enacted by the 10th day after final adjournment of
the term of the current Congress will materially determine the amount the
Debtors will be required to pay into the Section 524(g) trust if Debtors'
Plan is confirmed. Even if the Plan is not confirmed, enactment of such
legislation would materially impact the amount of the Debtors' asbestos
personal injury liability.

ASBESTOS PROPERTY DAMAGE CLAIMS

The Asbestos Agreement and the Plan do not resolve asbestos property damage
claims against the Debtors. The Plan provides that disputed asbestos
property damage claims timely filed in the bankruptcy proceeding will be
resolved either in the Bankruptcy Court or other court, where appropriate.
If it is determined that any amounts are owed for asbestos property damage
claims, the Plan provides that the Debtors will pay such amounts in full,
with interest where required. Any settled asbestos property damage claims
will also be paid in full.

As of the Petition Date, U.S. Gypsum was a defendant in 11 asbestos
property damage lawsuits. As a result of the bar date for filing asbestos
property damage claims in Debtors' Chapter 11 Cases, approximately 1,400
asbestos property damage claims were filed plus more than 70 such claims
filed after the bar date. To date, more than 900 claims have been
disallowed or withdrawn, leaving approximately 550 claims pending. Debtors
have reached agreements in principle to resolve 230 of the approximately
550 pending claims. Those claims that are not settled will likely be
resolved through litigation. The estimated cost of resolving pending
asbestos property damage claims, including settled and unresolved claims,
is included within the asbestos reserve recorded in the fourth quarter of
2005. The asbestos property damage claims are described in more detail in
Note 12, Litigation.

PRE-PETITION LIABILITIES OTHER THAN ASBESTOS PERSONAL INJURY CLAIMS

Subsequent to the Filing, the Debtors received approval from the Bankruptcy
Court to pay or otherwise honor certain of their pre-petition obligations,
including employee wages, salaries, benefits and other employee
obligations, and from limited available funds, pre-petition claims of
certain critical vendors, real estate taxes, environmental obligations,
certain customer programs and warranty claims, and certain other
pre-petition claims.

Pursuant to the Bankruptcy Code, schedules were filed by the Debtors with
the Bankruptcy Court on October 23, 2001, and certain of the schedules were
amended on May 31, 2002, December 13, 2002, and September 30, 2004, setting
forth the assets and liabilities of the Debtors as of the date of the
Filing. The Bankruptcy Court established a bar date of January 15, 2003, by
which proofs of claim were required to be filed against the Debtors for all
claims other than asbestos-related personal injury claims as defined in the
Bankruptcy Court's order.

Approximately 5,000 proofs of claim for general unsecured creditors

-17-

(including pre-petition debtholders and contingent claims, but excluding
asbestos-related claims) totaling approximately $8.7 billion were filed by
the bar date. Of this amount, $5.7 billion worth of claims have been
withdrawn from the case by creditors. The Debtors have been analyzing the
remaining proofs of claim and have determined that many of them are
duplicates of other proofs of claim or of liabilities previously scheduled
by the Debtors. In addition, many claims were filed against multiple
Debtors or against an incorrect Debtor, or were incorrectly claiming a
priority level higher than general unsecured or an incorrect dollar amount.
To date, the court has expunged 264 claims totaling $29.5 million as
duplicates; expunged 531 claims totaling $352.9 million as amended or
superceded; allowed the reduction of 848 claims by a total of $21.6
million; and allowed the correction of the Debtors on 1,533 claims and the
reclassification of 291 claims to general unsecured claims. The Debtors
continue to analyze and reconcile filed claims.

The deadline to bring avoidance actions in the Chapter 11 Cases was June
25, 2003. Avoidance actions may include claims to avoid alleged preferences
made during the 90-day period prior to the filing (or one-year period for
insiders) or other transfers made or obligations incurred that could be
alleged to be constructive or actual fraudulent conveyances under
applicable law. Effective prior to the avoidance action deadline, the
Bankruptcy Court granted the motion of the Official Committee of Unsecured
Creditors to file a complaint seeking to avoid and recover as preferences
certain pre-petition payments made by the Debtors to 206 creditors, where
such payments, in most cases, exceeded $500,000. Under the Plan, the
avoidance action would be dismissed.

In addition, prior to the deadline for filing avoidance actions, certain of
the Debtors entered into a Tolling Agreement pursuant to which the Debtors
voluntarily agreed to extend the time during which actions could be brought
to avoid certain intercompany transactions that occurred during the
one-year period prior to the filing of the Chapter 11 Cases. The
transactions as to which the Tolling Agreement applies are the creation of
liens on certain assets of Debtor subsidiaries in favor of the Corporation
in connection with intercompany loan agreements; a transfer by U.S. Gypsum
to the Corporation of a 9% interest in the equity of CGC Inc., the
principal Canadian subsidiary of the Corporation; and transfers made by the
Corporation to USG Foreign Investments, Ltd., a non-Debtor subsidiary. The
Bankruptcy Court approved the Tolling Agreement in June 2003.

Under the Plan, allowed claims of general unsecured creditors will be paid
in full, with interest where required. Disputed general unsecured claims,
including litigation claims, will be resolved in the bankruptcy proceedings
or other court, where appropriate. Upon resolution of those disputed
claims, the allowed amount of any such claims will be paid in full, with
interest as provided in the Plan.

In connection with the resolution process, the Debtors will make
adjustments to their schedules and financial statements as appropriate. Any
such adjustments could be material to the Corporation's consolidated

-18-

financial position, cash flows and results of operations in any given
period. At this time, it is not possible to estimate the Debtors' liability
for these claims. However, it is likely that the Debtors' liability for
these claims will be different from the amounts now recorded by the
Debtors.

FINANCIAL STATEMENT PRESENTATION

The accompanying consolidated financial statements have been prepared in
accordance with AICPA SOP 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code," and on a going-concern basis,
which contemplates continuity of operations, realization of assets and
liquidation of liabilities in the ordinary course of business. However, as
a result of the Filing, such realization of assets and liquidation of
liabilities, without substantial adjustments and/or changes of ownership,
are subject to uncertainty. Given this uncertainty, there is substantial
doubt about the Corporation's ability to continue as a going concern. Such
doubt includes, but is not limited to, a possible change in control of the
Corporation, as well as a potential change in the composition of the
Corporation's business portfolio. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
While operating as debtors-in-possession under the protection of Chapter 11
of the Bankruptcy Code and subject to Bankruptcy Court approval or
otherwise as permitted in the ordinary course of business, the Debtors, or
any of them, may sell or otherwise dispose of assets and liquidate or
settle liabilities for amounts other than those reflected in the
consolidated financial statements. Further, a plan of reorganization could
materially change the amounts and classifications in the historical
consolidated financial statements.

The Corporation's ability to continue as a going concern is dependent upon,
among other things, (i) the ability of the Corporation to maintain adequate
cash on hand, (ii) the ability of the Corporation to generate cash from
operations, (iii) confirmation of a plan of reorganization under the
Bankruptcy Code and (iv) the Corporation's ability to achieve profitability
following such confirmation. The Corporation believes that cash and
marketable securities on hand and future cash available from operations
will provide sufficient liquidity to allow its businesses to operate in the
normal course without interruption for the duration of the Chapter 11
Cases. This includes its ability to meet post-petition obligations of the
Debtors and to meet obligations of the non-Debtor subsidiaries.

LIABILITIES SUBJECT TO COMPROMISE

As reflected in the consolidated financial statements, liabilities subject
to compromise represent the Debtors' estimate of known or potential
pre-petition claims and related post-petition amounts to be resolved in
connection with the Chapter 11 Cases. Such claims remain subject to future
adjustments. Adjustments may result from (i) negotiations, (ii) actions of
the Bankruptcy Court, (iii) further developments with respect to disputed
claims, (iv) rejection of executory contracts and unexpired leases, (v) the
determination as to the value of any collateral securing claims, (vi)

-19-

proofs of claim, (vii) effect of any legislation which may be enacted or
(viii) other events. The amounts of the various liabilities that are
subject to compromise are set forth in the table below.

As a result of the Asbestos Agreement, in the fourth quarter of 2005, the
Corporation recorded a pretax charge of $3.1 billion ($1.935 billion, or
$44.36 per share, after tax) for all asbestos-related claims, increasing
U.S. Gypsum's reserve for all asbestos-related claims to $4.161 billion.
This reserve includes the Debtors' obligations to fund asbestos personal
injury claims as required by the Asbestos Agreement and as set forth in the
Plan (recorded at $3.95 billion based upon the assumption that the Plan
will be confirmed, but that the FAIR Act is not enacted as set forth in the
Plan). This reserve also includes the Debtors' estimate of the cost of
resolving asbestos property damage claims filed in its Chapter 11 Cases,
including estimated legal fees associated with those claims; and the
Debtors' estimate of resolving other asbestos-related claims and estimated
legal expenses associated with those claims. See Note 12, Litigation, for
further discussion regarding the asbestos reserve and for additional
information on the background of asbestos litigation and developments in
the Corporation's reorganization proceedings.

Enactment of the FAIR Act would not require increasing the Corporation's
current reserve for asbestos claims, because the amount of the reserve
assumes that the Corporation will make all contingent payments to the trust
established in connection with the Asbestos Agreement. However, if the FAIR
Act is enacted by the Trigger Date and survives subsequent constitutional
challenge, the Corporation will not be required to make the contingent
payments of $3.05 billion required by the Asbestos Agreement. In that
event, $3.05 billion of the asbestos reserve attributable to the contingent
payments would be reversed and taken into income. If the FAIR Act is
enacted after the Trigger Date, the Corporation will still be required to
make the contingent payments to the trust and therefore the asbestos
reserve would not be affected.

Payment terms for liabilities subject to compromise will be established as
part of a plan of reorganization under the Chapter 11 Cases. Liabilities
subject to compromise that are accrued on the consolidated and
debtor-in-possession balance sheets as of March 31, 2006 and December 31,
2005 consisted of the following items (dollars in millions):

-20-

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

Asbestos reserve $4,161 $4,161
Debt 1,005 1,005
Accounts payable 180 173
Accrued expenses* 520 36
Other long-term liabilities 8 8
------ ------
Subtotal 5,874 5,383
Elimination of intercompany accounts payable (43) (43)
------ ------
Total liabilities subject to compromise 5,831 5,340
====== ======

* The increase in accrued expenses from December 31, 2005, primarily reflects
$484 million of post-petition interest and fees from the Petition Date
through March 31, 2006 related to pre-petition obligations (primarily debt
and trade payables). See Interest Expense below.

INTERCOMPANY TRANSACTIONS

In the normal course of business, the Corporation (also referred to as the
"Parent Company" in the following discussion of intercompany transactions)
and the operating subsidiaries engage in intercompany transactions. To
document the relations created by these transactions, the Parent Company
and the operating subsidiaries, from the formation of the Corporation in
1985, have been parties to intercompany loan agreements that evidence their
obligations as borrowers or rights as lenders arising out of intercompany
cash transfers and various allocated intercompany charges (the
"Intercompany Corporate Transactions").

The Corporation operates a consolidated cash management system under which
the cash receipts of the domestic operating subsidiaries are ultimately
concentrated in Parent Company accounts. Cash disbursements for those
operating subsidiaries originate from those Parent Company concentration
accounts. Allocated intercompany charges from the Parent Company to the
operating subsidiaries primarily include expenses related to rent, property
taxes, information technology, and research and development, while
allocated intercompany charges between certain operating subsidiaries
primarily include expenses for shared marketing, sales, customer service,
engineering and accounting services. Detailed accounting records are
maintained of all cash flows and intercompany charges through the system in
either direction. Net balances, receivables or payables of such cash
transactions are reviewed on a regular basis with interest earned or
accrued on the balances. During the first six months of 2001, the
Corporation took steps to secure the obligations from each of the principal
domestic operating subsidiaries under intercompany loan agreements when it
became clear that the asbestos liability claims of U.S. Gypsum were
becoming an increasingly greater burden on the Corporation's cash
resources.

As of March 31, 2006, U.S. Gypsum and USG Interiors had net pre-petition
payable balances to the Parent Company for Intercompany Corporate
Transactions of $302 million and $109 million, respectively. L&W Supply had
a net pre-petition receivable balance from the Parent Company of $33

-21-

million. These pre-petition balances are subject to the provisions of the
Tolling Agreement discussed above. See Pre-Petition Liabilities Other Than
Asbestos Personal Injury Claims, above.

As of March 31, 2006, U.S. Gypsum, USG Interiors and L&W Supply had net
post-petition receivable balances from the Parent Company for Intercompany
Corporate Transactions of $699 million, $32 million and $221 million,
respectively. In addition to the above transactions, the operating
subsidiaries engage in ordinary-course purchase and sale of products with
other operating subsidiaries (the "Intercompany Trade Transactions").
Detailed accounting records are maintained of all such transactions, and
settlements are made on a monthly basis. Certain Intercompany Trade
Transactions between U.S. and non-U.S. operating subsidiaries are settled
via wire transfer payments utilizing several payment systems.

CHAPTER 11 REORGANIZATION EXPENSES

Chapter 11 reorganization expenses in the consolidated and
debtor-in-possession statements of operations consisted of the following
(dollars in millions):

Three Months ended March 31,
----------------------------
2006 2005
---- ----

Legal and financial advisory fees $ 14 $ 6
Bankruptcy-related interest income (12) (5)
---- ---
Total chapter 11 reorganization expenses 2 1
==== ===

INTEREST EXPENSE

Interest expense of $486 million was recorded in the first quarter of 2006.
Of this amount, $484 million ($300 million after-tax) represented a charge
for post-petition interest and fees from the Petition Date through March
31, 2006, related to pre-petition obligations (primarily debt and trade
payables) which are expected to be paid upon emergence from bankruptcy as
outlined in the Plan. In accordance with SOP 90-7, virtually all of the
Corporation's outstanding debt has been classified as liabilities subject
to compromise, and from the Petition Date through December 31, 2005,
interest expense on this debt and other pre-petition obligations had not
been accrued or recorded.

