USG CORP, 10-K, 1994-02-24

USG CORP
10-K, 1994-02-24
CONCRETE, GYPSUM & PLASTER PRODUCTS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________

FORM 10-K
_________________

(Mark One)

X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934 (FEE REQUIRED)
For fiscal year ended December 31, 1993
-----------------

----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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 S. FRANKLIN STREET, CHICAGO, ILLINOIS 60606-4678
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code: (312) 606-4000
--------------------------

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

Name of Exchange on
Title of Each Class Which Registered
------------------- ----------------

New York Stock Exchange
Common Stock, $0.10 par value Midwest Stock Exchange
----------------------------- -----------------------

New York Stock Exchange
Preferred Share Purchase Rights Midwest Stock Exchange
------------------------------- -----------------------

7.875% Sinking Fund
Debentures, due 2004 New York Stock Exchange
------------------------------- -----------------------

New York Stock Exchange
Warrants Midwest Stock Exchange
------------------------------- -----------------------

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

- -------------------------------------------------------------------------------

(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
Indicate by check mark whether the registrant 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 / /
As of January 31, 1994, the aggregate market value of USG Corporation
common stock held by nonaffiliates (based upon the New York Stock Exchange
("NYSE") closing prices)) was approximately $666,809,000.
As of January 31, 1994, 37,163,707 shares of common stock were
outstanding.

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<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE

APPLICABLE TO: DOCUMENT:

PART IV
- -------
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K. . . . . . . . . . . A list of exhibits
incorporated by
reference is
contained in this
report beginning on
page 123.

TABLE OF CONTENTS

PART I Page
- ------ ----
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 15
Item 4. Submission of Matters to a Vote of Security Holders. . . . . 16

PART II
- -------
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters. . . . . . . . . . . . . . . . . . . . . 16
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . 17
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition . . . . . . . . . . . . . 18
Item 8. Financial Statements and Supplementary Data:
Restructured Company . . . . . . . . . . . . . . . . . . . . 26
Predecessor Company. . . . . . . . . . . . . . . . . . . . . 61
Selected Quarterly Financial Data. . . . . . . . . . . . . . 104

Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . 105

PART III
- --------
Item 10. Directors and Executive Officers of the Registrant . . . . . 105
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . 112
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . 118
Item 13. Certain Relationships and Related Transactions . . . . . . . 120

PART IV
- -------
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . 123

Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130

<PAGE>
INDEX OF DEFINED TERMS

Page
----
1988 Recapitalization. . . . . . . . . . . . . . . 4
Acquiring Person . . . . . . . . . . . . . . . . . 39, 78
Adverse Person . . . . . . . . . . . . . . . . . . 39, 78
Anderson Case. . . . . . . . . . . . . . . . . . . 41, 81
Bank Debt. . . . . . . . . . . . . . . . . . . . . 22
Bank Group . . . . . . . . . . . . . . . . . . . . 22
Banks. . . . . . . . . . . . . . . . . . . . . . . 22
Bank Term Loan . . . . . . . . . . . . . . . . . . 22
Capitalized Interest Notes . . . . . . . . . . . . 22
Carlough . . . . . . . . . . . . . . . . . . . . . 43, 82
Center . . . . . . . . . . . . . . . . . . . . . . 43, 82
CGC. . . . . . . . . . . . . . . . . . . . . . . . 5
Code . . . . . . . . . . . . . . . . . . . . . . . 32
Combined Guarantors. . . . . . . . . . . . . . . . 49, 89
Combined Non-Guarantors. . . . . . . . . . . . . . 49, 89
Common Stock . . . . . . . . . . . . . . . . . . . 4
Corporation. . . . . . . . . . . . . . . . . . . . 4
Coverage Action. . . . . . . . . . . . . . . . . . 41, 80
Credit Agreement . . . . . . . . . . . . . . . . . 22
Credit Agreement Amendments. . . . . . . . . . . . 5, 47
DAP. . . . . . . . . . . . . . . . . . . . . . . . 21
Donn . . . . . . . . . . . . . . . . . . . . . . . 10
EBITDA . . . . . . . . . . . . . . . . . . . . . . 18
Employment Agreements. . . . . . . . . . . . . . . 115
Excess Reorganization Value. . . . . . . . . . . . 4, 66
FIFO . . . . . . . . . . . . . . . . . . . . . . . 32
Georgine . . . . . . . . . . . . . . . . . . . . . 43, 82
IRP. . . . . . . . . . . . . . . . . . . . . . . . 112
Junior Subordinated Director . . . . . . . . . . . 105
L&W Supply . . . . . . . . . . . . . . . . . . . . 5
LIFO . . . . . . . . . . . . . . . . . . . . . . . 32
Named Executives . . . . . . . . . . . . . . . . . 112
New Common Stock . . . . . . . . . . . . . . . . . 64
New Directors. . . . . . . . . . . . . . . . . . . 105
NOL Carryforward . . . . . . . . . . . . . . . . . 21
Note Placement . . . . . . . . . . . . . . . . . . 5, 47
NYSE . . . . . . . . . . . . . . . . . . . . . . . 1
Offering . . . . . . . . . . . . . . . . . . . . . 4, 47
Old Credit Agreement . . . . . . . . . . . . . . . 65
Old Junior Subordinated Debentures . . . . . . . . 64
Old Senior 1991 Notes. . . . . . . . . . . . . . . 65
Old Senior Subordinated Debentures . . . . . . . . 64
Parent Company . . . . . . . . . . . . . . . . . . 49, 89
Performance Plan . . . . . . . . . . . . . . . . . 38
Personal Injury Cases. . . . . . . . . . . . . . . 40, 80
Prepackaged Plan . . . . . . . . . . . . . . . . . 4, 29, 64
Property Damage Cases. . . . . . . . . . . . . . . 40, 80
Reorganization Value . . . . . . . . . . . . . . . 66
Restructuring. . . . . . . . . . . . . . . . . . . 4, 29, 64
Retirement Plan. . . . . . . . . . . . . . . . . . 116
Reverse Stock Split. . . . . . . . . . . . . . . . 64
Revolving Credit Facility. . . . . . . . . . . . . 5
Rights . . . . . . . . . . . . . . . . . . . . . . 38
Rights Agreement . . . . . . . . . . . . . . . . . 38
SEC. . . . . . . . . . . . . . . . . . . . . . . . 4
Senior 1995 Notes. . . . . . . . . . . . . . . . . 65
Senior 1996 Notes. . . . . . . . . . . . . . . . . 65
Senior 1998 Notes. . . . . . . . . . . . . . . . . 65
Senior 2002 Notes. . . . . . . . . . . . . . . . . 22, 29
Senior Subordinated Director . . . . . . . . . . . 105
SFAS . . . . . . . . . . . . . . . . . . . . . . . 21, 68
SOP 90-7 . . . . . . . . . . . . . . . . . . . . . 29
Supporting Insurers. . . . . . . . . . . . . . . . 43, 82
Transactions . . . . . . . . . . . . . . . . . . . 5, 47
USG. . . . . . . . . . . . . . . . . . . . . . . . 4
U.S. Gypsum. . . . . . . . . . . . . . . . . . . . 4
USG Interiors. . . . . . . . . . . . . . . . . . . 5
USG International. . . . . . . . . . . . . . . . . 5
Warrants . . . . . . . . . . . . . . . . . . . . . 39
Water Street . . . . . . . . . . . . . . . . . . . 4
Water Street Agreement . . . . . . . . . . . . . . 120
Water Street Director. . . . . . . . . . . . . . . 105
Water Street Entities. . . . . . . . . . . . . . . 120
Wellington Agreement . . . . . . . . . . . . . . . 43, 82

<PAGE>

PART I

ITEM 1. BUSINESS

(A) GENERAL DEVELOPMENT OF BUSINESS

United States Gypsum Company ("U.S. GYPSUM") was incorporated in 1901. USG
Corporation (together with its subsidiaries, called "USG" or the "CORPORATION")
was incorporated in Delaware on October 22, 1984. By a vote of stockholders at
a special meeting on December 19, 1984, U.S. Gypsum became a wholly owned
subsidiary of the Corporation and the stockholders of U.S. Gypsum became the
stockholders of the Corporation, all effective January 1, 1985.

In July 1988, the Corporation consummated a plan of recapitalization (the
"1988 RECAPITALIZATION") in part in response to an unsolicited takeover attempt.
Approximately $2.5 billion in new debt was incurred by the Corporation to
finance the 1988 Recapitalization, pay related costs and repay certain debt
existing at that time. The 1988 Recapitalization immediately changed the
Corporation's capital structure to one that was highly leveraged. At the time
of the 1988 Recapitalization, the Corporation projected that it would have
sufficient cash flows to meet its debt service obligations in a timely manner.
However, the Corporation was adversely affected by a cyclical downturn in its
construction-based markets which resulted in the Corporation's inability to
achieve projected operating results and service certain debt obligations in a
timely manner.

On May 6, 1993, the Corporation completed a comprehensive restructuring of
its debt (the "RESTRUCTURING") through implementation of a "prepackaged" plan of
reorganization (the "PREPACKAGED PLAN"). The provisions of the Prepackaged Plan
were agreed upon in principle with all committees and certain institutions
representing debt subject to the Restructuring in January 1993. The
Corporation's Registration Statement (Registration No. 33-40136), which included
a Disclosure Statement and Proxy Statement - Prospectus, was declared effective
by the Securities and Exchange Commission (the "SEC") in February 1993. The
solicitation process for approvals of the Prepackaged Plan was completed on
March 15, 1993. The Corporation commenced a prepackaged Chapter 11 bankruptcy
case in Delaware (IN RE: USG CORPORATION, Case No. 93-300) on March 17, 1993 and
received the U.S. Bankruptcy Court's confirmation of the Prepackaged Plan on
April 23, 1993. None of the subsidiaries of the Corporation were part of this
proceeding and there was no impact on trade creditors of the Corporation's
subsidiaries. Under the Prepackaged Plan, all previously existing defaults on
debt obligations were waived or cured. The Corporation accounted for the
Restructuring using the principles of fresh start accounting as required by
AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code". Pursuant to such principles,
individual assets and liabilities were adjusted to fair market value and
reorganization value in excess of identifiable assets ("EXCESS REORGANIZATION
VALUE") was established. Post-bankruptcy accounting rules require separate
reporting of financial results for the restructured company and the predecessor
company. As such, the Corporation's financial statements effective May 7, 1993
are presented under "Restructured Company" in Part II, Item 8. "Financial
Statements and Supplementary Data," while financial statements for periods prior
to that date are presented under "Predecessor Company." Due to the
Restructuring and implementation of fresh start accounting, financial statements
for the Restructured Company are not comparable to those for the Predecessor
Company. However, in order to facilitate a meaningful comparison of the
Corporation's operating performance, certain 1993 financial information is
presented in the following Part I narratives on an annual basis. See Part II,
Item 8. "Financial Statements and Supplementary Data - Predecessor Company -
Notes to Financial Statements - Financial Restructuring and Fresh Start
Accounting" notes for additional information on the Restructuring and
implementation of fresh start accounting.

4
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strategy which also includes (i) the placement of $150 million principal amount
of new senior notes due 2001 with certain institutional investors (the "NOTE
PLACEMENT") and (ii) certain amendments (the "CREDIT AGREEMENT AMENDMENTS" and,
together with the Offering and the Note Placement, the "TRANSACTIONS") to the
Credit Agreement. The Credit Agreement Amendments will, among other things,
increase the size of the Corporation's revolving credit facility (the
"REVOLVING CREDIT FACILITY") by $70 million, amend existing mandatory Bank Term
Loan prepayment provisions to allow the Corporation, upon the achievement of
certain financial tests, to retain additional free cash flow for capital
expenditures and for the purchase of its public debt. Certain Credit Agreement
Amendments are contingent on the consummation of the Offering. See Part II,
Item 8. "Financial Statements and Supplementary Data - Restructured Company -
Notes to Financial Statements - Subsequent Event" note for more information on
the Transactions.

(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

The Corporation participates in three industry segments: Gypsum Products,
Interior Systems and Building Products Distribution. Selected financial
information for each of the Corporation's industry segments is presented below
under "(c) Narrative Description of Business." See Part II, Item 8. "Financial
Statements and Supplementary Data - Notes to Financial Statements - Geographic
and Industry Segments" notes for both the Restructured Company and the
Predecessor Company for additional financial information and other related
disclosures about the Corporation's industry and geographic segments.

Through its subsidiaries, USG is a leading manufacturer of building
materials in North America which produces a wide range of products for use in
residential and nonresidential construction, repair and remodeling, as well as
products used in certain industrial processes. U.S. Gypsum is the largest
producer of gypsum wallboard in the United States and accounted for
approximately one-third of total domestic gypsum wallboard sales in 1993. USG
Interiors, Inc. ("USG INTERIORS") is a leading supplier of interior ceiling,
wall and floor products used primarily in commercial applications. In 1993, USG
Interiors was the largest producer of ceiling grid and the second largest
producer of ceiling tile in the United States, accounting for over one-half and
approximately one-third of total domestic sales of such products, respectively.
L&W Supply Corporation ("L&W SUPPLY") is the largest distributor of wallboard
and related products in the United States and in 1993 distributed approximately
22% of U.S. Gypsum's wallboard production. In addition to its United States
operations, the Corporation's 76% owned subsidiary, CGC Inc. ("CGC"), is the
largest manufacturer of gypsum products in Eastern Canada and the Corporation's
USG International, Ltd. ("USG INTERNATIONAL") unit supplies interior systems and
gypsum wallboard products in the Pacific, Europe and Latin America. In the year
ended December 31, 1993, the Corporation had net sales of $1,916 million and
generated EBITDA of $218 million.

U.S. INDUSTRY OVERVIEW

USG's consolidated financial performance is largely influenced by changes
in the three major components of the construction industry in the United States:
new residential construction, new nonresidential construction, and repair and
remodel activity. In recent years, structural changes in residential
construction activity combined with growth in the repair and remodel component
have partially mitigated the impact of the cyclical demand of the overall new
construction components.

<PAGE>

NEW RESIDENTIAL AND NONRESIDENTIAL CONSTRUCTION

Demand for the Corporation's products has historically been influenced
primarily by new residential (single and multi-family homes) and nonresidential
(offices, schools, stores, and other institutions) construction. Construction
activity is directly influenced by a variety of economic variables. In the short
term, the new residential segment is characterized by fluctuating activity
levels as builders and buyers respond to changes in funding costs, new home
prices, and the availability of new construction financing. Over the medium to
long term, new residential construction activity reflects the demand generated
by household formations, the home ownership rate, removals of housing stock, and
the growth of personal income.

Although new residential construction remains the largest single source of
demand for gypsum wallboard in the United States, it has declined significantly
as a percentage of gypsum wallboard demand since 1986 (a year in which total
gypsum wallboard shipments were comparable to 1993 levels). Residential
construction has a nominal impact on demand for Interiors Systems products. The
following table sets forth demand for gypsum wallboard in the United States by
end-use segment as estimated by U.S. Gypsum based on publicly available data,
internal surveys and data from the Gypsum Association, an industry trade group.
Management estimates that the distribution of U.S. Gypsum's sales volume to
these four end-use segments is generally proportional to industry demand.

1993 1986
---- ----
<S> <C> <C>
Residential construction. . . . . . . . . . . 48% 54%
Nonresidential construction . . . . . . . . . 9 10
Repair and remodel. . . . . . . . . . . . . . 36 30
Export/other. . . . . . . . . . . . . . . . . 7 6
</TABLE>

Over recent economic cycles, demand for gypsum wallboard has been favorably
impacted by a shift toward more single family housing within the new residential
construction segment and an increase in the average single family home size. New
single family homes, which typically require twice as much wallboard as
multi-family homes, accounted for 87% of total housing starts in 1993, as
compared to 65% in 1986. Additionally, the size of the average single family
home in the United States increased approximately 15% to 2,095 square feet in
1992 from 1,825 square feet in 1986. Largely as a result of these factors,
United States industry shipments of gypsum wallboard were a record 21.6 billion
square feet in 1993, as compared to 21.3 billion in 1986, despite an approximate
28% decline in the number of housing starts from 1.8 million units in 1986 to
1.3 million units in 1993, as depicted in the following chart.

6
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GYPSUM WALLBOARD INDUSTRY SHIPMENTS
AND TOTAL HOUSING STARTS

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gypsum Wallboard Industry
Shipments, in billions of
square feet 13.3 17.1 19.2 20.2 21.3 21.4 21.3 21.3 20.7 18.4 20.3 21.6

Housing Starts, in thousands
of units 1,062 1,703 1,750 1,742 1,805 1,621 1,488 1,376 1,193 1,014 1,200 1,285

</TABLE>

SOURCES: HOUSING STARTS ARE BASED ON DATA PUBLISHED BY THE U.S. BUREAU OF THE
CENSUS. GYPSUM WALLBOARD INDUSTRY SHIPMENTS ARE BASED ON DATA PUBLISHED BY THE
GYPSUM ASSOCIATION.

Nonresidential construction responds less quickly to changes in interest
rates than residential construction because long-term financing is normally
arranged in advance of the commencement of major building projects. In the
longer term, nonresidential construction activity levels are also affected by
the general rate of economic growth, the rate of new job formation and
population shifts. Continued weakness in the nonresidential construction segment
has negatively impacted demand for the products manufactured by both U.S. Gypsum
and USG Interiors. Demand for USG Interiors' products is particularly dependent
on new nonresidential construction activity. Management estimates that
approximately one-half of USG Interiors' 1993 sales were in the new
nonresidential construction segment as compared to approximately two-thirds in
1986. In recent years, nonresidential construction demand has accounted for
approximately 10% of gypsum wallboard industry demand in the United States.

REPAIR AND REMODEL

Based on data published by the U.S. Bureau of The Census, the size of the
total residential repair and remodel market grew to $104 billion in 1992 from
$91 billion in 1986 and $46 billion in 1980. Although data on nonresidential
repair and remodel activity is not readily available, management believes that
this segment grew significantly during the 1980s. The growth of the repair and
remodel market is primarily due to the aging of housing stock, remodeling of
existing buildings and tenant turnover in commercial space. The median age of
housing stock was 27 years in 1990, and the National Association of Homebuilders
forecasts that the median age will increase to 32 years by 2000. Management
believes that the continued aging of housing stock will contribute to further
growth in the repair and remodel segment. In addition, management believes that
the increase in the number of commercial buildings over the last decade will
provide a greater base for nonresidential repair and remodel activity in the
future, as building owners or tenants replace ceiling, wall and floor systems as
part of the tenant turnover process. Demand in the repair and remodel component
tends to be more stable than in new construction, although it does fluctuate
somewhat in response to general economic conditions.

<PAGE>

Management estimates that repair and remodel demand for gypsum wallboard
has increased more than 22% since 1986 and, in 1993, accounted for 36% of total
demand for gypsum wallboard in the United States. Management estimates that
approximately one-half of USG Interiors' 1993 sales were to the nonresidential
repair and remodel segment.

GYPSUM PRODUCTS

BUSINESS

The Gypsum Products segment consists primarily of the gypsum operations of
U.S. Gypsum in the United States, CGC in Canada and USG International in Mexico.

CGC is the largest manufacturer of gypsum wallboard in Eastern Canada.
Management estimates that industry sales in Eastern Canada, including the
Toronto and Montreal metropolitan areas, represent approximately two-thirds of
total Canadian sales volume. In 1993, CGC accounted for approximately 45% of
industry sales in Eastern Canada.

PRODUCTS

The Gypsum Products segment manufactures and markets building and
industrial products used in a variety of applications. Gypsum panel products are
used to finish the interior walls and ceilings in residential, commercial and
mobile home construction. These products provide aesthetic as well as sound and
fire retarding value. The majority of these products are sold under the
"SHEETROCK" brand name. Also sold under the "SHEETROCK" brand name is a line of
joint compounds used for finishing wallboard joints. The "DUROCK" line of cement
board and accessories is produced to provide fire-resistant and water damage
resistant assemblies for both interior and exterior construction. The
Corporation also produces a variety of plaster products used to provide a custom
finish for residential and commercial interiors. Like "SHEETROCK" brand
wallboard, these products provide aesthetic and sound and fire retarding value.
Plaster products are sold under the trade names of "RED TOP," "IMPERIAL" and
"DIAMOND." The Corporation also produces gypsum-based products sold to
agricultural and industrial customers for use in a number of applications,
including soil conditioning, road repair, fireproofing and ceramics.

FINANCIAL PERFORMANCE

Summary financial results of the Gypsum Products segment are outlined in
the table below. Such results are not adjusted for intersegment sales
eliminations and corporate expenses. Operating profit in 1993 for the Gypsum
Products segment is not comparable to prior years due to $51 million of non-cash
amortization of Excess Reorganization Value.

YEARS ENDED DECEMBER 31,
----------------------------------------------
1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ----
(DOLLARS IN MILLIONS)

<S> <C> <C> <C> <C> <C> <C>
Net sales ............. $1,165 $1,068 $1,011 $1,134 $1,263 $1,367
Operating profit ...... 90 85 93 148 227 266
EBITDA ................ 179 123 131 194 266 307
EBITDA margin ......... 15.4% 11.5% 13.0% 17.1% 21.1% 22.5%
Capital expenditures .. 30 31 25 25 41 60

</TABLE>

For additional information on the Corporation's results by industry
segment, including intersegment sales eliminations and corporate expenses, see
Part II, Item 8. "Financial Statements and Supplementary Data - Notes to
Financial Statements - Geographic and Industry Segments" notes for both the
Restructured and Predecessor Companies.

8
<PAGE>

MANUFACTURING

Gypsum and related products are produced by the Corporation at 42 plants
located throughout the United States, Eastern Canada and in central Mexico. The
Corporation believes several factors contribute to its low delivered cost,
including (i) the vertical integration of its key raw materials (gypsum and
paper); (ii) the technical expertise provided by its extensive research and
development efforts and its experienced employees and (iii) the proximity of its
plants to major metropolitan areas.

USG's vertically integrated gypsum and paper operations provide several
cost and quality advantages. Since the Corporation obtains substantially all of
its gypsum requirements from its own quarries and mines, it controls the cost,
quality and continuity of its supply. These factors are vital to producing
wallboard of a consistently high quality at a low cost. The Corporation's
geologists estimate that recoverable rock reserves are sufficient for more than
30 years of operation based on the Corporation's average annual production of
crude gypsum during the past five years. Proven reserves contain approximately
243 million tons, of which approximately 69% are located in the United States
and 31% in Canada. Additional reserves of approximately 153 million tons exist
on three properties not in operation. The Corporation's total average annual
production of crude gypsum in the United States and Canada during the past five
years was 9.4 million tons.

USG owns and operates seven modern paper mills located across the United
States for efficient distribution of paper to virtually all of its wallboard
plants. These mills have sufficient capacity to satisfy virtually all of the
Corporation's expected paper needs for the foreseeable future. All these mills
presently are designed to produce paper utilizing 100% recycled waste paper
fiber as opposed to more costly virgin pulp. Vertical integration in paper
ensures a continuous supply of high quality paper that is tailored to the
specific needs of USG's wallboard production processes.

As the leading producer of gypsum products for over 90 years, USG has
developed extensive knowledge of gypsum and the processes used in making its
products. Combined with USG's experienced work force, USG's technical expertise
provides significant cost efficiencies in the production of existing products
and development of new ones. USG maintains the largest research and development
facility in the gypsum industry in Libertyville, Illinois which conducts fire
and structural testing and product and process development. Research and
development activities involve technology related to gypsum, cellulosic fiber
and cement as the primary raw materials on which panel products and systems,
such as gypsum board and cement board, are based. Related technologies are those
pertaining to joint compounds and textures for wallboard finishing, specialty
plaster products for both construction and industrial applications, coatings and
latex polymers.

The number and location of the Corporation's gypsum plants enhance its cost
position by minimizing the distance and the transportation costs to major
metropolitan areas. Transportation costs can be a significant part of total
delivered cost of gypsum products.

MARKETING AND DISTRIBUTION

Distribution is carried out through L&W Supply's 131 distribution centers
located in 34 states, as well as mass merchandisers and other retailers,
building material dealers, contractors and distributors. Sales of gypsum
products are seasonal to the extent that sales are generally greater from spring
through the middle of autumn than during the remaining part of the year.

9
<PAGE>

COMPETITION

The Corporation competes in North America as the largest of 18 producers of
gypsum wallboard products and, in 1993, accounted for approximately one-third of
total gypsum wallboard sales in the United States. In 1993, U.S. Gypsum's
shipments of gypsum wallboard totaled 7.3 billion square feet, the highest in
the Corporation's history, compared with total domestic industry shipments of
21.6 billion square feet which is also a record level. Principal competitors in
the United States are: National Gypsum Company, which emerged from Chapter
11 bankruptcy in July 1993, The Celotex Corporation, which has operated under
Chapter 11 of the Bankruptcy Code since 1990, Domtar, Inc., Georgia-Pacific
Corporation and several smaller, regional competitors. Major competitors of CGC
in Eastern Canada include Domtar, Inc. and Westroc Industries Ltd.

INTERIOR SYSTEMS

BUSINESS

The Interior Systems segment consists of USG Interiors in the United
States, USG International in Europe, the Pacific and Latin America and CGC in
Canada.

The Corporation has increased its emphasis on the interior systems business
since 1986 when Donn Inc. ("DONN"), a manufacturer of ceiling suspension systems
("grid") and other interior products, was acquired. Already second behind
Armstrong World Industries, Inc. in the ceiling tile market, the acquisition of
Donn positioned the Corporation as the worldwide leader in ceiling suspension
systems and the only company to offer complete pre-designed, pre-engineered and
fully integrated ceiling systems. With the acquisition of Donn, USG Interiors
was established as a separate subsidiary to combine the operations of Donn and
USG Acoustical Products Company, formerly part of U.S. Gypsum and a leading
producer of mineral fiber ceiling products.

USG's international position was enhanced in late 1987 when it began to
export ceiling tile to Europe to complement Donn's established grid business and
to capitalize on the strength of its existing distribution channels. By
combining ceiling tile and grid as a system for distributors and contractors,
USG has used its leading position in grid to advance sales of ceiling tile. As a
result, management estimates that USG's share of the European ceiling tile
market has grown to approximately 8%. International sales are managed through
USG International on a regional basis consisting of Europe, the Pacific and
Latin America.

CGC manufactures and markets ceiling products and wall and floor systems
and accounted for over one-half of Canadian grid sales in 1993. CGC is the
second largest marketer of ceiling tile in Canada, behind Armstrong World
Industries, Inc., and accounted for approximately 30% of Canadian sales of such
products in 1993. CGC markets ceiling tile produced by USG Interiors.

PRODUCTS

The Interior Systems segment manufactures and markets ceiling grid and
ceiling tile, access floor systems, wall systems and mineral wool insulation and
soundproofing products. USG's integrated line of ceiling products provides
qualities such as sound absorption, fire retardation, and convenient access to
the space above the ceiling for electrical and mechanical systems, air
distribution and maintenance. The Corporation believes its ability to provide
custom-designed and specially fabricated ceiling solutions to meet specific job
design installation conditions is increasingly attractive to architects,
designers and building owners. USG Interiors' significant trade names include
the "ACOUSTONE" and "AURATONE" brands of ceiling tile and the "DX," "FINELINE,"
"CENTRICITEE" and "DONN" brands of ceiling grid.

<PAGE>

USG's wall systems provide the versatility of an open floor plan with the
privacy of floor-to-ceiling partitions which are compatible with leading office
equipment and furniture systems. Wall systems are designed to be installed
quickly and reconfigured easily. In addition, USG manufactures a line of access
floor systems that permit easy access to wires and cables for repairs,
modifications, and upgrading of electrical and communication networks as well as
convenient movement of furniture and equipment.

FINANCIAL PERFORMANCE

Summary financial results for the Interior Systems segment are outlined in
the table below. Such results are not adjusted for intersegment sales
eliminations and corporate expenses. Operating profit/(loss) in 1993 for the
Interior Systems segment is not comparable to prior years due to $60 million of
non-cash amortization of Excess Reorganization Value.

YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- -------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>

Net sales $550 $548 $576 $624 $610 $599
Operating profit/(loss) (17) 41 62 78 89 83
EBITDA 57 59 78 98 105 98
EBITDA margin 10.4% 10.8% 13.5% 15.7% 17.2% 16.4%
Capital expenditures 9 14 22 37 33 17

</TABLE>

For additional information on the Corporation's results by industry segment,
including intersegment sales eliminations and corporate expenses, see Part II,
Item 8. "Financial Statements and Supplementary Data - Notes to Financial
Statements - Geographic and Industry Segments" notes for both the Restructured
and Predecessor Companies.

MANUFACTURING

Interior Systems products are manufactured at 16 plants throughout North
America, including 5 ceiling tile plants and 4 ceiling grid plants. The
remaining plants produce other interior products and raw materials for ceiling
tile and grid. Principal raw materials used in the production of Interior
Systems products include mineral fiber, steel, aluminum extrusions and
high-pressure laminates. Certain of these raw materials are produced internally,
while others are obtained from various outside suppliers. Shortages of raw
materials used in this segment are not expected.

USG Interiors maintains its own research and development facility in Avon,
Ohio, which provides product design, engineering and testing services in
addition to manufacturing development, primarily in metal forming, with tool and
machine design and construction services. Additional research and development is
carried out at the Corporation's research and development center in
Libertyville, Illinois and at its "Solutions Center" -sm- in Chicago.

MARKETING AND DISTRIBUTION

Interiors Systems products are sold primarily in markets related to the new
construction and renovation of commercial buildings as well as the retail market
for small commercial contractors. Marketing and distribution to large commercial
users is conducted through a network of distributors and installation
contractors as well as through L&W Supply and is oriented toward providing
integrated interior systems at competitive price levels. The Corporation
emphasizes educational and promotional materials designed to influence decision
makers who play a significant role in choosing material suppliers, such as
interior designers, contractors and facility managers. To this end, USG
Interiors maintains the "Solutions Center"-sm- located adjacent to Chicago's
Merchandise Mart which is used for product displays, educational seminars on
products and new product design and development. In recent

11
<PAGE>

years, the Corporation has increased its emphasis on the retail market and as a
result now sells its products to seven of the ten largest building products
retailers in the United States.

COMPETITION

The Corporation estimates that it is the world's largest manufacturer of
ceiling suspension systems with approximately 40% of worldwide sales of such
products. USG's most significant competitor is Chicago Metallic Corporation,
which participates in the U.S. and European markets. Other competitors in
ceiling grid include W.A.V.E. (a joint venture of Armstrong World
Industries, Inc. and National Rolling Mills). The Corporation estimates that it
accounts for approximately one-third of sales of acoustical ceiling tile to the
U.S. market. Principal global competitors include Armstrong World
Industries, Inc. (the largest manufacturer), Odenwald of West Germany and the
Celotex Corporation.

BUILDING PRODUCTS DISTRIBUTION

BUSINESS

The Building Products Distribution segment consists of the operations of the
Corporation's L&W Supply subsidiary. L&W Supply is the largest distributor of
gypsum wallboard and related building products for residential and
nonresidential construction in the United States. L&W Supply distributes
approximately 9% of all gypsum wallboard in the United States (including
approximately 22% of U.S. Gypsum's wallboard production). Wallboard accounts for
approximately 47% of L&W Supply's total net sales.

Although L&W Supply specializes in distribution of gypsum wallboard, joint
compound and other products manufactured primarily by U.S. Gypsum, it also
distributes USG Interiors' products such as acoustical ceiling tile and ceiling
grid and products of other manufacturers, including drywall metal, insulation,
roofing products and accessories.

L&W Supply was founded in 1971 by U.S. Gypsum to address what management
perceived as a growing demand in the construction industry for a specialized
delivery service for construction materials, especially gypsum wallboard. U.S.
Gypsum management believed the construction industry could benefit from a
service-oriented organization that would deliver less than truckload quantities
of construction materials to a job site and place them in the areas where the
work was being done, thereby reducing or eliminating the need for handling by
contractors. To perform this service, U.S. Gypsum established a number of
distribution centers that could stock construction materials and be able to
deliver relatively large quantities with short lead times.

L&W Supply has grown significantly over the past 23 years and now has 131
distribution centers located in 34 states.

<PAGE>

FINANCIAL PERFORMANCE

Summary financial results for the Building Products Distribution segment are
outlined in the table below. Such results are not adjusted for corporate
expenses and there are no intersegment sales eliminations for this segment.
Operating profit in 1993 for the Building Products Distribution segment is not
comparable to prior years due to $2 million of non-cash amortization of Excess
Reorganization Value.

YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988
------ ------ ------ ------ ------ ------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Net sales ........................ $528 $464 $424 $478 $485 $483
Operating profit.................. 3 3 - 4 7 12
EBITDA............................ 7 5 4 12 16 23
EBITDA margin..................... 1.3% 1.1% 0.9% 2.5% 3.3% 4.8%
Capital expenditures.............. 2 3 1 1 1 3

</TABLE>

For additional information on the Corporation's results by industry segment,
including intersegment sales eliminations and corporate expenses, see Part II,
Item 8. "Financial Statements and Supplementary Data - Notes to Financial
Statements - Geographic and Industry Segments" notes for both the Restructured
and Predecessor Companies.

