Management’s Discussion and Analysis of
Financial Condition and Results of Operations

During the second quarter of 2001, ongoing discussions with G-P Gypsum led to a mutual agreement to extend the outside expiration date of the transition period initially to December 31, 2001. The extension was the result of Georgia-Pacific's recent curtailment of a significant portion of its gypsum wallboard manufacturing capacity because of adverse market conditions. This curtailment, along with Georgia-Pacific's stated reservations about committing to the minimum tonnage requirement under the new agreement in light of current market conditions, led the parties to agree to the extension of the transition period. Continued recent discussions, however, have led the parties to agree to further extend the outside expiration date of the transition period to April 1, 2002.

Although we believe that we are able to satisfy G-P Gypsum's product requirements, we can give no assurance that the new agreement will be implemented in accordance with its terms or that the pending litigation will be dismissed. Specifically, we cannot predict whether Georgia-Pacific's recent curtailment of gypsum wallboard manufacturing capacity will further affect whether, when or how a new agreement is implemented, including whether such curtailment will result in modifications to the ultimate volume requirements under any new contract that may be implemented. Accordingly, we believe that our operating results and financial condition will continue to be materially and adversely affected by the loss of contract volume from Georgia-Pacific unless and until a new supply agreement is implemented with significant volume requirements, and until a new supply agreement has been effective long enough to generate a substantial volume of required purchases from Georgia-Pacific.

New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It also requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities – Deferral of the Effective Date of FASB Statement 133." This pronouncement deferred the effective date of SFAS No. 133 until the fiscal year ending December 31, 2001. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities (an Amendment of FASB No. 133)." This pronouncement amends the accounting and reporting standards of SFAS No. 133 for certain derivative instruments and hedging activities.

We adopted SFAS No. 133, as amended, on January 1, 2001. This pronouncement did not have a material impact on our consolidated financial statements upon adoption.

In June 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS No. 141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 supercedes Accounting Principles Board ("APB") Opinion No. 16 "Business Combinations" and SFAS No. 38, "Accounting for Preacquisition Contingencies for Purchased Enterprises." SFAS No. 141 prescribes the accounting principles for business combinations and requires that all business combinations be accounted for using the purchase method of accounting. This pronouncement is effective for all business combinations after June 30, 2001.

SFAS No. 142 supercedes APB Opinion No. 17, "Intangible Assets". This pronouncement prescribes the accounting practices for goodwill and other intangible assets. Under this pronouncement, goodwill will no longer be amortized to earnings, but instead will be reviewed periodically (at least annually) for impairment. As of December 31, 2001, we had $146.5 million of recorded net goodwill, which will be subject to this new standard. During fiscal year 2001, we recorded $3.0 million of goodwill amortization expense, net of taxes. We adopted this standard effective January 1, 2002. We are currently evaluating this pronouncement using an external advisor and will determine the impact on our consolidated financial statements in accordance with the timing provisions under this pronouncement.

In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS no. 143"). This pronouncement requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, the entity either settles the obligation for the amount recorded or incurs a gain or loss. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. We do not expect the adoption of this pronouncement to have a material impact on our consolidated financial statements.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). This pronouncement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supercedes SFAS No. 121. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. We adopted SFAS No. 144 as of January 1, 2002. We do not expect the adoption of this pronouncement to have a material impact on our consolidated financial statements.

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