DIP FINANCIAL STATEMENTS

Under the Bankruptcy Code, the Corporation is required to file periodically
with the Bankruptcy Court various documents including financial statements
of the Debtors (the Debtor-In-Possession or "DIP" financial statements).
The Corporation cautions that these financial statements are prepared
according to requirements under the Bankruptcy Code. While these financial
statements are prepared under the same basis as the Corporation's
consolidated financial statements and accurately provide information
required under the Bankruptcy Code, they are nonetheless unconsolidated,
unaudited and prepared in a format different from that used for the
Corporation's consolidated financial statements

-22-

filed under United States securities laws. Accordingly, the Corporation believes
the substance and format do not allow meaningful comparison with the
Corporation's regular publicly disclosed consolidated financial statements.

The Debtors consist of the Corporation and the following wholly owned
subsidiaries: U.S. Gypsum; USG Interiors; USG Interiors International, Inc.; L&W
Supply; Beadex; B-R Pipeline Company; La Mirada Products Co., Inc.; Stocking
Specialists, Inc.; USG Industries, Inc.; and USG Pipeline Company. The condensed
DIP financial statements are presented as follows:

USG CORPORATION
DEBTOR-IN-POSSESSION STATEMENT OF OPERATIONS
(DOLLARS IN MILLIONS)
(UNAUDITED)

THREE MONTHS
ENDED MARCH 31,
-----------------
2006 2005
------- -------

Net sales $ 1,328 $ 1,058
Cost of products sold 1,012 877
Selling and administrative expenses 85 76
Chapter 11 reorganization expenses 2 1
Interest expense 485 1
Interest income -- (1)
Other (income)/expense, net -- (1)
------- -------
Earnings (loss) before income taxes (256) 105
Income tax expense (benefit) (93) 43
------- -------
Net earnings (loss) (163) 62
======= =======

-23-

USG CORPORATION
DEBTOR-IN-POSSESSION BALANCE SHEETS
(DOLLARS IN MILLIONS)
(UNAUDITED)

AS OF AS OF
MARCH 31, DECEMBER 31,
2006 2005
--------- ------------

ASSETS
Current Assets:
Cash and cash equivalents $ 844 $ 698
Short-term marketable securities 227 187
Restricted cash 93 77
Receivables (net of reserves - $11 and $10) 558 400
Inventories 286 262
Income taxes receivable 6 6
Deferred income taxes 28 --
Other current assets 149 147
------- -------
Total current assets 2,191 1,777
Long-term marketable securities -- 298
Property, plant and equipment (net of accumulated
depreciation and depletion - $847 and $819) 1,669 1,663
Deferred income taxes 1,624 1,423
Goodwill 105 64
Other assets 430 434
------- -------
Total Assets 6,019 5,659
======= =======

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable 277 239
Accrued expenses 203 250
Deferred income taxes -- 7
Income taxes payable 131 36
------- -------
Total current liabilities 611 532
Other liabilities 449 445
Liabilities subject to compromise 5,831 5,340
Stockholders' Equity (Deficit):
Preferred stock -- --
Common stock 5 5
Treasury stock (213) (219)
Capital received in excess of par value 149 145
Accumulated other comprehensive income (loss) (7) 53
Retained earnings (deficit) (806) (642)
------- -------
Total stockholders' equity (deficit) (872) (658)
------- -------
Total Liabilities and Stockholders' Equity (Deficit) 6,019 5,659
======= =======

-24-

USG CORPORATION
DEBTOR-IN-POSSESSION STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)

THREE MONTHS
ENDED MARCH 31,
---------------
2006 2005
------ ------

OPERATING ACTIVITIES:
Net earnings (loss) $(163) $ 62
Adjustments to reconcile net earnings (loss) to net cash:
Depreciation, depletion and amortization 29 26
Deferred income taxes (198) 14
(Increase) decrease in working capital:
Receivables (138) (75)
Income taxes receivable -- 1
Inventories (14) (8)
Payables 127 23
Accrued expenses (51) (25)
Increase in post-petition intercompany receivable (1) --
Increase in other assets (11) (5)
Increase in other liabilities 1 2
Increase (decrease) in liabilities subject to compromise 491 (1)
Other, net (6) (4)
----- -----
Net cash provided by operating activities 66 10
----- -----
INVESTING ACTIVITIES:
Capital expenditures (32) (28)
Purchases of marketable securities (66) (176)
Sale or maturities of marketable securities 325 140
Net proceeds from asset dispositions 1 --
Acquisitions of businesses, net of cash acquired (74) --
Deposit of restricted cash (16) (1)
----- -----
Net cash provided by (used for) investing activities 138 (65)
----- -----
FINANCING ACTIVITIES:
Payment of rights offering backstop commitment fee (67) --
Issuances of common stock upon exercise of stock options 7 1
Tax benefit of share-based payments 2 --
----- -----
Net cash provided by (used for) financing activities (58) 1
----- -----
Net increase (decrease) in cash and cash equivalents 146 (54)
Cash and cash equivalents at beginning of period 698 516
----- -----
Cash and cash equivalents at end of period 844 462
===== =====
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid -- --
Income taxes paid, net 2 1

-25-

(3) EARNINGS PER SHARE

Basic earnings per share are based on the weighted average number of common
shares outstanding. Diluted earnings per share are based on the weighted
average number of common shares outstanding and the dilutive effect of the
potential exercise of outstanding stock options. Diluted earnings per share
exclude the potential exercise of outstanding stock options for any period
in which such exercise would have an anti-dilutive effect. The
reconciliation of basic earnings per share to diluted earnings per share is
shown in the following table (dollars in millions, except share data):

Weighted
Net Average
Earnings Shares Per-Share
Three Months Ended March 31, (Loss) (000) Amount
- ---------------------------- -------- ------ ---------

2006:
Basic loss $(141) 44,729 $(3.15)
----- ------ ------
Diluted loss (141) 44,729 (3.15)
===== ====== ======

2005:
Basic earnings 77 43,327 1.77
----- ------ ------
Dilutive effect of stock options 180
----- ------ ------
Diluted earnings 77 43,507 1.77
===== ====== ======

For the three months ended March 31, 2006, options to purchase 127,048
shares of common stock are not included in the computation of earnings per
share because the effect would be anti-dilutive.

(4) ASSET RETIREMENT OBLIGATIONS

Changes in the liability for asset retirement obligations consisted of the
following (dollars in millions):

Three Months
ended March 31
--------------
2006 2005
---- ----

Balance as of January 1 $71 $43
Accretion expense 1 --
--- ---
Balance as of March 31 72 43
=== ===

-26-

(5) MARKETABLE SECURITIES

The Corporation's investments in marketable securities consisted of the
following (dollars in millions):

As of As of
March 31, 2006 December 31, 2005
------------------ ------------------
Fair Fair
Amortized Market Amortized Market
Cost Value Cost Value
--------- ------ --------- ------

Asset-backed securities $ 94 $ 94 $244 $243
U.S. government and agency securities 92 91 168 166
Municipal securities 21 21 21 21
Corporate securities 64 64 123 123
Time deposits 10 10 10 10
---- ---- ---- ----
Total marketable securities 281 280 566 563
==== ==== ==== ====

Contractual maturities of marketable securities as of March 31, 2006, were
as follows (dollars in millions):

Fair
Amortized Market
Cost Value
--------- ------

Due in 1 year or less $138 $137
Due in 1-5 years 8 8
Due in 5-10 years 1 1
Due after 10 years 40 40
---- ----
187 186
Asset-backed securities 94 94
---- ----
Total marketable securities 281 280
==== ====

The average duration of the portfolio is less than one year because a
majority of the longer-term securities either mature within one year or
have paydown or put features and liquidity facilities. While some
securities have contractual maturities beyond one year, all are classified
as short-term marketable securities on the consolidated balance sheet as of
March 31, 2006, due to the Corporation's intent to sell the securities
within one year and to use the proceeds to fund the Plan.

Management has evaluated the nature of all unrealized losses in marketable
securities, and has determined that the losses are related to the level of
interest rates. Since management expects to hold the impaired securities
for a period of time sufficient to allow for a recovery in market value,
all unrealized losses will remain in accumulated other comprehensive income
("OCI"). Investments in marketable securities that were in an unrealized
loss position consisted of the following (dollars in millions):

-27-

As of March 31, As of December 31,
2006 2005
--------------------- ---------------------
Less than 12 Months Less than 12 Months
12 Months or Longer 12 Months or Longer
--------- --------- --------- ---------

Asset-backed securities $32 $17 $143 $39
U.S. government and agency securities 23 10 89 32
Corporate securities 20 12 41 20
--- --- ---- ---
Total fair market value 75 39 273 91
--- --- ---- ---
Aggregate amount of unrealized losses 1 -- 2 1
=== === ==== ===

(6) DERIVATIVE INSTRUMENTS

The Corporation uses derivative instruments to manage selected commodity
price and foreign currency exposures. The Corporation does not use
derivative instruments for trading purposes. All derivative instruments are
recorded on the balance sheet at fair value. For derivatives designated as
fair value hedges, the changes in the fair values of both the derivative
instrument and the hedged item are recognized in earnings in the current
period. For derivatives designated as cash flow hedges, the effective
portion of changes in the fair value of the derivative is recorded to OCI
and is reclassified to earnings when the underlying transaction has an
impact on earnings. The ineffective portion of changes in the fair value of
the derivative is reported in cost of products sold. For derivatives
designated as net investment hedges, changes in value are recorded in OCI.
As of March 31, 2006, the Corporation had no foreign currency contracts.

COMMODITY DERIVATIVE INSTRUMENTS

The Corporation uses swap contracts to hedge anticipated purchases of
natural gas to be used in its manufacturing operations. Generally, the
Corporation has a substantial majority of its anticipated purchases of
natural gas over the next 12 months hedged; however, the Corporation
reviews its positions regularly and makes adjustments as market conditions
warrant. The current contracts, all of which mature by December 31, 2009,
are designated as cash flow hedges. As of March 31, 2006, the Corporation
had swap contracts to exchange monthly payments on notional amounts of
natural gas amounting to $282 million. The fair value of these swap
contracts as of March 31, 2006, was $41.6 million, of which an immaterial
amount remained in OCI.

COUNTERPARTY RISK

The Corporation is exposed to credit losses in the event of nonperformance
by the counterparties on its financial instruments. All counterparties have
investment grade credit standing; accordingly, the Corporation anticipates
that these counterparties will be able to fully satisfy their obligations
under the contracts. The Corporation receives collateral from its
counterparties based on the provisions in certain credit support
agreements. Similarly, the Corporation may be required to post collateral

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if aggregate payables exceed certain limits. Currently, the Corporation has
no collateral requirement. The Corporation enters into master agreements
which contain netting arrangements that minimize counterparty credit
exposure.

(7) COMPREHENSIVE INCOME

The components of comprehensive income are summarized in the following
table (dollars in millions):

Three Months
ended
March 31
------------
2006 2005
----- ----

Net (loss) earnings $(141) $ 77
----- ----
Pretax (loss) gain on derivatives (100) 59
Income tax benefit (expense) 39 (23)
----- ----
After-tax (loss) gain on derivative (61) 36
----- ----
Foreign currency translation (3) (4)
----- ----
Unrealized gain on marketable securities, net of tax 1 --
----- ----
Total comprehensive (loss) income (204) 109
===== ====

There was no tax impact on the foreign currency translation adjustments.

OCI consisted of the following (dollars in millions):

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

Gain (loss) on derivatives, net of tax $(1) $60
Foreign currency translation 18 21
Minimum pension liability, net of tax (8) (8)
Unrealized loss on marketable securities, net of tax -- (1)
--- ---
Total 9 72
=== ===

During the first quarter of 2006, accumulated net after-tax gains of $4
million ($7 million pretax) on derivatives were reclassified from OCI to
earnings. As of March 31, 2006, the estimated net after-tax losses expected
to be reclassified within the next 12 months from OCI to earnings is $1
million.

-29-

(8) EMPLOYEE RETIREMENT PLANS

The components of net pension and postretirement benefits costs for the
three months ended March 31, 2006 and 2005 are summarized in the following
table (dollars in millions):

Three Months
ended
March 31
------------
2006 2005
---- ----

PENSION:
Service cost of benefits earned $ 9 $ 9
Interest cost on projected
benefit obligation 15 14
Expected return on plan assets (16) (14)
Net amortization 4 5
---- ----
Net cost 12 14
==== ====

POSTRETIREMENT:
Service cost of benefits earned $ 3 $ 3
Interest cost on projected
benefit obligation 5 5
Net amortization (1) (1)
---- ----
Net cost 7 7
==== ====

In accordance with the Corporation's funding policy, the Corporation and
its subsidiaries contributed cash of $22 million during the first quarter
of 2006 and expect to contribute a total of approximately $72 million
during fiscal year 2006 to their pension plans.

(9) STOCK-BASED COMPENSATION

Effective January 1, 2006, the Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment," as its
method to account for stock-based compensation. Because stock options
issued prior to the Filing are fully vested and no stock options or any
other form of share-based compensation have been issued subsequent to the
Filing, the adoption of SFAS No. 123(R) did not have an impact on the
Corporation's financial position, cash flows or results of operations.
Prior to the adoption of SFAS No. 123(R), the Corporation presented tax
benefits associated with the exercise of stock options as operating cash
flows on the consolidated statement of cash flows. SFAS No. 123(R) requires
the cash flows resulting from such tax benefits to be classified as
financing cash flows.

Prior to the Filing, the Corporation issued stock options to key employees
under plans approved by stockholders. Under the plans, options were granted
at an exercise price equal to the market value on the date of grant. All
options granted under the plans have 10-year terms and vesting schedules of
two years. The options expire on the 10th anniversary of the date of grant,
except in the case of retirement, death or disability, in which case they
expire on the earlier of the fifth anniversary of such event or the
expiration of the original option term. Stock option activity during the
first quarter of 2006 was as follows:

Options Weighted Average
(000) Exercise Price
-------------------------------

Outstanding, January 1 605 $44.57
Granted - -
Exercised (159) 44.38
Cancelled (44) 43.29
Outstanding and exercisable, March 31 402 44.78
---------------------------------------------------------------------------

-30-

The aggregate intrinsic value and weighted average remaining contractual
term of all options outstanding as of March 31, 2006, were $20 million and
2.72 years, respectively. The total intrinsic value of options exercised
during the first quarter of 2006 was $6 million.