DISTRIBUTION CENTERS

L&W Supply leases approximately 80% of its facilities from third parties,
which management believes provides it with the flexibility to enter and exit
fluctuating market areas. Usually, initial leases are from three to five years
with a five-year renewal option. Facilities are located in virtually every major
metropolitan area in the United States.

A typical L&W Supply facility has approximately 12,000 square feet of
warehouse space, 1,500 square feet of office space and is located on 1.5 paved
acres of land in prime industrial areas with good interstate highway access.
Each center is equipped with at least one flatbed truck, a boom truck and, in
some cases, a towable forklift. Boom trucks are standard flatbed trucks with
telescoping hydraulic booms installed on the front of the truckbed. By using
either the telescoping boom or the towable forklift, L&W Supply employees are
able to place wallboard, joint compound and other materials in various locations
on a job site.

COMPETITION

L&W Supply's closest competitor, Gypsum Management Supply, is an independent
distributor with approximately 70 locations in the southern, central and western
United States. There are several regional competitors, such as Gypsum Drywall
Management Association in the southern United States and Strober Building Supply
in the northeastern United States. L&W Supply's many local competitors include
lumber dealers, hardware stores, mass merchandisers, home improvement centers,
acoustical tile distributors and manufacturers.

Sales are seasonal to the extent that sales are generally greater from the
middle of spring through the middle of autumn than during the remaining part of
the year.

(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES

See Part II, Item 8. "Financial Statements and Supplementary Data -
Notes to Financial Statements - Geographic and Industry Segments" notes for
both the Restructured and Predecessor Companies.

<PAGE>

ITEM 2. PROPERTIES

The Corporation's plants, mines, transport ships, quarries and other
facilities are located in North America, Europe, Australia, New Zealand, and
Malaysia. Many of these facilities are operating at or near full capacity. All
facilities and equipment are in good operating condition and, in management's
judgment, sufficient expenditures have been made annually to maintain them. The
locations of the production properties of the Corporation's subsidiaries,
grouped by industry segment, are as follows (plants are owned unless otherwise
indicated):

GYPSUM PRODUCTS

GYPSUM BOARD AND OTHER GYPSUM PRODUCTS
<TABLE>
<CAPTION>

<S> <C> <C>
UNITED STATES CANADA
(*)(**)Baltimore, MD * Norfolk, VA Hagersville, Ontario
* Boston (Charlestown), MA Oakfield, NY * Montreal, Quebec
* Detroit (River Rouge), MI Plaster City, CA * St. Jerome, Quebec
** East Chicago, IN Plasterco (Saltville), VA
Empire, NV * Santa Fe Springs, CA Mexico
Fort Dodge, IA Shoals, IN *** Puebla, Puebla
* Fremont, CA Sigurd, UT
(*)(**)Galena Park, TX Southard, OK
* Gypsum, OH Sperry, IA
* Jacksonville, FL * Stony Point, NY
(*)(**)New Orleans, LA Sweetwater, TX
</TABLE>

Gypsum plants utilize locally mined or quarried gypsum rock unless noted as
follows:
* These plants use rock from quarry operations at Alabaster (Tawas City),
Michigan; Empire, Nevada; Plaster City, California; Little Narrows
and/or Windsor, Nova Scotia; or Harbour Head, Jamaica, an outside
source.
** These plants purchase synthetic gypsum from outside sources.
*** This plant purchases all gypsum rock from outside sources.

JOINT COMPOUND

Surface preparation and joint treatment products are produced in plants
located at Chamblee, Georgia; Dallas, Texas; East Chicago, Indiana; Fort Dodge,
Iowa; Gypsum, Ohio; Jacksonville, Florida; Port Reading, New Jersey (leased);
Sigurd, Utah; Tacoma, Washington (leased); Torrance, California; Hagersville,
Ontario, Canada; Montreal, Quebec, Canada; Puebla, Mexico; and Selangor,
Malaysia (leased).

PAPER

Paper for gypsum board is manufactured at Clark, New Jersey; Galena Park,
Texas; Gypsum, Ohio; Jacksonville, Florida; North Kansas City, Missouri;
Oakfield, New York; and South Gate, California.

OCEAN VESSELS

Gypsum Transportation Limited, a wholly owned subsidiary of the Corporation,
headquartered in Bermuda, owns and operates a fleet of three self-unloading
ocean vessels. Under contract of affreightment, these vessels haul

<PAGE>

gypsum rock from Nova Scotia to the East Coast and Gulf port plants of U.S.
Gypsum. Excess ship time, when available, is offered for charter on the open
market.

MISCELLANEOUS

A mica-processing plant is located at Spruce Pine, North Carolina; perlite
ore is produced at Grants, New Mexico. Metal lath, plaster and drywall
accessories and light gauge steel framing products are manufactured at Puebla,
Mexico. Metal safety grating products are manufactured at Burlington, Ontario,
Canada (leased); and Delta, British Columbia, Canada (leased). Various other
products are manufactured at La Mirada, California (adhesives); and New Orleans,
Louisiana (lime products).

INTERIOR SYSTEMS

CEILING TILE

Acoustical ceiling tile and panels are manufactured at Cloquet, Minnesota;
Greenville, Mississippi; Gypsum, Ohio; Walworth, Wisconsin; San Juan Ixhautepec,
Mexico; and Aubange, Belgium.

CEILING GRID

Ceiling grid products are manufactured at Cartersville, Georgia; Stockton,
California; Westlake, Ohio; Auckland, New Zealand (leased); Dreux, France;
Oakville, Ontario, Canada; Peterlee, England (leased); Selangor, Malaysia
(leased); and Viersen, Germany. A coil coater and slitter plant used in the
production of ceiling grid is also located in Westlake, Ohio.

ACCESS FLOOR SYSTEMS

Access floor systems products are manufactured at Red Lion, Pennsylvania;
Dreux, France; Peterlee, England (leased); and Selangor, Malaysia (leased).

MINERAL WOOL

Mineral wool products are manufactured at Birmingham, Alabama; Gypsum,
Ohio; Red Wing, Minnesota; Tacoma, Washington; Wabash, Indiana; Walworth,
Wisconsin; and Weston, Ontario, Canada.

WALL SYSTEMS

Wall system products are manufactured at Medina, Ohio (leased).

ITEM 3. LEGAL PROCEEDINGS

See Part II, Item 8. "Financial Statements and Supplementary Data - Notes
to Financial Statements - Litigation" for information on legal proceedings.

<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the
fourth quarter of 1993.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS

(a) See Item 8. "Financial Statements and Supplementary Data - Selected
Quarterly Financial Data" for information with respect to the principal market
on which the Corporation's Common Stock is traded and the range of high and low
closing market prices.

(b) As of January 31, 1994, there were 14,702 stockholders of record of the
Corporation's Common Stock.

(c) There have been no dividends declared since the third quarter of 1988. The
Credit Agreement and certain other debt instruments prohibit the payment of cash
dividends for the foreseeable future.

<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

USG CORPORATION
COMPARATIVE FIVE-YEAR SUMMARY (A) (UNAUDITED)
(DOLLARS IN MILLIONS,EXCEPT PER SHARE DATA)

MAY 7 JANUARY 1
THROUGH THROUGH
DEC. 31, MAY 6, YEARS ENDED DECEMBER 31,
----------------------------------
1993(b) 1993 1992 1991 1990 1989
------- ---- ---- ---- ----- ----

<S> <C> <C> <C> <C> <C> <C>
EARNINGS STATEMENT DATA:
Net sales. . . . . . . . . . . . . . . . . $ 1,325 $ 591 $ 1,777 $ 1,712 $ 1,915 $ 2,007
Gross profit . . . . . . . . . . . . . . . 263 109 317 327 416 501
Selling and administrative expenses. . . . 149 71 218 194 203 209
Amortization of Excess Reorganization
Value. . . . . . . . . . . . . . . . . . 113 - - - - -
Operating profit . . . . . . . . . . . . . 1 38 99 133 195 292
Interest expense . . . . . . . . . . . . . 92 86 334 333 292 297
Interest income. . . . . . . . . . . . . . (4) (2) (12) (11) (8) (10)
Other (income)/expense, net. . . . . . . . (8) 6 1 5 5 15
Reorganization items . . . . . . . . . . . - (709) - - - -
Earnings/(loss) from continuing operations
before extraordinary gain/(loss) and changes
in accounting principles . . . . . . . . (108) 640 (191) (141) (54) 20
Extraordinary gain/(loss), net of taxes. . (21) 944 - - - -
Cumulative effect of accounting changes. . - (150) - - - -
Net earnings/(loss). . . . . . . . . . . . (129) 1,434 (191) (161) (90) 28
Net earnings/(loss) per common share (c) . (3.46)

BALANCE SHEET DATA (AS OF THE END OF THE PERIOD):
Working capital/(deficit). . . . . . . . . 121 217 (2,608) (2,372) (2,198) 51
Current ratio. . . . . . . . . . . . . . . 1.24 1.74 .21 .21 .24 1.09
Property, plant and equipment, net . . . . 754 767 800 819 825 837
Total assets . . . . . . . . . . . . . . . 2,163 2,194 1,659 1,626 1,675 1,585
Total debt (d) . . . . . . . . . . . . . . 1,531 1,556 2,711 2,660 2,600 2,428
Total stockholders' equity/(deficit) . . . (134) 4 (1,880) (1,680) (1,518) (1,438)

OTHER INFORMATION:
EBITDA . . . . . . . . . . . . . . . . . . 155 63 159 194 280 361
Capital expenditures . . . . . . . . . . . 29 12 49 49 64 76
Gross margin % . . . . . . . . . . . . . . 19.8 18.4 17.8 19.1 21.7 25.0
EBITDA margin %. . . . . . . . . . . . . . 11.7 10.7 8.9 11.3 14.6 18.0
Market value per common share (c). . . . . 29 1/4
Average number of employees. . . . . . . . 11,900 11,750 11,850 11,800 12,700 13,400

<FN>
(A) RESULTS REFLECT DAP (SOLD IN 1991), THE MARLITE DIVISION OF USG INTERIORS
(SOLD IN 1989) AND WISS, JANNEY, ELSTNER ASSOCIATES, INC. (SOLD IN 1989)
AS DISCONTINUED OPERATIONS.

(B) DUE TO THE RESTRUCTURING AND IMPLEMENTATION OF FRESH START ACCOUNTING, THE
FINANCIAL STATEMENTS EFFECTIVE MAY 7, 1993 FOR THE RESTRUCTURED COMPANY ARE
NOT COMPARABLE TO FINANCIAL STATEMENTS PRIOR TO THAT DATE. SEE ITEM 8
"FINANCIAL STATEMENTS & SUPPLEMENTARY DATA" - PREDECESSOR COMPANY - NOTES
TO FINANCIAL STATEMENTS - FINANCIAL RESTRUCTURING AND FRESH START ACCOUNTING
NOTES FOR MORE INFORMATION ON THE RESTRUCTURING AND IMPLEMENTATION OF FRESH START ACCOUNTING.

(C) PER-SHARE INFORMATION FOR PERIODS PRIOR TO MAY 7, 1993 IS OMITTED BECAUSE,
DUE TO THE RESTRUCTURING AND IMPLEMENTATION OF FRESH START ACCOUNTING, IT
IS NOT MEANINGFUL. MARKET VALUE PER COMMON SHARE OF $29 1/4 WAS THE
CLOSING STOCK PRICE ON DECEMBER 31, 1993.

(D) TOTAL DEBT IS SHOWN AT PRINCIPAL AMOUNTS FOR ALL PERIODS PRESENTED.
THE CARRYING AMOUNTS OF TOTAL DEBT (NET OF UNAMORTIZED REORGANIZATION
DISCOUNT) AS REFLECTED ON THE CORPORATION'S BALANCE SHEETS AS OF
DECEMBER 31, 1993 AND MAY 6, 1993 ARE $1,476 MILLION AND $1,461 MILLION,
RESPECTIVELY.

</TABLE>

<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION

RESULTS OF OPERATIONS

On May 6, 1993, the Corporation completed the Restructuring. Due to the
Restructuring and implementation of fresh start accounting, the Corporation's
financial statements effective May 7, 1993 are not comparable to financial
statements for periods prior to that date. See Item 8. "Financial Statements
and Supplementary Data - Predecessor Company - Notes to Financial Statements -
Financial Restructuring and Fresh Start Accounting" notes for information on the
Restructuring and implementation of fresh start accounting.

To facilitate a meaningful comparison of the Corporation's operating
performance, the following discussion and analysis is presented on an annual
basis. Consequently, 1993 information presented below does not comply with
post-bankruptcy accounting rules which require separate reporting for the
restructured company and the predecessor company. Included in the following
discussion are comparisons of earnings before interest, taxes, depreciation,
depletion, amortization, and additionally for 1993, non-cash postretirement
charges, reorganization items, extraordinary gain/(loss) and changes in
accounting principles ("EBITDA"). The Corporation believes EBITDA is helpful in
understanding cash flow generated from operations that is available for taxes,
debt service and capital expenditures. In addition, EBITDA facilitates the
monitoring of covenants related to certain long-term debt and other agreements
entered into in conjunction with the Restructuring. EBITDA should not be
considered by investors as an alternative to net earnings as an indicator of the
Corporation's operating performance or to cash flows as a measure of its overall
liquidity.

CONSOLIDATED RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31,
- ---------------------------------- ----------------------------
(DOLLARS IN MILLIONS) 1993 1992 1991
------ ------ ------
<S> <C> <C> <C>
NET SALES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,916 $ 1,777 $ 1,712
-------- -------- --------

GROSS PROFIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 372 317 327
% OF NET SALES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.4% 17.8% 19.1%
Selling and administrative expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220 218 194
% OF NET SALES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.5% 12.3% 11.3%
Amortization of Excess Reorganization Value. . . . . . . . . . . . . . . . . . . . . . . . . . 113 - -
------ ------ ------
OPERATING PROFIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 99 133
------ ------ ------
------ ------ ------

CALCULATION OF EBITDA:
Operating profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39 $ 99 $ 133
Amortization of Excess Reorganization Value. . . . . . . . . . . . . . . . . . . . . . . . . 113 - -
Depreciation and depletion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 58 57
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2 4
------ ------ ------
EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218 159 194
% OF NET SALES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.4% 8.9% 11.3%
------ ------ ------
------ ------ ------
</TABLE>

RESULTS OF OPERATIONS BY GEOGRAPHIC AREA YEARS ENDED DECEMBER 31,
- ---------------------------------------- ---------------------------------------------------------
(DOLLARS IN MILLIONS) NET SALES EBITDA
--------------------------- ------------------------
1993 1992 1991 1993 1992 1991
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
United States:
Gypsum Products. . . . . . . . . . . . . . . . . . . . . . . . $ 986 $ 889 $ 835 $ 148 $ 99 $ 93
Interior Systems . . . . . . . . . . . . . . . . . . . . . . . 376 368 386 45 47 59
Building Products Distribution . . . . . . . . . . . . . . . . 528 464 424 7 5 4
Corporate. . . . . . . . . . . . . . . . . . . . . . . . . . . - - - (25) (28) (19)
Intrasegment eliminations. . . . . . . . . . . . . . . . . . . (236) (216) (212) - - -
------- ------- ------- -------- -------- -------
Total United States. . . . . . . . . . . . . . . . . . . . . . . 1,654 1,505 1,433 175 123 137
Total Canada . . . . . . . . . . . . . . . . . . . . . . . . . . 143 149 169 17 14 29
Total Other Foreign. . . . . . . . . . . . . . . . . . . . . . . 208 208 193 26 22 28
Transfers between geographic areas . . . . . . . . . . . . . . . (89) (85) (83) - - -
------ ----- ----- ----- ----- -----
Total USG Corporation. . . . . . . . . . . . . . . . . . . . . . 1,916 1,777 1,712 218 159 194
------ ----- ----- ----- ----- -----
------ ----- ----- ----- ----- -----

</TABLE>

<PAGE>

CONSOLIDATED RESULTS

Net sales increased for the second consecutive year in 1993, up $139
million, or 7.8%, over the prior year. Net sales in 1992 increased $65 million,
or 3.8%, over the 1991 level. The primary factor for the improved levels of
sales has been increased demand for domestic gypsum wallboard which led to
all-time record shipments in 1993 and seven consecutive quarters of improving
prices. These trends reflect the continuing recovery in domestic residential
construction as evidenced by an approximate 7% increase in U.S. housing starts
in 1993 compared with the 1992 level, which was 18% higher than 1991 U.S.
housing starts.

As a percentage of net sales, gross profit in 1993 improved to 19.4% from
17.8% in 1992, reflecting increased gypsum wallboard pricing. In 1992, gross
profit as a percentage of net sales decreased from the 1991 level of 19.1%,
primarily due to lower margins for gypsum wallboard in Canada and interior
systems products.

Selling and administrative expenses increased slightly in 1993 versus 1992.
However, these expenses as a percentage of net sales improved to 11.5% from
12.3% in 1992 as a result of the increase in 1993 net sales. In 1992, selling
and administrative expenses increased $24 million, or 12.4%, over the 1991 level
due to increased compensation and benefits, rent associated with the new
corporate headquarters building, expansion of certain international operations
and a nonrecurring charge associated with organizational streamlining
activities.

Effective May 7, 1993, the Corporation began amortizing its Excess
Reorganization Value which was established in accordance with fresh start
accounting rules. This non-cash amortization, which will continue through April
1998, amounted to $113 million in 1993 with no counterpart in prior years.
Consequently, 1993 operating profit is not comparable to the prior years.

EBITDA in 1993 increased $59 million, or 37.1%, over 1992, after decreasing
$35 million, or 18.0%, in 1992 compared with 1991. These results reflect the
aforementioned gross profit performance and the higher 1992 versus 1991 selling
and administrative expenses.

UNITED STATES

Net sales and EBITDA for domestic Gypsum Products (primarily U.S. Gypsum)
have increased for two consecutive years. In 1993, net sales increased $97
million, or 10.9%, over 1992, following a $54 million, or 6.5%, increase in 1992
compared with 1991. EBITDA in 1993 improved $49 million, or 49.5%, over 1992,
which was $6 million, or 6.5%, higher than the 1991 level. These improvements
primarily reflect improving gypsum wallboard selling prices and increased
volume. Higher sales of joint compound, DUROCK cement board and other products
contributed to the more favorable domestic Gypsum Products results.

As a result of increased demand, 1993 shipments of gypsum wallboard
exceeded 7.3 billion square feet, the highest level in the Corporation's
history, and were up 2% over 1992. Shipments in 1992 were up 8% over 1991. As
gypsum wallboard demand and industry capacity utilization increased, prices
improved. After reaching a 14-year low in the first quarter of 1992, gypsum
wallboard prices rebounded in the following quarter and rose in each of the next
seven consecutive quarters. For 1993 as a whole, gypsum wallboard prices
increased 10.5% over the prior year average after falling 1.3% in 1992 from
1991. U.S. Gypsum's average gypsum wallboard prices per thousand square feet
for the three years were as follows:

1993 1992 1991
------ ------ ------
<S> <C> <C> <C>
First Quarter. . . . . . . . . . . $74.97 $67.77 $77.05
Second Quarter . . . . . . . . . . 77.71 72.20 71.93
Third Quarter. . . . . . . . . . . 80.70 73.03 71.32
Fourth Quarter . . . . . . . . . . 82.46 73.35 70.19

Total Year . . . . . . . . . . . . 79.07 71.58 72.53

</TABLE>

<PAGE>

Partially offsetting the favorable price and volume trends in 1993 was
a 3% increase in unit manufacturing cost for gypsum wallboard. This increase
was primarily attributable to higher levels of maintenance expenditures and
energy cost. In 1992, unit manufacturing cost declined 2% compared with 1991.
However, EBITDA in 1992 was unfavorably impacted by a nonrecurring pre-tax
charge of $4 million associated with organizational streamlining activities.

Net sales in 1993 for domestic Interior Systems (primarily USG
Interiors) increased $8 million, or 2.2%, over the 1992 level, while EBITDA
decreased $2 million, or 4.3%. Net sales and EBITDA in 1992 decreased $18
million, or 4.7%, and $12 million, or 20.3%, from the respective 1991 levels.
These results primarily reflect low levels of non-residential construction in
1992 and 1993, partially offset in 1993 by increased sales to retail markets.
The 1993 net sales and EBITDA trends primarily reflect increased sales of lower
margin products and higher raw material costs.

Building Products Distribution (L&W Supply) has experienced two
consecutive years of increased net sales and EBITDA. Net sales in 1993
increased $64 million, or 13.8%, and EBITDA rose $2 million, or 40.0%, over the
respective 1992 amounts. Comparing 1992 to 1991, net sales were up $40 million,
or 9.4%, and EBITDA increased $1 million, or 25.0%. These improvements reflect
higher gypsum wallboard selling prices and increased volume, as well as improved
results for its other building product lines.

CANADA

Net sales for the Corporation's Canadian operations (primarily CGC)
declined $6 million, or 4.0%, in 1993 versus 1992, due to the strengthened U.S.
dollar compared with the Canadian dollar. However, EBITDA was up $3 million, or
21.4%, in 1993 versus 1992 due to higher selling prices for gypsum wallboard.
Canadian gypsum wallboard prices were impacted in 1993 by the Canadian
government's ruling that dumping of U.S.-made gypsum wallboard had occurred and
the resulting imposition of duties on gypsum wallboard imported into Canada from
the United States at prices below certain levels. This ruling will be in effect
until January 1998. For 1992, net sales and EBITDA decreased $20 million, or
11.8%, and $15 million, or 51.7%, respectively, from the corresponding 1991
levels. These declines resulted from lower selling prices and volume for gypsum
wallboard due to the weak Canadian economy. Results for both 1993 and 1992 were
also unfavorably impacted by lower sales of CGC's interior systems products due
to the low level of commercial construction.

OTHER FOREIGN

Despite the continuing recession in Europe and the impact of the
strengthened U.S. dollar compared with European currencies, net sales in 1993
for the Corporation's Other Foreign businesses (primarily operations in Europe,
the Pacific and Mexico managed by USG International) were unchanged from 1992
due to increased sales of ceiling tile in Europe. However, EBITDA in 1993
increased $4 million, or 18.2%, over 1992 due to reduced overhead costs.
Comparing 1992 to 1991, net sales increased $15 million, or 7.8%, while EBITDA
decreased $6 million, or 21.4%. The improvement in net sales reflects increased
sales of interior systems products in certain markets as well as the impact of a
weakened U.S. dollar in 1992. The decline in EBITDA resulted from recessionary
market conditions in Europe, costs associated with the Aubange, Belgium ceiling
tile plant and increased overhead costs.

OTHER EARNINGS INFORMATION

Interest expense, which was significantly reduced as a result of the
Restructuring, amounted to $92 million in the period of May 7 through December
31, 1993, of which $8 million represented non-cash amortization of
reorganization debt discount. For the period of January 1 through May 6, 1993,
interest expense was $86 million.

<PAGE>

For the years ended December 31, 1992 and 1991, interest expense was $334
million and $333 million, respectively.

In connection with the Restructuring, the Corporation recorded in the
period of January 1 through May 6, 1993 a one-time reorganization items gain of
$709 million, which primarily consisted of an $851 million gain from recording
the Excess Reorganization Value pursuant to fresh start accounting principles.
See Item 8. "Financial Statements and Supplementary Data - Predecessor Company -
Notes to Financial Statements - Reorganization Items" note for additional
information on the reorganization items gain.

Income tax expense amounted to $29 million in the period of May 7
through December 31, 1993 due to the inability to benefit the amortization of
Excess Reorganization Value. Income tax expense was $17 million for the period
of January 1 through May 6, 1993 while income tax benefits of $33 million and
$53 million were recorded in 1992 and 1991, respectively. The income tax
expense in the period of January 1 through May 6, 1993 and the lower 1992
benefit compared to 1991 were primarily due to the inability to fully benefit a
net operating loss carryforward ("NOL CARRYFORWARD") as an offset to deferred
taxes. See Item 8. "Financial Statements and Supplementary Data - Notes to
Financial Statements - Taxes on Income and Deferred Income Taxes" notes for both
the Restructured and Predecessor Companies for additional information on income
taxes.

Also in connection with the Restructuring, the Corporation recorded in
the period of January 1 through May 6, 1993 a one-time after-tax extraordinary
gain of $944 million. See Item 8. "Financial Statements and Supplementary Data
- - Predecessor Company - Notes to Financial Statements - Extraordinary Gain" note
for additional information on the extraordinary gain. In the period of May 7
through December 31, 1993, the Corporation recorded an after-tax extraordinary
loss of $21 million reflecting the write-off of reorganization discount
associated with debt issues expected to be prepaid, redeemed or purchased in
1994 with a portion of the proceeds from the Offering and the Note Placement.
See Item 8. "Financial Statements and Supplementary Data - Restructured Company
- - Notes to Financial Statements - Subsequent Event" note for additional
information on the Offering and Note Placement.

A one-time after-tax net charge of $150 million was recorded in the
first quarter of 1993 representing the cumulative impact of the adoption of
Statement of Financial Accounting Standard ("SFAS") No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," and SFAS No. 109,
"Accounting for Income Taxes." See Item 8. "Financial Statements and
Supplementary Data - Predecessor Company - Notes to Financial Statements - Taxes
on Income and Deferred Income Taxes and Postretirement Benefits" notes for
information related to these accounting changes.

A net loss of $129 million was recorded in the period of May 7 through
December 31, 1993 after the aforementioned amortization of Excess Reorganization
Value of $113 million and the after-tax extraordinary loss of $21 million. Net
earnings of $1,434 million were recorded in the period of January 1 through May
6, 1993, reflecting the reorganization items gain of $709 million and the after-
tax extraordinary gain of $944 million. Net losses of $191 million and $161
million were recorded in 1992 and 1991, respectively, primarily due to high
levels of interest expense. The net loss in 1991 included a $20 million after-
tax provision relating to the sale of DAP Inc. ("DAP"), formerly a wholly owned
subsidiary of the Corporation. Results for DAP are reported separately as
discontinued operations up to September 1991, when the sale of DAP was
completed.

LIQUIDITY AND CAPITAL RESOURCES

On May 6, 1993, the Corporation completed the Restructuring through
implementation of the Prepackaged Plan. The provisions of the Prepackaged Plan
were agreed upon in principle with all committees and certain institutions
representing debt subject to the Restructuring in January 1993. The
Corporation's Registration Statement (Registration No. 33-40136), which included
a Disclosure Statement and Proxy Statement - Prospectus, was declared

<PAGE>

effective by the SEC in February 1993. The solicitation process for approvals
of the Prepackaged Plan was completed on March 15, 1993. The Corporation
commenced a prepackaged Chapter 11 bankruptcy case in Delaware (IN RE: USG
CORPORATION, Case No. 93-300) on March 17, 1993 and received the U.S. Bankruptcy
Court's confirmation of the Prepackaged Plan on April 23, 1993. None of the
subsidiaries of the Corporation were part of this proceeding and there was no
impact on trade creditors of the Corporation's subsidiaries. Under the
Prepackaged Plan, all previously existing defaults were waived or cured.

In the Restructuring, the Corporation (i) converted approximately $1.4
billion of subordinated debt and accrued interest into Common Stock and Warrants
to purchase Common Stock, (ii) converted approximately $300 million principal
amount of bank term loan (the "BANK TERM LOAN") and $40 million of other
obligations under an agreement (the "CREDIT AGREEMENT") with a syndicate of
commercial banks (the "BANKS" or the "BANK GROUP") into 10 1/4% Senior Notes due
2002 ("SENIOR 2002 NOTES") and (iii) extended the maturities of its remaining
Bank Debt and certain public debt. Further, modifications were made to the
Credit Agreement which resulted in, among other things, (i) the issuance of $56
million of notes (the "CAPITALIZED INTEREST NOTES" and, together with the Bank
Term Loan, the "BANK DEBT") in exchange for an equal amount of accrued but
unpaid interest and other obligations and (ii) modifications to the Revolving
Credit Facility. See Item 8. "Financial Statements and Supplementary Data -
Predecessor Company - Notes to Financial Statements - Financial Restructuring"
note for additional information on the Restructuring.

Subsequent to the Restructuring, on August 10, 1993, the Corporation
issued an additional $138 million of Senior 2002 Notes in exchange for Bank
Debt. This transaction improved the Corporation's financial flexibility and
responded to strong market demand for the Senior 2002 Notes by replacing near-
term maturities of the Bank Debt with the longer term notes. Although issuance
of these notes caused a modest increase in interest expense from the level
experienced since the Restructuring was consummated, it eliminated all Bank Term
Loan scheduled principal payments due through 1996. Furthermore, in connection
with this exchange, the cash sweep mechanism of the Credit Agreement was
modified, allowing the Corporation to apply cash otherwise subject to the cash
sweep through 1996 to repayment or purchase of senior debt. For the holders of
the Bank Debt participating in the exchange, the Senior 2002 Notes provide
greater yield and liquidity than the Bank Debt. See Item 8. "Financial
Statements and Supplementary Data - Restructured Company - Notes to Financial
Statements - Indebtedness" note for additional information on this transaction.

On January 7, 1994, the Corporation filed a Registration Statement
(Registration No. 33-51845), as amended on February 16, 1994, pertaining to its
planned public offering of 6,000,000 new shares of Common Stock to be sold by
the Corporation and 4,000,000 shares of Common Stock to be sold by Water Street
Corporate Recovery Fund I, L.P. The Offering is part of a refinancing strategy
which also includes (i) the placement of $150 million principal amount of new
senior notes due 2001 with certain institutional investors and (ii) certain
amendments to the Corporation's Credit Agreement. The Credit Agreement
Amendments will, among other things, increase the size of the Corporation's
Revolving Credit Facility by $70 million and amend existing mandatory Bank Term
Loan prepayment provisions to allow the Corporation, upon the achievement of
certain financial tests, to retain additional free cash flow for capital
expenditures and the purchase of its public debt. Certain amendments are
contingent on the consummation of the Offering.

On February 17, 1994, the Corporation completed the Note Placement of
$150 million principal amount of 9 1/4% Senior Notes due 2001. In connection
with such placement, the Corporation received in exchange for an equivalent
amount of such new Notes approximately $65 million principal amount of 8% Senior
Notes ($30 million due in 1996 and $35 million due in 1997) and repaid $75
million of its Bank Term Loans in satisfaction of the scheduled payment for 1997
and in reduction of the scheduled payment for 1998 from $100 million to $65
million.

In addition to the exchange of notes and payment of Bank Term Loans in
conection with the Note Placement as described above, the Corporation expects to
use a portion of the net proceeds from the Offering, together with approximately
$158 million of existing cash generated from operations to pay an additional $65
million of Bank

<PAGE>

Term Loans and to redeem or purchase approximately $195 million aggregate
principal amount of certain other senior debt issues. The remainder of the net
proceeds, approximately $92 million, will be available for general corporate
purposes, including capital expenditures for cost reduction, capacity
improvement and future growth opportunities. See Item 8. "Financial Statements
and Supplementary Data - Restructured Company - Notes to Financial Statements -
Subsequent Event" note for more information on the Transactions.

The Corporation believes that, as a result of the Restructuring, as
well as the subsequent exchange of Senior 2002 Notes for Bank Debt, the
Corporation's cash generated by operations and the estimated levels of liquidity
available to the Corporation will be sufficient to permit the Corporation to
satisfy its debt service requirements and other capital requirements for the
foreseeable future. Upon completion of the Transactions, the Corporation's
liquidity and capital resources will be further significantly strengthened.
However, the Corporation is subject to significant business, economic and
competitive uncertainties that are beyond its control. There can be no
assurance that the Corporation's financial resources will be sufficient for the
Corporation to satisfy its debt service obligations and other capital
requirements under all circumstances.

WORKING CAPITAL

As of December 31, 1993, working capital (current assets less current
liabilities) amounted to $121 million and the ratio of current assets to current
liabilities was 1.24 to 1, versus December 31, 1992 when current liabilities
exceeded current assets by $2.6 billion and the ratio of current assets to
current liabilities was .21 to 1. From December 31, 1990 through May 6, 1993,
the Corporation had a deficit working capital position, primarily resulting from
the inclusion of most long-term debt issues in current liabilities due to
various defaults upon certain of the debt issues. Upon consummation of the
Restructuring, all previously existing defaults were waived or cured and long-
term debt included in current liabilities was either exchanged for Common Stock
and Warrants to purchase Common Stock, reclassified to long-term debt, or in the
case of $140 million of the Revolving Credit Facility, repaid. See Item 8.
"Financial Statements and Supplementary Data - Predecessor Company - Notes to
Financial Statements - Financial Restructuring" note for additional information
related to the Restructuring.