Non-employee directors of the Corporation may elect to defer a portion of
their compensation in the form of deferred stock units which increase or
decrease in value in direct relation to the market price of shares of
common stock and are paid in cash upon termination of board service. As of
March 31, 2006, there were approximately 14,000 deferred stock units held
by non-employee directors. Amounts expensed in the first quarter of 2006
and 2005 were immaterial.

As of March 31, 2006, common shares totaling 402,175 were reserved for
future issuance in conjunction with existing stock option grants. Shares
issued in option exercises may be originally issued or from treasury
shares. There were no common shares reserved for future grants. As a result
of, and immediately following, the rights offering, the Corporation will,
pursuant to the terms of outstanding stock options, adjust the number of
shares underlying the outstanding stock options and the related exercise
prices to account for the rights offering. In addition, as a result of the
rights offering, the Corporation will adjust the deferred stock units held
by members of the Board of Directors pursuant to the USG Corporation Stock
Compensation Program for Non-Employee Directors. These adjustments will be
made in a manner that is designed to preserve the value of the outstanding
stock options and deferred stock units without triggering adverse tax
consequences.

(10) INCOME TAXES

Interest expense of $7 million ($4 million after-tax) was recorded in the
first quarter of 2006, representing an accrual for post-petition interest
(from the Petition Date through March 31, 2006) related to pre-petition tax
obligations which are expected to be paid upon or subsequent to emergence
from bankruptcy as outlined in the Plan. This amount has been included as
part of the income tax benefit recorded by the Corporation in the first
quarter of 2006.

The Corporation has a valuation allowance for deferred tax assets relating
to certain foreign and U.S. state net operating loss and tax credit
carryforwards and a portion of the Corporation's reserve for asbestos
claims due to uncertainty regarding their ultimate realization. Of the
total valuation allowance as of March 31, 2006, $55 million relates to the
reserve for asbestos claims, $12 million relates to foreign net operating
loss and tax credit carryforwards, and $12 million relates to U.S. state
net operating loss and tax credit carryforwards. The Corporation has net
operating loss and tax credit carryforwards in varying amounts in numerous
U.S. state and foreign jurisdictions. Under applicable law, if not used
prior thereto, most of these carryforwards will expire over periods ranging
from five to 20 years from the date of origin.

The Corporation's financial statements include amounts recorded for
contingent tax liabilities with respect to loss contingencies that are
deemed probable of occurrence. The pre-petition portion of such amounts is
included in liabilities subject to compromise on the Corporation's
consolidated balance sheets, while the post-petition portion is included in
income taxes payable. These loss contingencies relate primarily to tax
disputes with various state tax authorities and costs incurred with respect
to the Chapter 11 Cases. The Corporation's U.S. income tax returns for 2002
and prior years have been audited by the IRS and are closed.

-31-

(11) OPERATING SEGMENTS AND ACQUISITIONS

The Corporation's operations are organized into three operating segments:
(i) North American Gypsum, which manufactures SHEETROCK(R) brand gypsum
wallboard and joint compound, DUROCK(R) brand cement board, FIBEROCK(R)
brand gypsum fiber panels and other related building products in the United
States, Canada and Mexico; (ii) Worldwide Ceilings, which manufactures
ceiling tile in the United States and ceiling grid in the United States,
Canada, Europe and the Asia-Pacific region; and (iii) Building Products
Distribution, which distributes gypsum wallboard, drywall metal, ceiling
products, joint compound and other building products throughout the United
States. Operating segment results were as follows (dollars in millions):

Net Sales Operating Profit
--------------- ----------------
Three Months Ended March 31, 2006 2005 2006 2005
- ---------------------------- ------ ------ ----- ----

North American Gypsum $ 931 $ 725 $211 $107
Worldwide Ceilings 186 170 20 12
Building Products Distribution 604 456 53 26
Eliminations (256) (178) 2 3
Corporate -- -- (28) (23)
Chapter 11 reorganization expenses -- -- (2) (1)
------ ------ ---- ----
Total 1,465 1,173 256 124
====== ====== ==== ====

During the first quarter of 2006, L&W Supply purchased the outstanding
stock of several companies located in the Midwestern United States for
approximately $74 million, net of cash acquired and subject to final
purchase price adjustments. All of these acquisitions were part of L&W
Supply's strategy to profitably grow its specialty dealer business. These
acquisitions were accounted for under the purchase method of accounting
and, accordingly, included the results of operations in the accompanying
consolidated results of operations from their date of acquisition. Pro
forma combined results of operations for 2005 and 2006 would not be
materially different as a result of these acquisitions and therefore are
not presented. The purchase price of the acquisitions is allocated to the
tangible assets, liabilities and intangible assets acquired, based on their
estimated fair values. L&W Supply has preliminarily recorded approximately
$41 million of goodwill, approximately $4 million of intangible assets not
subject to amortization in connection with these acquisitions and the
remaining $29 million was primarily recorded to accounts receivable,
inventory and property plant and equipment, net of current liabilities.

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(12) LITIGATION

ASBESTOS AND RELATED BANKRUPTCY LITIGATION

One of the Corporation's subsidiaries and a Debtor, U.S. Gypsum, was among
many defendants in more than 100,000 pre-petition asbestos lawsuits
alleging personal injury or property damage liability. Most of the asbestos
lawsuits against U.S. Gypsum sought compensatory and, in many cases,
punitive damages for personal injury allegedly resulting from exposure to
asbestos-containing products. Certain of the asbestos lawsuits sought to
recover compensatory and, in many cases, punitive damages for costs
associated with the maintenance or removal and replacement of
asbestos-containing products in buildings.

U.S. Gypsum's asbestos liability derives from its sale of certain
asbestos-containing products beginning in the late 1920s. In most cases,
the products were discontinued or asbestos was removed from the formula by
1972, and no asbestos-containing products were produced after 1978.

In addition to the asbestos personal injury cases pending against U.S.
Gypsum, two other Debtors, L&W Supply and Beadex, have been named as
defendants in a small number of asbestos personal injury cases. The ACC,
the Futures Representative, and the Official Committee of Asbestos Property
Damage Claimants have also asserted that the Debtors are liable for the
asbestos liabilities of A.P. Green Refractories Co. ("A.P. Green"), a
former subsidiary of U.S. Gypsum and the Corporation. The Plan filed by the
Debtors, if confirmed, will resolve the asbestos personal injury liability
of all of the Debtors including any liability relating to A.P. Green.

More information regarding the asbestos cases against U.S. Gypsum, L&W
Supply, Beadex, and A.P. Green is set forth below.

DEVELOPMENTS IN THE REORGANIZATION PROCEEDING: The Debtors' Chapter 11
Cases are assigned to Judge Judith K. Fitzgerald, a bankruptcy court judge,
and Judge Joy Flowers Conti, a federal district court judge. Judge Conti
hears matters relating to estimation of the Debtors' liability for asbestos
personal injury claims. Other matters are heard by Judge Fitzgerald. Four
official committees were appointed in the Chapter 11 Cases - the Official
Committee of Personal Injury Claimants (or ACC), the Official Committee of
Asbestos Property Damage Claimants, the Official Committee of Unsecured
Creditors and the Official Committee of Equity Security Holders. In
addition, the Bankruptcy Court appointed Dean M. Trafelet as the Futures
Representative.

As contemplated by the Asbestos Agreement, the Debtors filed the Plan and
Disclosure Statement describing the Plan in April 2006. On April 7, 2006,
the Bankruptcy Court entered an order permitting Debtors to solicit votes
regarding the Plan from asbestos personal injury claimants, the only class
of creditors entitled to vote on the Plan. The deadline for voting on the
plan is June 2, 2006. The Bankruptcy Court has scheduled a hearing for

-33-

June 15 and 16, 2006, before both the Bankruptcy Court and the District
Court to determine whether to confirm the Plan.

At the time the Asbestos Agreement was reached, there were contested
proceedings before Judge Conti to estimate Debtors' asbestos personal
injury liability. In those proceedings, the Debtors, on the one hand, and
the ACC and Futures Representative, on the other hand, disputed the legal
and factual issues relating to estimating that liability. The Debtors
contended that the court should consider and determine the following legal
and factual issues: whether claimants who do not have objective evidence of
asbestos-related disease have valid claims and are entitled to be
compensated by the Debtors or whether such claimants are entitled to
compensation only if and when they develop asbestos-related disease; the
characteristics and number of present and future claimants who are likely
to have had exposure to the Debtors' asbestos-containing products
sufficient to cause disease; whether the particular type of asbestos
present in certain of the Debtors' products during the relevant time has
been shown to cause cancer; and the appropriate claim values to apply to
legitimate present and future asbestos personal injury claims. In
opposition, the ACC and the Futures Representative contended that
estimation of Debtors' liability should be based on extrapolation from the
settlement history of asbestos personal injury claims against Debtors and
not on litigating liability issues in the bankruptcy proceedings. The ACC
and the Futures Representative also contended that the Bankruptcy Court
does not have the power to deny recovery to claimants on the grounds that
they do not have objective evidence of disease or do not have adequate
exposure to the Debtors' products where such claimants, or claimants with
similar characteristics, are compensated in the tort system outside of
bankruptcy.

At the time the Asbestos Agreement was reached, there were also litigation
proceedings before Judge Fitzgerald relating to whether Debtors other than
U.S. Gypsum have responsibility for U.S. Gypsum's asbestos liabilities and
whether the Debtors have responsibility for the asbestos liabilities of
A.P. Green, a former subsidiary of U.S. Gypsum and the Corporation. In
those proceedings, the Debtors other than U.S. Gypsum requested a ruling
that the assets of the Debtors other than U.S. Gypsum are not available to
satisfy the asbestos liabilities of U.S. Gypsum. In opposition, the ACC,
the Futures Representative, and the Official Committee of Asbestos Property
Damage Claimants sought a contrary ruling that the assets of all Debtors
are available to satisfy the asbestos liabilities of U.S. Gypsum under
various asserted legal grounds, including successor liability, piercing the
corporate veil, and substantive consolidation.

-34-

liabilities. They further allege that because the Debtors other than U.S.
Gypsum are liable for U.S. Gypsum's liabilities, all of the Debtors are
therefore liable for A.P. Green's liabilities. The Official Committee of
Asbestos Property Damage Claimants asserted similar claims.

The estimated amount of A.P. Green's asbestos personal injury liabilities
is not known. The debtors in the A.P. Green reorganization proceeding have
filed a plan of reorganization which, if confirmed, would resolve the
asbestos liabilities of the debtors in that proceeding by channeling those
asbestos liabilities to a Section 524(g) trust. However, the A.P. Green
plan documents specifically exclude U.S. Gypsum from the protection of the
proposed channeling injunction. The A.P. Green plan documents state that
the asbestos personal injury trust to be created in that case will be
funded with approximately $334 million dollars in insurance proceeds and
21% of the stock of a corporate affiliate of A.P. Green. The plan documents
state that, as of A.P. Green's petition date, about 235,757
asbestos-related claims were pending against it and about 58,899 such
claims were pending against an affiliate. Although the A.P. Green plan
documents do not provide an estimate of the amount of A.P. Green's present
and future asbestos liabilities, available information indicates that the
assets to be provided to the asbestos trust in the A.P. Green case will not
be sufficient to pay in full the asbestos liability of A.P. Green. The A.P.
Green plan has been approved by vote of its creditors, and the bankruptcy
court presiding over the A.P. Green reorganization proceeding has scheduled
a hearing for June 5, 2006, to decide whether to confirm the A.P. Green
plan.

-35-

If Debtors' Plan is not confirmed, determination of the amount of Debtors'
asbestos personal injury liabilities and whether Debtors are responsible
for A.P. Green's liabilities would likely be resolved through continued
litigation proceedings in the Debtors' Chapter 11 Cases.

With regard to asbestos property damage claims, the Bankruptcy Court
established a bar date requiring all such claims against the Debtors to be
filed by January 15, 2003. Approximately 1,400 asbestos property damage
claims were filed by the bar date and more than 70 such claims were filed
after the bar date. In contrast, as of the Petition Date, 11 asbestos
property damage lawsuits were pending against U.S. Gypsum.

Most of the asbestos property damage claims filed did not provide evidence
that the Debtors' asbestos-containing products were ever installed in any
of the buildings at issue. Certain of the claim forms purport to file
claims on behalf of two classes of claimants that were the subject of
pre-petition class actions. One of these claim forms was filed on behalf of
a class of colleges and universities that was certified for certain
purposes in a pre-petition lawsuit filed in federal court in South
Carolina. However, many of the putative members of this class also filed
individual claim forms. Four of the claim forms were filed by a claimant
allegedly on behalf of putative members of certified and uncertified
classes in connection with a pre-petition lawsuit pending in South Carolina
state court.

The Debtors believe that they have substantial defenses to the property
damage claims, including the lack of evidence that the Debtors' products
were ever installed in the buildings at issue, the failure to file the
claims within the applicable statutes of limitation or repose, and the lack
of evidence that the claimants have any injury or damages.

Beginning in late 2004, the Debtors began filing objections to asbestos
property damage claims that did not provide any evidence that the Debtors'
products were installed in the buildings at issue. To date, in response to
these objections, the Court has disallowed approximately 460 asbestos
property damage claims for failure to provide sufficient product
identification evidence. In addition, approximately 470 asbestos property
damage claims have been withdrawn. The Debtors have also filed motions
challenging additional claims on product identification and other grounds.
These motions have not yet been addressed by the Bankruptcy Court.

At present, approximately 550 asbestos property damage claims remain
pending involving more than 1,200 buildings. This includes the claims that
are the subject of the Debtors' pending motions before the Bankruptcy

-36-

Court. Debtors have reached agreements in principle to resolve 230 of the
approximately 550 pending claims.

The Plan provides that all remaining disputed asbestos property damage
claims timely filed in the Debtors' bankruptcy proceedings will be resolved
in these bankruptcy proceedings or other court, where appropriate. Upon
resolution of these claims, the allowed amount, if any, of such claims will
be paid in full, with interest where required. The Debtors believe that
they have substantial defenses to these claims, including that the claims
do not provide evidence that Debtors' asbestos-containing products were
ever installed in the buildings at issue, statute of limitations or repose
defenses for some claims, and the lack of evidence that the claimants have
any injury or damage. Counsel for the Official Committee of Asbestos
Property Damage Claimants has stated in a court hearing that the committee
believes that the amount of the asbestos property damage claims may reach
$1 billion. The estimated cost of resolving pending asbestos property
damage claims, including settled and unresolved claims, is included within
the asbestos reserve recorded in the fourth quarter of 2005.

The following is a summary of the asbestos personal injury and property
damage cases pending against U.S. Gypsum and certain other Debtors as of
the Petition Date.

ASBESTOS PERSONAL INJURY CASES: Prior to the Filing, U.S. Gypsum managed
the handling and settlement of asbestos personal injury cases through its
membership in the Center for Claims Resolution (the "Center"). As reported
by the Center, U.S. Gypsum was a defendant in more than 100,000 pending
asbestos personal injury cases as of the Petition Date, as well as an
additional approximately 50,000 personal injury cases that may be the
subject of settlement agreements. These numbers do not include asbestos
personal injury claims that would have been filed after June 25, 2001, the
Petition Date, but for the automatic stay.

In 2000, U.S. Gypsum closed approximately 57,000 personal injury cases.
U.S. Gypsum's cash payments in 2000 to defend and resolve personal injury
cases totaled $162 million, of which $90 million was paid or reimbursed by
insurance. In 2000, the average settlement per case was approximately
$2,600, exclusive of defense costs. U.S. Gypsum made cash payments of $100
million in 1999 and $61 million in 1998 to resolve personal injury cases,
of which $85 million and $45.5 million, respectively, were paid or
reimbursed by insurance.

During late 2000 and in 2001, following the bankruptcy filings of other
defendants in asbestos personal injury litigation, plaintiffs substantially
increased their settlement demands to U.S. Gypsum. In response to these
increased settlement demands, U.S. Gypsum attempted to manage its asbestos
liability by contesting, rather than settling, a greater number of cases
that it believed to be non-meritorious. As a result, in the first and
second quarters of 2001, U.S. Gypsum agreed to

-37-

settle fewer personal injury cases, but at a significantly higher cost per
case.

In the first half of 2001 up to the Petition Date, U.S. Gypsum closed
approximately 18,900 personal injury cases. In the first half of 2001 up to
the Petition Date, U.S. Gypsum's total asbestos-related cash payments,
including defense costs, were approximately $124 million, of which
approximately $10 million was paid or reimbursed by insurance. A portion of
these payments was for settlements agreed to in prior periods. As of March
31, 2001, U.S. Gypsum had estimated that cash expenditures for personal
injury cases in 2001 would total approximately $275 million before
insurance recoveries of approximately $37 million.

In addition to the asbestos personal injury cases pending against U.S.
Gypsum, one of the Corporation's subsidiaries and a Debtor in the
bankruptcy proceedings, L&W Supply, was named as a defendant in
approximately 21 pending personal injury cases as of the Petition Date. L&W
Supply, a distributor of building products manufactured by U.S. Gypsum and
other building products manufacturers, has not made any payments in the
past to resolve personal injury cases.

Beadex, a subsidiary of U.S. Gypsum and a Debtor in the bankruptcy
proceedings, was named as a defendant in approximately 60 asbestos personal
injury cases pending primarily in the states of Washington and Oregon as of
the Petition Date. Beadex manufactured and sold joint compound containing
asbestos from 1963 through 1978 in the northwestern United States. Beadex
has confirmed approximately $11 million in primary or umbrella insurance
coverage available to pay asbestos-related costs, as well as $15 million in
available excess coverage.

ASBESTOS PROPERTY DAMAGE CASES: As of the Petition Date, U.S. Gypsum was a
defendant in 11 asbestos property damage cases, most of which involved
multiple buildings. One of the cases is a conditionally certified class
action comprising all colleges and universities in the United States, which
certification is presently limited to the resolution of certain allegedly
"common" liability issues (Central Wesleyan College v. W.R. Grace & Co., et
al., U.S.D.C. S.C.). In addition, a South Carolina state court certified a
second class action on the eve of the Petition Date. This second action is
styled Anderson Memorial Hospital v. W.R. Grace & Co., et al., Case No.
92-CP-25-279 (Hampton County S.C.). As a result of the Filing, all property
damage cases are stayed against U.S. Gypsum. Information regarding asbestos
property damage claims filed in the Debtors' Chapter 11 Cases is discussed
in Developments in the Reorganization Proceeding above, and U.S. Gypsum's
estimated cost of resolving the property damage claims is discussed in
Estimated Cost, below.

INSURANCE COVERAGE: As of March 31, 2006, all prior receivables relating to
insurance remaining to cover asbestos-related costs had been collected by
U.S. Gypsum, and its insurance coverage for asbestos claims has been

-38-

completely exhausted. As noted above, Beadex has approximately $26 million
in primary and excess insurance.

ESTIMATED COST: As a result of the Asbestos Agreement, in the fourth
quarter of 2005, the Corporation recorded a pretax charge of $3.1 billion
($1.935 billion, or $44.36 per share, after tax) for all asbestos-related
claims, increasing U.S. Gypsum's reserve for all asbestos-related claims to
$4.161 billion. This reserve includes the Debtors' obligations to fund
asbestos personal injury claims as will be set forth in the Plan (recorded
at $3.95 billion based upon the assumption that the Plan will be confirmed,
but that the FAIR Act is not enacted as set forth in the Plan). This
reserve also includes the Debtors' estimate of the cost of resolving
asbestos property damage claims filed in its Chapter 11 Cases, including
estimated legal fees associated with those claims; and the Debtors'
estimate of resolving other asbestos-related claims and estimated legal
expenses associated with those claims.

If the Plan is not confirmed, the amount of Debtors' asbestos personal
injury liabilities will not be resolved and will likely be subject to
substantial dispute and uncertainty. In that event, if the amount of such
liabilities is not resolved through negotiation or through federal asbestos
legislation, such liabilities likely will be determined through litigation
in the bankruptcy proceeding. The amount of Debtors' asbestos personal
injury liabilities could be determined to be significantly different from
the currently accrued reserve. This difference could be material to the
Corporation's financial position, cash flows, and results of operations in
the period recorded.

BOND TO SECURE CERTAIN CENTER OBLIGATIONS: In January 2001, U.S. Gypsum
obtained a performance bond from Safeco Insurance Company of America
("Safeco") in the amount of $60.3 million to secure certain obligations of
U.S. Gypsum for extended payout settlements of personal injury cases and
other obligations owed by U.S. Gypsum to the Center. The bond is secured by
an irrevocable letter of credit obtained by the Corporation in the amount
of $60.3 million and issued by JPMorgan Chase Bank (formerly Chase
Manhattan Bank) ("JPMorgan Chase") to Safeco. After the Filing, by a letter
dated November 16, 2001, the Center made a demand to Safeco for

-39-

payment of $15.7 million under the bond, and, by a letter dated December
28, 2001, the Center made a demand to Safeco for payment of approximately
$127 million under the bond. The amounts for which the Center made demand
were for the payment of, among other things, settlements of personal injury
cases that were entered into pre-petition. The total amount demanded by the
Center under the bond, approximately $143 million, exceeds the original
penal sum of the bond, which is $60.3 million. Safeco has not made any
payment under the bond.

On November 30, 2001, the Corporation and U.S. Gypsum filed an Adversary
Complaint in the Chapter 11 Cases to, among other things, enjoin the Center
from drawing on the bond and enjoin Safeco from paying on the bond during
the pendency of these bankruptcy proceedings. This Adversary Proceeding is
pending in the Bankruptcy Court and is captioned USG Corporation and United
States Gypsum Company v. Center for Claims Resolution, Inc. and Safeco
Insurance Company of America, Case No. 01-08932. The court consolidated the
Adversary Proceeding with similar adversary proceedings brought by
Federal-Mogul Corp., et al., and Armstrong World Industries, Inc., et al.,
in their bankruptcy proceedings.

The parties filed cross-motions for summary judgment in the consolidated
proceedings. On March 28, 2003, in response to the cross-motions for
summary judgment, the court issued an order and memorandum opinion which
granted in part and denied in part the Center's motion for summary
judgment. Although the court ruled that Safeco is not required to remit any
surety bond proceeds to the Center at this time, the court stated that
certain settlements that were completed before U.S. Gypsum's Petition Date
likely are covered by the surety bond but that the bond does not cover
settlement payments that were not yet completed as of the Petition Date.
The court did not rule on whether the bond covers other disputed
obligations and reserved these issues to a subsequent phase of the
litigation. To the extent that Safeco were to pay all or any portion of the
bond, it is likely that Safeco would draw down the JPMorgan Chase letter of
credit to cover the bond payment and JPMorgan Chase would assert a
pre-petition claim in a corresponding amount against the Corporation in the
bankruptcy proceedings.

The Center bond litigation is pending before Judge Fitzgerald and has not
been resolved. Pursuant to the Plan, the Center bond litigation would be
resolved in the bankruptcy proceedings.

CONCLUSION: There are numerous factors and conditions that will affect
confirmation of the Plan. One of the conditions is that the Plan be
confirmed and effective no later than August 1, 2006, absent written
agreement among the parties to the Asbestos Agreement to extend that date.
There can be no assurance that the Plan will be confirmed or, if confirmed,
become effective by August 1, 2006. If the Plan is not confirmed, the
Debtors will remain in chapter 11, the amount of Debtors' present and
future asbestos personal injury liabilities will be unresolved, and the
terms and timing of any plan of reorganization

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ultimately confirmed in Debtors' Chapter 11 Cases will be undetermined. In
such a situation, it cannot be known what amount will be necessary to
resolve Debtors' present and future asbestos personal injury liabilities;
how the plan of reorganization ultimately approved will treat other
pre-petition claims; whether there will be sufficient assets to satisfy
Debtors' pre-petition liabilities; and what impact any plan of
reorganization ultimately confirmed may have on the value of the shares of
USG Corporation's common stock. The interests of the Corporation's
stockholders may be substantially diluted or cancelled in whole or in part.

SILICA LITIGATION

During the 10 years prior to the Filing, Debtor U.S. Gypsum was named as a
defendant in approximately 10 lawsuits claiming personal injury from
exposure to silica allegedly from U.S. Gypsum products. The claims against
U.S. Gypsum in silica personal injury lawsuits pending at the time of the
Filing were stayed as a result of the Filing. Only one claimant filed a
proof of claim alleging silica personal injury liability as of the bar date
in the Bankruptcy Case.

In the fourth quarter of 2004, U.S. Gypsum was served with 17 complaints
involving more that 400 plaintiffs alleging personal injury resulting from
exposure to silica. These complaints were filed in various Mississippi
state courts, and each names from 178 to 195 defendants. None of these
claimants filed proofs of claim in the bankruptcy case, and the dates of
alleged injury are not specified in the state court complaints. However,
U.S. Gypsum believes that the claims against it in these lawsuits should be
stayed as a result of the Filing. In the third quarter of 2005, 14 of these
complaints, involving 392 plaintiffs, were voluntarily dismissed without
prejudice to refile. The Corporation does not have sufficient information
to estimate the likely cost of resolving the pending silica claims.
However, the Corporation believes that it has significant defenses to these
claims if they are allowed to proceed. The Corporation has provided notice
of these recent complaints to its insurance carriers. The Plan provides
that the one silica claimant who timely filed a proof of claim in the
Debtors' bankruptcy proceedings will have his claim resolved in those
proceedings or other court, where appropriate.

The Corporation believes that these silica matters, including the pending
state court complaints, will not have a material impact on its financial
position, cash flows or results of operations.

ENVIRONMENTAL LITIGATION

The Corporation and certain of its subsidiaries have been notified by state
and federal environmental protection agencies of possible involvement as
one of numerous "potentially responsible parties" in a number of so-called
"Superfund" sites in the United States. In most of these sites, the
involvement of the Corporation or its subsidiaries is expected to be
minimal. The Corporation believes that appropriate reserves have been
established for its potential liability in connection with all

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Superfund sites but is continuing to review its accruals as additional
information becomes available. Such reserves take into account all known or
estimated undiscounted costs associated with these sites, including site
investigations and feasibility costs, site cleanup and remediation, legal
costs, and fines and penalties, if any. In addition, environmental costs
connected with site cleanups on Corporation-owned property also are covered
by reserves established in accordance with the foregoing. The Debtors have
been given permission by the Bankruptcy Court to satisfy environmental
obligations up to $12 million. The Corporation believes that neither these
matters nor any other known governmental proceedings regarding
environmental matters will have a material adverse effect upon its
financial position, cash flows or results of operations.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION

OVERVIEW

PLAN OF REORGANIZATION

USG Corporation (the "Corporation") and 10 of its United States subsidiaries
(collectively, the "Debtors") are currently operating under Chapter 11 of the
United States Bankruptcy Code (the "Bankruptcy Code"). The Debtors took this
action to resolve asbestos claims in a fair and equitable manner, to protect the
long-term value of the Debtors' businesses, and to maintain the Debtors'
leadership positions in their markets.

The Corporation's Annual Report on Form 10-K for the fiscal year ending December
31, 2005, which was filed on February 14, 2006, discussed the Debtors' agreement
with the committee representing asbestos personal injury claimants (the
"Official Committee of Asbestos Personal Injury Claimants" or "ACC") and the
legal representative for future asbestos personal injury claimants (the "Futures
Representative") to resolve Debtors' present and future asbestos personal injury
liabilities (the "Asbestos Agreement"). Since the filing of the Form 10-K, there
have been additional developments in the Debtors' Chapter 11 Cases, as discussed
below.

As contemplated by the Asbestos Agreement, the Debtors filed a First Amended
Joint Plan of Reorganization of USG Corporation and its Debtor Subsidiaries (the
"Plan") and Disclosure Statement describing the Plan with the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") in April
2006. Consistent with the Asbestos Agreement, the Plan, which has not been
confirmed by the court, provides for the resolution of Debtors' asbestos
personal injury liability and the resolution and payment of all other claims or
interests as follows:

- - The Debtors' asbestos personal injury liability will be resolved by the
creation and funding of a Section 524(g) trust that will pay all qualifying
present and future asbestos personal injury claims against the Debtors.

- - The amount that Debtors will pay into the Section 524(g) trust depends upon
whether the Fairness in Asbestos Injury Resolution Act of 2005 or
substantially similar legislation creating a national trust or similar fund
(collectively the "FAIR Act") is enacted by the 10th day after final
adjournment of the term of the current Congress (currently expected to
occur no later than December 2006).