For the period of May 7 through December 31, 1993, cash and cash
equivalents increased $162 million as cash flows from operating activities of
$183 million were partially offset by a net repayment of debt of $21 million. As
of December 31, 1993, $158 million of long-term debt was reclassified to
currently maturing long-term debt due to the cash sweep mechanism of the Credit
Agreement. This cash sweep mechanism requires prepayment of long-term debt in
1994. For the period of January 1 through May 6, 1993, cash and cash
equivalents decreased by $131 million, primarily due to debt repayments in
connection with the Restructuring.

Comparing December 31, 1993 balances with December 31, 1992, accrued
expenses of $208 million were down $345 million, or 62.4%, primarily due to the
cancellation and discharge of $375 million of accrued interest in connection
with the Restructuring. Inventories of $145 million increased $32 million, or
28.3%, primarily due to their revaluation as a result of fresh start accounting.
Accounts receivable (net) of $264 million declined $35 million, or 11.7%,
reflecting a decline in miscellaneous corporate receivables, partially offset by
an increase of $26 million in customer receivables due to the higher level of
net sales. Accounts payable of $104 million rose $13 million, or 14.3%, due to
the increased level of business and improved trade credit.

CAPITAL EXPENDITURES

Capital expenditures amounted to $29 million in the period of May 7
through December 31, 1993 and $12 million in the period of January 1 through May
6, 1993 for a total of $41 million in the year ended December 31, 1993. In
1992, capital expenditures were $49 million. Capital expenditure commitments
for the replacement, modernization and expansion of operations amounted to $11
million as of December 31, 1993, compared with $24 million as of December 31,
1992. The Credit Agreement restricts, among other things, capital expenditures
above

<PAGE>

certain levels. The Corporation believes that these permitted levels are
adequate. In connection with the planned Offering and Note Placement, the
Credit Agreement will be amended, allowing the Corporation to retain additional
cash flow for capital expenditures and other uses. Upon completion of the
Transactions, the Corporation intends to augment its capital spending program on
a basis consistent with such new amendment. See Item 8. "Financial Statements
and Supplementary Data - Restructured Company - Notes to Financial Statements -
Subsequent Event" note for additional information related to the Transactions.

LITIGATION

One of the Corporation's subsidiaries, U.S. Gypsum, is a defendant in
asbestos lawsuits alleging both property damage and personal injury. This
litigation has not had a material effect on the Corporation's liquidity or
earnings. Virtually all costs of the Personal Injury Cases are being paid by
insurance. However, many of U.S. Gypsum's insurance carriers are denying
coverage for the Property Damage Cases, although U.S. Gypsum believes that
substantial coverage exists and the trial court in U.S. Gypsum's Coverage Action
has so ruled (such ruling has been appealed). In view of the limited insurance
funding currently available to U.S. Gypsum for Property Damage Cases resulting
from continued resistance by a number of U.S. Gypsum's insurers to providing
coverage, the effect of the asbestos litigation on the Corporation will depend
upon a variety of factors, including the damages sought in Property Damage Cases
that reach trial prior to the completion of the Coverage Action, U.S. Gypsum's
ability to successfully defend or settle such cases, and the resolution of the
Coverage Action. As a result, management is unable to determine whether an
adverse outcome in the asbestos litigation will have a material adverse effect
on the results of operations or the consolidated financial position of the
Corporation.

<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>

PAGE
<S> <C>
Restructured Company: (a)

Consolidated Statement of Earnings - May 7 through December 31, 1993. . . . . . . . . . . . . . 26
Consolidated Balance Sheet - as of December 31, 1993. . . . . . . . . . . . . . . . . . . . . . 27
Consolidated Statement of Cash Flows - May 7 through December 31, 1993. . . . . . . . . . . . . 28
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Report of Independent Public Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Schedule V -- Property, Plant and Equipment . . . . . . . . . . . . . . . . . . . . . . . 54
Schedule VI -- Accumulated Depreciation and Depletion of Property, Plant and Equipment . . 55
Schedule VIII -- Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . 56
Schedule IX -- Short-Term Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Schedule X -- Supplemental Statement of Earnings Information. . . . . . . . . . . . . . . 58
Supplemental Note on Financial Information for United States Gypsum Company . . . . . . . . . . 59
Report of Independent Public Accountants with Respect to Supplemental Note and
Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

Predecessor Company: (a)

Consolidated Statement of Earnings - January 1 through May 6, 1993 and the years ended
December 31, 1992 and 1991. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Consolidated Balance Sheet - as of May 6, 1993 and December 31, 1992. . . . . . . . . . . . . . 62
Consolidated Statement of Cash Flows - January 1 through May 6, 1993 and the years ended
December 31, 1992 and 1991. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Report of Independent Public Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Schedule V -- Property, Plant and Equipment . . . . . . . . . . . . . . . . . . . . . . . 97
Schedule VI -- Accumulated Depreciation and Depletion of Property, Plant and Equipment . . 98
Schedule VIII -- Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . 99
Schedule IX -- Short-Term Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Schedule X -- Supplemental Statement of Earnings Information. . . . . . . . . . . . . . . 101
Supplemental Note on Financial Information for United States Gypsum Company . . . . . . . . . . 102
Report of Independent Public Accountants with Respect to Supplemental Note and
Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

Selected Quarterly Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
<FN>

(a) POST-BANKRUPTCY ACCOUNTING RULES REQUIRE SEPARATE REPORTING OF FINANCIAL
RESULTS FOR THE RESTRUCTURED COMPANY AND THE PREDECESSOR COMPANY. AS SUCH,
THE CORPORATION'S FINANCIAL STATEMENTS EFFECTIVE MAY 7, 1993 ARE PRESENTED
UNDER "RESTRUCTURED COMPANY" WHILE FINANCIAL STATEMENTS FOR PERIODS PRIOR
TO THAT DATE ARE PRESENTED UNDER "PREDECESSOR COMPANY." DUE TO THE
RESTRUCTURING AND IMPLEMENTATION OF FRESH START ACCOUNTING, FINANCIAL
STATEMENTS FOR THE RESTRUCTURED COMPANY ARE NOT COMPARABLE TO THOSE FOR THE
PREDECESSOR COMPANY. SEE "PREDECESSOR COMPANY - NOTES TO FINANCIAL
STATEMENTS - FINANCIAL RESTRUCTURING AND FRESH START ACCOUNTING" NOTES FOR
INFORMATION ON THE RESTRUCTURING AND IMPLEMENTATION OF FRESH START
ACCOUNTING

</TABLE>

ALL OTHER SCHEDULES HAVE BEEN OMITTED BECAUSE THEY ARE NOT APPLICABLE, ARE NOT
REQUIRED, OR THE INFORMATION IS INCLUDED IN THE FINANCIAL STATEMENTS OR NOTES
THERETO.

<PAGE>

USG CORPORATION
(RESTRUCTURED COMPANY)
CONSOLIDATED STATEMENT OF EARNINGS
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)

MAY 7
THROUGH
DECEMBER 31,
1993
------------

<S> <C>
NET SALES. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,325
Cost of products sold. . . . . . . . . . . . . . . . . . . . . 1,062
----------
GROSS PROFIT . . . . . . . . . . . . . . . . . . . . . . . . . 263

Selling and administrative expenses. . . . . . . . . . . . . . 149
Amortization of Excess Reorganization Value. . . . . . . . . . 113
----------
OPERATING PROFIT . . . . . . . . . . . . . . . . . . . . . . . 1

Interest expense . . . . . . . . . . . . . . . . . . . . . . . 92
Interest income. . . . . . . . . . . . . . . . . . . . . . . . (4)
Other income, net. . . . . . . . . . . . . . . . . . . . . . . (8)
----------
LOSS BEFORE TAXES ON INCOME AND EXTRAORDINARY LOSS . . . . . . (79)

Taxes on income. . . . . . . . . . . . . . . . . . . . . . . . 29
----------
LOSS BEFORE EXTRAORDINARY LOSS . . . . . . . . . . . . . . . . (108)

Extraordinary loss, net of taxes . . . . . . . . . . . . . . . (21)
----------

NET LOSS . . . . . . . . . . . . . . . . . . . . . . . . . . . (129)
----------
----------
LOSS PER COMMON SHARE:
Before extraordinary loss . . . . . . . . . . . . . . . . $ (2.90)
Extraordinary loss. . . . . . . . . . . . . . . . . . . . (0.56)
----------

NET LOSS PER COMMON SHARE. . . . . . . . . . . . . . . . . . . (3.46)
----------
----------
</TABLE>

THE NOTES TO FINANCIAL STATEMENTS ON PAGES 29 THROUGH 52 ARE AN INTEGRAL PART OF
THIS STATEMENT.

<PAGE>

USG CORPORATION
(RESTRUCTURED COMPANY)
CONSOLIDATED BALANCE SHEET
(DOLLARS IN MILLIONS)

AS OF
DECEMBER 31,
1993
------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (primarily time deposits). . . . . . $ 211
Receivables (net of reserves of $13) . . . . . . . . . . . . . 264
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . 145
---------
Total current assets. . . . . . . . . . . . . . . . . . . 620
---------
PROPERTY, PLANT AND EQUIPMENT, NET . . . . . . . . . . . . . . 754
EXCESS REORGANIZATION VALUE (net of accumulated amortization of $113) 735
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . 54
---------
Total assets. . . . . . . . . . . . . . . . . . . . . . . 2,163
---------
---------

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . $ 104
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . 208
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . 2
Long-term debt maturing within one year. . . . . . . . . . . . 165
Taxes on income. . . . . . . . . . . . . . . . . . . . . . . . 20
---------
Total current liabilities . . . . . . . . . . . . . . . . 499
---------
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . . . . . . . 1,309
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . . . 180
OTHER LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . 309
STOCKHOLDERS' EQUITY/(DEFICIT):
Preferred stock - $1 par value; authorized 36,000,000 shares;
$1.80 convertible preferred stock (initial series);
outstanding - none . . . . . . . . . . . . . -
Common stock - $0.10 par value; authorized 200,000,000 shares;
outstanding 37,158,085 (after deducting
27,876 shares held in treasury). . . . . . . 4
Capital received in excess of par value. . . . . . . . . . . . -
Deferred currency translation. . . . . . . . . . . . . . . . . (9)
Reinvested earnings/(deficit). . . . . . . . . . . . . . . . . (129)
---------
Total stockholders' equity/(deficit). . . . . . . . . . . (134)
---------
Total liabilities and stockholders' equity. . . . . . . . 2,163
---------
---------

</TABLE>

THE NOTES TO FINANCIAL STATEMENTS ON PAGES 29 THROUGH 52 ARE AN INTEGRAL PART
OF THIS STATEMENT.

<PAGE>

USG CORPORATION
(RESTRUCTURED COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)

MAY 7
THROUGH
DECEMBER 31,
1993
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (129)

Adjustments to reconcile net loss to net cash:
Amortization of Excess Reorganization Value . . . . . . . 113
Extraordinary loss. . . . . . . . . . . . . . . . . . . . 21
Depreciation, depletion and amortization. . . . . . . . . 44
Postretirement expense. . . . . . . . . . . . . . . . . . 7
Deferred income taxes . . . . . . . . . . . . . . . . . . 22
Net gain on asset dispositions. . . . . . . . . . . . . . (9)
Decrease in working capital:
Receivables . . . . . . . . . . . . . . . . . . . . . . . 51
Inventories . . . . . . . . . . . . . . . . . . . . . . . 4
Payables. . . . . . . . . . . . . . . . . . . . . . . . . 14
Accrued expenses. . . . . . . . . . . . . . . . . . . . . 37
Decrease in other assets . . . . . . . . . . . . . . . . . . . 7
Increase in other liabilities. . . . . . . . . . . . . . . . . 5
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . (4)
-----------
Net cash flows from operating activities. . . . . . . . . 183
-----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . (29)
Net proceeds from asset dispositions . . . . . . . . . . . . . 29
-----------
Net cash flows from investing activities. . . . . . . . . -
-----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt . . . . . . . . . . . . . . . . . . . . . . . 36
Repayment of debt. . . . . . . . . . . . . . . . . . . . . . . (57)
-----------
Net cash flows to financing activities. . . . . . . . . . (21)
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . 162
-----------
Cash and cash equivalents as of beginning of period. . . . . . 49
-----------
Cash and cash equivalents as of end of period. . . . . . . . . 211
-----------
-----------
Supplemental Cash Flow Disclosures:
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . $ 73
Income taxes paid. . . . . . . . . . . . . . . . . . . . . . . 5
-----------
-----------
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ON PAGER 29 THROUGH 52 ARE AN INTEGRAL PART
OF THIS STATEMENT.

<PAGE>

USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS
(TERMS IN INITIAL CAPITAL LETTERS ARE DEFINED ELSEWHERE IN THIS FORM 10-K)

PRINCIPLES OF CONSOLIDATION

Excess Reorganization Value, which was recorded as a result of the
implementation of fresh start accounting, is being amortized through April
1998. The Corporation continues to evaluate whether events and circumstances
have occurred that indicate the remaining estimated useful life of Excess
Reorganization Value may warrant revision or that the remaining balances may
not be recoverable. The Corporation uses an estimate of its undiscounted cash
flows over the remaining life of the Excess Reorganization Value in measuring
whether the asset is recoverable. See "Financial Restructuring" note below for
more information on the implementation of fresh start accounting.

For purposes of the Consolidated Balance Sheet and Consolidated Statement
of Cash Flows, all highly liquid investments with a maturity of three months or
less at the time of purchase are considered to be cash equivalents.

FINANCIAL RESTRUCTURING

On May 6, 1993, the Corporation completed a comprehensive restructuring of
its debt (the "RESTRUCTURING") through implementation of a "prepackaged" plan
of reorganization under federal bankruptcy laws (the "PREPACKAGED PLAN") which
was confirmed on April 23, 1993 by the Bankruptcy Court. In the Restructuring,
the Corporation (i) converted approximately $1.4 billion of subordinated debt
and accrued interest into Common Stock and warrants to purchase Common Stock,
(ii) converted approximately $340 million of its bank obligations into 10 1/4%
Senior Notes due 2002 ("SENIOR 2002 NOTES") and (iii) extended the maturities
of its remaining Bank Debt and certain public debt. Upon consummation of the
Restructuring, all previously existing defaults upon senior securities were
waived or cured. None of the subsidiaries of the Corporation were part of this
proceeding and there was no impact on trade creditors of the Corporation's
subsidiaries. The Corporation accounted for the Restructuring using the
principles of fresh start accounting as required by AICPA Statement of Position
90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy
Code" ("SOP 90-7"). Pursuant to such principles, individual assets and
liabilities were adjusted to fair market value as of May 6, 1993. See
"Predecessor Company - Notes to Financial Statements - Financial Restructuring
and Fresh Start Accounting" notes for information on the terms and
implementation of the Prepackaged Plan and fresh start accounting.

PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS

The following unaudited Pro Forma Condensed Consolidated Statement of
Earnings for the year ended December 31, 1993 has been prepared giving effect
to the consummation of the Restructuring, including the implementation of fresh
start accounting, as if the consummation had occurred on January 1, 1993. Due
to the Restructuring and implementation of fresh start accounting, financial
statements effective May 7, 1993 for the restructured company are not
comparable to financial statements prior to that date for the predecessor
company. However, for presentation of this statement, total results for 1993
are shown under the caption "Total Before Adjustments." The adjustments set
forth under the caption "Pro Forma Adjustments" reflect the implementation of
the Prepackaged Plan and the adoption of fresh start accounting as if they had
occurred on January 1, 1993.

29
<PAGE>

USG CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1993
(UNAUDITED)
(DOLLARS IN MILLIONS)

TOTAL
BEFORE PRO FORMA
ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------- --------------- -----------
<S> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . $ 1,916 $ - $ 1,916
Cost of products sold . . . . . . . . . . . . . 1,544 - 1,544
------------ -------- ---------
Gross profit. . . . . . . . . . . . . . . . . . 372 - 372
Selling and administrative expense. . . . . . . 220 - 220
Amortization of Excess Reorganization Value . . 113 57 (a) 170
------------ -------- ---------
Operating profit/(loss) . . . . . . . . . . . . 39 (57) (18)
Interest expense. . . . . . . . . . . . . . . . 178 (42) (b) 136
Interest income . . . . . . . . . . . . . . . . (6) - (6)
Other (income)/expense, net . . . . . . . . . . (2) (1) (c) (3)
Reorganization items. . . . . . . . . . . . . . (709) 709 (d) -
------------ -------- ---------
Earnings/(loss) before taxes on income,
extraordinary gain and changes in
accounting principles. . . . . . . . . . . 578 (723) (145)
Taxes on income . . . . . . . . . . . . . . . . 46 (16) 30
------------ -------- ---------
Earnings/(loss) before extraordinary gain and
changes in accounting principles . . . . . 532 (707) (175)
------------ -------- ---------
------------ -------- ---------

<FN>

(a) Reflects amortization of Excess Reorganization Value which would
have been recorded during the period of January 1 through May 6,
1993.

(b) Reflects the adjustment to restate interest expense for the
period of January 1 through May 6, 1993 to the amount that would
have been recorded.

(c) Represents the reversal of first quarter 1993 amortization of
historical capitalized financing costs which were written off in
connection with the Restructuring.

(d) Represents the reversal of actual reorganization items incurred
in connection with the Restructuring and implementation of fresh
start accounting. This gain would have been recorded in 1992 had
the Restructuring occurred on January 1, 1993.

</TABLE>

EXTRAORDINARY LOSS

In December 1993, the Corporation recorded an extraordinary loss of $21
million, net of related income tax benefit of $11 million, reflecting the write-
off of the reorganization discount associated with debt issues expected to be
prepaid, redeemed or purchased in 1994 in connection with the Corporation's
planned public offering of Common Stock and issuance of new senior notes. See
"Subsequent Event" note for more information on the planned public offering of
stock and issuance of new senior notes.

<PAGE>

RESEARCH AND DEVELOPMENT

Research and development expenditures are charged to earnings as incurred
and amounted to $10 million in the period of May 7 through December 31, 1993.

TAXES ON INCOME AND DEFERRED INCOME TAXES

Loss before taxes on income and extraordinary loss consisted of the
following (dollars in millions):

MAY 7
THROUGH
DECEMBER 31,
1993
------------
<S> <C>
U.S.. . . . . . . . . . . . . . . . . . . . . $ (72)
Foreign . . . . . . . . . . . . . . . . . . . (7)
------------
Total . . . . . . . . . . . . . . . . . . . . (79)
------------
------------

</TABLE>

Taxes on income consisted of the following (dollars in millions):

MAY 7
THROUGH
DECEMBER 31,
1993
------------
<S> <C>
Current:
U.S. Federal. . . . . . . . . . . . . . . . $ 12
Foreign . . . . . . . . . . . . . . . . . . 5
State . . . . . . . . . . . . . . . . . . . 1
------------
18
------------
Deferred:
U.S. Federal. . . . . . . . . . . . . . . . 11
Foreign . . . . . . . . . . . . . . . . . . -
State . . . . . . . . . . . . . . . . . . . -
------------
11
------------
Total . . . . . . . . . . . . . . . . . . . . 29
------------
------------

</TABLE>

The difference between the statutory U.S. Federal income tax/(benefit) rate
and the Corporation's effective income tax rate is summarized as follows:

MAY 7
THROUGH
DECEMBER 31,
1993
--------------
<S> <C>
Statutory U.S. Federal income tax/(benefit) rate. . . . (35.0)%
Excess Reorganization Value amortization. . . . . . . . 49.6
Foreign tax rate differential . . . . . . . . . . . . . 11.4
Statutory rate adjustment to historical deferred taxes. 4.0
Valuation allowance adjustment. . . . . . . . . . . . . 3.3
Other, net. . . . . . . . . . . . . . . . . . . . . . . 3.4
---------
Effective income tax rate . . . . . . . . . . . . . . . 36.7
---------
---------

</TABLE>

<PAGE>

Temporary differences and carryforwards which give rise to current and
long-term deferred tax (assets)/liabilities as of December 31, 1993 were as
follows (dollars in millions):

AS OF
DECEMBER 31,
1993
-----------
<S> <C>
Property, plant and equipment . . . . . . . . . . . $ 164
Debt discount . . . . . . . . . . . . . . . . . . . 19
----------
Deferred tax liabilities. . . . . . . . . . . . . . 183
----------

Pension and retiree medical benefits. . . . . . . . (90)
Reserves not deductible until paid. . . . . . . . . (61)
Other . . . . . . . . . . . . . . . . . . . . . . . (8)
----------
Deferred tax assets before valuation allowance. . . (159)
Valuation allowance . . . . . . . . . . . . . . . . 90
----------
Deferred tax assets . . . . . . . . . . . . . . . . (69)
----------
Net deferred tax liabilities. . . . . . . . . . . . 114
----------
----------

</TABLE>

A valuation allowance has been provided for deferred tax assets relating to
pension and retiree medical benefits due to the long-term nature of their
realization. Because of the uncertainty regarding the application of the
Internal Revenue Code (the "CODE") to the Corporation's NOL Carryforwards as a
result of the Prepackaged Plan, no deferred tax asset is recorded. Under fresh
start accounting rules, any benefit realized from utilizing predecessor company
NOL Carryforwards will not impact net earnings.

The Corporation has NOL Carryforwards of $90 million remaining from 1992
after using approximately $23 million to offset U.S. taxable income in 1993 and
a reduction due to cancellation of indebtedness from the Prepackaged Plan.
These NOL Carryforwards may be used to offset U.S. taxable income through 2007.
The Code will limit the Corporation's annual use of its NOL Carryforwards to the
lesser of its taxable income or approximately $30 million plus any unused limit
from prior years. Furthermore, due to the uncertainty regarding the application
of the Code to the exchange of stock for debt, the Corporation's NOL
Carryforwards could be further reduced or eliminated. The Corporation has a $4
million minimum tax credit which may be used to offset U.S. regular tax
liability in future years.

The Corporation does not provide for U.S. Federal income taxes on the
portion of undistributed earnings of foreign subsidiaries which are intended to
be permanently reinvested. The cumulative amount of such undistributed earnings
totaled approximately $79 million as of December 31, 1993. Any future
repatriation of undistributed earnings would not, in the opinion of management,
result in significant additional taxes.

INVENTORIES

In accordance with the implementation of fresh start accounting,
inventories were stated at fair market value as of May 6, 1993. Most of the
Corporation's domestic inventories are valued under the last-in, first-out
("LIFO") method. As of December 31, 1993, the LIFO values of these inventories
were $103 million and would have been the same if they were valued under the
first-in, first-out ("FIFO") and average production cost methods. The remaining
inventories are stated at the lower of cost or market, under the FIFO or average
production cost methods.

<PAGE>

Inventories include material, labor and applicable factory overhead costs.
Inventory classifications were as follows (dollars in millions):

AS OF
DECEMBER 31,
1993
-----------
<S> <C>
Finished goods and work-in-process. . . . . . $ 84
Raw materials . . . . . . . . . . . . . . . . 53
Supplies. . . . . . . . . . . . . . . . . . . 8
---------
Total . . . . . . . . . . . . . . . . . . . . 145
---------
---------

</TABLE>

The LIFO value of U.S. domestic inventories under fresh start accounting
exceeded that computed for U.S. Federal income tax purposes by $25 million as of
December 31, 1993.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment were stated at fair market value as of May 6,
1993 in accordance with fresh start accounting. Provisions for depreciation are
determined principally on a straight-line basis over the expected average useful
lives of composite asset groups. Depletion is computed on a basis calculated to
spread the cost of gypsum and other applicable resources over the estimated
quantities of material recoverable. Interest during construction is capitalized
on major property additions. Property, plant and equipment classifications were
as follows (dollars in millions):

AS OF
DECEMBER 31,
1993
-----------
<S> <C>
Land and mineral deposits . . . . . . . . . . $ 61
Buildings and realty improvements . . . . . . 233
Machinery and equipment . . . . . . . . . . . 496
-----------
790
Reserves for depreciation and depletion . . . (36)
-----------
Total . . . . . . . . . . . . . . . . . . . . 754
-----------
-----------

</TABLE>

LEASES

<PAGE>

to $22 million in the period of May 7 through December 31, 1993. Future minimum
lease payments, by year and in the aggregate, under operating leases with
initial or remaining noncancellable terms in excess of one year as of December
31, 1993 were as follows (dollars in millions):

MINIMUM
LEASE
PAYMENTS
--------
<S> <C>
1994. . . . . . . . . . . . . . . . . . . . . $ 24
1995. . . . . . . . . . . . . . . . . . . . . 21
1996. . . . . . . . . . . . . . . . . . . . . 16
1997. . . . . . . . . . . . . . . . . . . . . 12
1998. . . . . . . . . . . . . . . . . . . . . 11
Thereafter. . . . . . . . . . . . . . . . . . 35
-------
Aggregate minimum payments. . . . . . . . . . 119
-------
-------

</TABLE>

INDEBTEDNESS

Total debt, including currently maturing debt, consisted of the following
(dollars in millions):

AS OF
DECEMBER 31,
1993
-----------
<S> <C>
SECURED DEBT:
Bank Term Loan, installments due 1997 through 2000. . $ 448
Senior notes and debentures:
8% Senior Notes due 1995. . . . . . . . . . . . . . 75
8% Senior Notes due 1996. . . . . . . . . . . . . . 90
8% Senior Notes due 1997. . . . . . . . . . . . . . 100
9% Senior Notes due 1998. . . . . . . . . . . . . . 35
10 1/4% Senior Notes due 2002 . . . . . . . . . . . 478
7 7/8% Sinking Fund Debentures due 2004 . . . . . . 36
8 3/4% Sinking Fund Debentures due 2017 . . . . . . 200
Other secured debt, average interest rate 8.0%,
varying payments through 1999. . . . . . . . . . 31

UNSECURED DEBT:
Industrial revenue bonds, 5.9% ranging to 8.0%,
due through 2014 . . . . . . . . . . . . . . . . 38
--------
Total principal amount of debt. . . . . . . . . . . . 1,531
Less unamortized reorganization discount. . . . . . . (55)
--------
Total carrying amount of debt . . . . . . . . . . . . 1,476
--------
--------

</TABLE>

As of December 31, 1993, the Corporation and its subsidiaries had $1,531
million total principal amount of debt (before unamortized reorganization
discount) on a consolidated basis. Of such total debt, $105 million represented
direct borrowings by the subsidiaries, including $38 million of industrial
revenue bonds, $36 million of 7 7/8% sinking fund debentures issued by U.S.
Gypsum in 1974 and subsequently assumed by the Corporation on a joint and
several basis in 1985, $27 million of debt (primarily project financing)
incurred by the Corporation's foreign subsidiaries other than CGC, $2 million of
working capital borrowings by CGC, and $2 million of other long-term borrowings
by CGC.

<PAGE>

The Credit Agreement includes a cash sweep mechanism under which excess
cash as of the end of any year, calculated in accordance with the Credit
Agreement, must be used to pay debt within the following year. As of
December 31, 1993, such excess cash amounted to $158 million. Accordingly,
$158 million of long term debt was reclassified to currently maturing long-
term debt.

On August 10, 1993, the Corporation issued $138 million of Senior 2002
Notes in exchange for $92 million of Bank Term Loans due 1994 through 1996
and $46 million of Capitalized Interest Notes due 2000. The Corporation did
not receive any cash proceeds from the issuance of these securities. In
connection with this transaction, the Credit Agreement was modified,
providing for the following changes: (i) scheduled Bank Term Loan
amortization payments of $95 million due in 1994, 1995 and 1996 were
eliminated ($3 million was added to the final maturity of the Bank Term Loan
due in 2000); (ii) USG Interiors paid $9 million of Capitalized Interest
Notes due in 1998; and (iii) the cash sweep mechanism was modified to permit
the use of up to $165 million of cash otherwise subject to mandatory Bank
Term Loan prepayments in 1994, 1995 and 1996 for payment or purchase of
senior debt with maturities prior to January 1, 1999, or for the prepayment
of Bank Term Loans, at the discretion of the Corporation.

The Bank Term Loan and most other senior debt are secured by a pledge of
all of the shares of the Corporation's major domestic subsidiaries and 65% of
the shares of certain of its foreign subsidiaries including CGC, pursuant to
a collateral trust arrangement controlled primarily by holders of the Bank
Term Loan. The rights of the Corporation and its creditors to the assets of
any subsidiary upon the latter's liquidation or reorganization will be
subject to the prior claims of such subsidiary's creditors, except to the
extent that the Corporation may itself be a creditor with enforceable claims
against such subsidiary. The average rate of interest on the Bank Term Loan
was 5.3% in the period of May 7 through December 31, 1993.

The "Other Secured Debt" category shown in the table above primarily
includes short-term and long-term borrowings from several foreign banks by
USG International used principally to finance construction of the Aubange,
Belgium ceiling tile plant. This debt is secured by a lien on the assets of
the Aubange plant and has restrictive covenants that restrict, among other
things, the payment of dividends. Foreign borrowings made by the
Corporation's international operations are generally allowed, within certain
limits, under provisions of the Credit Agreement.

In general, the Credit Agreement restricts, among other things, the
incurrence of additional indebtedness, mergers, asset dispositions,
investments, prepayment of other debt, dealings with affiliates, capital
expenditures, payment of dividends and lease commitments. The Credit
Agreement, as amended in accordance with the Prepackaged Plan, also requires
the Corporation, beginning January 1, 1995, to satisfy certain financial
covenants.

The fair market value of debt as of December 31, 1993 was $1,481
million, based on indicative bond prices as of that date, excluding other
secured debt, primarily representing financing for construction of the
Aubange plant, which was not practicable to estimate.

Aggregate, presently scheduled maturities of long-term debt, after the
assumed effect of prepayments pursuant to the aforementioned cash sweep
mechanism and excluding other amounts classified as current liabilities, are
$9 million, $20 million, $148 million and $153 million in the years 1995
through 1998, respectively.
35

<PAGE>

PENSION PLANS

The Corporation and most of its subsidiaries have defined benefit
retirement plans for all eligible employees. Benefits of the plans are
generally based on years of service and employees' compensation during the
last years of employment. The Corporation's contributions are made in
accordance with independent actuarial reports which, for most plans, required
minimal funding in the period of May 7 through December 31, 1993. Net
pension expense included the following components (dollars in millions):

MAY 7
THROUGH
DECEMBER 31,
1993
---------
<S> <C>
Service cost-benefits earned during the period........... $ 7
Interest cost on projected benefit obligation............ 21
Actual return on plan assets............................. (37)
Net amortization/(deferral).............................. 16
------
Net pension expense...................................... 7
------
------

</TABLE>

The pension plan assets, which consist primarily of publicly traded common
stocks and debt securities, had an estimated fair market value that was lower
than the projected benefit obligation as of December 31, 1993. The following
table presents a reconciliation of the total assets of the pension plans to
the projected benefit obligation (dollars in millions):

AS OF
DECEMBER 31,
1993
-------
<S> <C>
Amount of assets available for benefits:
Funded assets of the plans at fair market value....... $ 400
Accrued pension expense............................... 25
------
Total assets of the plans................................ 425
------
Present value of estimated pension obligation:
Vested benefits....................................... 329
Nonvested benefits.................................... 27
------
Accumulated benefit obligation........................... 356
Additional benefits based on projected future salary
increases............................................. 85
------
Projected benefit obligation............................. 441
------
Projected benefit obligation in excess of assets......... (16)
------
------

</TABLE>

The projected benefit obligation in excess of assets consisted of an
unrecognized net loss due to changes in assumptions and differences between
actual and estimated experience.

The expected long-term rate of return on plan assets was 9% for the period
of May 7 through December 31, 1993. The assumed weighted average discount
rate used in determining the accumulated benefit obligation was 7% and the
rate of increases in projected future compensation levels was 5%.

36
<PAGE>

POSTRETIREMENT BENEFITS

The Corporation maintains plans that provide retiree health care and life
insurance benefits for all eligible employees. Employees generally become
eligible for the retiree benefit plans when they meet minimum retirement age
and service requirements. The cost of providing most of these benefits is
shared with retirees.

The following table summarizes the components of net periodic
postretirement benefit cost for the period of May 7 through December 31, 1993
(dollars in millions):

<TABLE>
<CAPTION>
MAY 7
THROUGH
DECEMBER 31,
1993
------
<S> <C>
Service cost of benefits earned......................... $ 4
Interest on accumulated postretirement benefit obligation 9
-----
Net periodic postretirement benefit cost................ 13
-----
-----
</TABLE>
The status of the Corporation's accrued postretirement benefit cost as of
December 31, 1993 was as follows (dollars in millions):

<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1993
------
<S> <C>
Accumulated postretirement benefit obligation:
Retirees............................................. $ 123
Fully eligible active participants................... 14
Other active participants............................ 66
------
203
unrecognized net loss................................... (2)
------
Accrued postretirement benefit cost liability
Unrecognized on the Consolidated Balance Sheet............ 201
------
------
</TABLE>

The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 11% as of December 31, 1993 with a
gradually declining rate to 5% by the year 2000 and remaining at that level
thereafter. A one-percentage-point increase in the assumed health care cost
trend rate for each year would increase the accumulated postretirement
benefit obligation as of December 31, 1993 by $22 million and increase the
net periodic postretirement benefit cost for the period of May 7 through
December 31, 1993 by $2 million. The assumed discount rate used in
determining the accumulated postretirement benefit obligation was 7%.

COMMITMENTS AND CONTINGENCIES

The Corporation employs a variety of off-balance sheet financial
instruments to reduce its exposure to fluctuations in interest rates, foreign
currency exchange rates and energy costs. These instruments consists
primarily of interest rate caps and swaps, foreign currency forward exchange
contracts and energy price swaps and option agreements. The Corporation
designates interest rate swaps as hedges of LIBOR-based bank debt, and
accrues as interest expense the differential to be paid or received under the
agreements as rates change over the life of the

<PAGE>

contracts. Gains and losses arising from foreign currency forward contracts
offset gains and losses resulting from the underlying hedged transactions.
Upon settlement of energy price contracts, the resulting gain or loss is
included in related manufacturing cost. The Corporation continually monitors
its positions with, and the credit quality of, the financial institutions
which are counterparties to its off-balance sheet financial instruments and
does not anticipate non-performance by the counterparties.

As of December 31, 1993, the Corporation had approximately $500 million
(notional amount) of interest rate contracts outstanding, extending up to
three years, and approximately $50 million (combined notional amount) of
foreign currency and energy price contracts outstanding, extending one year
or less. The difference in the value of all of the aforementioned contracts
and the December 31, 1993 market value was not material.

MANAGEMENT PERFORMANCE PLAN

On May 6, 1993, all outstanding stock options were cancelled without
consideration and certain shares of restricted and deferred stock were
cashed-out pursuant to "change in control" provisions contained in the
Management Performance Plan (the "PERFORMANCE PLAN"). As of December 31,
1993, restricted stock and awards for deferred stock yet to be issued
(totaling 25,259 shares) remained outstanding as a consequence of certain
waivers of the change in control event by senior members of management.

As permitted by the Prepackaged Plan, 2,788,350 common shares were
reserved for future issuance in conjunction with stock options, all of which
remained in reserve as of December 31,1993. Options for 1,673,000 common
shares were granted on June 1, 1993, leaving an additional 1,115,350 common
shares available for future grants. The options granted on June 1, 1993
become exercisable in the years 1994 through 1996 at an exercise price of
$10.3125 per share.

PREFERRED SHARE PURCHASE RIGHTS

On June 6, 1988, the Corporation adopted a Preferred Share Purchase Rights
Plan and pursuant to its provisions declared, subject to the consummation of
the 1988 Recapitalization, a distribution of one right (the "RIGHTS") upon
each new share of Common Stock issued in the 1988 Recapitalization. The 1988
Recapitalization became effective July 13, 1988 and the distribution occurred
immediately thereafter. The Rights contain provisions which are intended to
protect stockholders in the event of an unsolicited attempt to acquire the
Corporation.

The Preferred Share Purchase Rights Plan was terminated in connection with
the implementation of the Prepackaged Plan. On May 6, 1993, a new rights
plan (the "RIGHTS AGREEMENT") was adopted with provisions substantially
similar to the old rights agreement except that: (i) the purchase price of
the Rights was reset; (ii) the expiration of the Rights was extended; (iii) a
so-called "flip-in" feature and exchange feature were added; (iv) certain
exemptions were added permitting certain acquisition and the continued
holding of common shares by Water Street and its affiliates in excess of the
otherwise specified thresholds; (v) the redemption price was reduced; and
(vi) the amendment provision was liberalized.

Under the terms of the Rights Agreement, and subject to certain exceptions
for Water Street and its affiliates,

38
<PAGE>

generally the Rights become exercisable (i) 10 days following the date of a
public announcement that a person or group of affiliated or associated
persons (an "ACQUIRING PERSON"), other than the Corporation, any employee
benefit plan of the Corporation, any entity holding Common Stock for or
pursuant to the terms of any such plan, has beneficial ownership (as defined
in the Rights Agreement) of 20% or more of the then outstanding Common Stock,
(ii) 10 days following the date of a public announcement that a person or
group of affiliated or associated persons (an "ADVERSE PERSON") has
beneficial ownership of 10% or more of the then outstanding Common Stock, the
acquisition of which has been determined by the Board to present an actual
threat of an acquisition of the Corporation that would not be in the best
interest of the Corporation's stockholders or (iii) 10 days following the
date of commencement of, or public announcement of, a tender offer or
exchange offer for 30% or more of the Common Stock. When exercisable, each
of the Rights entitles the registered holder to purchase one-hundredth of a
share of a junior participating preferred stock, series C, $1.00 par value
per share, at a price of $35.00 per one-hundredth of a preferred share,
subject to adjustments.

In the event that the Corporation is the surviving corporation in a merger
or other business combination involving an Acquiring Person or an Adverse
Person and the Common Stock remains outstanding and unchanged or in the event
that an Acquiring Person or an Adverse Person engages in one of a number of
self-dealing transactions specified in the Rights Agreement, proper provision
will be made so that each holder of a Right, other than Rights that are or
were beneficially owned (as defined in the Rights Agreement) by the Acquiring
Person or the Adverse Person, as the case may be, on the earliest of the
Distribution Date, the date the Acquiring Person acquires 20% or more of the
outstanding Common Stock or the date the Adverse Person becomes such (which
will thereafter be void), will thereafter have the right to receive upon
exercise thereof that number of shares of Common Stock having a market value
at the time of such transaction of two times the exercise price of the Right.
In addition, under certain circumstances the Board has the option of
exchanging all or part of the Rights (excluding void Rights) for Common Stock
in the manner described in the Rights Agreement. The Rights Agreement also
contains a so-called "flip-in" feature which provides that if any person or
group of affiliated or associated persons becomes an Adverse Person, then the
provisions of the preceding two sentences shall apply.

WARRANTS

On May 6, 1993, a total of 2,602,566 warrants, each to purchase a share of
Common Stock at an exercise price of $16.14 per share (the "WARRANTS"), were
issued to holders of the Old Junior Subordinated Debentures in addition to
the shares of Common Stock issued to such holders, all as provided by the
Prepackaged Plan. Upon issuance, each of the Warrants entitled the holder to
purchase one share of Common Stock at a purchase price of $16.14 per share,
subject to adjustment under certain events.

The Warrants are exercisable, subject to applicable securities laws, at
any time prior to May 6, 1998. Each share of Common Stock issued upon
exercise of a Warrant prior to the Distribution Date (as defined in the
Rights Agreement) and prior to the redemption or expiration of the Rights
will be accompanied by an attached Right issued under the terms and subject
to the conditions of the Rights Agreement as it may then be in effect. As of
December 31, 1993, 2,601,619 Warrants were outstanding.

<PAGE>

STOCKHOLDERS' EQUITY

Changes in stockholders' equity are summarized as follows (dollars in
millions):

MAY 7
THROUGH
DECEMBER 31,
1993
-------------
<S> <C>
COMMON STOCK:
Beginning Balance. . . . . . . . . . . . . . . . . $ 4
-----
Ending Balance . . . . . . . . . . . . . . . . . . 4
-----

CAPITAL RECEIVED IN EXCESS OF PAR VALUE:
Beginning Balance. . . . . . . . . . . . . . . . . -
-----
Ending Balance . . . . . . . . . . . . . . . . . . -
-----

DEFERRED CURRENCY TRANSLATION:
Beginning Balance. . . . . . . . . . . . . . . . . -
Change during the period . . . . . . . . . . . . . (9)
-----
Ending Balance . . . . . . . . . . . . . . . . . . (9)
-----

REINVESTED EARNINGS/(DEFICIT):
Beginning Balance. . . . . . . . . . . . . . . . . -
Net earnings/(loss). . . . . . . . . . . . . . . . (129)
-----
Ending Balance . . . . . . . . . . . . . . . . . . (129)
-----

Total stockholders' equity/(deficit) . . . . . . . (134)
-----
-----

</TABLE>

As of December 31, 1993, there were 27,876 shares of $0.10 par value
Common Stock held in treasury, which were acquired through the forfeiture of
restricted stock.

LITIGATION

One of the Corporation's subsidiaries, U.S. Gypsum, is among numerous
defendants in lawsuits arising out of the manufacture and sale of asbestos-
containing building materials. U.S. Gypsum sold certain asbestos-containing
products beginning in the 1930's; in most cases the products were discontinued
or asbestos was removed from the product formula by 1972, and no asbestos-
containing products were sold after 1977. Some of these lawsuits seek to
recover compensatory and in many cases punitive damages for costs associated
with maintenance or removal and replacement of products containing asbestos (the
"PROPERTY DAMAGE CASES"). Others of these suits (the "PERSONAL INJURY CASES")
seek to recover compensatory and in many cases punitive damages for personal
injury allegedly resulting from exposure to asbestos and asbestos-containing
products. It is anticipated that additional personal injury and property damage
cases containing similar allegations will be filed.

<PAGE>
$625 million of insurance remains potentially available. Because U.S. Gypsum's
insurance carriers initially responded to its claims for defense and
indemnification with various theories denying or limiting coverage and the
applicability of their policies, U.S. Gypsum filed a declaratory judgment action
against them in the Circuit Court of Cook County, Illinois on December 29,
1983. (U.S. GYPSUM CO. V. ADMIRAL INSURANCE CO., ET AL.) (the "COVERAGE
ACTION"). U.S. Gypsum alleges in the Coverage Action that the carriers are
obligated to provide indemnification for settlements and judgments and, in some
cases, defense costs incurred by U.S. Gypsum in property damage and personal
injury claims in which it is a defendant. The current defendants are ten
insurance carriers that provided comprehensive general liability insurance
coverage to U.S. Gypsum between the 1940's and 1984. As discussed below,
several carriers have settled all or a portion of the claims in the Coverage
Action.

U.S. Gypsum's aggregate expenditures for all asbestos-related matters,
including property damage, personal injury, insurance coverage litigation and
related expenses, exceeded aggregate insurance payments by $10.9 million in
1991, $25.8 million in 1992, and $8.2 million in 1993.

PROPERTY DAMAGE CASES

The Property Damage Cases have been brought against U.S. Gypsum by a
variety of plaintiffs, including school districts, state and local governments,
colleges and universities, hospitals and private property owners. U.S. Gypsum
is one of many defendants in four cases that have been certified as class
actions and others that request such certification. One class action suit is
brought on behalf of owners and operators of all elementary and secondary
schools in the United States that contain or contained friable asbestos-
containing material. (IN RE ASBESTOS SCHOOL LITIGATION, U.S.D.C., E.D. Pa.)
Approximately 1,350 school districts opted out of the class, some of which have
filed or may file separate lawsuits or are participants in a state court class
action involving approximately 333 school districts in Michigan. (BOARD OF
EDUCATION OF THE CITY OF DETROIT, ET AL. V. THE CELOTEX CORP., ET AL., Circuit
Court for Wayne County, Mich.) On April 10, 1992, a state court in Philadelphia
certified a class consisting of all owners of buildings leased to the federal
government. (PRINCE GEORGE CENTER, INC. V. U.S. GYPSUM CO., ET AL., Court of
Common Pleas, Philadelphia, Pa.) On September 4, 1992, a Federal district court
in South Carolina conditionally certified a class comprised of 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.). On December 23,
1992, a case was filed in state court in South Carolina purporting to be a
"voluntary" class action on behalf of owners of all buildings containing certain
types of asbestos-containing products manufactured by the nine named defendants,
including U.S. Gypsum, other than buildings owned by the federal or state
governments, single family residences, or buildings at issue in the four
above-described class actions (ANDERSON COUNTY HOSPITAL V. W.R. GRACE & CO., ET
AL., Court of Common Pleas, Hampton Co., S.C. (the "ANDERSON CASE"). On January
14, 1993, the plaintiff filed an amended complaint that added a number of claims
and defendants, including USG Corporation. The amended complaint alleges, among
other things, that the guarantees executed by U.S. Gypsum in connection with the
1988 Recapitalization, as well as subsequent distributions of cash from U.S.
Gypsum to the Corporation, rendered U.S. Gypsum insolvent and constitute a
fraudulent conveyance. The suit seeks to set aside the guarantees and recover
the value of the cash flow "diverted" from U.S. Gypsum to the Corporation in an
amount to be determined. This case has not been certified as a class action and
no other threshold issues, including whether the South Carolina Courts have
personal jurisdiction over the Corporation, have been decided. The damages
claimed against U.S. Gypsum in the class action cases are unspecified. U.S.
Gypsum has denied the substantive allegations of each of the Property Damage
Cases and intends

<PAGE>

to defend them vigorously except when advantageous settlements are possible.

As of December 31, 1993, 61 Property Damage Cases were pending against
U.S. Gypsum; however, the number of buildings involved is greater than the
number of cases because many of these cases, including the class actions
referred to above, involve multiple buildings. In addition, approximately 42
property damage claims have been threatened against U.S. Gypsum.

In total, U.S. Gypsum has settled property damage claims of
approximately 191 plaintiffs involved in approximately 75 cases. Twenty-five
cases have been tried to verdict, 16 of which were won by U.S. Gypsum and 6
lost; two other cases, one won at the trial level and one lost, were settled
during appeals. Another case that was lost at the trial court level has been
reversed on appeal and a new trial ordered. Appeals are pending in 5 of the
tried cases. In the cases lost, compensatory damage awards against U.S. Gypsum
have totaled $11.5 million. Punitive damages totalling $5.5 million were
entered against U.S. Gypsum in four trials. Two of the punitive damage awards,
totalling $1.45 million, were paid after appeals were exhausted; a third was
settled after the verdict was reversed on appeal. The remaining punitive damage
award is on appeal.

In 1991, 13 new Property Damage Cases were filed against U.S. Gypsum,
11 were dismissed before trial, 8 were settled, 2 were closed following trial or
appeal, and 100 were pending at year-end. U.S. Gypsum expended $22.2 million
for the defense and resolution of Property Damage Cases and received insurance
payments of $13.8 million in 1991. During 1992, 7 new Property Damage Cases
were filed against U.S. Gypsum, 10 were dismissed before trial, 18 were settled,
3 were closed following trial or appeal, and 76 were pending at year-end. U.S.
Gypsum expended $34.9 million for the defense and resolution of Property Damage
Cases and received insurance payments of $10.2 million in 1992. In 1993, 5 new
Property Damage Cases were filed against U.S. Gypsum, 7 were dismissed before
trial, 11 were settled, 1 was closed following trial or appeal, 2 were
consolidated into 1, and 61 were pending at year-end. U.S. Gypsum expended
$13.9 million for the defense and resolution of Property Damage Cases and
received insurance payments of $7.6 million in 1993.

In the Property Damage Cases litigated to date, a defendant's
liability for compensatory damages, if any, has been limited to damages
associated with the presence and quantity of asbestos-containing products
manufactured by that defendant which are identified in the buildings at issue,
although plaintiffs in some cases have argued that principles of joint and
several liability should apply. Because of the unique factors inherent in each
of the Property Damage Cases, including the lack of reliable information as to
product identification and the amount of damages claimed against U.S. Gypsum in
many cases, including the class actions described above, management is unable to
make a reasonable estimate of the cost of disposing of pending Property Damage
Cases.

PERSONAL INJURY CASES

U.S. Gypsum was among numerous defendants in asbestos personal injury
suits and administrative claims involving approximately 59,000 claimants pending
as of December 31, 1993. All asbestos bodily injury claims pending in the
federal courts, including approximately one-third of the Personal Injury Cases
pending against U.S. Gypsum, have been consolidated in the United States
District Court for the Eastern District of Pennsylvania.

U.S. Gypsum is a member, together with 19 other former producers of
asbestos-containing products, of the

<PAGE>

Center for Claims Resolution (the "CENTER"). The Center has assumed the
handling, including the defense and settlement, of all Personal Injury Cases
pending against U.S. Gypsum and the other members of the Center. Each member of
the Center is assessed a portion of the liability and defense costs of the
Center for the Personal Injury Cases handled by the Center, according to
predetermined allocation formulas. Five of U.S. Gypsum's insurance carriers
that in 1985 signed an Agreement Concerning Asbestos-Related Claims (the
"WELLINGTON AGREEMENT") are supporting insurers (the "SUPPORTING INSURERS") of
the Center. The Supporting Insurers are obligated to provide coverage for the
defense and indemnity costs of the Center's members pursuant to the coverage
provisions in the Wellington Agreement. Claims for punitive damages are
defended but not paid by the Center; if punitive damages are recovered,
insurance coverage may be available under the Wellington Agreement depending on
the terms of particular policies and applicable state law. Punitive damages
have not been awarded against U.S. Gypsum in any of the Personal Injury Cases.
Virtually all of U.S. Gypsum's personal injury liability and defense costs are
paid by those of its insurance carriers that are Supporting Insurers. The
Supporting Insurers provided approximately $350 million of the total coverage
referred to above, of which approximately $262 million remains unexhausted.

On January 15, 1993, U.S. Gypsum and the other members of the Center
were named as defendants in a class action filed in the U.S. District Court for
the Eastern District of Pennsylvania (GEORGINE ET AL. V. AMCHEM PRODUCTS INC.,
ET AL., Case No. 93-CV-0215) (hereinafter "GEORGINE," formerly known as
"CARLOUGH"). The complaint generally defines the class of plaintiffs as all
persons who have been occupationally exposed to asbestos-containing products
manufactured by the defendants and who had not filed an asbestos personal injury
suit as of the date of the filing of the class action. Simultaneously with the
filing of the class action, the parties filed a settlement agreement in which
the named plaintiffs, proposed class counsel, and the defendants agreed to
settle and compromise the claims of the proposed class. The settlement, if
approved by the court, will implement for all future Personal Injury Cases,
except as noted below, an administrative compensation system to replace judicial
claims against the defendants, and will provide fair and adequate compensation
to future claimants who can demonstrate exposure to asbestos-containing products
manufactured by the defendants and the presence of an asbestos-related disease.
Class members will be given the opportunity to "opt out," or elect to be
excluded from the settlement, although the defendants reserve the right to
withdraw from the settlement if the number of opt outs is, in their sole
judgment, excessive. In addition, in each year a limited number of claimants
will have certain rights to prosecute their claims for compensatory (but not
punitive) damages in court in the event they reject the compensation offered by
the administrative processing of their claim.

The Center members, including U.S. Gypsum, have instituted proceedings
against those of their insurance carriers that had not consented to support the
settlement, seeking a declaratory judgment that the settlement is reasonable
and, therefore, that the carriers are obligated to fund their portion of it.
Consummation of the settlement is contingent upon, among other things, court
approval of the settlement and a favorable ruling in the declaratory judgment
proceedings against the non-consenting insurers. It is anticipated that appeals
will follow the district court's ruling on the fairness and reasonableness of
the settlement.

Each of the defendants has committed to fund a defined portion of the
settlement, up to a stated maximum amount, over the initial ten year period of
the agreement (which is automatically extended unless terminated by the
defendants). Taking into account the provisions of the settlement agreement
concerning the maximum number of claims that must be processed in each year and
the total amount to be made available to the claimants, the Center estimates
that U.S. Gypsum will be obligated to fund a maximum of approximately $125
million of the class action settlement, exclusive of expenses, with a maximum
payment of less than $18 million in any single year; of the total

<PAGE>

amount of U.S. Gypsum's obligation, all but approximately $7 million is expected
to be paid by U.S. Gypsum's insurance carriers.

During 1991, approximately 13,100 Personal Injury Cases were filed
against U.S. Gypsum and approximately 6,300 were settled or dismissed. U.S.
Gypsum incurred expenses of $15.1 million in 1991 with respect to Personal
Injury Cases of which $15.0 million was paid by insurance. During 1992,
approximately 20,100 Personal Injury Cases were filed against U.S. Gypsum and
approximately 10,600 were settled or dismissed. U.S. Gypsum incurred expenses
of $21.6 million in 1992 with respect to Personal Injury Cases of which $21.5
million was paid by insurance. During 1993, approximately 26,900 Personal
Injury Cases were filed against U.S. Gypsum and approximately 22,900 were
settled or dismissed. U.S. Gypsum incurred expenses of $34.9 million in 1993
with respect to Personal Injury Cases of which $34.0 million was paid by
insurance. As of December 31, 1993, 1992, and 1991, approximately 59,000,
54,000, and 43,000 Personal Injury Cases were outstanding against U.S. Gypsum,
respectively.

U.S. Gypsum's average settlement cost for Personal Injury Cases over
the past three years has been approximately $1,600 per claim, exclusive of
defense costs. Management anticipates that its average settlement cost is
likely to increase due to such factors as the possible insolvency of co-
defendants, although this increase may be offset to some extent by other
factors, including the possibility for block settlements of large numbers of
cases and the apparent increase in the percentage of asbestos personal injury
cases that appear to have been brought by individuals with little or no physical
impairment. Through the Center, U.S. Gypsum has reached settlements on
approximately 26,700 pending Personal Injury Cases for an amount estimated at
approximately $32 million. These settlements will be consummated and the cases
closed over a three year period. In management's opinion, based primarily upon
U.S. Gypsum's experience in the Personal Injury Cases disposed of to date and
taking into consideration a number of uncertainties, it is probable that all
asbestos-related Personal Injury Cases pending against U.S. Gypsum as of
December 31, 1993, can be disposed of for a total amount, including both
indemnity costs and legal fees and expenses, estimated to be between $100
million and $120 million (of which all but $2 million or $5 million,
respectively, is expected to be paid by insurance). The estimated cost of
resolving pending claims takes into account, among other factors, (i) an
increase in the number of pending claims; (ii) the settlements of certain large
blocks of claims for higher per-case averages than have historically been paid;
(iii) the committed but unconsummated settlements described above; and (iv) a
small increase in U.S. Gypsum's historical settlement average.

Assuming that the Georgine class action settlement referred to above
is approved substantially in its current form, management estimates, based on
assumptions supplied by the Center, U.S. Gypsum's maximum total exposure in
Personal Injury Cases during the next ten years (the initial term of the
agreement), including liability for pending claims and claims resolved as part
of the class action settlement, as well as defense costs and other expenses, at
approximately $262 million, of which approximately $250 million is expected to
be paid by insurance. U.S. Gypsum's additional exposure for claims filed by
persons who have opted out of Georgine would depend on the number of such claims
that are filed, which cannot presently be determined.

COVERAGE ACTION

<PAGE>

U.S. Gypsum has voluntarily dismissed the Supporting Insurers referred to above
from the personal injury portion of the Coverage Action because they are
committed to providing personal injury coverage in accordance with the
Wellington Agreement. U.S. Gypsum's claims against the remaining carriers for
coverage for the Personal Injury Cases have been stayed since 1984.

On January 7, 1991, the trial court in the Coverage Action ruled on the
applicability of U.S. Gypsum's insurance policies to settlements and one adverse
judgment in eight Property Damage Cases. The court ruled that the eight cases
were generally covered, and imposed coverage obligations on particular policy
years based upon the dates when the presence of asbestos-containing material was
"first discovered" by the plaintiff in each case. The court awarded
reimbursement of approximately $6.2 million spent by U.S. Gypsum to resolve the
eight cases. U.S. Gypsum has appealed the court's ruling with respect to the
policy years available to cover particular claims, and the carriers have
appealed most other aspects of the court's ruling. The appeal process is likely
to take up to a year or more from the date of this report.

U.S. Gypsum's experience in the Property Damage Cases suggests that "first
discovery" dates in the eight cases referred to above (1978 through 1985) are
likely to be typical of most pending cases. U.S. Gypsum's total insurance
coverage for the years 1978 through 1984 is approximately $350 million (after
subtracting insolvencies and discounts given to settling carriers). However,
some pending cases, as well as some cases filed in the future, may be found to
have first discovery dates later than August 1, 1984, after which U.S.
Gypsum's insurance policies did not provide coverage for asbestos-related
claims. In addition, as described below, the first layer excess carrier for the
years 1980 through 1984 is insolvent and U.S. Gypsum may be required to pay
amounts otherwise covered by those and other insolvent policies. Accordingly,
if the court's ruling is affirmed, U.S. Gypsum will likely be required to bear a
portion of the cost of the property damage litigation.

Eight carriers, including two of the Supporting Insurers, have settled U.S.
Gypsum's claims for both property damage and personal injury coverage and have
been dismissed from the Coverage Action entirely. Four of these carriers have
agreed to pay all or a substantial portion of their policy limits to U.S. Gypsum
beginning in 1991 and continuing over the next four years. Three other excess
carriers, including the two settling Supporting Insurers, have agreed to provide
coverage for the Property Damage Cases and the Personal Injury Cases subject to
certain limitations and conditions, when and if underlying primary and excess
coverage is exhausted. It cannot presently be determined when such coverage
might be reached. Taking into account the above settlements, including
participation of certain of the settling carriers in the Wellington Agreement,
and consumption through December 31, 1993, carriers providing a total of
approximately $90 million of unexhausted insurance have agreed, subject to the
terms of the various settlement agreements, to cover both Personal Injury Cases
and Property Damage Cases. Carriers providing an additional $250 million of
coverage that was unexhausted as of December 31, 1993 have agreed to cover
Personal Injury Cases under the Wellington Agreement, but continue to contest
coverage for Property Damage Cases and remain defendants in the Coverage
Action. U.S. Gypsum will continue to seek negotiated resolutions with its
carriers in order to minimize the expense and delays of litigation.

<PAGE>

1984; and American Mutual Insurance Company, declared insolvent in 1989,
provided the primary layer of insurance ($500,000 per year) from February 1,
1963 to April 15, 1971. It is possible that U.S. Gypsum will be required to pay
a presently indeterminable portion of the costs that would otherwise have been
covered by these policies. In addition, portions of various policies issued by
Lloyd's and other London market companies between 1966 and 1979 have also become
insolvent; under the Wellington Agreement, U.S. Gypsum must pay these amounts,
which total approximately $12 million.

It is not possible to predict the number of additional lawsuits alleging
asbestos-related claims that may be filed against U.S. Gypsum. The number of
Personal Injury Cases pending against U.S. Gypsum has increased in each of the
last several years. In addition, many Property Damage Cases are still at an
early stage and the potential liability therefrom is consequently uncertain. In
view of the limited insurance funding currently available for the Property
Damage Cases resulting from the continued resistance by a number of U.S.
Gypsum's insurers to providing coverage, the effect of the asbestos litigation
on the Corporation will depend upon a variety of factors, including the damages
sought in the Property Damage Cases that reach trial prior to the completion of
the Coverage Action, U.S. Gypsum's ability to successfully defend or settle such
cases, and the resolution of the Coverage Action. As a result, management is
unable to determine whether an adverse outcome in the asbestos litigation will
have a material adverse effect on the results of operations or the consolidated
financial position of the Corporation.

ACCOUNTING CHANGE

Effective January 1, 1994, the Corporation will adopt the requirements of
Financial Accounting Standards Board Interpretation No. 39. In accordance with
Interpretation No. 39, U.S. Gypsum will record an accrual for its liabilities
for asbestos-related matters which are deemed probable and can be reasonably
estimated, and will separately record an asset equal to the amount of such
liabilities that is expected to be paid by uncontested insurance. Due to
management's inability to reasonably estimate U.S. Gypsum's liability for
Property Damage Cases and (until the implementation of Georgine is deemed
probable) future Personal Injury Cases, it is presently anticipated that the
liabilities and assets to be recorded in 1994 will relate only to pending
Personal Injury Cases. This implementation of Interpretation No. 39 is not
expected to have a material impact on reported earnings or net assets.

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 substantially all 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 Superfund sites but is continuing to
review its accruals as additional information becomes available. Such reserves
take into account all known or estimable 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 USG-owned property are also
covered by reserves established in accordance with the foregoing. The
Corporation believes that neither these matters nor any other known governmental
proceeding regarding environmental matters will have a material adverse effect
upon its earnings or consolidated financial position.

<PAGE>

SUBSEQUENT EVENT

On January 7, 1994, the Corporation filed a Registration Statement
(Registration No. 33-51845), as amended on February 16, 1994, pertaining to its
planned public offering (the "OFFERING") of 6,000,000 new shares of Common Stock
to be sold by the Corporation and 4,000,000 shares of Common Stock to be sold by
Water Street Corporate Recovery Fund I, L.P. The Offering is part of a
refinancing strategy which also includes (i) the placement (the "NOTE
PLACEMENT") of $150 million principal amount of Senior 2001 Notes with certain
institutional investors and (ii) certain amendments to the Corporation's Credit
Agreement (the "CREDIT AGREEMENT AMENDMENTS" and, together with the Offering and
Note Placement, the "TRANSACTIONS"). The Credit Agreement Amendments will,
among other things, increase the size of the Corporation's revolving credit
facility by $70 million and amend existing mandatory Bank Term Loan prepayment
provisions to allow the Corporation, upon the achievement of certain financial
tests, to retain additional free cash flow for capital expenditures and the
purchase of its public debt. Certain Credit Agreement Amendments are contingent
on the consummation of the Offering.

The Corporation expects to use a portion of the net proceeds from the
Offering and the Note Placement, together with approximately $158 million of
existing cash generated from operations to pay $140 million of Bank Term Loans
and to redeem or purchase approximately $260 million aggregate principal amount
of certain other senior debt issues. The remainder of the net proceeds,
approximately $92 million, will be available for general corporate purposes,
including capital expenditures for cost reduction, capacity improvement and
future growth opportunities. The following is an unaudited Pro Forma Condensed
Consolidated Balance Sheet as of December 31, 1993 illustrating the effect of
the Transactions as if they had occurred on that date:

USG CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
As of December 31, 1993
(unaudited)
(Dollars in millions)

Historical Pro Forma
---------- ---------
<S> <C> <C>
Cash and cash equivalents . . . . . . . . . . . . $ 211 $ 145
Other current assets. . . . . . . . . . . . . . . 409 409
Other assets. . . . . . . . . . . . . . . . . . . 1,543 1,543
------ ------
Total assets . . . . . . . . . . . . . . . . 2,163 2,097
------ ------
------ ------

Long-term debt maturing within one year . . . . . $ 165 $ 7
Other current liabilities . . . . . . . . . . . . 334 334
Long-term debt. . . . . . . . . . . . . . . . . . 1,309 1,218
Other liabilities . . . . . . . . . . . . . . . . 489 489
Total stockholders' equity. . . . . . . . . . . . (134) 49
------ ------
Total liabilities and stockholders' equity . 2,163 2,097
------ ------
------ ------

</TABLE>

47
<PAGE>

GEOGRAPHIC AND INDUSTRY SEGMENTS

Transactions between geographic areas are accounted for on an
"arm's-length" basis. No single customer accounted for 4% or
more of consolidated net sales. Export sales to foreign unaffiliated
customers represent less than 10% of consolidated net sales.

Intrasegment and intersegment eliminations largely reflect intercompany
sales from U.S. Gypsum to L&W Supply. Segment operating profit/(loss)
includes all costs and expenses directly related to the segment involved and
an allocation of expenses which benefit more than one segment. Operating
profit/(loss) in the period of May 7 through December 31, 1993 reflects the
non-cash amortization of Excess Reorganization Value which had the impact of
reducing the operating profit of domestic Gypsum Products by $51 million,
domestic Interior Systems by $60 million and Building Products Distribution by
$2 million.

To assist the reader in evaluating the profitability of each geographic
and industry segment, EBITDA is shown separately in the following tables.
EBITDA represents earnings before interest, taxes, depreciation, depletion and
amortization. For the period of May 7 through December 31, 1993, the
Corporation also added back non-cash postretirement charges and an
extraordinary loss. The Corporation believes EBITDA is helpful in
understanding cash flow generated from operations that is available for taxes,
debt service and capital expenditures. In addition, EBITDA facilitates the
monitoring of covenants related to certain long-term debt and other agreements
entered into in conjunction with the Restructuring. EBITDA should not be
considered by investors as an alternative to net earnings as an indicator of
the Corporation's operating performance or to cash flows as a measure of its
overall liquidity.