- - On the effective date of the Plan, the Debtors will be required to pay $900
million to the Section 524(g) asbestos trust and provide a contingent
payment note for an additional $3.05 billion to the trust. If the FAIR ACT
is enacted and survives subsequent constitutional challenge, the contingent
payment note will be cancelled and the Debtors will owe no further payments
to the Section 524(g) trust.

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- - If the FAIR Act is not enacted in the time specified, or is enacted but
declared unconstitutional, the Debtors will be required to make the $3.05
billion payment to the Section 524(g) trust in two installments pursuant to
the contingent payment note, for a total payment to the trust of $3.95
billion.

- - Allowed claims of all other creditors, including allowed claims of general
unsecured creditors, will be paid in full, with interest as provided in the
Plan.

- - Disputed claims, including disputed asbestos property damage claims, will
be resolved in the bankruptcy proceedings or other court, where
appropriate, and will be paid in full the amount, if any, determined to be
owed plus interest as required.

- - Shareholders of the Corporation as of the effective date of the Plan will
retain their shares, and pursuant to a proposed rights offering, will have
the right to purchase, at $40.00 per share, one new share of the
Corporation's common stock for each share owned as of the record date of
the rights offering.

The amounts that the Debtors will be required to pay under the Asbestos
Agreement and the Plan are fixed amounts, depending only upon passage of the
FAIR Act, that were determined through settlement negotiations with the ACC and
the Futures Representative.

If confirmed by the courts, the Plan will contain an injunction channeling all
present and future asbestos personal injury and related claims against the
Debtors to the trust for payment and barring any individual or entity from
bringing an asbestos personal injury or related claim against Debtors. This
channeling injunction will include any asbestos personal injury claims against
Debtors relating to A.P. Green Refractories Co. ("A.P. Green"), a former
subsidiary of U.S. Gypsum and the Corporation.

On April 7, 2006, the Bankruptcy Court entered an order permitting Debtors to
solicit votes regarding the Plan from asbestos personal injury claimants, the
only class of creditors entitled to vote on the Plan. The deadline for voting on
the Plan is June 2, 2006. The Bankruptcy Court has scheduled a hearing for June
15 and 16, 2006, before both the Bankruptcy Court and the United States District
Court for the District of Delaware (the "District Court") to determine whether
to confirm the Plan.

There are important conditions that must be met before the Plan can be confirmed
and become effective. One of the conditions is that the Plan must be confirmed
and have an effective date on or before August 1, 2006, absent written agreement
among all parties to the Asbestos Agreement to extend that time. There can be no
assurance that the Plan will be confirmed or, if confirmed, become effective by
August 1, 2006.

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Additional information about the Plan, the Section 524(g) asbestos personal
injury trust contemplated by the Plan, funding relating to the Plan, the rights
offering and conditions and other factors relating to the effectiveness of the
Plan is set forth below in Developments in the Reorganization Proceeding, and in
Note 12, Litigation.

FINANCIAL RESULTS

The Corporation had $1.458 billion of cash, cash equivalents, restricted cash
and marketable securities as of March 31, 2006. The Corporation believes that
cash and marketable securities on hand and future cash available from operations
will provide sufficient liquidity to allow its businesses to operate in the
normal course without interruption for the duration of the Chapter 11 Cases.
This includes its ability to meet post-petition obligations of the Debtors and
to meet obligations of the non-Debtor subsidiaries. These obligations include,
among other things, capital expenditures, working capital needs and contractual
obligations. Following its emergence from bankruptcy, the Corporation believes
future cash available from operations will provide sufficient liquidity to
satisfy normal course cash requirements.

The Corporation's first quarter of 2006 net sales and operating profit were the
highest levels for any quarter in its history, increasing 25% and 106%,
respectively, compared with the first quarter of 2005. The Corporation's gross
margin percentage (gross profit as a percent of net sales) was 24.4% in the
first quarter of 2006, up from 18.2% in the first quarter of 2005. Gross margin
improved primarily as a result of higher selling prices for most major product
lines and increased shipments of SHEETROCK(R) brand gypsum wallboard.

Demand for products sold by the Corporation's North American Gypsum and Building
Products Distribution operating segments continued to be strong in the first
quarter of 2006 due to strength in the new housing and repair and remodel
markets. Shipments of gypsum wallboard remained at historically high levels for
the Corporation and the industry in the first quarter of 2006 and are expected
to be strong for the remainder of the year.

Other first quarter 2006 financial highlights included:

- - United States Gypsum Company ("U.S. Gypsum") shipped more wallboard in the
first quarter of 2006 than in any other quarter in its history. The
favorable level of activity in the aforementioned markets and extremely
high industry capacity utilization rates have resulted in higher market
selling prices for gypsum wallboard. The nationwide average realized
selling price for U.S. Gypsum's SHEETROCK(R) brand gypsum wallboard was up
28% from the first quarter of 2005.

- - L&W Supply Corporation ("L&W Supply"), the leading specialty building
products distribution business in the United States, shipped more wallboard
in the first quarter of 2006 than in any other quarter in its history. L&W
Supply's net sales and operating profit also were all-time highs for any
quarter.

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- - USG Interiors, Inc. ("USG Interiors"), the Corporation's domestic ceilings
business, recorded gains in first quarter net sales and operating profit
compared with the prior-year period.

- - In connection with the Plan, the Corporation recorded a pretax charge of
$484 million ($300 million after-tax) for post-petition interest and fees
from the Petition Date through March 31, 2006, related to pre-petition
obligations (primarily debt and trade payables) which are expected to be
paid upon emergence from bankruptcy as outlined in the Plan.

VOLUNTARY REORGANIZATION UNDER CHAPTER 11

On June 25, 2001 (the "Petition Date"), the Debtors filed voluntary petitions
for reorganization (the "Filing") under the Bankruptcy Code. The Debtors'
bankruptcy cases (the "Chapter 11 Cases") are pending in the Bankruptcy Court
and are jointly administered as In re: USG Corporation et al. (Case No.
01-2094). The Debtors include USG Corporation and the following subsidiaries:
U.S. Gypsum; USG Interiors; USG Interiors International, Inc.; L&W Supply;
Beadex Manufacturing, LLC ("Beadex"); B-R Pipeline Company; La Mirada Products
Co., Inc; Stocking Specialists, Inc.; USG Industries, Inc.; and USG Pipeline
Company. The Chapter 11 Cases do not include any of the Corporation's non-U.S.
subsidiaries or companies that were acquired post-petition by any of the
Debtors.

At the time of the Filing, U.S. Gypsum was a defendant in more than 100,000
asbestos personal injury lawsuits. U.S. Gypsum was also a defendant in 11
asbestos lawsuits alleging property damage. In addition, two subsidiaries,
Debtors L&W Supply and Beadex, were defendants in a small number of asbestos
personal injury lawsuits.

CONSEQUENCES OF THE FILING

As a consequence of the Filing, all asbestos lawsuits and other lawsuits pending
against the Debtors as of the Petition Date are stayed, and no party may take
any action to pursue or collect pre-petition claims except pursuant to an order
of the Bankruptcy Court. Since the Filing, the Debtors have ceased making cash
payments with respect to asbestos lawsuits. The Debtors are operating their
businesses without interruption as debtors-in-possession subject to the
provisions of the Bankruptcy Code, and vendors are being paid for goods
furnished and services provided after the Filing.

DEVELOPMENTS IN THE REORGANIZATION PROCEEDING

The Debtors' Chapter 11 Cases are assigned to Judge Judith K. Fitzgerald, a
bankruptcy court judge, and Judge Joy Flowers Conti, a federal district court
judge. Four official committees were appointed in the Chapter 11 Cases - the
Official Committee of Personal Injury Claimants (or ACC), the Official Committee
of Asbestos Property Damage Claimants, the Official Committee of Unsecured
Creditors and the Official Committee of Equity Security Holders. In addition,
the Bankruptcy Court appointed Dean M. Trafelet as the Futures Representative.

Both Judge Conti and Judge Fitzgerald will preside over a hearing scheduled for
June 15 and 16, 2006, to determine whether to confirm the Plan. If confirmed, as

-46-

provided by the Plan, the Debtors will fund the Section 524(g) asbestos personal
injury trust by making a $890 million cash payment to the trust; issuing to the
trust an interest-bearing promissory note in the principal amount of $10 million
payable on December 31, 2006; and issuing to the trust a contingent payment note
in the amount of $3.05 billion, payable as described below.

Whether the Debtors must make payment on the contingent payment note of $3.05
billion depends upon whether the FAIR Act is enacted and made law by the 10th
day after final adjournment of the 109th Congress (the "Trigger Date"). Final
adjournment of the 109th Congress is currently expected to be no later than
December 2006. With certain exceptions outlined below, the Plan provides that
the Debtors' obligations under the $3.05 billion contingent payment note will be
cancelled if the FAIR Act is enacted and made law by the Trigger Date. If the
FAIR Act is not enacted and made law by the Trigger Date, or is enacted but held
unconstitutional, the Debtors will be obligated to make payments under the $3.05
billion contingent payment note to the Section 524(g) trust as follows: $1.9
billion of the contingent payment note will be payable within 30 days after the
Trigger Date, and the remaining $1.15 billion of the contingent payment note
will be payable within 180 days after the Trigger Date. Interest will accrue on
the $1.15 billion payment beginning 30 days after the Trigger Date.

The Debtors will be co-obligors and jointly and severally liable under both the
$10 million note and the $3.05 billion contingent payment note. Each of the
notes will be secured by an obligation to pledge to the Section 524(g) trust
shares of the voting stock of the reorganized Corporation equal to 51 percent of
the amount outstanding. The obligation to pledge those shares would be triggered
by a payment default under the applicable note.

Under the Plan, if the FAIR Act is enacted by the Trigger Date but is ultimately
held unconstitutional, the Debtors will be required to pay the full amount of
the $3.05 billion contingent payment note. Specifically, if there is a
constitutional challenge to the FAIR Act within 60 days of enactment, the
Debtors will be obligated to pay the $3.05 billion note if the constitutional
challenge results in a final, non-appealable order that the FAIR Act is (i)
unconstitutional in its entirety; or (ii) unconstitutional insofar as it applies
to debtors in chapter 11 cases whose plans of reorganization had not yet been
confirmed and become substantially consummated as defined in the Asbestos
Agreement. If the constitutional challenge is resolved by a final,
non-appealable order in any manner other than as described in the preceding
sentence, then the $3.05 billion contingent payment, including the obligation to
pledge the stock of the reorganized Corporation, will be cancelled.

The Debtors' financial obligations under the Plan, if confirmed, will depend
upon, among other things, whether the $3.05 billion contingent payment note
becomes due. The Debtors propose to fund their obligations under the Plan
through (i) accumulated cash and marketable securities (totaling $1.458 billion
as of March 31, 2006), as well as future cash available from operations; (ii) a
rights offering to the Corporation's stockholders that is expected to raise
gross proceeds of approximately $1.8 billion in new equity funding; (iii)
anticipated tax refunds; and (iv) new debt financing.

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Under the proposed rights offering, each stockholder as of the record date of
the rights offering will receive a right to purchase, for each USG Corporation
common share held on that date, one new USG Corporation common share at a price
of $40.00. If all stockholders exercise their rights to purchase these
additional shares, the percentage ownership of each stockholder in the
Corporation will remain unchanged by the rights offering. These rights are
expected to be freely tradeable during the offering period in which they are
outstanding. The record date for the rights offering has not been established
but the rights offering will not commence until after confirmation and the
effective date of the Plan. This Quarterly Report on Form 10-Q does not
constitute an offer to sell, or the solicitation of an offer to buy, any
securities.

The rights offering is supported by a backstop commitment from Berkshire
Hathaway Inc., a current stockholder of the Corporation, which has been approved
by the Bankruptcy Court. As part of the backstop commitment, Berkshire Hathaway
Inc. agrees that it will purchase from the Corporation, at $40.00 per share, all
of the shares of common stock offered pursuant to the rights offering that are
not issued pursuant to the exercise of rights in the rights offering, up to a
total commitment of $1.8 billion. In consideration for Berkshire Hathaway Inc.'s
commitment, in the first quarter of 2006, the Corporation made a one-time,
non-refundable payment of $67 million to Berkshire Hathaway Inc.

Unless extended by the Corporation, the backstop commitment will expire if the
rights offering has not been concluded prior to September 30, 2006. If the
rights offering is not concluded by September 30, 2006, the Corporation may
extend the obligations of Berkshire Hathaway Inc. under the backstop commitment
until November 14, 2006 in specified circumstances, including the payment to
Berkshire Hathaway Inc. of an additional non-refundable $6.7 million fee.

In connection with the backstop commitment, the Corporation and Berkshire
Hathaway Inc. entered into a shareholder's agreement whereby Berkshire Hathaway
Inc. agrees, among other things, that for a period of seven years following
completion of the rights offering, except in limited circumstances, Berkshire
Hathaway Inc. will not acquire beneficial ownership of the Corporation's voting
securities if, after giving effect to the acquisition, Berkshire Hathaway Inc.
would own more than 40% of the Corporation's voting securities on a fully
diluted basis (or such higher percentage of voting securities that Berkshire
Hathaway Inc. owns after making any purchases required under the backstop
commitment described above). Berkshire Hathaway Inc. further agrees that, during
such seven-year period, it will not solicit proxies with respect to securities
of the Corporation or submit a proposal or offer involving a merger, acquisition
or other extraordinary transaction unless such proposal or offer is (i)
requested by the Corporation's Board of Directors, or (ii) made to the Board of
Directors confidentially, is conditioned on approval by a majority of the voting
securities of the Corporation not owned by Berkshire Hathaway Inc. and a
determination by the Board of Directors as to its fairness to stockholders and,
if the proposed transaction is not a tender offer for all shares of common stock
or an offer for the entire company, is accompanied by an undertaking to offer to
acquire all shares of common stock of the Corporation outstanding after
completion of the transaction at the same price per share as was paid in the
transaction. The

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shareholder's agreement also provides that, with certain exceptions, any new
shares of common stock acquired by Berkshire Hathaway Inc. in excess of those
owned on the date of the agreement (and shares distributed on those shares,
including in the rights offering) will be voted proportionally with all voting
shares. Berkshire Hathaway Inc. also agrees that if purchases or sales of common
stock of the Corporation by it or specified affiliates would prevent the
Corporation from carrying back a net operating loss attributable to a specified
payment to the Section 524(g) trust, Berkshire Hathaway Inc. will not, upon
notice from the Corporation, make such purchases or sales until the Corporation
has made its first payment under the contingent payment note issued to the
Section 524(g) trust or the Corporation notifies Berkshire Hathaway Inc. that
this limitation is no longer needed.