OPERATING DEPRECIATION
MAY 7 THROUGH DECEMBER 31, 1993 NET PROFIT/ DEPLETION AND CAPITAL IDENTIFIABLE
GEOGRAPHIC SEGMENTS SALES (LOSS) EBITDA AMORTIZATION EXPENDITURES ASSETS
- ------------------- ----- -------- ------ ------------ ------------ -----------
(Dollars in millions)

<S> <C> <C> <C> <C> <C> <C>
United States:
Gypsum Products . . . . . . . . . . $ 683 $ 47 $ 108 $ 61 $ 17 $ 904
Interior Systems. . . . . . . . . . 255 (22) 30 52 2 510
Building Products Distribution. . . 372 4 7 3 1 121
Intrasegment eliminations . . . . . (163) - - - - -
Corporate . . . . . . . . . . . . . - (26) (18) 10 - 254
------ ------ ------ ------ ------ ------
Total . . . . . . . . . . . . . . . 1,147 3 127 126 20 1,789

Canada . . . . . . . . . . . . . . . . . 95 (6) 10 17 6 178
Other Foreign . . . . . . . . . . . . . 143 4 18 14 3 197
Transfers between geographic areas . . . (60) - - - - (1)
------ ------ ------ ------ ------ ------
Total. . . . . . . . . . . . . . . . . . 1,325 1 155 157 29 2,163
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------

INDUSTRY SEGMENTS
- -----------------
Gypsum Products. . . . . . . . . . . . . $ 806 $ 53 $ 129 $ 76 $ 23 $ 1,093
Interior Systems . . . . . . . . . . . . 373 (30) 37 68 5 695
Building Products Distribution . . . . . 372 4 7 3 1 121
Intersegment eliminations. . . . . . . . (226) - - - - -
Corporate. . . . . . . . . . . . . . . . - (26) (18) 10 - 254
------ ------ ------ ------ ------ ------
Total. . . . . . . . . . . . . . . . . . 1,325 1 155 157 29 2,163
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------

</TABLE>

<PAGE>

<TABLE>

MAY 7
THROUGH
DECEMBER 31,
TRANSFERS BETWEEN GEOGRAPHIC AREAS 1993
- ---------------------------------- -------------
(Dollars in millions)

<S> <C>
United States. . . . . . . . . . . . . . . . $ 25
Canada . . . . . . . . . . . . . . . . . . . 16
Other Foreign. . . . . . . . . . . . . . . . 19
-----
Total. . . . . . . . . . . . . . . . . . . . 60
-----
-----
</TABLE>

SUBSIDIARY DEBT GUARANTEES

The Corporation issued $340 million aggregate principal amount of Senior
2002 Notes in May 1993 and an additional $138 million aggregate principal amount
of similar notes in August 1993. Each of U.S. Gypsum, USG Industries, Inc., USG
Interiors, USG Foreign Investments, Ltd., L&W Supply, Westbank Planting Company,
USG Interiors International, Inc., American Metals Corporation and La Mirada
Products Co., Inc. (together, the "COMBINED GUARANTORS") guaranteed, in the
manner described below, both the obligations of the Corporation under the Credit
Agreement and the Senior 2002 Notes. The Combined Guarantors are jointly and
severally liable under the Subsidiary Guarantees. Holders of the Bank Debt have
the right to (i) determine whether, when and to what extent the guarantees will
be enforced (provided that each guarantee payment will be applied to the Bank
Term Loan, Revolving Credit Facility, Capitalized Interest Notes and Senior 2002
Notes pro rata based on the respective amounts owed thereon) and (ii) amend or
eliminate the guarantees. The guarantees will terminate when the Bank Term
Loan, the Revolving Credit Facility and the Capitalized Interest Notes are
retired regardless of whether any Senior 2002 Notes remain unpaid. The
liability of each of the Combined Guarantors on its guarantee is limited to the
greater of (i) 95% of the lowest amount, calculated as of July 13, 1988,
sufficient to render the guarantor insolvent, leave the guarantor with
unreasonably small capital or leave the guarantor unable to pay its debts as
they become due (each as defined under applicable law) and (ii) the same amount,
calculated as of the date any demand for payment under such guarantee is made,
in each case plus collection costs. The guarantees are senior obligations of
the applicable guarantor and rank PARI PASSU with all unsubordinated obligations
of the guarantor.

There are 43 Non-Guarantors (the "COMBINED NON-GUARANTORS"), substantially
all of which are subsidiaries of Guarantors. The Combined Non-Guarantors
primarily include CGC, Gypsum Transportation Limited, USG Canadian Mining Ltd.
and the Corporation's Mexican, European and Pacific subsidiaries. The long-term
debt of the Combined Non-Guarantors of $24 million as of December 31, 1993 has
restrictive covenants that restrict, among other things, the payment of
dividends.

The following condensed consolidating information presents:

(i) Condensed financial statements as of December 31, 1993 and for the period
of May 7 through December 31, 1993 of: (a) the Corporation on a parent
company only basis (the "PARENT COMPANY," which was the only entity of
the Corporation included in the bankruptcy proceeding); (b) the Combined
Guarantors; (c) the Combined Non-Guarantors; and (d) the Corporation on a
consolidated basis. Due to the Restructuring and implementation of fresh
start accounting, the financial statements for the restructured company
(periods after May 6, 1993) are not comparable to those of the
predecessor

<PAGE>

company. Except for the following condensed financial statements,
separate financial information with respect to the Combined
Guarantors is omitted as such separate financial information is not
deemed material to investors.

(ii) The Parent Company and Combined Guarantors shown with their
investments in their subsidiaries accounted for on the equity
method.

(iii) Elimination entries necessary to consolidate the Parent Company and
its subsidiaries.

USG CORPORATION
(RESTRUCTURED COMPANY)
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
MAY 7 THROUGH DECEMBER 31, 1993
(DOLLARS IN MILLIONS)

COMBINED
PARENT COMBINED NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ---------------- ----------- --------------- ------------
<S> <C> <C> <C> <C> <C>
NET SALES. . . . . . . . . . . . . . . . $ - $ 1,153 $ 238 $ (66) $ 1,325
------------ ---------------- ----------- -------------- ------------

GROSS PROFIT . . . . . . . . . . . . . . - 216 47 - 263
------------ ---------------- ----------- -------------- ------------

OPERATING PROFIT/(LOSS). . . . . . . . . (27) 30 (2) - 1

Equity in net loss of the Subsidiaries . 291 11 - (302) -
Interest expense, net. . . . . . . . . . 84 2 2 - 88
Corporate service charge . . . . . . . . (106) 106 - - -
Other expense/(income) . . . . . . . . . (197) 188 1 - (8)
------------ ---------------- ----------- -------------- ------------

LOSS BEFORE TAXES ON INCOME AND
EXTRAORDINARY LOSS. . . . . . . . . . . (99) (277) (5) 302 (79)

Taxes on income. . . . . . . . . . . . . 9 14 6 - 29
------------ ---------------- ----------- -------------- ------------

LOSS BEFORE EXTRAORDINARY LOSS . . . . . (108) (291) (11) 302 (108)

Extraordinary loss, net of taxes . . . . (21) - - - (21)
------------ ---------------- ----------- -------------- ------------

NET LOSS . . . . . . . . . . . . . . . . (129) (291) (11) 302 (129)
------------ ---------------- ----------- -------------- ------------
------------ ---------------- ----------- -------------- ------------

</TABLE>

<PAGE>

USG CORPORATION
(RESTRUCTURED COMPANY)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1993
(DOLLARS IN MILLIONS)

COMBINED
PARENT COMBINED NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------------- --------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . $ 187 $ (8) $ 32 $ - $ 211
Receivables, net. . . . . . . . . . 8 240 44 (28) 264
Inventories . . . . . . . . . . . . - 114 34 (3) 145
--------------- --------------- -------------- --------------- -------------
Total current assets . . . . . . . 195 346 110 (31) 620
PROPERTY, PLANT AND EQUIPMENT, NET . 21 620 113 - 754
INVESTMENT IN SUBSIDIARIES . . . . . 1,511 277 - (1,788) -
EXCESS REORGANIZATION VALUE, NET . . - 582 153 - 735
OTHER ASSETS . . . . . . . . . . . . (35) 91 3 (5) 54
--------------- --------------- -------------- --------------- -------------
Total assets . . . . . . . . . . . 1,692 1,916 379 (1,824) 2,163
--------------- --------------- -------------- --------------- -------------
--------------- --------------- -------------- --------------- -------------

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
expenses. . . . . . . . . . . . . $ 100 $ 207 $ 52 $ (27) $ 332
Notes payable and long-term debt
maturing within one year . . . . . 158 3 6 - 167
--------------- --------------- -------------- --------------- -------------
Total current liabilities. . . . . 258 210 58 (27) 499
LONG-TERM DEBT . . . . . . . . . . . 1,249 36 24 - 1,309
DEFERRED INCOME TAXES. . . . . . . . 14 151 15 - 180
OTHER LIABILITIES. . . . . . . . . . 296 8 5 - 309
STOCKHOLDERS' EQUITY/(DEFICIT):
Common stock. . . . . . . . . . . . 4 1 6 (7) 4
Capital received in excess of
par value . . . . . . . . . . . . - 1,472 310 (1,782) -
Deferred currency translation . . . - - (9) - (9)
Reinvested earnings/(deficit) . . . (129) 38 (30) (8) (129)
--------------- --------------- -------------- --------------- -------------
Total stockholders' equity/
(deficit). . . . . . . . . . . . (125) 1,511 277 (1,797) (134)
--------------- --------------- -------------- --------------- -------------
Total liabilities and stockholders'
equity . . . . . . . . . . . . . 1,692 1,916 379 (1,824) 2,163
--------------- --------------- -------------- --------------- -------------
--------------- --------------- -------------- --------------- -------------

</TABLE>

<PAGE>

USG CORPORATION
(RESTRUCTURED COMPANY)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
MAY 7 THROUGH DECEMBER 31, 1993
(DOLLARS IN MILLIONS)

COMBINED
PARENT COMBINED NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- -------------- ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C>
NET CASH FLOWS (TO)/FROM OPERATING ACTIVITIES. . . . $ (27) $ 185 $ 25 $ - $ 183
----------- -------------- ------------ -------------- ---------------

Capital expenditures. . . . . . . . . . . . . . . . - (20) (9) - (29)
Net proceeds from asset dispositions. . . . . . . . 16 13 - - 29
----------- -------------- ------------ -------------- ---------------
NET CASH FLOWS (TO)/FROM INVESTING ACTIVITIES. . . . 16 (7) (9) - -
----------- -------------- ------------ -------------- ---------------

Issuance of debt. . . . . . . . . . . . . . . . . . - - 36 - 36
Repayment of debt . . . . . . . . . . . . . . . . . (8) (9) (40) - (57)
Cash dividends (paid)/received. . . . . . . . . . . - 12 (12) - -
Net cash transfers (to)/from Corporate. . . . . . . 182 (182) - - -
----------- -------------- ------------ -------------- ---------------
NET CASH FLOWS (TO)/FROM FINANCING ACTIVITIES. . . . 174 (179) (16) - (21)
----------- -------------- ------------ -------------- ---------------

NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS. . . . . . . . . . . . . . . . . . 163 (1) - - 162
----------- -------------- ------------ -------------- ---------------
Cash and cash equivalents at beginning of period . . 24 (7) 32 - 49
----------- -------------- ------------ -------------- ---------------
Cash and cash equivalents at end of period . . . . . 187 (8) 32 - 211
----------- -------------- ------------ -------------- ---------------
----------- -------------- ------------ -------------- ---------------

</TABLE>

USG CORPORATION
MANAGEMENT REPORT

Management is responsible for the preparation and integrity of the financial
statements and related notes included herein. These statements have been
prepared in accordance with generally accepted accounting principles and, of
necessity, include some amounts that are based on management's best estimates
and judgments.

The Corporation's accounting systems include internal controls designed to
provide reasonable assurance of the reliability of its financial records and the
proper safeguarding and use of its assets. Such controls are based on
established policies and procedures, are implemented by trained personnel, and
are monitored through an internal audit program. The Corporation's policies and
procedures prescribe that the Corporation and its subsidiaries are to maintain
ethical standards and that its business practices are to be consistent with
those standards.

The Audit Committee of the Board, consisting solely of outside Directors of
the Corporation, maintains an ongoing appraisal, on behalf of the stockholders,
of the effectiveness of the independent auditors and management with respect to
the preparation of financial statements, the adequacy of internal controls and
the Corporation's accounting policies.

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board
of Directors of USG Corporation:

We have audited the accompanying consolidated balance sheet of USG
Corporation (Restructured Company), a Delaware corporation, and subsidiaries as
of December 31, 1993 and the related consolidated statements of earnings and
cash flows for the period of May 7 through December 31, 1993. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

As discussed in Notes to Financial Statements - "Financial Restructuring"
note, on May 6, 1993, the Corporation completed a comprehensive financial
restructuring through the implementation of a prepackaged plan of reorganization
under Chapter 11 of the United States Bankruptcy Code and applied fresh start
accounting. As such, results of operations through May 6, 1993 (Predecessor
Company) are not comparable with results of operations subsequent to that date.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of USG Corporation and
subsidiaries as of December 31, 1993, and the results of their operations and
their cash flows for the period of May 7 through December 31, 1993, in
conformity with generally accepted accounting principles.

As discussed in Notes to Financial Statements - "Litigation" note, in view of
the limited insurance funding currently available for property damage cases
resulting from the continued resistance by a number of U.S. Gypsum's insurers to
providing coverage, the effect of the asbestos litigation on the Corporation
will depend upon a variety of factors, including the damages sought in property
damage cases that reach trial prior to the completion of the coverage action,
U.S. Gypsum's ability to successfully defend or settle such cases, and the
resolution of the coverage action. As a result, management is unable to
determine whether an adverse outcome in the asbestos litigation will have a
material adverse effect on the consolidated results of operations or the
consolidated financial position of the Corporation.

ARTHUR ANDERSEN & CO.
Chicago, Illinois
January 31, 1994

<PAGE>

USG CORPORATION
(RESTRUCTURED COMPANY)
SCHEDULE V
PROPERTY, PLANT AND EQUIPMENT
(DOLLARS IN MILLIONS)

BEGINNING ENDING
CLASSIFICATION BALANCE BALANCE
- -------------- ------------- ------------
<S> <C> <C>
MAY 7 THROUGH DECEMBER 31, 1993
- -------------------------------

Land and mineral deposits . . . . . $ 61 $ 61
Buildings and realty improvements . 228 233
Machinery and equipment . . . . . . 478 496
------------- ------------
Total . . . . . . . . . . . . . . . 767 790
------------- ------------
------------- ------------
</TABLE>

In accordance with fresh start accounting, the Corporation adjusted its
property, plant and equipment accounts as of May 6, 1993 to fair market value.

Detailed information regarding additions and deductions is omitted as neither
total additions nor total deductions during the period shown above exceeded 10%
of the balance at the end of the period. Total additions were $29 million,
total deductions were $8 million and other adjustments increased property, plant
and equipment by $2 million in the period of May 7 through December 31, 1993.

Total deductions include the effect of foreign currency translation which
increased total deductions by $5 million in the period of May 7 through December
31, 1993.

Upon retirement or other disposition of property, the applicable cost and
accumulated depreciation and depletion are removed from the accounts. Any gains
and losses are included in earnings.

<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
SCHEDULE VI
ACCUMULATED DEPRECIATION AND DEPLETION OF
PROPERTY, PLANT AND EQUIPMENT
(DOLLARS IN MILLIONS)

BEGINNING ENDING
Classification BALANCE BALANCE
- -------------- --------- --------

MAY 7 THROUGH DECEMBER 31, 1993
- -------------------------------
<S> <C> <C>
Land and mineral deposits . . . . . . . . . . . . $ - $ -
Buildings and realty improvements . . . . . . . . - 8
Machinery and equipment . . . . . . . . . . . . . - 28
----- -----
Total. . . . . . . .. . . . . . . . . . . . . . . - 36
----- -----
----- -----
</TABLE>

In accordance with fresh start accounting, the Corporation adjusted its
property, plant and equipment accounts as of May 6, 1993 to fair market value.
Consequently, there were no reserves for depreciation and depletion as of May 7,
1993.

Detailed information regarding additions and deductions is omitted as neither
total additions nor total deductions of property, plant and equipment (see
Schedule V) during the period shown above exceeded 10% of the balance of
property, plant and equipment at the end of the period. Total provisions for
depreciation and depletion were $34 million, total deductions were $1 million
and other adjustments increased reserves by $3 million in the period of May 7
through December 31, 1993.

Upon retirement or other disposition of property, the applicable cost and
accumulated depreciation and depletion are removed from the accounts. Any gains
and losses are included in earnings.

<PAGE>

USG CORPORATION
(Restructured Company)
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in millions)

PROVISION RECEIVABLES
CHARGED TO WRITTEN OFF
BEGINNING COSTS AND AND DISCOUNTS ENDING
ACCOUNT BALANCE EXPENSES ALLOWED BALANCE
- ------- --------- ---------- ------------- -------

MAY 7 THROUGH DECEMBER 31, 1993
- --------------------------------
<S> <C> <C> <C> <C>
Doubtful accounts . . . . . . . . $ 11 $ 4 $ (4) $ 11
Cash discounts. . . . . . . . . . 2 15 (15) 2

</TABLE>

<PAGE>

USG CORPORATION
(Restructured Company)
SCHEDULE IX
SHORT-TERM BORROWINGS
(Dollars in millions)

MAXIMUM AVERAGE WEIGHTED
AMOUNT AMOUNT AVERAGE
WEIGHTED OUTSTANDING OUTSTANDING INTEREST
CATEGORY OF AGGREGATE ENDING AVERAGE DURING THE DURING THE rATE DURING
SHORT-TERM BORROWINGS BALANCE INTEREST RATE PERIOD PERIOD (a) THE PERIOD (b)
- --------------------- ------- ------------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
MAY 7 THROUGH DECEMBER 31, 1993

Notes payable (c) . . . . . . . . $ 2 6.6% $ 9 $ 7 6.6%
Revolving Credit Facility (d) . . - - - - -

<FN>
(a) The average of month-end principal balances.

(b) Computed by dividing average monthly interest expense for the period by the
average amount of short-term borrowings outstanding.

(c) Represents borrowings from several foreign banks by USG International and CGC
which are generally not subject to the provisions of the Credit Agreement.

(d) The Credit Agreement includes a $175 million Revolving Credit Facility, of
which $110 million was established as a letter of credit subfacility.

</TABLE>

<PAGE>
USG CORPORATION
(Restructured Company)
SCHEDULE X
SUPPLEMENTAL STATEMENT OF EARNINGS INFORMATION
(Dollars in millions)

The following amounts were charged to costs and expenses:

May 7
through
December 31,
1993
------------
<S> <C>
Maintenance and repairs. . . . . . . . . . . . . . . . . . $ 84
--------
--------
Depreciation, depletion and amortization . . . . . . . . . $ 44
Amortization of excess reorganization value. . . . . . . . 113
-------
Total depreciation, depletion and amortization. . . . . 157
--------
--------

</TABLE>
Maintenance and repairs are recorded as costs or expenses when incurred.

Taxes (excluding payroll and income taxes), rents, royalties and advertising
costs are not shown above, as individually they do not exceed one percent of net
sales in the period shown.

<PAGE>

USG CORPORATION
(Restructured Company)
SUPPLEMENTAL NOTE ON FINANCIAL INFORMATION FOR
UNITED STATES GYPSUM COMPANY
(A SUBSIDIARY OF USG CORPORATION)

USG Corporation, a holding company, owns several operating subsidiaries,
including U.S. Gypsum. On January 1, 1985, all of the issued and outstanding
shares of stock of U.S. Gypsum were converted into shares of USG Corporation and
the holding company became a joint and several obligor for certain debentures
originally issued by U.S. Gypsum. As of December 31, 1993, debentures totaling
$36 million were recorded on the holding company's books of account. Financial
results for U.S. Gypsum are presented below in accordance with disclosure
requirements of the SEC (dollars in millions):

SUMMARY STATEMENT OF EARNINGS

May 7
through
December 31,
1993
------------
<S> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . $ 673
Cost and expenses. . . . . . . . . . . . . . . . . . . . . . 584
Amortization of Excess Reorganization Value. . . . . . . . . 41
---------
Operating profit . . . . . . . . . . . . . . . . . . . . . . 48
Interest income, net . . . . . . . . . . . . . . . . . . . . (2)
Other income, net. . . . . . . . . . . . . . . . . . . . . . (1)
Corporate charges. . . . . . . . . . . . . . . . . . . . . . 60
---------
Loss before taxes on income. . . . . . . . . . . . . . . . . (9)
Taxes on income. . . . . . . . . . . . . . . . . . . . . . . 15
---------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . (24)
---------
---------

</TABLE>

SUMMARY BALANCE SHEET

As of
December 31,
1993
------------
<S> <C>
Current assets . . . . . . . . . . . . . . . . . . . . . . . $ 190
Property, plant and equipment, net . . . . . . . . . . . . . 483
Excess Reorganization Value, net . . . . . . . . . . . . . . 265
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 3
---------
Total assets . . . . . . . . . . . . . . . . . . . . . . . 941
---------
---------

Current liabilities. . . . . . . . . . . . . . . . . . . . . $ 124
Other liabilities and obligations. . . . . . . . . . . . . . 149
Stockholder's equity . . . . . . . . . . . . . . . . . . . . 668
---------
Total liabilities and stockholder's equity . . . . . . . . 941
---------
---------
</TABLE>

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
WITH RESPECT TO SUPPLEMENTAL NOTE AND FINANCIAL STATEMENT SCHEDULES

We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of USG Corporation (Restructured Company)
included in this Form 10-K, and have issued our report thereon dated January 31,
1994. Our report on the consolidated financial statements includes an
explanatory paragraph with respect to the asbestos litigation as discussed in
Notes to Financial Statements - "Litigation" note. Our audit was made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The supplemental note and financial statement schedules on pages 54
through 59 are the responsibility of the Corporation's management and are
presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. The
supplemental note and financial statement schedules have been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.

ARTHUR ANDERSEN & CO.
Chicago, Illinois
January 31, 1994

<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
CONSOLIDATED STATEMENT OF EARNINGS
(DOLLARS IN MILLIONS)

JANUARY 1
THROUGH
MAY 6, YEARS ENDED DECEMBER 31,
------------------------
1993 1992 1991
----- ----- -----

<S> <C> <C> <C>
NET SALES. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 591 $ 1,777 $ 1,712
Cost of products sold. . . . . . . . . . . . . . . . . . . . . . 482 1,460 1,385
------ ------ ------

GROSS PROFIT . . . . . . . . . . . . . . . . . . . . . . . . . . 109 317 327

Selling and administrative expenses. . . . . . . . . . . . . . . 71 218 194
------ ------ ------

OPERATING PROFIT . . . . . . . . . . . . . . . . . . . . . . . . 38 99 133

Interest expense . . . . . . . . . . . . . . . . . . . . . . . . 86 334 333
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . (2) (12) (11)
Other expense, net . . . . . . . . . . . . . . . . . . . . . . . 6 1 5
Reorganization items . . . . . . . . . . . . . . . . . . . . . . (709) - -
------ ------ ------

EARNINGS/(LOSS) FROM CONTINUING OPERATIONS BEFORE
TAXES ON INCOME, EXTRAORDINARY GAIN AND
CHANGES IN ACCOUNTING PRINCIPLES. . . . . . . . . . . . . . 657 (224) (194)

Taxes on income/(income tax benefit) . . . . . . . . . . . . . . 17 (33) (53)
------ ------ ------

EARNINGS/(LOSS) FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY GAIN AND CHANGES
IN ACCOUNTING PRINCIPLES. . . . . . . . . . . . . . . . . . 640 (191) (141)

Extraordinary gain, net of taxes . . . . . . . . . . . . . . . . 944 - -
Cumulative effect of changes in accounting principles, net . . . (150) - -
------ ------ ------

EARNINGS/(LOSS) FROM CONTINUING OPERATIONS . . . . . . . . . . . 1,434 (191) (141)

Reserve for DAP divestiture, net of taxes. . . . . . . . . . . . - - (20)
------ ------ ------

NET EARNINGS/(LOSS). . . . . . . . . . . . . . . . . . . . . . . 1,434 (191) (161)
------- ------ ------
------- ------ ------

<FN>

PER-SHARE INFORMATION IS OMITTED BECAUSE, DUE TO THE RESTRUCTURING AND IMPLEMENTATION OF FRESH START ACCOUNTING, IT IS NOT
MEANINGFUL.

THE NOTES TO FINANCIAL STATEMENTS ON PAGES 64 THROUGH 95 ARE AN INTEGRAL PART OF THIS STATEMENT.

</TABLE>

<PAGE>

USG CORPORATION
(PREDECESSOR COMPANY)
CONSOLIDATED BALANCE SHEET
(DOLLARS IN MILLIONS)

AS OF AS OF
MAY 6, DECEMBER 31,
1993 1992
------ -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (primarily time deposits). . . . . . . $ 49 $ 180
Receivables (net of reserves of $13 and $11) . . . . . . . . . . 315 299
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . 148 113
Restricted cash. . . . . . . . . . . . . . . . . . . . . . . . . - 88
------ ------

Total current assets. . . . . . . . . . . . . . . . . . . . 512 680
------ ------
PROPERTY, PLANT AND EQUIPMENT, NET . . . . . . . . . . . . . . . 767 800
PURCHASED GOODWILL, NET. . . . . . . . . . . . . . . . . . . . . - 69
EXCESS REORGANIZATION VALUE. . . . . . . . . . . . . . . . . . . 851 -
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . 64 110
------ ------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . 2,194 1,659
------ ------
------ ------

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . $ 96 $ 91
Accrued interest expense . . . . . . . . . . . . . . . . . . . . 9 386
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . 162 167
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . 6 2
Revolving Credit Facility. . . . . . . . . . . . . . . . . . . . - 140
Long-term debt maturing within one year. . . . . . . . . . . . . 9 576
Long-term debt classified as current . . . . . . . . . . . . . . - 1,926
Taxes on income. . . . . . . . . . . . . . . . . . . . . . . . . 13 -
------ ------
Total current liabilities . . . . . . . . . . . . . . . . . 295 3,288
------ ------
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . . . . . . . . 1,446 67
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . 170 175
OTHER LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . 279 9
STOCKHOLDERS' EQUITY/(DEFICIT):
Preferred stock - $1 par value; $1.80 convertible preferred stock
(initial series); outstanding - none. . . . . - -
Common stock - $0.10 par value; outstanding 37,157,458 and
55,757,394 shares (after deducting 27,556 and
368,409 shares held in treasury). . . . . . . 4 5
Capital received in excess of par value. . . . . . . . . . . . . - 23
Deferred currency translation. . . . . . . . . . . . . . . . . . - (8)
Reinvested earnings/(deficit). . . . . . . . . . . . . . . . . . - (1,900)
------ ------
Total stockholders' equity/(deficit). . . . . . . . . . . . 4 (1,880)
------ ------
Total liabilities and stockholders' equity. . . . . . . . . 2,194 1,659
------ ------
------ ------

<FN>
THE NOTES TO FINANCIAL STATEMENTS ON PAGES 64 THROUGH 95 ARE AN INTEGRAL PART OF THIS STATEMENT.

</TABLE>

<PAGE>

USG CORPORATION
(PREDECESSOR COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)

JANUARY 1
THROUGH
MAY 6, YEARS ENDED DECEMBER 31,
------------------------
1993 1992 1991
----- ----- -----

<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Earnings/(loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . $ 1,434 $ (191) $ (141)
Reserve for DAP divestiture, net of taxes. . . . . . . . . . . . . . . . . . . . . . - - (20)
Adjustments to reconcile earnings/(loss) from
continuing operations to net cash:
Cumulative effect of accounting changes . . . . . . . . . . . . . . . . . . . . 150 - -
Depreciation, depletion and amortization. . . . . . . . . . . . . . . . . . . . 22 66 68
Postretirement expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 - -
Interest expense on pay-in-kind debentures. . . . . . . . . . . . . . . . . . . 17 74 63
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13) (25) (13)
Net (gain)/loss on asset dispositions . . . . . . . . . . . . . . . . . . . . . 4 (5) (3)
(Increase)/decrease in working capital:
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 (1) (16)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8) (3) (7)
Payables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (4) (14)
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 213 132
Increase in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12) (23) (9)
Changes due to reorganization items:
Increase in reorganization items. . . . . . . . . . . . . . . . . . . . . . . . 65 - -
Net adjustments to fair market value. . . . . . . . . . . . . . . . . . . . . . (759) - -
Gain on discharge of prepetition liabilities. . . . . . . . . . . . . . . . . . (944) - -
Payment of liabilities net of collection of
letters of credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7) - -
Decrease in other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . - (2) (2)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) (9) (9)
------ ------ ------
Net cash flows (to)/from operating activities . . . . . . . . . . . . . . . . . (14) 90 29
------ ------ ------

Cash Flows from Investing Activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12) (49) (49)
Net proceeds from asset dispositions . . . . . . . . . . . . . . . . . . . . . . . . - 6 5
Net proceeds from divestiture of discontinued operations . . . . . . . . . . . . . . - - 80
------ ------ ------
Net cash flows (to)/from investing activities . . . . . . . . . . . . . . . . . (12) (43) 36
------ ------ ------

CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 57 65
Repayment of debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (142) (75) (68)
(Increase)/decrease in restricted assets . . . . . . . . . . . . . . . . . . . . . . 32 (4) (84)
------ ------ ------
Net cash flows to financing activities. . . . . . . . . . . . . . . . . . . . . (105) (22) (87)
------ ------ ------

NET CASH FLOWS FROM DISCONTINUED OPERATIONS. . . . . . . . . . . . . . . . . . . . . - - 2
------ ------ ------

NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . (131) 25 (20)
------ ------ ------
Cash and cash equivalents as of beginning of period. . . . . . . . . . . . . . . . . 180 155 175
------ ------ ------
Cash and cash equivalents as of end of period. . . . . . . . . . . . . . . . . . . . 49 180 155
------ ------ ------
------ ------ ------

Supplemental Cash Flow Disclosures:
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 58 $ 52 $ 154
Income taxes paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 13 15
------ ------ ------
------ ------ ------
<FN>

THE NOTES TO FINANCIAL STATEMENTS ON PAGES 64 THROUGH 95 ARE AN INTEGRAL PART OF THIS STATEMENT.

</TABLE>

<PAGE>

USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS
(TERMS IN INITIAL CAPITAL LETTERS ARE DEFINED ELSEWHERE IN THIS FORM 10-K)

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the
Corporation and its subsidiaries after elimination of intercompany accounts and
transactions. Revenue is recognized upon the shipment of products. Net
currency translation gains or losses on foreign subsidiaries are included in
deferred currency translation, a component of stockholders' equity, except for
the years ended December 31, 1992 and 1991, for which Mexican currency
translation losses were charged to earnings. Purchased goodwill, which was
written off in accordance with the implementation of fresh start accounting, was
previously being amortized over a period of 40 years. See "Fresh Start
Accounting" note below for more information on the implementation of fresh start
accounting.

FINANCIAL RESTRUCTURING

The following summary of the major provisions of the Prepackaged Plan is
qualified in its entirety by reference to the more detailed information
appearing in the Disclosure Statement.

(a) The Prepackaged Plan provided for a one-for-50 reverse stock split (the
"REVERSE STOCK SPLIT") which was effected immediately prior to the
distribution of new common stock (the "NEW COMMON STOCK") pursuant to the
Prepackaged Plan. On May 6, 1993, after giving effect to the Reverse Stock
Split, the following distributions were made to holders of the following
securities of the Corporation:

(i) For each $1,000 principal amount of 13 1/4% senior subordinated
debentures due 2000 (the "OLD SENIOR SUBORDINATED DEBENTURES")
(excluding accrued interest thereon, which was cancelled), the holder
received 50.81 shares of New Common Stock. As of May 6, 1993, the
total principal amount of the Old Senior Subordinated Debentures was
$600 million.

(ii) For each $1,000 principal amount of 16% junior subordinated debentures
due 2008 (the "OLD JUNIOR SUBORDINATED DEBENTURES") (excluding accrued
interest thereon, which was cancelled), the holder received 11.61
shares of New Common Stock and 5.42 Warrants. As of May 6, 1993, the
total principal amount of Old Junior Subordinated Debentures was $533
million, of which $480 million was

<PAGE>

subject to the distribution.

Stockholders existing prior to the distribution of New Common Stock
retained their shares of Common Stock, subject to the Reverse Stock Split.
After giving effect to the Reverse Stock Split and distribution of New
Common Stock, there were 37,157,458 shares of Common Stock outstanding on
May 6, 1993, of which the shares held by stockholders existing prior to
such distribution represented 3% of the total number of outstanding shares.
If all Warrants were exercised, the aggregate holdings of Old Senior
Subordinated Debenture holders, Old Junior Subordinated Debenture holders
and previously existing stockholders would represent 76.7%, 20.6% and 2.7%,
respectively, of the total number of outstanding shares.

(b) For each $1,000 principal amount of 7 3/8% senior notes due 1991 (the "OLD
SENIOR 1991 NOTES"), the holder received $750 principal amount of 8% senior
notes due 1995 (the "SENIOR 1995 NOTES") and $250 principal amount of 9%
senior notes due 1998 (the "SENIOR 1998 NOTES"). As of May 6, 1993, the
total principal amount of the Old Senior 1991 Notes was $100 million. In
addition, the Corporation issued $10 million principal amount of Senior
1998 Notes to two institutional holders of existing 8% senior notes due
1996 (the "SENIOR 1996 NOTES") in exchange for an equal principal amount
thereof. The Senior 1995 and 1998 Notes are secured, with certain other
indebtedness of the Corporation and subject to a collateral trust
arrangement controlled primarily by holders of the Banks' claims, by first
priority security interests in the capital stock of certain subsidiaries of
the Corporation.

(c) Pursuant to the Prepackaged Plan, modifications were made to a credit
agreement dated as of July 1, 1988 (the "OLD CREDIT AGREEMENT") with the
Bank Group. The modifications, reflected in the Credit Agreement, are
summarized as follows: (i) issuance of $340 million of Senior 2002 Notes
in exchange for $300 million principal amount of Bank Term Loans, $24
million of accrued but unpaid interest on the Bank Term Loan and $16
million owed in connection with certain interest rate swap contracts; (ii)
extension of the final maturity of the remaining principal outstanding on
the Bank Term Loan ($540 million) from 1996 to 2000 and deferral of any
scheduled principal payments until December 1994; (iii) issuance of $56
million of Capitalized Interest Notes bearing annual interest at LIBOR plus
2 1/4% (or Citibank's base rate plus 1 1/4%) in exchange for $51 million of
accrued but unpaid interest on the Bank Debt and $5 million in additional
amounts owed in connection with interest rate swap contracts; (iv) making
available (at the Corporation's option but subject to certain limitations
on the availability of LIBOR) an annual interest rate applicable to the
Bank Term Loan and an extended revolving credit facility of LIBOR plus 1
7/8% (or Citibank's base rate plus 7/8%), with the option to issue
additional Capitalized Interest Notes for the amount of such interest in
excess of LIBOR plus 1% per annum; (v) provision for an excess cash flow
sweep that will take into account certain liquidity thresholds; (vi)
suspension of all financial covenants through January 1, 1995 and providing
for new covenants thereafter; and (vii) extension to 1998 of the maturity
date of and establishment of a maximum borrowing capacity of $175 million
under the Revolving Credit Facility, including a $110 million letter of
credit subfacility. Capitalized Interest Notes of $47 million were
allocated as term capitalized interest notes maturing in 2000, being direct
obligations of the Corporation, and $9 million of the Capitalized Interest
Notes were allocated as revolver capitalized interest notes maturing in
1998, being direct obligations of USG Interiors.

The Corporation deferred certain principal and interest payments in order to
maintain adequate liquidity during the Restructuring process. These payment
deferrals constituted defaults under the applicable loan agreements and
indentures, which were waived or cured on May 6, 1993.

<PAGE>

FRESH START ACCOUNTING

The Corporation accounted for the Restructuring using the principles of fresh
start accounting as required by SOP 90-7. Pursuant to such principles, in
general, the Corporation's assets and liabilities were revalued. Total assets
were stated at the reorganization value of the Corporation following the
Restructuring. The Corporation primarily used "net present value" and
"comparable companies" approaches to determine reorganization value (the
"REORGANIZATION VALUE"). In the net present value approach, projected,
unleveraged after-tax cash flows of the Subsidiaries and corporate operations
through 1995 were discounted at rates approximating the Corporation's adjusted
weighted average cost of capital. Terminal value was determined by capitalizing
the 1995 projected results. Liabilities were stated at fair market value. The
difference between the Reorganization Value of the assets and the fair market
value of the liabilities was recorded as stockholders' equity with retained
earnings restated to zero.

In accordance with SOP 90-7, individual assets and liabilities were adjusted
to fair market value as of May 6, 1993. The portion of the Reorganization Value
not attributable to specific assets ("EXCESS REORGANIZATION VALUE") will be
amortized over a five year period. Adjustments were made to the historical
balances of inventory, property, plant and equipment, purchased goodwill, long-
term debt, various accrued liabilities and other long-term liabilities.

66
<PAGE>

The following balance sheet details the adjustments that were made as of May
6, 1993 to record the Restructuring and implement fresh start accounting:

USG CORPORATION
(PREDECESSOR COMPANY)
CONSOLIDATED BALANCE SHEET
AS OF MAY 6, 1993
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>

PRE- (A) (B) POST-
RESTRUCTURING RESTRUCTURING FRESH START RESTRUCTURING
AND FRESH START ADJUSTMENTS ADJUSTMENTS AND FRESH START
-------------- ------------- ----------- ---------------

<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . $ 153 $ (104) $ - $ 49
Receivables, net . . . . . . . . . . . . 281 35 (1) 315
Inventories. . . . . . . . . . . . . . . 122 - 26 148
Restricted cash. . . . . . . . . . . . . 99 (99) - -
------------ ------------ ------------ ------------
Total current assets . . . . . . . . . 655 (168) 25 512
PROPERTY, PLANT AND EQUIPMENT, NET . . . 792 - (25) 767
PURCHASED GOODWILL, NET. . . . . . . . . 69 - (69) -
EXCESS REORGANIZATION VALUE. . . . . . . - - 851 851
OTHER ASSETS . . . . . . . . . . . . . . 65 (1) - 64
------------ ------------ ------------ ------------
Total assets . . . . . . . . . . . . . 1,581 (169) 782 2,194
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . $ 96 $ - $ - $ 96
Accrued expenses . . . . . . . . . . . . 203 (28) (4) 171
Notes payable. . . . . . . . . . . . . . 6 - - 6
Revolving Credit Facility. . . . . . . . 140 (140) - -
Long-term debt maturing within one year. 9 - - 9
Long-term debt classified as current . . 427 (427) - -
Taxes on income. . . . . . . . . . . . . 17 - (4) 13
------------ ------------ ------------ ------------
Total current liabilities. . . . . . . 898 (595) (8) 295
------------ ------------ ------------ ------------
LONG-TERM DEBT . . . . . . . . . . . . . 67 1,473 (94) 1,446
DEFERRED INCOME TAXES. . . . . . . . . . 111 24 35 170
OTHER LIABILITIES. . . . . . . . . . . . 194 - 85 279
LIABILITIES SUBJECT TO COMPROMISE. . . . 2,458 (2,458) - -
STOCKHOLDERS' EQUITY/(DEFICIT):
Preferred stock . . . . . . . . . . . . - - - -
Common stock . . . . . . . . . . . . . . 5 (1) - 4
Capital received in excess of par value. 23 444 (467) -
Deferred currency translation. . . . . . (7) - 7 -
Reinvested earnings/(deficit). . . . . . (2,168) 944 1,224 -
------------ ------------ ------------ ------------
Total stockholders' equity/(deficit) . (2,147) 1,387 764 4
------------ ------------ ------------ ------------
Total liabilities and stockholders' equity 1,581 (169) 782 2,194
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
<FN>
(a) To record the consummation of the Prepackaged Plan. See "Financial
Restructuring" note above for a summary of the terms of the Prepackaged
Plan.

(b) To record the adjustments to state assets and liabilities at their estimated
fair market value, including establishment of Excess Reorganization Value.

</TABLE>

67
<PAGE>

REORGANIZATION ITEMS

In connection with the Restructuring, the Corporation recorded a one-time
reorganization items gain of $709 million in the period of January 1 through May
6, 1993. The (income)/expense components of this gain are as follows (dollars
in millions):

JANUARY 1
THROUGH
MAY 6,
1993
---------

<S> <C>
Excess Reorganization Value $ (851)
Other fresh start adjustments 63
Restructuring fees and expenses 57
Write-off of 1988 capitalized financing costs 22
-------
Total reorganization items (709)
-------
-------
</TABLE>

EXTRAORDINARY GAIN

Also in connection with the Restructuring, the Corporation recorded a one-
time after-tax extraordinary gain of $944 million in the period of January 1
through May 6, 1993. The income/(expense) components of this gain are as
follows (dollars in millions):

JANUARY 1
THROUGH
MAY 6,
1993
--------

<S> <C>
Gain on exchange of the Old Senior Subordinated Debentures for stock. . . . . . . . . . . $ 477
Gain on exchange of the Old Junior Subordinated Debentures for stock and warrants . . . . 456
Write-off of bank debt default interest . . . . . . . . . . . . . . . . . . . . . . . . . 49
Tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24)
Management incentive compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1)
---------
Total extraordinary items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 944
---------
---------
</TABLE>

CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES

A one-time after-tax charge of $150 million was recorded in the first quarter
of 1993 representing the adoption of Statement of Financial Accounting Standard
("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," - $180 million, partially offset by the adoption of SFAS No. 109,
"Accounting for Income Taxes," - $30 million. See "Postretirement Benefits" and
"Taxes on Income and Deferred Taxes" notes for information on the adoption of
these standards. Neither of these standards impact cash flow.

<PAGE>

DISCONTINUED OPERATIONS

Results for DAP are set forth separately as discontinued operations in the
accompanying consolidated financial statements and supplementary data schedules
up to September 20, 1991, the completion date of the sale of the business and
substantially all of the assets. Operating results for DAP in 1991 included net
sales of $128 million, taxes on income of $1 million and breakeven net earnings.

In the second quarter of 1991, the Corporation absorbed an expense provision
of $20 million related to the disposition of DAP, net of related income tax
expense of $8 million. An expense provision of $41 million, net of a related
income tax benefit of $2 million, was previously recorded in the fourth quarter
of 1990. Net proceeds from the transaction amounted to approximately $84
million. In connection with the execution of the DAP sale agreement, the Banks
consented to the sale as required under the Old Credit Agreement subject to an
agreement by the Corporation and DAP to deposit the proceeds in a bank account
to be held exclusively for use in the Restructuring. As a result, these funds,
and interest earned on these funds, were maintained on an interim basis in a
restricted bank account and were classified as restricted cash in the
Consolidated Balance Sheet until their release in connection with the
Restructuring.

RESEARCH AND DEVELOPMENT

Research and development expenditures are charged to earnings as incurred and
amounted to $4 million, $14 million and $12 million in the period of January 1
through May 6, 1993 and in the years ended December 31, 1992 and 1991,
respectively.

TAXES ON INCOME AND DEFERRED INCOME TAXES

Effective January 1, 1993, the Corporation adopted SFAS No. 109, "Accounting
for Income Taxes." The cumulative effect as of January 1, 1993 of adopting SFAS
No. 109 was a one-time benefit to first quarter 1993 net earnings of $30
million, primarily due to adjusting deferred taxes from historical to current
tax rates. Financial statements for periods prior to January 1, 1993 have not
been restated to reflect the adoption of this standard.

Earnings/(loss) from continuing operations before taxes on income,
extraordinary gain and changes in accounting principles consisted of the
following (dollars in millions):

JANUARY 1
THROUGH
MAY 6, YEARS ENDED DECEMBER 31,
--------------------------
1993 1992 1991
-------- ----------- ------------
<S> <C> <C> <C>

U.S. . . . . . . . . . . . . $ 483 $ (246) $ (217)
Foreign. . . . . . . . . . . 174 22 23
----------- ------------ -----------
Total. . . . . . . . . . . . 657 (224) (194)
----------- ------------ -----------
----------- ------------ -----------
</TABLE>

<PAGE>

Taxes on income/(income tax benefit) consisted of the following (dollars in
millions):

<TABLE>
<CAPTION>
JANUARY 1
THROUGH
MAY 6, YEARS ENDED DECEMBER 31,
-------------------------
1993 1992 1991
----------- ----------- ------------

<S> <C> <C> <C>
Current:
U.S. Federal . . . . . . . . . $ 13 $ (12) $ (53)
Foreign. . . . . . . . . . . . 2 6 12
---------- ---------- ------------
15 (6) (41)
---------- ---------- ------------
Deferred:
U.S. Federal . . . . . . . . . - (27) (11)
Foreign. . . . . . . . . . . . 2 - (1)
---------- ---------- ------------
2 (27) (12)
---------- ---------- ------------
Total. . . . . . . . . . . . . . 17 (33) (53)
---------- ---------- ------------
---------- ---------- ------------
</TABLE>

The difference between the statutory U.S. Federal income tax/(benefit) rate
and the Corporation's effective income tax/(benefit) rate is summarized as
follows:

JANUARY 1
THROUGH
MAY 6, YEARS ENDED DECEMBER 31,
------------------------
1993 1992 1991
-------- ------- ------

<S> <C> <C> <C>
Statutory U.S. Federal income tax/(benefit) rate . . 34.0 % (34.0)% (34.0)%
Nontaxable effects of adopting fresh start accounting (41.4) - -
Capitalized restructuring fees . . . . . . . . . . . 2.0 - -
Foreign tax rate differential. . . . . . . . . . . . 1.3 7.7 8.3
Valuation allowance adjustment . . . . . . . . . . . 2.3 - -
Unbenefited NOL Carryforward . . . . . . . . . . . . 2.3 12.6 -
Other, net . . . . . . . . . . . . . . . . . . . . . 2.1 (1.3) (1.8)
-------- ------- ------
Effective income tax/(benefit) rate. . . . . . . . . 2.6 (15.0) (27.5)
-------- ------- ------
-------- ------- ------
</TABLE>

Temporary differences and carryforwards which give rise to current and long-
term deferred tax (assets)/liabilities as of May 6, 1993 were as follows
(dollars in millions):

AS OF
MAY 6,
1993
--------

<S> <C>
Property, plant and equipment. . . . . . . . . . . . $ 148
Debt discount. . . . . . . . . . . . . . . . . . . . 32
--------
Deferred tax liabilities . . . . . . . . . . . . . . 180
--------

Pension and retiree medical benefits . . . . . . . . (85)
Reserves not deductible until paid . . . . . . . . . (47)
Other. . . . . . . . . . . . . . . . . . . . . . . . (2)
--------
Deferred tax assets before valuation allowance . . . (134)
Valuation allowance. . . . . . . . . . . . . . . . . 85
--------
Deferred tax assets. . . . . . . . . . . . . . . . . (49)
--------
Net deferred tax liabilities . . . . . . . . . . . . 131
--------
</TABLE>

<PAGE>

The Corporation has NOL Carryforwards of $113 million remaining from 1992
after a reduction due to cancellation of indebtedness from the Prepackaged Plan.
These NOL Carryforwards may be used to offset U.S. taxable income through 2007.
The Code will limit the Corporation's annual use of its NOL Carryforwards to the
lesser of its taxable income or approximately $30 million plus any unused limit
from prior years. Furthermore, due to the uncertainty regarding the application
of the Code to the exchange of stock for debt, the Corporation's NOL
Carryforwards could be further reduced or eliminated. The Corporation has a $3
million minimum tax credit which may be used to offset U.S. regular tax
liability in future years.

During 1991 and 1992, deferred income taxes resulted from certain items
being treated differently for financial reporting purposes than for income tax
purposes. The tax effect of such differences is summarized as follows (dollars
in millions):

YEARS ENDED DECEMBER 31,
--------------------------
1992 1991
----------- -----------
<S> <C> <C>
Tax benefit carryforwards. . . . . . . . . . . . . . . . . . $ (19) $ (9)
Accelerated tax depreciation . . . . . . . . . . . . . . . . (5) -
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . (3) (3)
----------- -----------
Total deferred provision . . . . . . . . . . . . . . . . . . (27) (12)
Classification adjustment of prior years' deferrals. . . . . 2 (1)
----------- -----------
Increase/(decrease) in deferred taxes. . . . . . . . . . . . (25) (13)
----------- -----------
----------- -----------

</TABLE>

The Corporation does not provide for U.S. Federal income taxes on the
portion of undistributed earnings of foreign subsidiaries which are intended to
be permanently reinvested. The cumulative amount of such undistributed earnings
totaled approximately $75 million as of May 6, 1993. Any future repatriation of
undistributed earnings would not, in the opinion of management, result in
significant additional taxes.

INVENTORIES

In accordance with the implementation of fresh start accounting,
inventories were stated at fair market value as of May 6, 1993. Most of the
Corporation's domestic and Mexican inventories are valued under the LIFO method.
As of May 6, 1993, the LIFO values of these inventories were $103 million and
would have been the same if they were valued under the FIFO and average
production cost methods. Inventories valued under the LIFO method totaled $72
million as of December 31, 1992 and would have been $25 million higher if they
were valued under the FIFO and average production cost methods. The remaining
inventories as of December 31, 1992 were stated at the lower of cost or market,
under the FIFO or average production cost methods. Inventories include

<PAGE>

material, labor and applicable factory overhead costs. Inventory
classifications were as follows (dollars in millions):

AS OF AS OF
MAY 6, DECEMBER 31,
1993 1992
------------ ------------
<S> <C> <C>
Finished goods and work-in-process . . . . . . $ 87 $ 66
Raw materials. . . . . . . . . . . . . . . . . 54 40
Supplies . . . . . . . . . . . . . . . . . . . 7 7
------------ ------------
Total. . . . . . . . . . . . . . . . . . . . . 148 113
------------ ------------
------------ ------------

</TABLE>

The LIFO value of U.S. domestic inventories under fresh start accounting
exceeded that computed for U.S. Federal income tax purposes by $26 million as of
May 6, 1993. As of December 31, 1992, the LIFO value of USG Interiors'
inventories acquired under the purchase method exceeded that computed for U.S.
Federal income tax purposes by $6 million.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment were stated at fair market value as of May 6,
1993 in accordance with fresh start accounting and at cost as of December 31,
1992. Provisions for depreciation are determined principally on a straight-line
basis over the expected average useful lives of composite asset groups.
Depletion is computed on a basis calculated to spread the cost of gypsum and
other applicable resources over the estimated quantities of material
recoverable. Interest during construction is capitalized on major property
additions. Property, plant and equipment classifications were as follows
(dollars in millions):

AS OF AS OF
MAY 6, DECEMBER 31,
1993 1992
------------ ------------
<S> <C> <C>

Land and mineral deposits. . . . . . . . . . . $ 61 $ 41
Buildings and realty improvements. . . . . . . 228 401
Machinery and equipment. . . . . . . . . . . . 478 1,012
------------ ------------
767 1,454
Reserves for depreciation and depletion. . . . - (654)
------------ ------------
Total. . . . . . . . . . . . . . . . . . . . . 767 800
------------ ------------
------------ ------------

</TABLE>

LEASES

The Corporation leases certain of its offices, buildings, machinery and
equipment, and autos under noncancellable operating leases. These leases have
various terms and renewal options. Lease expense amounted to $11 million, $31
million and $26 million in the period of January 1 through May 6, 1993 and in
the years ended December 31, 1992 and 1991, respectively.

<PAGE>

INDEBTEDNESS

Total debt, including currently maturing debt, consisted of the following
(dollars in millions):

AS OF AS OF
MAY 6, DECEMBER 31,
1993 1992
------------- -------------
<S> <C> <C>
SECURED DEBT:
Bank Debt:
Bank Term Loan, installments due through 2000 . . . . . . . . . . . . $ 540 $ 840
Revolving Credit Facility . . . . . . . . . . . . . . . . . . . . . . - 140
Capitalized Interest Notes, due through 2000. . . . . . . . . . . . . 56 -
Senior notes and debentures:
7 3/8% Senior Notes due 1991. . . . . . . . . . . . . . . . . . . . . - 100
8% Senior Notes due 1995. . . . . . . . . . . . . . . . . . . . . . . 75 -
8% Senior Notes due 1996. . . . . . . . . . . . . . . . . . . . . . . 90 100
8% Senior Notes due 1997. . . . . . . . . . . . . . . . . . . . . . . 100 100
9% Senior Notes due 1998. . . . . . . . . . . . . . . . . . . . . . . 35 -
10 1/4% Senior Notes due 2002 . . . . . . . . . . . . . . . . . . . . 340 -
7 7/8% Sinking Fund Debentures due 2004 . . . . . . . . . . . . . . . 41 41
8 3/4% Sinking Fund Debentures due 2017 . . . . . . . . . . . . . . . 200 200
Other secured debt, average interest rates 10.5% and 10.9%, varying
payments through 1999 . . . . . . . . . . . . . . . . . . . . . . . . 40 37

UNSECURED DEBT:
Industrial revenue bonds, 5.9% ranging to 10.25%, due through 2014 . . . . 39 38
Old Subordinated Debentures:
13 1/4% Senior Subordinated Debentures due 2000, sinking fund
of $300 million due 1999. . . . . . . . . . . . . . . . . . . . . - 600
16% Junior Subordinated Debentures due 2008, sinking fund
commencing 2004 . . . . . . . . . . . . . . . . . . . . . . . . . - 515
------------- -------------
Total principal amount of debt . . . . . . . . . . . . . . . . . . . . . . 1,556 2,711
Less unamortized reorganization discount . . . . . . . . . . . . . . . . . (95) -
------------- -------------
Total carrying amount of debt. . . . . . . . . . . . . . . . . . . . . . . 1,461 2,711
------------- -------------
------------- -------------

</TABLE>

As of May 6, 1993, the Corporation and its subsidiaries had $1,556 million
total principal amount of debt (before unamortized reorganization discount) on a
consolidated basis. Of such total debt, $118 million represented direct
borrowings by the subsidiaries, including $38 million of industrial revenue
bonds, $41 million of 7 7/8% sinking fund debentures issued by U.S. Gypsum in
1974 and subsequently assumed by the Corporation on a joint and several basis in
1985, $33 million of debt (primarily project financing) incurred by the
Corporation's foreign subsidiaries other than CGC, $4 million of working capital
borrowings by CGC, and $3 million of other long-term borrowings by CGC.

Throughout the Restructuring process (from December 31, 1990 through May 6,
1993), most long-term debt issues were included in current liabilities due to
various defaults upon certain of the debt issues which allowed for the possible
triggering of acceleration and cross-acceleration provisions. Upon consummation
of the Prepackaged Plan, all previously existing defaults were waived or cured
and long-term debt included in current liabilities was treated in accordance
with the Prepackaged Plan as described in "Financial Restructuring" note above.

The Bank Debt and most other senior debt are secured by a pledge of all of
the shares of the Corporation's

<PAGE>

major domestic subsidiaries and 65% of the shares of certain of its foreign
subsidiaries, including CGC, pursuant to a collateral trust arrangement
controlled primarily by holders of the Bank Debt. The rights of the Corporation
and its creditors to the assets of any subsidiary upon the latter's liquidation
or reorganization will be subject to the prior claims of such subsidiary's
creditors, except to the extent that the Corporation may itself be a creditor
with enforceable claims against such subsidiary. The average rate of interest
on the Bank Term Loan, excluding default interest which was cured or waived in
accordance with the Prepackaged Plan, was 6.5% in the period of January 1
through May 6, 1993. The rate of interest on the Capitalized Interest Notes
issued on May 6, 1993 in connection with the provisions of the Prepackaged Plan
was 5.4% based on LIBOR plus 2 1/4%.

The "Other Secured Debt" category shown in the table above primarily
includes short-term and long-term borrowings from several foreign banks by USG
International used principally to finance construction of the Aubange, Belgium
ceiling tile plant. This debt is secured by a lien on the assets of the Aubange
plant and has restrictive covenants that restrict, among other things, the
payment of dividends. Foreign borrowings made by the Corporation's
international operations are generally allowed, within certain limits, under
provisions of the Credit Agreement.

The fair market value of debt as of May 6, 1993 was $1,421 million, based
on estimates of fair market value calculated in connection with implementation
of fresh start accounting, excluding other secured debt, primarily representing
financing for construction of the Aubange plant that is secured by a direct lien
on its assets, which was not practicable to estimate. As of December 31, 1992,
the fair market value of debt amounted to $679 million, based on indicative bond
prices as of that date excluding the following items which were not practicable
to estimate: (i) the bank debt for which there was no active market; (ii) the 7
7/8% senior debentures due 2004 virtually all of which were owned by a single
investment group; and (iii) the other secured debt which primarily represented
financing for construction of the Aubange plant as described above.

PENSION PLANS

<PAGE>

for most plans, required minimal funding in the period of January 1 through May
6, 1993 and the years ended December 31, 1992 and 1991. Net pension
expense/(benefit) included the following components (dollars in millions):

JANUARY 1
THROUGH
MAY 6, YEARS ENDED DECEMBER 31,
-------------------------
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
Service cost-benefits earned during the period . . . . . . . . . . . $ 3 $ 9 $ 5
Interest cost on projected benefit obligation. . . . . . . . . . . . 11 29 29
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . (15) (14) (79)
Unrecognized prior service cost. . . . . . . . . . . . . . . . . . . 1 2 2
Net amortization/(deferral). . . . . . . . . . . . . . . . . . . . . 2 (25) 41
---------- ---------- ----------
Net pension expense/(benefit). . . . . . . . . . . . . . . . . . . . 2 1 (2)
---------- ---------- ----------
---------- ---------- ----------

</TABLE>

The pension plan assets, which consist primarily of publicly traded common
stocks and debt securities, had an estimated fair market value that equaled the
projected benefit obligation as of May 6, 1993 and exceeded the projected
benefit obligation as of December 31, 1992. The following table presents a
reconciliation of the total assets of the pension plans to the projected benefit
obligation (dollars in millions):

AS OF AS OF
MAY 6, DECEMBER 31,
1993 1992
------------- -------------
<S> <C> <C>
Amount of assets available for benefits:
Funded assets of the plans at fair market value . . . . . . . . . . . . . . . $ 379 $ 383
Accrued pension expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 15
------------- -------------
Total assets of the plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 404 398
------------- -------------
Present value of estimated pension obligation:
Vested benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298 252
Nonvested benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 18
------------- -------------
Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . 322 270
Additional benefits based on projected future salary increases . . . . . . . . . . 82 66
------------- -------------
Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . 404 336
------------- -------------
Assets in excess of projected benefit obligation . . . . . . . . . . . . . . . . . - 62
------------- -------------
------------- -------------

</TABLE>

Assets in excess of projected benefit obligation consisted of the following
(dollars in millions):

AS OF AS OF
MAY 6, DECEMBER 31,
1993 1992
------------- -------------
<S> <C> <C>
Net assets existing at the date of adoption of SFAS No. 87 not yet recognized. . . $ - $ 32
Unrecognized net gain due to changes in assumptions and differences
between actual and estimated experience . . . . . . . . . . . . . . . . . . . - 43
Unrecognized cost of retroactive benefits granted by plan amendments . . . . . . . - (13)
------------- -------------
Assets in excess of projected benefit obligation . . . . . . . . . . . . . . . . . - 62
------------- -------------
------------- -------------

</TABLE>

The expected long-term rate of return on plan assets was 9% for both the
period of January 1 through May 6, 1993 and the year ended December 31, 1992.
The assumed weighted average discount rate used in determining

<PAGE>

the accumulated benefit obligation was 8% and 9% as of May 6, 1993 and December
31, 1992, respectively. The rate of increases in projected future compensation
levels was 5.5% for the period of January 1 through May 6, 1993 and the year
ended December 31, 1992. The unrecognized cost of retroactive benefits granted
by plan amendments was being amortized over 13 years as of December 31, 1992.

POSTRETIREMENT BENEFITS

The Corporation maintains plans that provide retiree health care and life
insurance benefits for all eligible employees. Employees generally become
eligible for the retiree benefit plans when they meet minimum retirement age and
service requirements. The cost of providing most of these benefits is shared
with retirees.

Effective January 1, 1993, the Corporation adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," for its
retiree benefit plans. Under this accounting standard, the Corporation is
required to accrue the estimated cost of retiree benefit payments during
employees' active service period. The Corporation elected to recognize this
change in accounting principles on the immediate recognition basis. The
cumulative effect as of January 1, 1993 of adopting SFAS No. 106 was a one-time
after-tax charge to first quarter 1993 net earnings of $180 million. The
Corporation previously expensed the cost of these benefits, which principally
relate to health care, as claims were incurred. These costs were $8 million and
$7 million in the years ended December 31, 1992 and 1991, respectively.

The following table summarizes the components of net periodic
postretirement benefit cost for the period of January 1 through May 6, 1993
(dollars in millions):

JANUARY 1
THROUGH
MAY 6,
1993
---------

<S> <C>
Service cost of benefits earned . . . . . . . . . . . . . . . . $ 1
Interest on accumulated postretirement benefit obligation . . . 5
---------
Net periodic postretirement benefit cost. . . . . . . . . . . . 6
---------
---------
</TABLE>

The status of the Corporation's accrued postretirement benefit cost as of May
6, 1993 was as follows (dollars in millions):

AS OF
MAY 6,
1993
---------
<S> <C>
Accumulated postretirement benefit obligation:
Retirees. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 118
Fully eligible active participants. . . . . . . . . . . . . . 13
Other active participants . . . . . . . . . . . . . . . . . . 62
---------
Accrued postretirement benefit cost liability
recognized on the Consolidated Balance Sheet. . . . . . . . 193
---------
---------

</TABLE>

The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 13% as of May 6, 1993 with a gradually
declining rate to 6% by the year 2000 and remaining at that level

<PAGE>

thereafter. A one-percentage-point increase in the assumed health care cost
trend rate for each year would increase the accumulated postretirement benefit
obligation as of May 6, 1993 by $18 million and increase the net periodic
postretirement benefit cost for the period of January 1 through May 6, 1993 by
$1 million. The assumed discount rate used in determining the accumulated
postretirement benefit obligation was 8%.

MANAGEMENT PERFORMANCE PLAN

The Performance Plan reserved 8,600,000 shares of Common Stock for issuance
in connection with grants of incentive stock options, nonqualified stock
options, stock appreciation rights, restricted stock, deferred stock,
performance shares and performance units.

In accordance with the Prepackaged Plan, all outstanding stock options (for
3,786,575 shares) were cancelled without consideration, 1,016,090 shares of
restricted and deferred stock were cashed-out pursuant to "change in control"
provisions contained in the Performance Plan, and 25,580 shares (after giving
effect to the Reverse Stock Split) of restricted stock and awards for deferred
stock yet to be issued remained outstanding as a consequence of certain waivers
of the change in control event by senior members of management.

Limitations on the Performance Plan in accordance with the Prepackaged Plan
provide that: (i) options to purchase a number of shares not to exceed 7.5% of
the number of shares of New Common Stock outstanding immediately after giving
effect to the Reverse Stock Split and all distributions of New Common Stock
under the Prepackaged Plan will be reserved for management incentives (2,788,350
shares); (ii) a portion of such options (not to exceed 4.5% of such number of
outstanding shares) may be granted immediately upon consummation of the
Prepackaged Plan; (iii) prior to June 22, 1997, the Corporation will not issue,
award or grant, for compensatory purposes, any stock (including restricted and
deferred stock grants and awards), stock options, stock appreciation rights or
other stock-based awards, except for the options described above or as may
otherwise be approved by the Corporation's stockholders; and (iv) reference to
the year "1988" is deleted from the name of the Performance Plan.

PREFERRED SHARE PURCHASE RIGHTS

On June 6, 1988, the Corporation adopted a Preferred Share Purchase Rights
Plan and pursuant to its provisions declared, subject to the consummation of the
1988 Recapitalization, the distribution of one Right upon each new share of
Common Stock issued in the 1988 Recapitalization. The 1988 Recapitalization
became effective July 13, 1988 and the distribution occurred immediately
thereafter. The Rights contain provisions which are intended to protect
stockholders in the event of an unsolicited attempt to acquire the Corporation.

The Preferred Share Purchase Rights Plan was terminated in connection with
implementation of the Prepackaged Plan. On May 6, 1993, the Rights Agreement
was adopted with provisions substantially similar to the old rights except that:
(i) the purchase price of the Rights was reset; (ii) the expiration of the
Rights was extended; (iii) a so-called "flip-in" feature and exchange feature
was added; (iv) certain exemptions were added permitting certain acquisitions
and the continued holding of common shares by Water Street and its affiliates in
excess of the otherwise specified thresholds; (v) the redemption price was
reduced; and (vi) the amendment provision was liberalized.

Under the terms of the Rights Agreement and subject to certain exceptions for
Water Street and its affiliates,

77
<PAGE>

generally the Rights become exercisable (i) 10 days following the date of a
public announcement that a person or group of affiliated or associated persons
(an "ACQUIRING PERSON"), other than the Corporation, any employee benefit plan
of the Corporation, any entity holding Common Stock for or pursuant to the terms
of any such plan has beneficial ownership (as defined in the Rights Agreement)
of 20% or more of the then outstanding Common Stock, (ii) 10 days following the
date of a public announcement that a person or group of affiliated or associated
persons (an "ADVERSE PERSON") has beneficial ownership of 10% or more of the
then outstanding Common Stock, the acquisition of which has been determined by
the Board to present an actual threat of an acquisition of the Corporation that
would not be in the best interest of the Corporation's stockholders or (iii) 10
days following the date of commencement of, or public announcement of, a tender
offer or exchange offer for 30% or more of the Common Stock. When exercisable,
each of the Rights entitles the registered holder to purchase one-hundredth of a
share of a junior participating preferred stock, series C, $1.00 par value per
share, at a price of $35.00 per one-hundredth of a preferred share, subject to
adjustment.