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

The parties also entered into a registration rights agreement whereby the
Corporation granted Berkshire Hathaway Inc. registration rights with respect to
its shares of the Corporation's common stock.

If the Debtors are required to pay the $3.05 billion contingent payment note to
the Section 524(g) trust, the Corporation expects to fund part of these payment
obligations by obtaining approximately $1 billion of new debt financing (which
excludes any necessary tax bridge financing) in the second half of 2006. It is
currently expected that the new debt financing will also include a revolving
credit facility as well as a $1.1 billion tax bridge facility. The tax bridge
facility could be used to make trust payments if the proceeds from tax refunds
generated from the Debtors' contribution to the Section 524(g) trust are not
received prior to the time that those trust payments are due. Assuming that the
$3.05 billion contingent payment note becomes due and is payable to the Section
524(g) asbestos trust, the Corporation expects to receive cash tax refunds of
about $1.1 billion based upon a net operating loss that would be created. If
these tax refunds have not been received by the Corporation when the final
payment is due to the trust, the Corporation may use the tax bridge facility to
make such payment. The Corporation is in the process of negotiating the terms
and conditions of those credit facilities. There can be no assurance that
financing

-49-

will become available on terms currently contemplated or otherwise on
commercially reasonable terms.

There are numerous factors and conditions that will affect whether the Plan is
confirmed and becomes effective. These include, among others, the following
requirements: the plan must be confirmed and effective no later than August 1,
2006, absent written agreement of the parties to the Asbestos Agreement to
extend that date; the class or classes of claimants whose claims are to be
addressed by the Section 524(g) asbestos personal injury trust must be
established and vote in favor of the Plan by at least 75% of those voting; the
Bankruptcy Court or the District Court must issue various findings of fact and
conclusions of law required to create a Section 524(g) asbestos personal injury
trust and issue an injunction channeling all asbestos personal injury claims
against Debtors to the Section 524(g) trust, including the findings that the
asbestos trust is designed to pay present claims and future demands that involve
similar claims in substantially the same manner and that the trust own, or have
the right to acquire if specified contingencies occur, a majority of the voting
stock of a relevant Debtor, its parent corporation, or a subsidiary that is also
a Debtor; the Bankruptcy Court or the District Court must issue various findings
that the Plan complies with all other applicable requirements of the Bankruptcy
Code; the Bankruptcy Court or the District Court must enter a confirmation order
(and, if the Bankruptcy Court enters the confirmation order, the District Court
must affirm it); and the Bankruptcy Court and the District Court, as required,
must enter the Section 524(g) injunction set forth in the Plan. The failure to
resolve disputes with any objectors to the Plan could materially hinder
satisfaction of the requirement that the Plan be confirmed and effective by
August 1, 2006.

At the time the Asbestos Agreement was reached, there were also litigation
proceedings before Judge Fitzgerald relating to whether Debtors other than U.S.
Gypsum have responsibility for U.S. Gypsum's asbestos liabilities and whether
the Debtors have responsibility for the asbestos liabilities of A.P. Green, a
former subsidiary of U.S. Gypsum and the Corporation. In those proceedings, the
Debtors other than U.S. Gypsum requested a ruling that the assets of the Debtors
other than U.S. Gypsum are not available to satisfy the asbestos liabilities of
U.S. Gypsum. In opposition, the ACC, the Futures Representative, and the
Official Committee of Asbestos Property Damage Claimants sought a contrary
ruling that the assets of all Debtors are available to satisfy the asbestos
liabilities of U.S. Gypsum under various asserted legal grounds, including
successor liability, piercing the corporate veil, and substantive consolidation.

In those same proceedings before Judge Fitzgerald, the ACC and the Futures

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Representative alleged that the Debtors are liable for claims arising from the
sale of asbestos-containing products by A.P. Green. They alleged that U.S.
Gypsum is responsible for A.P. Green's asbestos liabilities due to U.S. Gypsum's
acquisition by merger of A.P. Green in 1967 and that, pursuant to the merger
documents, U.S. Gypsum assumed A.P. Green's liabilities. They further allege
that because the Debtors other than U.S. Gypsum are liable for U.S. Gypsum's
liabilities, the other Debtors are therefore liable for A.P. Green's
liabilities. The Official Committee of Asbestos Property Damage Claimants
asserted similar claims.

At the time the Asbestos Agreement was reached, there was no resolution in the
litigation proceedings regarding whether the Debtors are responsible for some or
all of the asbestos liabilities of A.P. Green. For additional information
regarding the litigation proceedings before Judge Conti and Judge Fitzgerald,
see Note 12, Litigation.

The Plan filed by the Debtors in these Chapter 11 Cases provides that all
asbestos personal injury claims against the Debtors, including claims relating
to A.P. Green, will be channeled to the Debtors' Section 524(g) trust. However,
the Plan is subject to numerous conditions, and there can be no assurance that
the Plan will be confirmed. If the Plan is not confirmed, the Debtors will
remain in chapter 11, the amount of Debtors' present and future asbestos
personal injury liabilities will be unresolved, and the terms and timing of any
plan of reorganization ultimately confirmed in Debtors' Chapter 11 Cases will be
undetermined. In such a situation, it cannot be known what amount will be
necessary to resolve Debtors' present and future asbestos personal injury
liabilities, including alleged liabilities relating to A.P. Green; how the plan
of reorganization ultimately approved will treat other pre-petition claims;
whether there will be sufficient assets to satisfy Debtors' pre-petition
liabilities; and what impact any plan of reorganization ultimately confirmed may
have on the value of the shares of the Corporation's common stock or other
securities. The interests of the Corporation's stockholders may be substantially
diluted or cancelled in whole or in part.

POTENTIAL FEDERAL LEGISLATION REGARDING ASBESTOS PERSONAL INJURY CLAIMS

There have also been developments in the first quarter of 2006 relating to
proposed federal legislation addressing asbestos personal injury claims titled
the Fairness in Asbestos Injury Resolution Act of 2005 (Senate Bill 852, the
"FAIR Act of 2005" or the "Act").

As stated above, pursuant to the Plan, the amounts that Debtors will be required
to pay into the Section 524(g) asbestos personal injury trust depend on whether
the FAIR Act is enacted by the 10th day after final adjournment of the term of
the current Congress. Final adjournment is currently expected to be no later
than December 2006. Under the Plan, if such legislation is enacted by that date
and survives subsequent constitutional challenge, the amount that the Debtors
will be required to contribute to the Section 524(g) trust will be $900 million.
If the FAIR Act is not enacted by the 10th day after final adjournment of the
term of the current Congress, or is enacted but declared unconstitutional, the
amount that the Debtors will be required to pay to the trust will total $3.95
billion.

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The outcome of the legislative process is inherently speculative, and it cannot
be known whether the FAIR Act will ever be enacted or, if enacted, what the
terms of the final legislation might be. In February 2006, the Senate began
debate on the FAIR Act. However, an objection to further proceedings was raised
based on the failure of the FAIR Act to comply with federal budget rules. This
objection could have been waived by the affirmative vote of 60 Senators, but a
motion to waive the budget objection failed by a vote of 58 to 41 on February
14, 2006. As a result, the Senate ceased debate on the FAIR Act and no
additional action has been subsequently taken or is scheduled at this time.

See Consequences of the Filing, above, and Item 1, Note 12, Litigation, for
information concerning the asbestos and related bankruptcy litigation, silica
litigation and environmental litigation.

ASBESTOS PROPERTY DAMAGE CLAIMS

The Asbestos Agreement and the Plan do not resolve asbestos property damage
claims against the Debtors. The Plan provides that disputed asbestos property
damage claims timely filed in the bankruptcy proceeding will be resolved either
in the Bankruptcy Court or other court, where appropriate. If it is determined
that any amounts are owed for asbestos property damage claims, the Plan provides
that the Debtors will pay such amounts in full, with interest where required.
Any settled asbestos property damage claims will also be paid in full.

The estimated cost of resolving pending asbestos property damage claims,
including settled and unresolved claims, is included within the asbestos reserve
recorded in the fourth quarter of 2005. The asbestos property damage claims are
described in more detail in Note 12, Litigation.

ESTIMATED COST OF ASBESTOS LIABILITY

As a result of the Asbestos Agreement, in the fourth quarter of 2005, the
Corporation recorded a pretax charge of $3.1 billion ($1.935 billion, or $44.36
per share, after tax) for all asbestos-related claims, increasing U.S. Gypsum's
reserve for all asbestos-related claims to $4.161 billion. This reserve includes
the Debtors' obligations to fund asbestos personal injury claims as set forth in
the Plan (recorded at $3.95 billion based upon the assumption that the Plan will
be confirmed, but that the FAIR Act is not enacted as set forth in the Plan).
This reserve also includes the Debtors' estimate of the cost of resolving
asbestos property damage claims filed in its Chapter 11 Cases, including
estimated legal fees associated with those claims; and the Debtors' estimate of
resolving other asbestos-related claims and estimated legal expenses associated
with those claims.

Enactment of the FAIR Act would not require increasing the Corporation's current
reserve for asbestos claims, because the amount of the reserve assumes that the
Corporation will make all contingent payments to the trust established in
connection with the Asbestos Agreement. However, if the FAIR Act is enacted by
the Trigger Date and survives subsequent constitutional challenge, the
Corporation will not be required to make the contingent payments of $3.05
billion required by the Asbestos Agreement. In that event, $3.05 billion of the
asbestos reserve attributable to the contingent payments would be reversed and
taken into

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income. If the FAIR Act is enacted after the Trigger Date, the Corporation will
still be required to make the contingent payments to the trust and therefore the
asbestos reserve would not be affected.

If the Plan is not confirmed, the amount of Debtors' asbestos personal injury
liabilities will not be resolved and will likely be subject to substantial
dispute and uncertainty. In that event, if the amount of such liabilities is not
resolved through negotiation or through federal asbestos legislation, such
liabilities likely will be determined through litigation in the bankruptcy
proceeding. The amount of Debtors' asbestos personal injury liabilities could be
determined to be significantly different from the currently accrued reserve.
This difference could be material to the Corporation's financial position, cash
flows, and results of operations in the period recorded.

POTENTIAL OUTCOMES OF THE FILING

If the Plan is confirmed, all present and future asbestos personal injury claims
against the Debtors will be channeled to a Section 524(g) trust, and no
individual or entity may thereafter bring an asbestos personal injury claim
against Debtors. Under the Plan, allowed claims of other creditors, including
allowed claims of general unsecured creditors, will be paid in full, with
interest where required. Shareholders of the Corporation as of the effective
date of the Plan will retain their shares and, pursuant to a proposed rights
offering, will have the right to purchase, at $40.00 per share, one new share of
the Corporation's common stock for each share owned as of the record date of the
rights offering. Under the Plan, the amount that the Debtors will pay to the
Section 524(g) asbestos personal injury trust depends upon whether the FAIR Act
is enacted by the 10th day after final adjournment of the term of the current
Congress. If such legislation is enacted by that date and survives subsequent
constitutional challenge, the Debtors' funding obligation to the Section 524(g)
trust will be $900 million. If such legislation is not enacted before the
specified date, or is enacted but held unconstitutional, the Debtors' funding
obligation to the Section 524(g) trust will total $3.95 billion.

The Plan is subject to numerous conditions, including the requirement the Plan
be confirmed and effective no later than August 1, 2006. There can be no
assurance that the Plan will be confirmed. If the Plan is not confirmed, the
Debtors will remain in chapter 11, the amount of Debtors' present and future
asbestos personal injury liabilities will be unresolved, and the terms and
timing of any plan of reorganization ultimately confirmed in Debtors' Chapter 11
Cases will be undetermined. In such a situation, it cannot be known what amount
will be necessary to resolve Debtors' present and future asbestos personal
injury liabilities, how the plan of reorganization ultimately approved will
treat other pre-petition claims, whether there will be sufficient assets to
satisfy Debtors' pre-petition liabilities, and what impact any plan of
reorganization ultimately confirmed may have on the value of the shares of the
Corporation's common stock. The interests of the Corporation's stockholders may
be substantially diluted or cancelled in whole or in part.

See Voluntary Reorganization Under Chapter 11, above, and Item 1, Note 2,
Voluntary Reorganization Under Chapter 11, and Note 12, Litigation, for

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additional information on the Debtors' obligations and the funding of those
obligations under the Plan.

ACCOUNTING IMPACT

The Corporation is required to follow American Institute of Certified Public
Accountants Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by
Entities in Reorganization under the Bankruptcy Code." Pursuant to SOP 90-7, the
Corporation's pre-petition liabilities that are subject to compromise are
reported separately on the consolidated balance sheet. Liabilities subject to
compromise include, among other things, (i) all of the Corporation's
pre-petition debt currently in default and recorded at face value, (ii)
post-petition interest expense and fees from the Petition Date through March 31,
2006, related to pre-petition obligations (primarily debt and trade payables)
recorded in the first quarter of 2006 and, (iii) U.S. Gypsum's asbestos
liability. See Part I, Note 2, Voluntary Reorganization Under Chapter 11, which
includes information related to financial statement presentation, the
debtor-in-possession statements and detail of liabilities subject to compromise
and chapter 11 reorganization expenses.

CONSOLIDATED RESULTS OF OPERATIONS

NET SALES

Net sales in the first quarter of 2006 totaled $1.465 billion, a record for any
quarter in the Corporation's history and a 25% increase from $1.173 billion in
the first quarter of 2005. The increase in net sales was primarily due to
strength in the new housing and repair and remodel markets and improving
commercial market. As explained below under Core Business Results of Operations,
net sales increased for all three of the Corporation's operating segments.

COST OF PRODUCTS SOLD

Cost of products sold in the first quarter of 2006 was $1.108 billion, up 16%
from $959 million a year ago primarily due to increased volume for wallboard as
well as higher manufacturing costs related to energy and raw materials.