In the event that the Corporation is the surviving corporation in a merger or
other business combination involving an Acquiring Person or an Adverse Person
and the Common Stock remains outstanding and unchanged or in the event that an
Acquiring Person or an Adverse Person engages in one of a number of self-dealing
transactions specified in the Rights Agreement, proper provision will be made so
that each holder of a Right, other than Rights that are or were beneficially
owned (as defined in the Rights Agreement) by the Acquiring Person or the
Adverse Person, as the case may be, on the earliest of the Distribution Date,
the date the Acquiring Person acquires 20% or more of the outstanding Common
Stock or the date the Adverse Person becomes such (which will thereafter be
void), will thereafter have the right to receive upon exercise thereof that
number of shares of Common Stock having a market value at the time of such
transaction of two times the exercise price of the Right. In addition, under
certain circumstances the Board has the option of exchanging all or part of the
Rights (excluding void Rights) for Common Stock in the manner described in the
Rights Agreement. The Rights Agreement also contains a so-called "flip-in"
feature which provides that if any person or group of affiliated or associated
persons becomes an Adverse Person, then the provisions of the preceding two
sentences shall apply.

WARRANTS

On May 6, 1993, a total of 2,602,566 Warrants were issued to holders of the
Old Junior Subordinated Debentures in addition to the shares of Common Stock
issued to such holders, all as provided by the Prepackaged Plan. Upon issuance,
each of the Warrants entitled the holder to purchase one share of Common Stock
at a purchase price of $16.14 per share, subject to adjustment under certain
events.

The Warrants are exercisable, subject to applicable securities laws, at any
time prior to May 6, 1998. Each share of Common Stock issued upon exercise of a
Warrant prior to the Distribution Date (as defined in the Rights Agreement) and
prior to the redemption or expiration of the Rights will be accompanied by an
attached Right issued under the terms and subject to the conditions of the
Rights Agreement as it may then be in effect.

<PAGE>

STOCKHOLDERS' EQUITY

Changes in stockholders' equity are summarized as follows (dollars in
millions):
<TABLE>
<CAPTION>

JANUARY 1
THROUGH
MAY 6, YEARS ENDED DECEMBER 31,
------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
COMMON STOCK:
Beginning Balance.................... $ 5 $ 5 $ 5
Reverse Stock Split.................. (4) - -
Issuance of New Common Stock......... 3 - -
--------- --------- ---------
Ending Balance 4 5 5
--------- --------- ---------

CAPITAL RECEIVED IN EXCESS OF PAR VALUE:
Beginning Balance..................... 23 24 23
Restructuring adjustments............. 444 - -
Fresh start accounting adjustment..... (467) - -
Other, net ........................... - (1) 1

--------- --------- ---------
Ending Balance ........................ - 23 24
--------- --------- ---------

DEFERRED CURRENCY TRANSLATION:
Beginning Balance...................... (8) - -
Change during the period............... 1 (8) -
Fresh start accounting adjustment...... 7 - -
--------- --------- ---------
Ending Balance ........................ - (8) -
--------- --------- ---------

REINVESTED EARNINGS/(DEFICIT):
Beginning Balance....................... (1,900) (1,709) (1,546)
Net earnings/(loss) .................... 1,434 (191) (161)
Fresh start accounting adjustment....... 467 - -
Other, net ............................. (1) - (2)
Ending Balance ......................... - (1,900) (1,709)
--------- --------- ---------
Total stockholders' equity/(deficit) 4 (1,880) (1,680)
--------- --------- ---------
--------- --------- ---------

</TABLE>

The Corporation is authorized to issue 36,000,000 shares of $1 par value
preferred stock, however, none were outstanding as of May 6, 1993 or December
31, 1992.

As of May 6, 1993, the number of authorized shares of Common Stock, $0.10 par
value, was 200,000,000 shares, reduced from 300,000,000 shares in accordance
with the Prepackaged Plan. After giving effect to the Reverse Stock Split and
distribution of New Common Stock pursuant to the Prepackaged Plan, there were
37,157,458 shares of Common Stock outstanding, excluding 27,556 shares held in
treasury, as of May 6, 1993. As of December 31, 1992, there were 55,757,394
shares of Common Stock outstanding, after deducting 368,409 shares held in
treasury. The treasury shares were acquired through the forfeiture of
restricted stock.

<PAGE>

LITIGATION

As discussed below, U.S. Gypsum has substantial personal injury and property
damage insurance for the years involved in the asbestos litigation. Prior to
1985, when an asbestos exclusion was added to U.S. Gypsum's policies, U.S.
Gypsum purchased comprehensive general liability insurance policies covering
personal injury and property damage in an aggregate face amount of
approximately $850 million. Insurers that issued approximately $100 million of
these policies are presently insolvent. Because U.S. Gypsum's insurance
carriers initially responded to its claims for defense and indemnification with
various theories denying or limiting coverage and the applicability of their
policies, U.S. Gypsum filed a declaratory judgment action against them in the
Circuit Court of Cook County, Illinois on December 29, 1983. (U.S. GYPSUM CO.
V. ADMIRAL INSURANCE CO., ET AL.) (the "COVERAGE ACTION"). U.S. Gypsum alleges
in the Coverage Action that the carriers are obligated to provide
indemnification for settlements and judgments and, in some cases, defense costs
incurred by U.S. Gypsum in personal injury and property damage cases in which it
is a defendant. The current defendants are ten insurance carriers that provided
comprehensive general liability insurance coverage to U.S. Gypsum between the
1940's and 1984. As discussed below, several carriers have settled all or a
portion of the claims in the Coverage Action.

U.S. Gypsum's aggregate expenditures for all asbestos-related matters,
including property damage, personal injury, insurance coverage litigation and
related expenses, exceeded aggregate insurance payments by $10.9 million and
$25.8 million in the years ended December 31, 1991 and 1992, respectively, and
by $3.8 million in the period of January 1 through May 6, 1993.

PROPERTY DAMAGE CASES

<PAGE>

Ct. of Common Pleas, Philadelphia, Pa.) On September 4, 1992, a Federal
district court in South Carolina conditionally certified a class comprised of
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.). On December 23, 1992, a case was filed in state court in South Carolina
purporting to be a "voluntary" class action on behalf of owners of all buildings
containing certain types of asbestos-containing products manufactured by the
nine named defendants, including U.S. Gypsum, other than buildings owned by the
federal or state governments, single family residences, or buildings at issue in
the four above described class actions (ANDERSON COUNTY HOSPITAL V. W.R. GRACE &
CO., ET AL., Court of Common Pleas, Hampton Co., S.C. (the "ANDERSON CASE"). On
January 14, 1993, the plaintiff filed an amended complaint that added a number
of defendants, including the Corporation. The amended complaint alleges, among
other things, that the guarantees executed by U.S. Gypsum in connection with the
1988 Recapitalization, as well as subsequent distributions of cash from U.S.
Gypsum to the Corporation, rendered U.S. Gypsum insolvent and constitute a
fraudulent conveyance. The suit seeks to set aside the guarantees and recover
the value of the cash flow "diverted" from U.S. Gypsum to the Corporation in an
amount to be determined. This case has not been certified as a class action and
no other threshold issues, including whether the South Carolina Courts have
personal jurisdiction over the Corporation, have been decided. The damages
claimed against U.S. Gypsum in the class action cases are unspecified. U.S.
Gypsum has denied the substantive allegations of each of the Property Damage
Cases and intends to defend them vigorously except when advantageous settlements
are possible.

As of May 6, 1993, 67 Property Damage Cases were pending against U.S. Gypsum;
however, the number of buildings involved is greater than the number of cases
because many of these cases, including the class actions referred to above,
involve multiple buildings. Approximately 40 property damage claims have been
threatened against U.S. Gypsum.

In total, U.S. Gypsum has settled property damage claims of approximately 187
plaintiffs involved in approximately 71 cases. Twenty-two cases have been tried
to verdict, 13 of which were won by U.S. Gypsum and 7 lost; two other cases, one
won at the trial level and one lost, were settled after appeals. Appeals are
pending in 4 of the tried cases. In the cases lost, compensatory damage awards
against U.S. Gypsum have totaled $12.5 million. Punitive damages totaling $5.5
million were entered against U.S. Gypsum in four trials. Two of the punitive
damage awards, totaling $1.45 million, were paid after appeals were exhausted; a
third was settled after the verdict was reversed on appeal. The remaining
punitive award is on appeal.

In 1991, 13 new Property Damage Cases were filed against U.S. Gypsum, 11 were
dismissed before trial, 8 were settled, 2 were closed following trial or appeal,
and 100 were pending at year end; U.S. Gypsum expended $22.2 million for the
defense and resolution of Property Damage Cases and received insurance payments
of $13.8 million in 1991. In 1992, 7 new Property Damage Cases were filed
against U.S. Gypsum, 10 were dismissed before trial, 18 were settled, 3 were
closed following trial or appeal, and 76 were pending at year end. U.S. Gypsum
expended $34.9 million for the defense and resolution of Property Damage Cases
and received insurance payments of $10.2 million in 1992. In the period of
January 1 through May 6, 1993, no new Property Damage Cases were filed against
U.S. Gypsum, 2 were dismissed before trial, 7 were settled, and 67 were pending
at the end of the period. U.S. Gypsum expended $7.0 million for the defense and
resolution of Property Damage Cases and received insurance payments of $3.7
million in the period.

In the Property Damage Cases litigated to date, a defendant's liability for
compensatory damages, if any, has

<PAGE>

been limited to damages associated with the presence and quantity of asbestos-
containing products manufactured by that defendant which are identified in the
buildings at issue, although plaintiffs in some cases have argued that
principles of joint and several liability should apply. Because of the unique
factors inherent in each of the Property Damage Cases, including the lack of
reliable information as to product identification and the amount of damages
claimed against U.S. Gypsum in many cases, including the class actions described
above, management is unable to make a reasonable estimate of the cost of
disposing of pending Property Damage Cases.

PERSONAL INJURY CASES

U.S. Gypsum was among numerous defendants in asbestos personal injury suits
and administrative claims involving 57,645 claimants pending as of May 6, 1993.
All asbestos bodily injury claims pending in the federal courts, including
approximately one-third of the Personal Injury Cases pending against U.S.Gypsum,
have been consolidated in the United States District Court for the Eastern
District of Pennsylvania.

U.S. Gypsum is a member, together with 19 other former producers of asbestos-
containing products, of the Center for Claims Resolution (the "CENTER"). The
Center has assumed the handling, including the defense and settlement, of all
Personal Injury Cases pending against U.S. Gypsum and the other members of the
Center. Each member of the Center is assessed a portion of the liability and
defense costs of the Center for the Personal Injury Cases handled by the Center,
according to predetermined allocation formulas. Five of U.S. Gypsum's insurance
carriers that in 1985 signed an Agreement Concerning Asbestos-Related Claims
(the "WELLINGTON AGREEMENT") are supporting insurers (the "SUPPORTING INSURERS")
of the Center. The Supporting Insurers are obligated to provide coverage for
the defense and indemnity costs of the Center's members pursuant to the coverage
provisions in the Wellington Agreement. Claims for punitive damages are
defended but not paid by the Center; if punitive damages are recovered,
insurance coverage may be available under the Wellington Agreement
depending on the terms of particular policies and applicable state law.
Punitive damages have not been awarded against U.S. Gypsum in any of the
Personal Injury Cases. Virtually all of U.S. Gypsum's personal injury
liability and defense costs are paid by those of its insurance carriers that are
Supporting Insurers. The Supporting Insurers provided approximately $350
million of the total coverage referred to above.

On January 15, 1993, U.S. Gypsum and the other members of the Center were
named as defendants in a class action filed in the U.S. District Court for the
Eastern District Pennsylvania (GEORGINE ET AL. V. AMCHEM PRODUCTS INC., ET AL.,
Case No. 93-CV-0215) (hereinafter "GEORGINE," formerly known as "CARLOUGH").
The complaint generally defines the class of plaintiffs as all persons who have
been occupationally exposed to asbestos-containing products manufactured by the
defendants and who had not filed an asbestos personal injury suit as of the date
of the filing of the class action. Simultaneously with the filing of the class
action, the parties filed a settlement agreement in which the named plaintiffs,
proposed class counsel, and the defendants agreed to settle and compromise the
claims of the proposed class. The settlement, if approved by the court, will
implement for all future Personal Injury Cases, except as noted below, an
administrative compensation system to replace judicial claims against the
defendants, and will provide fair and adequate compensation to future claimants
who can demonstrate exposure to asbestos-containing products manufactured by the
defendants and the presence of an asbestos-related disease. Class members will
be given the opportunity to "opt out," or elect to be excluded from the
settlement, although the defendants reserve the right to withdraw from the
settlement if the number of opt outs is, in their sole judgment, excessive. In
addition, in each year a limited number of claimants will have certain rights to
prosecute their claims

<PAGE>

for compensatory (but not punitive) damages in court in the event they reject
compensation offered by the administrative processing of their claim.

Each of the defendants has committed to fund a defined portion of the
settlement, up to a stated maximum amount, over the initial ten-year period of
the agreement (which is automatically extended unless terminated by the
defendants). Taking into account the provisions of the settlement agreement
concerning the maximum number of claims that must be processed in each year and
the total amount to be made available to the claimants, the Center estimates
that U.S. Gypsum will be obligated to fund a maximum of approximately $125
million of the class action settlement, exclusive of expenses, with a maximum
payment of less than $18 million in any single year; of the total amount of U.S.
Gypsum's obligation, all but approximately $13 million or less is expected to be
paid by U.S. Gypsum's insurance carriers.

During 1991, approximately 13,100 Personal Injury Cases were filed against
U.S. Gypsum and approximately 6,300 were settled or dismissed. U.S. Gypsum
incurred expenses of $15.1 million in 1991 with respect to Personal Injury
Cases, of which $15.0 million was paid by insurance. During 1992, approximately
20,100 Personal Injury Cases were filed against U.S. Gypsum and approximately
10,600 were settled or dismissed. U.S. Gypsum incurred expenses of $21.6
million in 1992 with respect to Personal Injury Cases of which $21.5 million was
paid by insurance. In the period of January 1 through May 6, 1993,
approximately 8,700 Personal Injury Cases were filed against U.S. Gypsum and
approximately 5,300 were settled or dismissed. U.S. Gypsum incurred expenses of
$10.9 million in the period with respect to Personal Injury Cases of which $10.8
million was paid by insurance. As of May 6, 1993, December 31, 1992 and
December 31, 1991, approximately 58,000, 54,000 and 43,000 Personal Injury Cases
were outstanding against U.S. Gypsum, respectively.

U.S. Gypsum's average settlement cost for Personal Injury Cases over the past
three years has been approximately $1,350 per claim, exclusive of defense costs.
Management anticipates that its average settlement cost is likely to increase
due to such factors as the possible insolvency of co-defendants, although this
increase may be offset to some extent by other factors, including the
possibility for block settlements of large numbers of cases and the apparent
increase in the percentage of asbestos personal injury cases that appear to have
been brought by individuals with little or no physical impairment. In
management's opinion, based primarily upon U.S. Gypsum's experience in the
Personal Injury Cases disposed of to date and taking into consideration a number
of uncertainties, it is probable that asbestos-related Personal Injury Cases
pending against U.S. Gypsum as of December 31, 1992, can be disposed of for an
amount estimated to be between $80 million and $100 million, including both
indemnity costs and legal fees and expenses. The estimated cost of resolving
pending claims takes into account, among other factors, (i) an increase in the
number of pending claims; (ii) the settlements of certain large blocks of claims
for higher per-case averages than have historically been paid; and (iii) a
slight increase in U.S. Gypsum's historical settlement average. No accrual has
been recorded for this amount because, pursuant to the Wellington Agreement,
U.S. Gypsum's Supporting Insurers are obligated to pay these costs.

<PAGE>

Assuming that the Georgine class action settlement referred to above is
approved substantially in its current form, management estimates, based on
assumptions supplied by the Center, U.S. Gypsum's maximum total exposure in
Personal Injury Cases during the next ten years (the initial term of the
agreement), including liability for pending claims, claims resolved as part of
the class action settlement, and opt out claims, as well as defense costs and
other expenses, at approximately $271 million, of which at least $254 million is
expected to be paid by insurance. U.S. Gypsum's additional exposure for claims
filed by persons who have opted out of Georgine would depend on the number of
such claims that are filed, which cannot presently be determined.

COVERAGE ACTION

As indicated above, all of U.S. Gypsum's carriers initially denied coverage
for the Property Damage Cases and the Personal Injury Cases, and U.S. Gypsum
initiated the Coverage Action to establish its right to such coverage. U.S.
Gypsum has voluntarily dismissed the Supporting Insurers referred to above from
the personal injury portion of the Coverage Action because they are committed to
providing personal injury coverage in accordance with the Wellington Agreement.
U.S. Gypsum's claims against the remaining carriers for coverage for the
Personal Injury Cases have been stayed since 1984.

U.S. Gypsum's experience in the Property Damage Cases suggests that "first
discovery" dates in the eight cases referred to above (1978 through 1985) are
likely to be typical of most pending cases. U.S. Gypsum's total insurance
coverage for the years 1978 through 1984 totals approximately $350 million
(after subtracting insolvencies and discounts given to settling carriers).
However, some pending cases, as well as some cases filed in the future, may be
found to have first discovery dates later than August 1, 1984, after which
U.S. Gypsum's insurance policies did not provide coverage for asbestos-related
claims. In addition, as described below, the first layer excess carrier for the
years 1980 through 1984 is insolvent and U.S. Gypsum may be required to pay
amounts otherwise covered by those and other insolvent policies. Accordingly,
if the court's ruling is affirmed, U.S. Gypsum will likely be required to bear a
portion of the cost of the property damage litigation.

<PAGE>

the terms of the various settlement agreements, to cover both Personal Injury
Cases and Property Damage Cases. Carriers providing an additional $276 million
of coverage that was unexhausted as of December 31, 1992 have agreed to cover
Personal Injury Cases under the Wellington Agreement, but continue to contest
coverage for Property Damage Cases and remain defendants in the Coverage Action.
U.S. Gypsum will continue to seek negotiated resolutions with its carriers in
order to minimize the expense and delays of litigation.

Insolvency proceedings have been instituted against four of U.S. Gypsum's
insurance carriers. Midland Insurance Company, declared insolvent in 1986,
provided excess insurance ($4 million excess of $1 million excess of $500,000
primary in each policy year) from February 15, 1975 to February 15, 1978;
Transit Casualty Company, declared insolvent in 1985, provided excess insurance
($15 million excess of $1 million primary in each policy year) from August 1,
1980 to December 31, 1985; Integrity Insurance Company, declared insolvent in
1986, provided excess insurance ($10 million quota share of $25 million excess
of $90 million) from August 1, 1983 to July 31, 1984; and American Mutual
Insurance Company, declared insolvent in 1989, provided the primary layer of
insurance ($500,000 per year) from February 1, 1963 to April 15, 1971. It is
possible that U.S. Gypsum will be required to pay a presently indeterminable
portion of the costs that would otherwise have been covered by these policies.

It is not possible to predict the number of additional lawsuits alleging
asbestos-related claims that may be filed against U.S. Gypsum. The number of
Personal Injury Claims pending against U.S. Gypsum has increased in each of the
last several years. In addition, many Property Damage Cases are still at an
early stage and the potential liability therefrom is consequently uncertain. In
view of the limited insurance funding currently available for the Property
Damage Cases resulting from the continued resistance by a number of U.S.
Gypsum's insurers to providing coverage, the effect of the asbestos litigation
on the Corporation will depend upon a variety of factors, including the damages
sought in the Property Damage Cases that reach trial prior to the completion of
the Coverage Action, U.S. Gypsum's ability to successfully defend or settle such
cases, and the resolution of the Coverage Action. As a result, management is
unable to determine whether an adverse outcome in the asbestos litigation will
have a material adverse effect on the results of operations or the consolidated
financial position of the Corporation.

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 substantially all 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 Superfund sites but is continuing to
review its accruals as additional information becomes available. Such reserves
take into account all known or estimable 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 USG-owned property are also
covered by reserves established in accordance with the foregoing. The
Corporation believes that neither these matters nor any other known governmental
proceeding regarding environmental matters will have a material adverse effect
upon its earnings or consolidated financial position.

<PAGE>

GEOGRAPHIC AND INDUSTRY SEGMENTS

Transactions between geographic areas are accounted for on an
"arm's-length" basis. No single customer accounted for 4% or more of
consolidated net sales. Export sales to foreign unaffiliated customers
represent less than 10% of consolidated net sales.

To assist the reader in evaluating the profitability of each geographic
and industry segment, EBITDA is shown separately in the following tables.
EBITDA represents earnings before interest, taxes, depreciation, depletion and
amortization. For the period of January 1 through May 6, 1993, the
Corporation also added back non-cash postretirement charges, reorganization
items, an extraordinary gain and the cumulative impact of changes in
accounting principles. The Corporation believes EBITDA is helpful in
understanding cash flow generated from operations that is available for taxes,
debt service and capital expenditures. In addition, EBITDA facilitates the
monitoring of covenants related to certain long-term debt and other agreements
entered into in conjunction with the Restructuring. EBITDA should not be
considered by investors as an alternative to net earnings as an indicator of
the Corporation's operating performance or to cash flows as a measure of its
overall liquidity. Certain amounts for 1992 and 1991 have been reclassified
to conform to the current period presentation.

Variations in the levels of corporate identifiable assets primarily
reflect fluctuations in the levels of cash and cash equivalents. Restricted
cash of $88 million and $84 million, which represents the proceeds from the
sale of DAP, are included in corporate identifiable assets for 1992 and 1991,
respectively.

86
<PAGE>

OPERATING DEPRECIATION
JANUARY 1 THROUGH MAY 6, 1993 NET PROFIT/ DEPLETION AND CAPITAL IDENTIFIABLE
GEOGRAPHIC SEGMENTS SALES (LOSS) EBITDA AMORTIZATION EXPENDITURES ASSETS
- -------------------------------- ------ ---------- ------- ------------- ------------ ------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
United States:
Gypsum Products................. $ 303 $ 30 $ 40 $ 10 $ 6 $ 956
Interior Systems................ 121 10 15 5 2 562
Building Products Distribution 156 (1) - 1 1 116
Intrasegment eliminations (73) - - - - -
Corporate....................... - (11) (7) 2 - 142
------ --------- ------- ------------- ------------ ------------

Total........................... 507 28 48 18 9 1,776

Canada............................ 48 4 7 2 1 198
Other Foreign .................... 65 6 8 2 2 221
Transfers between geographic areas (29) - - - - (1)
Total............................. 591 38 63 22 12 2,194
------ --------- ------- ------------- ------------ ------------
------ --------- ------- ------------- ------------ ------------

INDUSTRY SEGMENTS
Gypsum Products................... $359 $37 $ 50 $ 13 $ 7 $1,175
Interior Systems.................. 177 13 20 6 4 761
Building Products Distribution 156 (1) - 1 1 116
Intersegment eliminations (101) - - - - -
Corporate......................... - (11) (7) 2 - 142
------ ---------- ------- ------------- ------------ ------------
Total............................. 591 38 63 22 12 2,194
------ ---------- ------- ------------- ------------ ------------
------ ---------- ------- ------------- ------------ ------------

</TABLE>

DEPRECIATION
YEAR ENDED DECEMBER 31, 1992 NET OPERATING DEPLETION AND CAPITAL IDENTIFIABLE
GEOGRAPHIC SEGMENTS SALES PROFIT EBITDA AMORTIZATION EXPENDITURES ASSETS
- -------------------------------- ------ ---------- ------- ------------- ------------ ------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>

United States:
Gypsum Products................. $889 $69 $ 99 $ 30 $ 25 $ 645
Interior Systems................ 368 34 47 13 11 260
Building Products Distribution 464 3 5 2 3 95
Intrasegment eliminations (216) - - - - -
Corporate....................... - (30) (28) 8 1 423
------ ---------- ------- ------------- ------------ ------------
Total........................... 1,505 76 123 53 40 1,423

Canada............................ 149 7 14 7 6 96
Other Foreign .................... 208 16 22 6 3 140
Transfers between geographic areas (85) - - - - -
------ ---------- ------- ------------- ------------ ------------
Total............................. 1,777 99 159 66 49 1,659
------- ---------- ------- ------------- ------------ ------------
------- ---------- ------- ------------- ------------ ------------

INDUSTRY SEGMENTS
Gypsum Products................... $1,068 $85 $ 123 $ 38 $ 31 $ 764
Interior Systems.................. 548 41 59 18 14 377
Building Products Distribution 464 3 5 2 3 95
Intersegment eliminations (303) - - - - -
Corporate......................... - (30) (28) 8 1 423
------- ---------- ------- ------------- ------------ ------------
Total............................. 1,777 99 159 66 49 1,659
------- ---------- ------- ------------- ------------ ------------
------- ---------- ------- ------------- ------------ ------------

</TABLE>

<PAGE>

<TABLE>
<CAPTION>
DEPRECIATION
YEAR ENDED DECEMBER 31, 1991 NET OPERATING DEPLETION AND CAPITAL IDENTIFIABLE
GEOGRAPHIC SEGMENTS SALES PROFIT EBITDA AMORTIZATION EXPENDITURES ASSETS
- -------------------------------- ------ ---------- ------- ------------- ------------ ------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
United States:
Gypsum Products................. $835 $64 $ 93 $ 29 $ 23 $ 627
Interior Systems................ 386 47 59 12 9 263
Building Products Distribution 424 - 4 4 1 85
Intrasegment eliminations (212) - - - - -
Corporate....................... - (22) (19) 10 1 383
------- ---------- ------- ------------- ------------ ------------
Total........................... 1,433 89 137 55 34 1,358
------- ---------- ------- ------------- ------------ ------------

Canada............................ 169 22 29 7 3 111
Other Foreign .................... 193 22 28 6 12 157
Transfers between geographic areas (83) - - - - -
------- ---------- ------- ------------- ------------ ------------
Total............................. 1,712 133 194 68 49 1,626
------- ---------- ------- ------------- ------------ ------------
------- ---------- ------- ------------- ------------ ------------

INDUSTRY SEGMENTS
Gypsum Products................... $1,011 $93 $ 131 $ 37 $ 25 $ 754
Interior Systems.................. 576 62 78 17 22 404
Building Products Distribution 424 - 4 4 1 85
Intersegment eliminations (299) - - - - -
Corporate......................... - (22) (19) 10 1 383
------- ---------- ------- ------------- ------------ ------------
Total............................. 1,712 133 194 68 49 1,626
------- ---------- ------- ------------- ------------ ------------
------- ---------- ------- ------------- ------------ ------------

</TABLE>

JANUARY 1
THROUGH YEARS ENDED DECEMBER 31,
MAY 6, ------------------------
TRANSFERS BETWEEN GEOGRAPHIC AREAS 1993 1992 1991
- ---------------------------------- -------- ---------- -----------

(Dollars in millions)
<S> <C> <C> <C>
United States................................... $ 13 $ 35 $ 34
Canada.......................................... 8 23 22
Other Foreign................................... 8 27 27
-------- ---------- -----------
Total........................................... 29 85 83
-------- ---------- -----------
-------- ---------- -----------

</TABLE>

88
<PAGE>

SUBSIDIARY DEBT GUARANTEES

In May 1993, the Corporation issued $340 million aggregate principal amount
of Senior 2002 Notes. Each of U.S. Gypsum, USG Industries, Inc., USG
Interiors, USG Foreign Investments, Ltd., L&W Supply, Westbank Planting
Company, USG Interiors International, Inc., American Metals Corporation and La
Mirada Products Co., Inc. (together, the "COMBINED GUARANTORS") guaranteed,
in the manner described below, both the obligations of the Corporation under
the Credit Agreement and the Senior 2002 Notes. The Combined Guarantors are
jointly and severally liable under the Subsidiary Guarantees. Holders of the
Bank Debt have the right to (i) determine whether, when and to what extent the
guarantees will be enforced (provided that each guarantee payment will be
applied to the Bank Term Loan, Revolving Credit Facility, Capitalized Interest
Notes and Senior 2002 Notes pro rata based on the respective amounts owed
thereon) and (ii) amend or eliminate the guarantees. The guarantees will
terminate when the Bank Term Loan, the Revolving Credit Facility and the
Capitalized Interest Notes are retired regardless of whether any Senior 2002
Notes remain unpaid. The liability of each of the Combined Guarantors on its
guarantee is limited to the greater of (i) 95% of the lowest amount,
calculated as of July 13, 1988, sufficient to render the guarantor insolvent,
leave the guarantor with unreasonably small capital or leave the guarantor
unable to pay its debts as they become due (each as defined under applicable
law) and (ii) the same amount, calculated as of the date any demand for
payment under such guarantee is made, in each case plus collection costs. The
guarantees are senior obligations of the applicable guarantor and rank PARI
PASSU with all unsubordinated obligations of the guarantor.

There are 43 Non-Guarantors (the "COMBINED NON-GUARANTORS"),
substantially all of which are subsidiaries of Guarantors. The Combined
Non-Guarantors primarily include CGC, Gypsum Transportation Limited, USG
Canadian Mining Ltd. and the Corporation's Mexican, European and Pacific
subsidiaries. The long-term debt of the Combined Non-Guarantors of $28
million as of May 6, 1993 has restrictive covenants that restrict, among other
things, the payment of dividends.

The following condensed consolidating information presents:

(i) Condensed financial statements as of May 6, 1993 and December 31, 1992
and for the period of January 1 through May 6, 1993, and the years
ended December 31, 1992 and 1991 of: (a) the Corporation on a parent
company only basis (the "PARENT COMPANY," which was the only entity
of the Corporation included in the bankruptcy proceeding); (b) the
Combined Guarantors; (c) the Combined Non-Guarantors; and (d) the
Corporation on a consolidated basis. Due to the Restructuring and
implementation of fresh start accounting, the financial statements for
the restructured company (periods after May 6, 1993) are not
comparable to those of the predecessor company. Except for the
following condensed financial statements, separate financial
information with respect to the Combined Guarantors is omitted as such
separate financial information is not deemed material to investors.

(ii) The Parent Company and Combined Guarantors shown with their
investments in their subsidiaries accounted for on the equity method.

(iii) Elimination entries necessary to consolidate the Parent Company
and its subsidiaries.