GROSS PROFIT

Gross profit in the first quarter of 2006 was $357 million, a 67% increase from
$214 million in the first quarter of 2005. The gross margin percentage was 24.4%
in the first quarter of 2006, up from 18.2% in the first quarter of 2005.

SELLING AND ADMINISTRATIVE EXPENSES

Selling and administrative expenses in the first quarter of 2006 were $99
million, up 11% from $89 million in the first quarter of 2005. Expenses were up
in the 2006 period primarily due to increased levels of compensation and
benefits and funding for growth initiatives. As a percent of net sales, selling
and administrative expenses were 6.8% in the first quarter of 2006, down from
7.6% in the comparable 2005 period.

CHAPTER 11 REORGANIZATION EXPENSES

In connection with the Filing, the Corporation recorded chapter 11
reorganization expenses of $2 million in the first quarter of 2006, compared
with $1 million in

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the first quarter of 2005. For the first quarter of 2006 and 2005, respectively,
these expenses consisted of legal and financial advisory fees of $14 million and
$6 million, partially offset by bankruptcy-related interest income of $12
million and $5 million, respectively.

INTEREST EXPENSE

Interest expense of $486 million was recorded in the first quarter of 2006. Of
this amount, $484 million ($300 million after-tax) represented a charge for
post-petition interest and fees from the Petition Date through March 31, 2006,
related to pre-petition obligations (primarily debt and trade payables) which
are expected to be paid upon emergence from bankruptcy as outlined in the Plan.
In accordance with SOP 90-7, virtually all of the Corporation's outstanding debt
has been classified as liabilities subject to compromise, and from the Petition
Date through December 31, 2005, interest expense on this debt and other
pre-petition obligations had not been accrued or recorded.

INTEREST INCOME

Non-bankruptcy related interest income of $3 million and $2 million was recorded
in the first quarter of 2006 and 2005, respectively.

INCOME TAX EXPENSE (BENEFIT)

An income tax benefit of $86 million was recorded in the first quarter of 2006.
Income tax expense amounted to $48 million in the first quarter of 2005. The
effective tax rates were 37.8% and 38.8% for the respective periods.

NET EARNINGS (LOSS)

A net loss of $141 million, or $3.15 per share, was recorded for the first
quarter of 2006. This loss included an after-tax charge of $300 million, or
$6.70 per share, for post-petition interest and fees related to pre-petition
obligations as described above. Net earnings of $77 million, or $1.77 per share,
were recorded in the first quarter of 2005.

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CORE BUSINESS RESULTS OF OPERATIONS

Operating
Net Sales Profit
(dollars in millions) --------------- -----------
Three Months Ended March 31, 2006 2005 2006 2005
- ---------------------------- ------ ------ ---- ----

NORTH AMERICAN GYPSUM:
U.S. Gypsum Company $ 834 $ 654 $189 $ 93
CGC Inc. (gypsum) 86 75 12 12
Other subsidiaries* 64 40 10 2
Eliminations (53) (44) -- --
------ ------ ---- ---
Total 931 725 211 107
------ ------ ---- ----

WORLDWIDE CEILINGS:
USG Interiors, Inc. 127 117 14 6
USG International 54 51 3 3
CGC Inc. (ceilings) 16 13 3 3
Eliminations (11) (11) -- --
------ ------ ---- ----
Total 186 170 20 12
------ ------ ---- ----

BUILDING PRODUCTS DISTRIBUTION:
L&W Supply Corporation 604 456 53 26
------ ------ ---- ----
Eliminations (256) (178) 2 3
Corporate -- -- (28) (23)
Chapter 11 reorganization expenses -- -- (2) (1)
------ ------ ---- ----
Total USG Corporation 1,465 1,173 256 124
====== ====== ==== ====

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

NORTH AMERICAN GYPSUM

Net sales of $931 million increased 28% from the first quarter of 2005, while
operating profit increased 97% to $211 million.

United States Gypsum Company: First quarter record net sales for U.S. Gypsum
increased $180 million, or 28%, compared with the first quarter of 2005, while
operating profit rose $96 million, or 103%. These increases primarily reflected
all-time quarterly record shipments and selling prices for SHEETROCK(R) brand
gypsum wallboard and joint compound and FIBEROCK(R) brand gypsum fiber panels.

U.S. Gypsum's nationwide average realized selling price for SHEETROCK(R) brand
gypsum wallboard was $170.77 per thousand square feet in the first quarter of
2006. This price represented a 28% increase from $133.73 in the first quarter of
2005. However, the benefit of improved pricing was partially offset by higher
costs, including higher energy and raw material prices. The robust level of
activity in the new housing and residential repair and remodel markets, which
together account for nearly two-thirds of all demand for gypsum wallboard, and
near-capacity utilization rates for the industry, have resulted in strong demand
and higher selling prices for gypsum wallboard.

Shipments of SHEETROCK(R) brand gypsum wallboard totaled 2.96 billion square
feet during the first quarter of 2006, a record for any quarter and a 10%
increase from 2.69 billion in the first quarter of 2005. Wallboard plants
operated at 99%

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of capacity in the first quarter of 2006 compared with 91% in the first quarter
of 2005. Industry shipments of gypsum wallboard were up approximately 11% from
the first quarter of 2005.

CGC Inc.: Net sales for the gypsum business of Canada-based CGC Inc. increased
15% versus the first quarter of 2005 primarily due to the increased volume for
SHEETROCK(R) brand gypsum wallboard and the favorable effects of currency
translation. However, operating profit of $12 million was unchanged largely as a
result of higher manufacturing costs.

WORLDWIDE CEILINGS

Net sales of $186 million increased 9%, and operating profit of $20 million rose
67%, from the first quarter of 2005.

USG Interiors, Inc.: USG Interiors reported first quarter 2006 net sales and
operating profit of $127 million and $14 million, respectively. These results
compared with net sales of $117 million and operating profit of $6 million in
the first quarter of 2005. Improved selling prices for ceiling tile and higher
shipments of ceiling grid were partially offset by higher manufacturing costs
for ceiling tile. The gains reflect a rebound in the commercial construction
market, which has benefited from declining office vacancy rates, job growth and
improved corporate investment.

USG International: Net sales for USG International increased 6% from the first
quarter of 2005 due primarily to increased demand for gypsum-related products in
Europe, Latin America and the Pacific region, partially offset by lower sales of
ceiling tile products. Operating profit was unchanged as higher overhead costs
offset the profit contribution from increased sales.

CGC Inc.: The ceilings business of CGC Inc. reported net sales of $16 million in
the first quarter of 2006 which was an increase of 23% from the first quarter of
2005, primarily due to increases in ceiling grid volume and ceiling tile selling
prices. However, operating profit remained unchanged primarily due to higher
ceiling tile costs.

BUILDING PRODUCTS DISTRIBUTION

L&W Supply reported net sales of $604 million in the first quarter of 2006, a
record for any quarter and a 32% increase versus the first quarter of 2005.
Operating profit for the company, also a record for any quarter, more than
doubled to $53 million in the first quarter of 2006. These results reflected
record shipments of gypsum wallboard and complementary building products.
Results also benefited from improved selling prices for gypsum wallboard, which
increased 28%. Sales of complementary building products, which include products
such as drywall metal, ceiling products and joint compound, were up 14% versus
the same period last year.

L&W Supply operated 210 locations in the United States as of March 31, 2006,
compared with 185 locations as of March 31, 2005.

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MARKET CONDITIONS AND OUTLOOK

Industry shipments of gypsum wallboard in the United States were an estimated
9.75 billion square feet in the first quarter of 2006, an 11% increase from 8.77
billion square feet in the first quarter of 2005. The robust level of activity
in the new housing and residential repair and remodel markets, which together
account for nearly two-thirds of all demand for gypsum wallboard, and
near-capacity utilization rates for the industry, have resulted in strong demand
and higher selling prices for gypsum wallboard.

The outlook for the Corporation's markets in 2006 remains very positive, despite
the recent moderation in some demand indicators. Lower levels of housing
affordability and rising mortgage interest rates, for example, suggest that
demand from both the new housing and residential remodeling markets, which have
been at record levels, may soften in the latter part of the year. The
fundamentals for nonresidential building remain solid, and modest growth is
expected in this market in 2006. In addition, the Corporation's operating
subsidiaries, like many other companies, face many ongoing cost pressures,
particularly in the areas of energy and raw materials.

The Corporation continues to focus its attention and capital investments on
improving customer service, manufacturing costs and operating efficiencies, as
well as strategic investments to grow its businesses. In addition, the
Corporation is keenly focused on its reorganization plan and is on track to
emerge from Chapter 11 proceedings this summer.

LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY

As of March 31, 2006, the Corporation had $1.458 billion of cash, cash
equivalents, restricted cash and marketable securities, down $119 million, or
8%, from $1.577 billion as of December 31, 2005. Of the total March 31, 2006,
amount, $294 million was held by non-Debtor subsidiaries. Since the Petition
Date, the Corporation's level of liquidity has increased due to strong operating
cash flows and the absence of cash payments related to asbestos settlements and
interest on pre-petition debt. During the bankruptcy proceeding, the Corporation
expects to have limited ability to access capital other than its own cash,
marketable securities and future cash flows to fund potential future growth
opportunities such as new products, acquisitions and joint ventures.
Nonetheless, the Corporation expects to be able to maintain a program of capital
spending and acquisitions aimed at maintaining and enhancing its businesses.

The Corporation believes that cash and marketable securities on hand and future
cash available from operations will provide sufficient liquidity to allow its
businesses to operate in the normal course without interruption for the duration
of the Chapter 11 Cases, including its ability to meet post-petition obligations
of the Debtors and to meet obligations of the non-Debtor subsidiaries. These
obligations include, among other things, capital expenditures, working capital
needs and contractual obligations. Following its emergence from bankruptcy, the

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Corporation believes future cash available from operations will provide
sufficient liquidity to satisfy normal course cash requirements.

The timing of cash inflows and outflows related to the Plan will depend on
whether and when the Plan becomes effective and the outcome of the FAIR Act.
Obligations under the Plan include the following:

- - If the Plan is confirmed and becomes effective, the Section 524(g) asbestos
personal injury trust will be funded by the Debtors on the effective date
of the Plan by payment of $890 million in cash; issuance to the trust of an
interest-bearing promissory note in the principal amount of $10 million
payable on December 31, 2006; and issuance to the trust of a contingent
payment note in the amount of $3.05 billion. The contingent payment note of
$3.05 billion will be payable to the Section 524(g) trust depending upon
whether the FAIR Act is enacted and made law by the Trigger Date. With
certain exceptions, outlined above, the Debtors' obligations under the
$3.05 billion contingent payment note will be cancelled if the FAIR Act is
enacted and made law by the Trigger Date. If the FAIR Act is not enacted
and made law by the Trigger Date, or is enacted but held unconstitutional,
the Debtors will be obligated to make payments under the $3.05 billion
contingent payment note to the Section 524(g) trust as follows: $1.9
billion of the contingent payment note will be payable within 30 days after
the Trigger Date, and the remaining $1.15 billion of the contingent payment
note will be payable within 180 days after the Trigger Date. Interest will
accrue on the $1.15 billion payment beginning 30 days after the Trigger
Date.

- - The Corporation will be obligated to pay approximately $1.4 billion due to
unsecured creditors, including long-term debt included in liabilities
subject to compromise and related interest from the Petition Date.

The Corporation expects to fund these obligations from accumulated cash and
marketable securities, as well as future cash available from operations; a
rights offering to the Corporation's stockholders that is expected to raise
gross proceeds of approximately $1.8 billion in new equity funding; and new debt
financing. It is currently expected that the new debt will include a revolving
credit facility as well as a tax bridge facility that could be utilized to make
trust payments if the proceeds from tax refunds generated from the Debtors'
contributions to the Section 524(g) trust are not received prior to the time
those trust payments are due. Assuming that the $3.05 billion contingent payment
note becomes due and is payable to the Section 524(g) asbestos trust, the
Corporation expects to receive cash tax refunds of about $1.1 billion. The
Corporation is in the process negotiating the terms and conditions of those
credit facilities. There can be no assurance that financing will become
available on terms currently contemplated or otherwise on commercially
reasonable terms.

See Voluntary Reorganization Under Chapter 11, above, and Item 1, Note 2,
Voluntary Reorganization Under Chapter 11, and Note 12, Litigation, for
additional information on the Debtors' obligations and the funding of those
obligations under the Plan.

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CASH FLOWS

As shown on the consolidated statement of cash flows, cash and cash equivalents
increased $147 million during the first quarter of 2006. The primary sources of
cash in the first quarter of 2006 were earnings from operations adjusted for the
post-petition interest charge and net sales of marketable securities. Primary
uses of cash were: (i) working capital of $109 million (primarily increases in
receivables and inventory costs, payments of customer rebates and employee
incentive compensation, and other seasonal needs), (ii) acquisitions of
businesses of $74 million, (iii) a payment of $67 million to Berkshire Hathaway
Inc. in connection with its backstop commitment supporting the proposed rights
offering as described above, (iv) capital spending of $52 million and (v)
pension funding of $22 million.

Comparing the first quarter of 2006 with the first quarter of 2005, net cash
from operating activities was $63 million in the 2006 period compared with $(14)
million a year ago. This variation was primarily attributable to a higher level
of earnings from operations adjusted for the post-petition interest charge,
partially offset by an increase in deferred income taxes. Investing activities
in the first quarter of 2006 provided net cash of $142 million, while in the
comparable 2005 period, net cash used was $72 million. This variation primarily
reflected net sales of marketable securities of $284 million in 2006 compared
with net purchases of marketable securities of $40 million in 2005, partially
offset by cash used in 2006 for business acquisitions and restricted cash
deposits as well as increased capital spending in 2006. Net cash of $58 million
used for financing activities during the first quarter of 2006 primarily
reflected the payment of the rights offering backstop commitment fee.

CAPITAL EXPENDITURES

Capital spending amounted to $52 million in the first quarter of 2006, compared
with $33 million in the corresponding 2005 period. As of March 31, 2006,
remaining capital expenditure commitments for the replacement, modernization and
expansion of operations amounted to $576 million, compared with $587 million as
of December 31, 2005. The Corporation's capital expenditures program, which is
funded by cash from operations, includes:

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

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

- - approximately $75 million for a new 40,000 ton self-unloading ship that
will lower the delivered cost of gypsum rock to East Coast wallboard
plants. The new ship is expected to become operational in 2007.

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

- - approximately $30 million for a mill modernization at U.S. Gypsum's Plaster
City, Calif., gypsum wallboard plant. Construction on this project will
begin in early 2006 and is expected to be completed in 2007.

- - approximately $16 million to build a ready-mixed joint compound line at
U.S. Gypsum's Baltimore plant. Construction on this project will begin in
mid-2006 and is expected to be completed in 2007.

- - approximately $13 million to rebuild the ready-mixed joint compound line at
U.S. Gypsum's Jacksonville, Fla., plant. Construction on this project will
begin in early 2006 and is expected to be completed in 2007.

WORKING CAPITAL

Total working capital (current assets less current liabilities) as of March 31,
2006, amounted to $1.956 billion and the ratio of current assets to current
liabilities was 3.89-to-1. As of December 31, 2005, working capital amounted to
$1.579 billion, and the ratio of current assets to current liabilities was
3.63-to-1.

Receivables increased to $639 million as of March 31, 2006, from $453 million as
of December 31, 2005, primarily reflecting first quarter payments of customer
rebates and a 28.9% increase in net sales for the month of March 2006 as
compared with December 2005. Inventories increased to $341 million from $315.
Accounts payable increased to $321 million from $281 million. Accrued expenses
declined to $227 million from $275 million as of December 31, 2005, primarily
due to the payment of employee incentive compensation during the first quarter.

MARKETABLE SECURITIES

As of March 31, 2006, $280 million was invested in marketable securities, down
$283 million from $563 million as of December 31, 2005. While some securities
have contractual maturities beyond one year, all are classified as short-term
marketable securities on the consolidated balance sheet as of March 31, 2006,
due to the Corporation's intent to sell the securities within one year and to
use the proceeds to fund a portion of the Plan. The Corporation's marketable
securities are classified as available-for-sale securities and reported at fair
market value with unrealized gains and losses excluded from earnings and
reported in accumulated other comprehensive income (loss) on the consolidated
balance sheets.

LETTERS OF CREDIT AND RESTRICTED CASH

The Corporation has a $175 million credit agreement, which expires April 30,
2008, with LaSalle Bank N.A. (the "LaSalle Facility") to provide letters of
credit needed to support business operations. As of March 31, 2006, there were
outstanding $88 million of letters of credit under the LaSalle Facility, which
are cash collateralized at 103%.

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As of March 31, 2006, a total of $95 million was reported as restricted cash on
the consolidated balance sheet. Restricted cash primarily represented collateral
to support outstanding letters of credit.

DEBT

As of March 31, 2006, and December 31, 2005, total debt amounted to $1,005
million, all of which was included in liabilities subject to compromise.

REALIZATION OF DEFERRED TAX ASSET

The Corporation's consolidated balance sheet as of March 31, 2006, includes a
net long-term deferred tax asset of $1.625 billion. Included in this amount is a
deferred tax asset of $1.698 billion relating to the U.S. federal and state
income tax benefits expected to be realized in future periods with respect to
the Corporation's asbestos reserve of $4.161 billion. Management has concluded,
based on the weight of available evidence, that all but $55 million of these tax
benefits are more likely than not to be realized in the future. Consequently,
there has been no change to the previously recorded valuation allowance of $55
million.

In arriving at its conclusion, management has considered both the federal
taxable income reported by the Corporation for the 1996 through 2005 taxable
years as well as future reversals of existing taxable temporary differences and
projections of future taxable income. In the taxable year(s) in which the
Corporation's cash contributions to the Section 524(g) asbestos trust are made,
the related federal income tax deduction will create a net operating loss. Under
the Internal Revenue Code, a net operating loss resulting from the payment of
asbestos claims (including cash contributions to a Section 524(g) trust) can be
carried back and offset against the Corporation's federal taxable income in the
10 preceding years, generating a refund of taxes paid in those years. Since the
Corporation has reported (or expects to report) federal taxable income of $3.2
billion, in the aggregate, for the years 1996 through 2005, the carryback of
this loss is expected to produce a refund of federal income taxes paid in those
years of approximately $1.1 billion, which the Corporation expects to receive in
2007 and 2008. Further, as a result of federal taxable income (excluding tax
deductions for asbestos-related payments) projected to be realized in 2006 and
2007, the Corporation expects to utilize the remaining $360 million of federal
deferred tax assets relating to its asbestos reserve by the end of 2007. As a
result, it is more likely than not that the Corporation will realize the federal
deferred tax asset relating to its asbestos reserve.

In contrast to the results under the Internal Revenue Code, most U.S. states do
not allow the carryback of a net operating loss in any significant amount. As a
result, most of the state tax benefits relating to the Corporation's payment of
asbestos claims will be realized through a reduction of future state income tax
liabilities by offsetting the net operating losses resulting from the
Corporation's cash contributions to the Section 524(g) asbestos trust in 2006
and 2007 against future state taxable income. Based on projections of future
taxable income (consistent with historical results and anticipated future
trends) in the U.S. states in which the Corporation conducts business operations
and the loss carryforward periods allowed by current state laws (generally 5 to
20 years),

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management has concluded that all but $55 million of the $240 million state
deferred tax asset relating to the Corporation's asbestos reserve is more likely
than not to be realized.

LEGAL CONTINGENCIES

As a result of the Filing, all pending asbestos lawsuits against the Debtors are
stayed, and no party may take any action to pursue or collect on such asbestos
claims absent specific authorization of the Bankruptcy Court.

U.S. Gypsum has also been named as a defendant in lawsuits claiming personal
injury from exposure to silica allegedly from U.S. Gypsum products. Pre-petition
claims against U.S. Gypsum in silica personal injury lawsuits are also stayed as
a result of the Filing. Only one individual filed a proof of claim in the
Debtors' Chapter 11 Cases alleging silica-related personal injury.

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

See Item 1, Note 12, Litigation, for additional information on (i) the
background of asbestos litigation, developments in the Corporation's
reorganization proceeding and estimated cost, (ii) silica litigation and (iii)
environmental litigation.

CRITICAL ACCOUNTING POLICIES

The preparation of the Corporation's 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
Corporation's Annual Report on Form 10-K for the fiscal year ended December 31,
2005, which was filed on February 14, 2006, includes a summary of the critical
accounting policies the Corporation believes are the most important to aid in
understanding its financial results. There have been no material changes to
these critical accounting policies that impacted the Corporation's reported
amounts of assets, liabilities, revenues or expenses during the first three
months of 2006.

NEW ACCOUNTING PRONOUNCEMENT

Effective January 1, 2006, the Corporation adopted SFAS No. 123(R), "Share-Based
Payment," which requires companies to recognize as compensation expense the
grant-date fair value of stock options and other equity-based compensation
issued to employees. Because stock options issued prior to the Filing are fully
vested

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and no stock options or any other form of share-based compensation have been
issued subsequent to the Filing, the adoption of SFAS No. 123(R) did not have an
impact on the Corporation's financial position, cash flows or results of
operations. Prior to the adoption of SFAS No. 123(R), the Corporation presented
tax benefits associated with the exercise of stock options, as operating cash
flows on the consolidated statement of cash flows. SFAS No. 123(R) requires the
cash flows resulting from such tax benefits to be classified as financing cash
flows.

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements related to management's
expectations about future conditions. The effects of the Corporation's Chapter
11 reorganization and the conduct, outcome and costs of the Chapter 11 Cases,
including the ultimate outcome and costs associated with the Corporation's plan
of reorganization and its obligations that remain after it emerges from its
Chapter 11 reorganization, may differ from management's expectations. Actual
business, market or other conditions may also differ from management's
expectations and accordingly affect the Corporation's sales and profitability or
other results. Actual results may differ due to various other factors, including
economic conditions such as the levels of construction activity, employment
levels, mortgage interest rates, housing affordability, currency exchange rates
and consumer confidence; competitive conditions such as price and product
competition; shortages in raw materials; increases in raw material, energy and
employee benefit costs; loss of one or more major customers; capacity
constraints; the unpredictable effects of acts of terrorism or war upon domestic
and international economies and financial markets; and acts of God. The
Corporation assumes no obligation to update any forward-looking information
contained in this report.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

The Corporation's chief executive officer and chief financial officer, after
evaluating the effectiveness of the Corporation's "disclosure controls and
procedures" (as defined in Rule 13a-15(e) of the Securities Exchange Act of
1934), have concluded that, as of the end of the quarter covered by this report
on Form 10-Q, the Corporation's disclosure controls and procedures were
effective to provide reasonable assurance that information required to be
disclosed by the Corporation in the reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported,
within the time periods specified in the Commission's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by an
issuer in the reports that it files or submits under the Act is accumulated and
communicated to the issuer's management, including its principal executive
officer or officers and principal financial officer or officers, or persons
performing similar functions, as

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appropriate to allow timely decisions regarding required disclosure.

(b) Changes in internal control over financial reporting.

On October 1, 2005, the Corporation began to roll out a new enterprise resource
planning system in the United States and Canada. The rollout is being undertaken
in phases and is currently planned to be substantially completed in 2007.
Management expects that the new system will enhance operational efficiencies and
help the Corporation better serve its customers. Other than the changes related
to the new system, there was no change in the Corporation's "internal control
over financial reporting" (as defined in Rule 13a-15(f) of the Securities
Exchange Act of 1934) identified in connection with the evaluation required by
Rule 13a-15(d) of the Securities Exchange Act of 1934 that occurred during the
first quarter of the fiscal year covered by this report on Form 10-Q that has
materially affected, or is reasonably likely to materially affect, the
Corporation's internal control over financial reporting.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors of USG Corporation:

We have reviewed the accompanying consolidated balance sheet of USG Corporation
and subsidiaries as of March 31, 2006 and the related consolidated statements of
operations and cash flows for each of the three month periods ended March 31,
2006 and 2005. These interim financial statements are the responsibility of the
Corporation's management.

We conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated interim financial statements for them
to be in conformity with accounting principles generally accepted in the United
States of America.

We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of USG Corporation and subsidiaries as of December 31, 2005 and 2004, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2005
(not presented herein); and in our report dated February 13, 2006 we expressed
an unqualified opinion on those consolidated financial statements and included
explanatory paragraphs concerning (i) matters which raise substantial doubt
about the Corporation's ability to continue as a going concern; and (ii) a
change in the method of accounting for asset retirement obligations due to the
Corporation's adoption of Statement of Financial Accounting Standards (SFAS) No.
143, "Accounting for Asset Retirement Obligations" in 2003, and Financial
Accounting Standards Board Interpretation No. 47, "Accounting for Conditional
Asset Retirements" in 2005. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of December 31, 2005 is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.

As discussed in Note 2 to the consolidated financial statements, USG Corporation
and certain subsidiaries voluntarily filed for Chapter 11 bankruptcy protection
on June 25, 2001. The accompanying consolidated financial statements do not
purport to reflect or provide for the consequences of the bankruptcy
proceedings. In particular, such financial statements do not purport to show (a)
as to assets, their realizable value on a liquidation basis or their
availability to satisfy

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liabilities; (b) as to pre-petition liabilities, the amounts that may be allowed
for claims or contingencies, or the status and priority thereof; (c) as to
stockholder accounts, the effect of any changes that may be made in the
capitalization of the Corporation; or (d) as to operations, the effect of any
changes that may be made in its business.

The accompanying consolidated financial statements have been prepared assuming
that the Corporation will continue as a going concern. As discussed in Notes 2
and 12 to the consolidated financial statements, there is significant
uncertainty as to the resolution of the Corporation's asbestos litigation. In
January 2006, the Corporation reached an Asbestos Agreement in which all present
and future asbestos personal injury claims made against the Corporation would be
resolved through cash payments by the Corporation into a trust established as
part of the bankruptcy,if approved by the Bankruptcy Court. The Asbestos
Agreement and the Corporation's Proposed Plan for emerging from its Chapter 11
bankruptcy proceedings are described in Note 2. It is not certain that the
Asbestos Agreement or the Proposed Plan will ultimately be approved, or
consummated as described. Should the Asbestos Agreement or the Proposed Plan not
be approved or consumated, there is uncertainty as to the resolution of the
Corporation's asbestos litigation. The uncertainty raises substantial doubt
about the Corporation's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Notes 2 and 12 to the
financial statements. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

/s/ DELOITTE & TOUCHE LLP

DELOITTE & TOUCHE LLP

Chicago, Illinois
April 26, 2006

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Part I, Item 1, Note 12, Litigation, for information concerning the asbestos
and related bankruptcy litigation, silica litigation and environmental
litigation.

ITEM 1A.RISK FACTORS

There were no material changes to the risk factors set forth in the
Corporation's Annual Report on Form 10-K for the fiscal year ended December 31,
2005, which was filed on February 14, 2006.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(c) Total Number of (c) Maximum Number (or
Shares (or Units) Approximate Dollar Value)
(a) Total Number of (b) Average Price Purchased as Part of of Shares (or Units)
2006 of Shares (or Units) Paid per Share (or Publicly Announced that May Yet Be Purchased
Period Purchased Unit) Plans or Programs Under the Plans or Programs
------ -------------------- ------------------ -------------------- ---------------------------

January -- -- -- --
February -- -- -- --
March -- -- -- --
--- --- --- ---
Total 1st Quarter -- -- -- --
=== === === ===

(a) Reflects shares reacquired to provide for tax withholdings on shares issued
to employees under the terms of the USG Corporation 1995 Long-Term Equity
Plan, 1997 Management Incentive Plan or 2000 Omnibus Management Incentive
Plan.

(b) The price per share is based upon the mean of the high and the low prices
for a USG Corporation common share on the NYSE on the date of the tax
withholding transaction.

ITEM 6. EXHIBITS

15. Letter from Deloitte & Touche LLP regarding unaudited financial
information.

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

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

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

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

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

USG CORPORATION

By /s/ William C. Foote
-------------------------------------
William C. Foote,
Chairman and Chief Executive Officer

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

By /s/ D. Rick Lowes
-------------------------------------
D. Rick Lowes,
Vice President and Controller

May 1, 2006

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