89
<PAGE>

USG CORPORATION
(PREDECESSOR COMPANY)
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
JANUARY 1 THROUGH MAY 6, 1993
(DOLLARS IN MILLIONS)

COMBINED
PARENT COMBINED NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
NET SALES.................................. $ - $ 501 $ 113 $ (23) $ 591
------- ---------- ---------- ------------ ------------
GROSS PROFIT............................... 1 84 24 - 109
------- ---------- ---------- ------------ ------------

OPERATING PROFIT/(LOSS).................... (11) 39 10 - 38

Equity in net earnings of the Subsidiaries (751) (169) - 920 -
Interest expense, net...................... 80 3 1 - 84
Corporate service charge................... (92) 92 - - -
Other expense.............................. 1 5 - - 6
Reorganization items....................... 53 (597) (165) - (709)
------- ---------- ---------- ------------ ------------

EARNINGS BEFORE TAXES ON INCOME,
EXTRAORDINARY GAIN AND CHANGES IN
ACCOUNTING PRINCIPLES...................... 698 705 174 (920) 657

Taxes on income/(income tax benefit)....... 37 (24) 4 - 17
------- ---------- ---------- ------------ ------------

EARNINGS BEFORE EXTRAORDINARY GAIN AND
CHANGES IN ACCOUNTING PRINCIPLES......... 661 729 170 (920) 640

Extraordinary gain, net of taxes........... 944 - - - 944
Cumulative effect of changes in
accounting principles...................... (171) 22 (1) - (150)
------- ---------- ---------- ------------ ------------

NET EARNINGS............................... 1,434 751 169 (920) 1,434
------- ---------- ---------- ------------ ------------
------- ---------- ---------- ------------ ------------

</TABLE>

<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1992
(DOLLARS IN MILLIONS)

COMBINED
PARENT COMBINED NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
NET SALES. . . . . . . . . . . . . . . . . . $ - $ 1,503 $ 359 $ (85) $ 1,777
----------- ------------ ------------ -------------- --------------

GROSS PROFIT/(LOSS). . . . . . . . . . . . . (2) 251 68 - 317
----------- ------------ ------------ -------------- --------------

OPERATING PROFIT/(LOSS). . . . . . . . . . . (30) 105 24 - 99

Equity in net (earnings)/loss of the
Subsidiaries . . . . . . . . . . . . . . . 230 (17) - (213) -
Interest expense, net. . . . . . . . . . . . 310 10 2 - 322
Corporate service charge . . . . . . . . . . (340) 340 - - -
Other expense/(income) . . . . . . . . . . . (73) 75 (1) - 1
----------- ------------ ------------ -------------- --------------

EARNINGS/(LOSS) BEFORE TAXES ON INCOME . . . (157) (303) 23 213 (224)

Taxes on income/(income tax benefit) . . . . 34 (73) 6 - (33)
----------- ------------ ------------ -------------- --------------

NET EARNINGS/(LOSS). . . . . . . . . . . . . (191) (230) 17 213 (191)
----------- ------------ ------------ -------------- --------------
----------- ------------ ------------ -------------- --------------

</TABLE>

USG CORPORATION
(PREDECESSOR COMPANY)
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1991
(DOLLARS IN MILLIONS)

COMBINED
PARENT COMBINED NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
NET SALES. . . . . . . . . . . . . . . . . . $ - $ 1,452 $ 366 $ (106) $ 1,712
----------- ------------ ------------ -------------- --------------

GROSS PROFIT . . . . . . . . . . . . . . . . 1 241 85 - 327
----------- ------------ ------------ -------------- --------------

OPERATING PROFIT/(LOSS). . . . . . . . . . . (22) 110 45 - 133

Equity in net (earnings)/loss of the
Subsidiaries . . . . . . . . . . . . . . . 185 (30) - (155) -
Interest expense, net. . . . . . . . . . . . 305 15 2 - 322
Corporate service charge . . . . . . . . . . (331) 331 - - -
Other expense/(income) . . . . . . . . . . . 6 (2) 1 - 5
----------- ------------ ------------ -------------- --------------

EARNINGS/(LOSS) FROM CONTINUING OPERATIONS
BEFORE TAXES ON INCOME . . . . . . . . . . (187) (204) 42 155 (194)

Taxes on income/(income tax benefit) . . . . 15 (80) 12 - (53)
----------- ------------ ------------ -------------- --------------

EARNINGS/(LOSS) FROM CONTINUING OPERATIONS . (202) (124) 30 155 (141)

Discontinued operations. . . . . . . . . . . 41 (61) - - (20)
----------- ------------ ------------ -------------- --------------

NET EARNINGS/(LOSS). . . . . . . . . . . . . (161) (185) 30 155 (161)
----------- ------------ ------------ -------------- --------------
----------- ------------ ------------ -------------- --------------

</TABLE>

<PAGE>

USG CORPORATION
(PREDECESSOR COMPANY)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MAY 6, 1993
(DOLLARS IN MILLIONS)

COMBINED
PARENT COMBINED NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . $ 24 $ (7) $ 32 $ - $ 49
Receivables, net. . . . . . . . . . . . . . 55 236 49 (25) 315
Inventories . . . . . . . . . . . . . . . . - 111 39 (2) 148
----------- ------------ ------------ -------------- --------------
Total current assets . . . . . . . . . . . 79 340 120 (27) 512
PROPERTY, PLANT AND EQUIPMENT, NET . . . . . 22 628 117 - 767
INVESTMENT IN SUBSIDIARIES . . . . . . . . . 1,823 312 - (2,135) -
EXCESS REORGANIZATION VALUE. . . . . . . . . - 671 180 - 851
OTHER ASSETS . . . . . . . . . . . . . . . . (103) 159 5 3 64
----------- ------------ ------------ -------------- --------------
Total assets . . . . . . . . . . . . . . . 1,821 2,110 422 (2,159) 2,194
----------- ------------ ------------ -------------- --------------
----------- ------------ ------------ -------------- --------------

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses . . . $ 176 $ 76 $ 52 $ (24) $ 280
Notes payable and long-term debt maturing
within one year. . . . . . . . . . . . . . 3 1 11 - 15
----------- ------------ ------------ -------------- --------------
Total current liabilities. . . . . . . . . 179 77 63 (24) 295
LONG-TERM DEBT . . . . . . . . . . . . . . . 1,371 47 28 - 1,446
DEFERRED INCOME TAXES. . . . . . . . . . . . - 155 15 - 170
OTHER LIABILITIES. . . . . . . . . . . . . . 267 8 4 - 279
STOCKHOLDERS' EQUITY:
Common stock. . . . . . . . . . . . . . . . 4 1 6 (7) 4
Capital received in excess of par value . . - 1,678 306 (1,984) -
Deferred currency translation . . . . . . . - - - - -
Reinvested earnings . . . . . . . . . . . . - 144 - (144) -
----------- ------------ ------------ -------------- --------------
Total stockholders' equity . . . . . . . . 4 1,823 312 (2,135) 4
----------- ------------ ------------ -------------- --------------
Total liabilities and stockholders'
equity. . . . . . . . . . . . . . . . . . 1,821 2,110 422 (2,159) 2,194
----------- ------------ ------------ -------------- --------------
----------- ------------ ------------ -------------- --------------

</TABLE>

<PAGE>

USG CORPORATION
(PREDECESSOR COMPANY)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1992
(DOLLARS IN MILLIONS)

COMBINED
PARENT COMBINED NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . $ 59 $ 87 $ 34 $ - $ 180
Receivables (net of reserves) . . . . . . . 65 219 40 (25) 299
Inventories . . . . . . . . . . . . . . . . - 82 34 (3) 113
Restricted cash . . . . . . . . . . . . . . - 88 - - 88
----------- ------------ ------------ -------------- --------------
Total current assets . . . . . . . . . . . 124 476 108 (28) 680
PROPERTY, PLANT AND EQUIPMENT, NET . . . . . 19 664 117 - 800
INVESTMENT IN SUBSIDIARIES . . . . . . . . . 1,073 133 - (1,206) -
PURCHASED GOODWILL, NET. . . . . . . . . . . - 61 8 - 69
OTHER ASSETS . . . . . . . . . . . . . . . . (89) 214 (11) (4) 110
----------- ------------ ------------ -------------- --------------
Total assets . . . . . . . . . . . . . . . 1,127 1,548 222 (1,238) 1,659
----------- ------------ ------------ -------------- --------------
----------- ------------ ------------ -------------- --------------

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses . . . $ 538 $ 91 $ 39 $ (24) $ 644
Notes payable and long-term debt maturing
within one year. . . . . . . . . . . . . . 570 141 7 - 718
Long-term debt classified as current. . . . 1,926 - - - 1,926
----------- ------------ ------------ -------------- --------------
Total current liabilities. . . . . . . . . 3,034 232 46 (24) 3,288
LONG-TERM DEBT . . . . . . . . . . . . . . . 1 38 28 - 67
DEFERRED INCOME TAXES. . . . . . . . . . . . (36) 196 15 - 175
OTHER LIABILITIES. . . . . . . . . . . . . . - 9 - - 9
STOCKHOLDERS' EQUITY/(DEFICIT):
Common stock. . . . . . . . . . . . . . . . 5 2 5 (7) 5
Capital received in excess of par value . . 23 1,002 34 (1,036) 23
Deferred currency translation . . . . . . . - (2) (6) - (8)
Reinvested earnings/(deficit) . . . . . . . (1,900) 71 100 (171) (1,900)
----------- ------------ ------------ -------------- --------------
Total stockholders' equity/(deficit) . . . (1,872) 1,073 133 (1,214) (1,880)
----------- ------------ ------------ -------------- --------------
Total liabilities and stockholders'
equity. . . . . . . . . . . . . . . . . . 1,127 1,548 222 (1,238) 1,659
----------- ------------ ------------ -------------- --------------
----------- ------------ ------------ -------------- --------------

</TABLE>

<PAGE>

USG CORPORATION
(PREDECESSOR COMPANY)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
JANUARY 1 THROUGH MAY 6, 1993
(DOLLARS IN MILLIONS)

COMBINED
PARENT COMBINED NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
NET CASH FLOWS (TO)/FROM OPERATING
ACTIVITIES. . . . . . . . . . . . . . . . . $ (90) $ 76 $ - $ - $ (14)
----------- ------------ ------------ -------------- --------------

Capital expenditures. . . . . . . . . . . . - (9) (3) - (12)
Net proceeds from asset dispositions. . . . - - - - -
----------- ------------ ------------ -------------- --------------
NET CASH FLOWS TO INVESTING ACTIVITIES . . . - (9) (3) - (12)
----------- ------------ ------------ -------------- --------------

Issuance of debt. . . . . . . . . . . . . . - - 5 - 5
Repayment of debt . . . . . . . . . . . . . - (140) (2) - (142)
Cash dividends (paid)/received. . . . . . . 2 - (2) - -
(Increase)/decrease in restricted assets. . 44 (12) - - 32
Net cash transfers (to)/from Corporate. . . 9 (9) - - -
----------- ------------ ------------ -------------- --------------
NET CASH FLOWS (TO)/FROM FINANCING
ACTIVITIES. . . . . . . . . . . . . . . . . 55 (161) 1 - (105)
----------- ------------ ------------ -------------- --------------

NET DECREASE IN CASH AND CASH EQUIVALENTS. . (35) (94) (2) - (131)
----------- ------------ ------------ -------------- --------------
Cash and cash equivalents at beginning
of period . . . . . . . . . . . . . . . . . 59 87 34 - 180
----------- ------------ ------------ -------------- --------------
Cash and cash equivalents at end
of period . . . . . . . . . . . . . . . . . 24 (7) 32 - 49
----------- ------------ ------------ -------------- --------------
----------- ------------ ------------ -------------- --------------

</TABLE>

USG CORPORATION
(PREDECESSOR COMPANY)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1992
(DOLLARS IN MILLIONS)

COMBINED
PARENT COMBINED NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
NET CASH FLOWS (TO)/FROM OPERATING
ACTIVITIES. . . . . . . . . . . . . . . . . $ (93) $ 117 $ 66 $ - $ 90
----------- ------------ ------------ -------------- --------------

Capital expenditures. . . . . . . . . . . . (1) (39) (9) - (49)
Net proceeds from asset dispositions. . . . - 2 4 - 6
----------- ------------ ------------ -------------- --------------
NET CASH FLOWS TO INVESTING ACTIVITIES . . . (1) (37) (5) - (43)
----------- ------------ ------------ -------------- --------------

Issuance of debt. . . . . . . . . . . . . . - - 57 - 57
Repayment of debt . . . . . . . . . . . . . (4) (2) (69) - (75)
Cash dividends (paid)/received. . . . . . . - 56 (56) - -
Increase in restricted assets . . . . . . . - (4) - - (4)
Net cash transfers (to)/from Corporate. . . 121 (121) - - -
----------- ------------ ------------ -------------- --------------
NET CASH FLOWS (TO)/FROM FINANCING
ACTIVITIES. . . . . . . . . . . . . . . . . 117 (71) (68) - (22)
----------- ------------ ------------ -------------- --------------

NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS. . . . . . . . . . . . . . 23 9 (7) - 25
----------- ------------ ------------ -------------- --------------
Cash and cash equivalents at beginning of
period. . . . . . . . . . . . . . . . . . . 36 78 41 - 155
----------- ------------ ------------ -------------- --------------
Cash and cash equivalents at end of period . 59 87 34 - 180
----------- ------------ ------------ -------------- --------------
----------- ------------ ------------ -------------- --------------

</TABLE>

<PAGE>

USG CORPORATION
(PREDECESSOR COMPANY)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1991
(DOLLARS IN MILLIONS)

COMBINED
PARENT COMBINED NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
NET CASH FLOWS (TO)/FROM OPERATING
ACTIVITIES. . . . . . . . . . . . . . . . . $ (216) $ 211 $ 34 $ - $ 29
----------- ------------ ------------ -------------- --------------

Capital expenditures. . . . . . . . . . . . (1) (33) (15) - (49)
Net proceeds from asset dispositions. . . . - 4 1 - 5
Net proceeds from divestiture of
Discontinued Operations. . . . . . . . . . 80 - - - 80
----------- ------------ ------------ -------------- --------------
NET CASH FLOWS (TO)/FROM INVESTING
ACTIVITIES. . . . . . . . . . . . . . . . . 79 (29) (14) - 36
----------- ------------ ------------ -------------- --------------

Issuance of debt. . . . . . . . . . . . . . - - 65 - 65
Repayment of debt . . . . . . . . . . . . . (4) (1) (63) - (68)
Cash dividends (paid)/received. . . . . . . 10 9 (19) - -
Increase in restricted assets . . . . . . . - (84) - - (84)
Net cash transfers (to)/from Corporate. . . 34 (34) - - -
----------- ------------ ------------ -------------- --------------
NET CASH FLOWS (TO)/FROM FINANCING
ACTIVITIES. . . . . . . . . . . . . . . . . 40 (110) (17) - (87)

NET CASH FLOWS FROM DISCONTINUED
OPERATIONS. . . . . . . . . . . . . . . . . - 2 - - 2
----------- ------------ ------------ -------------- --------------

NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS. . . . . . . . . . . . . . (97) 74 3 - (20)
----------- ------------ ------------ -------------- --------------
Cash and cash equivalents at beginning
of period . . . . . . . . . . . . . . . . . 133 4 38 - 175
----------- ------------ ------------ -------------- --------------
Cash and cash equivalents at end
of period . . . . . . . . . . . . . . . . . 36 78 41 - 155
----------- ------------ ------------ -------------- --------------
----------- ------------ ------------ -------------- --------------

</TABLE>

USG CORPORATION
MANAGEMENT REPORT

Management is responsible for the preparation and integrity of the
financial statements and related notes included herein. These statements have
been prepared in accordance with generally accepted accounting principles and,
of necessity, include some amounts that are based on management's best estimates
and judgments.

<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board
of Directors of USG Corporation:

We have audited the accompanying consolidated balance sheet of USG
Corporation (Predecessor Company), a Delaware corporation, and subsidiaries as
of May 6, 1993 and December 31, 1992 and the related consolidated statements of
earnings and cash flows for the period of January 1 through May 6, 1993 and for
the years ended December 31, 1992 and 1991. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

As discussed in Notes to Financial Statements - "Financial Restructuring"
and "Fresh Start Accounting" notes, on May 6, 1993, the Corporation completed a
comprehensive financial restructuring through the implementation of a
prepackaged plan of reorganization under Chapter 11 of the United States
Bankruptcy Code and applied fresh start accounting. The restructuring resulted
in an extraordinary gain of $944 million, primarily from the exchange of debt,
and fresh start accounting resulted in a $709 million gain, primarily from
revaluing assets and liabilities to reflect reorganization value. These one-
time credits to income were recorded as of May 6, 1993 by the Predecessor
Company. As such, results of operations through May 6, 1993 (Predecessor
Company) are not comparable with results of operations subsequent to that date.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of USG Corporation and
subsidiaries as of May 6, 1993 and December 31, 1992, and the results of their
operations and their cash flows for the period of January 1 through May 6, 1993
and for the years ended December 31, 1992 and 1991, in conformity with generally
accepted accounting principles.

As discussed in Notes to Financial Statements - "Litigation" note, in view
of the limited insurance funding currently available for property damage cases
resulting from the continued resistance by a number of U.S. Gypsum's insurers to
providing coverage, the effect of the asbestos litigation on the Corporation
will depend upon a variety of factors, including the damages sought in property
damage cases that reach trial prior to the completion of the coverage action,
U.S. Gypsum's ability to successfully defend or settle such cases, and the
resolution of the coverage action. As a result, management is unable to
determine whether an adverse outcome in the asbestos litigation will have a
material adverse effect on the consolidated results of operations or the
consolidated financial position of the Corporation.

As discussed in Notes to Financial Statements - "Cumulative Effect of
Changes in Accounting Principles" note, on January 1, 1993 the Corporation
changed its method of accounting for postretirement benefits other than pensions
and accounting for income taxes.

ARTHUR ANDERSEN & CO.
Chicago, Illinois
January 31, 1994

<PAGE>

USG CORPORATION
(PREDECESSOR COMPANY)
SCHEDULE V
PROPERTY, PLANT AND EQUIPMENT
(DOLLARS IN MILLIONS)

BEGINNING ENDING
CLASSIFICATION BALANCE BALANCE
- -------------- -------- -------

YEAR ENDED DECEMBER 31, 1991
- ----------------------------

Land and mineral deposits . . . . . . . . . . $ 43 $ 41
Buildings and realty improvements . . . . . . 385 402
Machinery and equipment . . . . . . . . . . . 972 1,000
----- -----
Total . . . . . . . . . . . . . . . . . . . . 1,400 1,443
----- -----
----- -----

YEAR ENDED DECEMBER 31, 1992
- ----------------------------

Land and mineral deposits . . . . . . . . . . 41 41
Buildings and realty improvements . . . . . . 402 401
Machinery and equipment . . . . . . . . . . . 1,000 1,012
----- -----
Total . . . . . . . . . . . . . . . . . . . . 1,443 1,454
----- -----
----- -----

JANUARY 1 THROUGH MAY 6, 1993
- -----------------------------

Land and mineral deposits . . . . . . . . . . 41 61
Buildings and realty improvements . . . . . . 401 228
Machinery and equipment . . . . . . . . . . . 1,012 478
----- -----
Total . . . . . . . . . . . . . . . . . . . . 1,454 767
----- -----
----- -----
</TABLE>

In accordance with fresh start accounting, the Corporation adjusted its
property, plant and equipment accounts as of May 6, 1993 to fair market value.

Detailed information regarding additions and deductions other than those
associated with fresh start accounting is omitted as neither total additions nor
total deductions during each of the periods shown above exceeded 10% of the
balance at the end of the period. Excluding fresh start adjustments, total
additions were $12 million in the period of January 1 through May 6, 1993 and
$49 million in each of the years ended December 31, 1992 and 1991. Total
deductions excluding fresh start adjustments were $12 million in the period of
January 1 through May 6, 1993 and $38 million and $6 million in the years ended
December 31, 1992 and 1991, respectively.

Total deductions include the effect of foreign currency translation which
increased total deductions by $1 million in the period of January 1 through May
6, 1993 and by $18 million in the year ended December 31, 1992. In 1991,
foreign currency translation adjustments decreased total deductions by $1
million.

Upon retirement of other disposition of property, the applicable cost and
accumulated depreciation and depletion are removed from the accounts. Any gains
and losses are included in earnings.

<PAGE>

USG CORPORATION
(PREDECESSOR COMPANY)
SCHEDULE VI
ACCUMULATED DEPRECIATION AND DEPLETION OF
PROPERTY, PLANT AND EQUIPMENT
(DOLLARS IN MILLIONS)

BEGINNING ENDING
CLASSIFICATION BALANCE BALANCE
- -------------- -------- -------

YEAR ENDED DECEMBER 31, 1991
- ----------------------------

Land and mineral deposits . . . . . . . . . . $ 7 $ 7
Buildings and realty improvements . . . . . . 141 147
Machinery and equipment . . . . . . . . . . . 427 470
----- -----
Total . . . . . . . . . . . . . . . . . . . . 575 624
----- -----
----- -----

YEAR ENDED DECEMBER 31, 1992
- ----------------------------

Land and mineral deposits . . . . . . . . . . 7 7
Buildings and realty improvements . . . . . . 147 155
Machinery and equipment . . . . . . . . . . . 470 492
----- -----
Total . . . . . . . . . . . . . . . . . . . . 624 654
----- -----
----- -----

JANUARY 1 THROUGH MAY 6, 1993
- -----------------------------

Land and mineral deposits . . . . . . . . . . 7 -
Buildings and realty improvements . . . . . . 155 -
Machinery and equipment . . . . . . . . . . . 492 -
----- -----
Total . . . . . . . . . . . . . . . . . . . . 654 -
----- -----
----- -----

</TABLE>

Detailed information regarding additions and deductions other than those
associated with fresh start accounting is omitted as neither total additions nor
total deductions of property, plant and equipment (see Schedule V) during each
of the periods shown above exceeded 10% of the balance of property, plant and
equipment at the end of the related period. Total provisions for depreciation
and depletion were $20 million in the period of January 1 through May 6, 1993
and $58 million and $57 million in the years ended December 31, 1992 and 1991,
respectively. Total deductions, excluding fresh start adjustments, were $12
million in the period of January 1 through May 6, 1993 and $28 million and $8
million in the years ended December 31, 1992 and 1991, respectively.

Total deductions include the effect of foreign currency translation which
increased total deductions by $2 million in the period of January 1 through May
6, 1993 and by $10 million in the year ended December 31, 1992 and decreased
total deductions by $1 million in the year ended December 31, 1991.

Upon retirement or other disposition of property, the applicable cost and
accumulated depreciation and depletion are removed from the accounts. Any gains
and losses are included in earnings.

<PAGE>

USG CORPORATION
(PREDECESSOR COMPANY)
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN MILLIONS)

PROVISION RECEIVABLES
CHARGED TO WRITTEN OFF
BEGINNING COSTS AND AND DISCOUNTS ENDING
ACCOUNT BALANCE EXPENSES ALLOWED BALANCE
- ------- ------ -------- ------------ -------

<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1991
- ----------------------------

Doubtful accounts . . . . . . . . . . . . . . . . $ 6 $ 7 $ (6) $ 7
Cash discounts. . . . . . . . . . . . . . . . . . 2 23 (23) 2

YEAR ENDED DECEMBER 31, 1992
- ----------------------------

Doubtful accounts . . . . . . . . . . . . . . . . 7 7 (5) 9
Cash discounts. . . . . . . . . . . . . . . . . . 2 24 (24) 2

JANUARY 1 THROUGH MAY 6, 1993
- -----------------------------

Doubtful accounts . . . . . . . . . . . . . . . . 9 3 (1) 11
Cash discounts. . . . . . . . . . . . . . . . . . 2 8 (8) 2

</TABLE>

<PAGE>

USG CORPORATION
(PREDECESSOR COMPANY)
SCHEDULE IX
SHORT-TERM BORROWINGS
(DOLLARS IN MILLIONS)

MAXIMUM AVERAGE WEIGHTED
AMOUNT AMOUNT AVERAGE
Weighted OUTSTANDING OUTSTANDING INTEREST
CATEGORY OF AGGREGATE ENDING AVERAGE DURING THE DURING THE RATE DURING
SHORT-TERM BORROWINGS BALANCE INTEREST rATE PERIOD PERIOD (a) THE PERIOD (b)
- --------------------- ------ ------------ ---------- ----------- --------------

YEAR ENDED DECEMBER 31, 1991
- ----------------------------

Notes payable (c) . . . . . . . . . . . . . . . . $ 8 8.5% $ 19 $ 15 10.5%
Revolving Credit Facility (d) . . . . . . . . . . 140 12.8 140 140 13.3

YEAR ENDED DECEMBER 31, 1992

- ----------------------------

Notes payable (c) . . . . . . . . . . . . . . . . 2 10.6 12 7 8.0
Revolving Credit Facility (d) . . . . . . . . . . 140 10.0 140 140 11.2

JANUARY 1 THROUGH MAY 6, 1993
- -----------------------------

Notes payable (c) . . . . . . . . . . . . . . . . 6 7.3 6 3 8.8
Revolving Credit Facility (d) . . . . . . . . . . - 7.3 140 140 8.7

<FN>
(a) The average of month-end principal balances.

(b) Computed by dividing average monthly interest expense for the period by the average amount of short-term borrowings
outstanding.

(c) Represents borrowings from several foreign banks by USG International and CGC which are generally not subject to the provisions
of the Credit Agreement.

(d) The Old Credit Agreement, effective up to May 6, 1993, included a $200 million Revolving Credit Facility, of which $70 million
was established as a letter of credit subfacility. Effective May 6, 1993, these amounts were $175 million and $110 million,
respectively.

</TABLE>

100

<PAGE>

USG CORPORATION
(PREDECESSOR COMPANY)
SCHEDULE X
SUPPLEMENTAL STATEMENT OF EARNINGS INFORMATION
(DOLLARS IN MILLIONS)

The following amounts were charged to costs and expenses:

JANUARY 1
THROUGH YEARS ENDED DECEMBER 31,
MAY 6, ------------------------------
1993 1992 1991
------------ ------------- --------------
<S> <C> <C> <C>

Maintenance and repairs . . . . . . . . . . . $ 34 $ 105 $ 99
Depreciation, depletion and amortization. . . 22 66 68

</TABLE>

Maintenance and repairs are recorded as costs or expenses when incurred.

Taxes (excluding payroll and income taxes), rents, royalties and
advertising costs are not shown above, as individually they do not exceed one
percent of net sales in any of the periods shown.

101

<PAGE>

USG CORPORATION
(PREDECESSOR COMPANY)
SUPPLEMENTAL NOTE ON FINANCIAL INFORMATION FOR
UNITED STATES GYPSUM COMPANY
(A SUBSIDIARY OF USG CORPORATION)

USG Corporation, a holding company, owns several operating subsidiaries,
including U.S. Gypsum. On January 1, 1985, all of the issued and outstanding
shares of stock of U.S. Gypsum were converted into shares of USG Corporation and
the holding company became a joint and several obligor for certain debentures
originally issued by U.S. Gypsum. As of May 6, 1993, debentures totaling $41
million were recorded on the holding company's books of account equal to the
amount recorded as of December 31, 1992. Financial results for U.S. Gypsum are
presented below in accordance with disclosure requirements of the SEC (dollars
in millions):

SUMMARY STATEMENT OF EARNINGS

JANUARY 1
THROUGH YEARS ENDED DECEMBER 31,
MAY 6, ---------------------------------
1993 1992 1991
-------------- -------------- ---------------
<S> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . $ 297 $ 871 $ 822
Cost and expenses. . . . . . . . . . . . . . . 268 801 759
-------------- -------------- ---------------
Operating profit . . . . . . . . . . . . . . . 29 70 63
Interest expense, net. . . . . . . . . . . . . - 2 4
Other income, net. . . . . . . . . . . . . . . - (2) (1)
Corporate charges. . . . . . . . . . . . . . . 52 188 173
Reorganization items . . . . . . . . . . . . . (295) - -
-------------- -------------- ---------------
Earnings/(loss) before taxes on income and
change in accounting principle . . . . . . . 272 (118) (113)
Income tax benefit . . . . . . . . . . . . . . (11) (44) (43)
-------------- -------------- ---------------
Earnings/(loss) before change in accounting
principle . . . . . . . . . . . . . . . . . . 283 (74) (70)
Cumulative effect of change in accounting
principle . . . . . . . . . . . . . . . . . . 28 - -
-------------- -------------- ---------------
Net earnings/(loss). . . . . . . . . . . . . . 311 (74) (70)
-------------- -------------- ---------------
-------------- -------------- ---------------

</TABLE>

SUMMARY BALANCE SHEET

AS OF AS OF
MAY 6, DECEMBER 31,
1993 1992
------------- --------------
<S> <C> <C>
Current assets . . . . . . . . . . . . . . . . $ 183 $ 192
Property, plant and equipment, net . . . . . . 486 511
Excess Reorganization Value. . . . . . . . . . 306 -
Other assets . . . . . . . . . . . . . . . . . 9 7
-------------- --------------
Total assets . . . . . . . . . . . . . . . . 984 710
-------------- --------------
-------------- --------------

Current liabilities. . . . . . . . . . . . . . $ 33 $ 32
Other liabilities and obligations. . . . . . . 154 193
Stockholder's equity . . . . . . . . . . . . . 797 485
-------------- --------------
Total liabilities and stockholder's equity . 984 710
-------------- --------------
-------------- --------------

</TABLE>

102

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
WITH RESPECT TO SUPPLEMENTAL NOTE AND FINANCIAL STATEMENT SCHEDULES

We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of USG Corporation (Predecessor Company)
included in this Form 10-K, and have issued our report thereon dated January 31,
1994. Our report on the consolidated financial statements includes an
explanatory paragraph with respect to the asbestos litigation as discussed in
Notes to the Financial Statements - "Litigation" note. Our report on the
consolidated financial statements also includes an explanatory paragraph with
respect to the changes in the methods of accounting for postretirement benefits
other than pensions and accounting for income taxes as discussed in Notes to
Financial Statements - "Cumulative Effect of Changes in Accounting Principles"
note. Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental note and financial
statement schedules on pages 97 through 102 are the responsibility of the
Corporation's management and are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
financial statements. The supplemental note and financial statement schedules
have been subjected to the auditing procedures applied in the audits of the
basic financial statements and, in our opinion, fairly state in all material
respects the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.

ARTHUR ANDERSEN & CO.
Chicago, Illinois
January 31, 1994

103

<PAGE>

USG CORPORATION
SELECTED QUARTERLY FINANCIAL DATA (A) (UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

APRIL 1 MAY 7
FIRST THROUGH THROUGH THIRD FOURTH
QUARTER MAY 6 JUNE 30 QUARTER QUARTER
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
1993
Net sales . . . . . . . . . . . . . . . . . $ 436 $ 155 $ 315 $ 514 $ 496
Gross profit. . . . . . . . . . . . . . . . 79 30 63 105 95
Operating profit/(loss) (b) . . . . . . . . 27 11 (1) 6 (4)
Net earnings/(loss) (b) (c) . . . . . . . . (279) 1,713 (21) (25) (83)
Per common share (d):
Net loss. . . . . . . . . . . . . . . . . - - (0.57) (0.66) (2.23)
Price range (e) - high . . . . . . . . . - - 14 22 5/8 30 1/2
low. . . . . . . . . . - - 9 5/8 13 20 1/4
EBITDA. . . . . . . . . . . . . . . . . . . 46 17 37 65 53

</TABLE>

FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
1992 (d)
Net sales . . . . . . . . . . . . . . . . . $ 426 $ 441 $ 474 $ 436 $ 1,777
Gross profit. . . . . . . . . . . . . . . . 71 81 94 71 317
Operating profit. . . . . . . . . . . . . . 20 28 39 12 99
Net loss. . . . . . . . . . . . . . . . . . (50) (48) (33) (60) (191)
EBITDA. . . . . . . . . . . . . . . . . . . 35 43 54 27 159

<FN>

(a) Due to the Restructuring and implementation of fresh start accounting, the
financial statements effective May 7, 1993 for the restructured company
are not comparable to financial statements prior to that date for the
predecessor company.

(b) Effective May 7, 1993, the Corporation began amortizing its Excess
Reorganization Value. This non-cash amortization reduced operating profit
and net earnings by $28 million, $43 million and $42 million in the period
of May 7 through June 30, the third quarter and the fourth quarter of 1993,
respectively.

(c) Net loss in the first quarter of 1993 reflects a one-time after-tax net
charge of $150 million for the cumulative effect of changes in accounting
principles and a pre-tax reorganization items expense of $69 million. Net
earnings in the period of April 1 through May 6, 1993 include a one-time
pre-tax reorganization items gain of $778 million and a one-time after-tax
extraordinary gain of $944 million, both of which were associated with the
Restructuring. Net earnings in the fourth quarter of 1993 include an
after-tax extraordinary loss of $21 million related to the Corporation's
proposed 1994 financing plan.

(d) Per-share information for periods prior to May 7, 1993 is omitted because,
due to the Restructuring and implementation of fresh start accounting, it
is not meaningful.

(e) Stock price ranges are for transactions on the New York Stock Exchange
(trading symbol USG), which is the principal market for these securities.
Stockholders of record as of January 31, 1994: Common - 14,702; Preferred -
none.

</TABLE>

104

<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

A Form 8-K reporting a change of accountants has not been filed within
24 months prior to the date of the most recent financial statements.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

In connection with the consummation of the Prepackaged Plan, the number
of persons comprising the Board was increased by five effective May 6, 1993
which, after the May 1993 retirement of one director whose position was
eliminated, brought the total Board membership to 15. Of the five New
Directors (the "NEW DIRECTORS"), two, Messrs. Crutcher and Lesser, were
nominated by a committee representing holders of the Corporation's senior
subordinated debentures which were converted into Common Stock under the
Prepackaged Plan (each a "SENIOR SUBORDINATED DIRECTOR"); two, Messrs. Fetzer
and Zubrow, were nominated by Water Street (each a "WATER STREET DIRECTOR");
and one, Mr. Brown, was nominated by a committee representing holders of the
Corporation's junior subordinated debentures which were converted into Common
Stock and Warrants to purchase Common Stock under the Prepackaged Plan (a
"JUNIOR SUBORDINATED DIRECTOR").

As the respective terms of office of the New Directors expire, the
Prepackaged Plan provides that each such New Director will be renominated.
If a New Director declines or is unable to accept such nomination, or in the
event a New Director resigns during his term or otherwise becomes unable to
continue his duties as a director, such New Director or, in the case of a
Water Street Director, Water Street, shall recommend his successor to the
Committee on Directors of the Board. In the event of the death or incapacity
of a New Director, his successor shall be recommended, in the case of a Water
Street Director, by Water Street, in the case of a Senior Subordinated
Director, by the remaining Senior Subordinated Director, and in the case of a
Junior Subordinated Director, by the remaining New Directors. Any such
nominee shall be subject to approval by the Board's Committee on Directors
and the Board, which approval shall not be unreasonably withheld.

Until June 22, 1997, the time at which the director nomination and
selection procedures established by the Prepackaged Plan terminate, no more
than two employee directors may serve simultaneously on the Board. An
"employee director" is defined for this purpose as any officer or employee of
the Corporation or any direct or indirect subsidiary, or any director of any
such subsidiary who is not also a director of the Corporation.

105

<PAGE>

DIRECTORS OF THE REGISTRANT

YEAR FIRST
PRINCIPAL OCCUPATION, BECAME
FIVE YEAR EMPLOYMENT HISTORY DIRECTOR
NAME AND AGE AND OTHER DIRECTORSHIPS AND CLASS
- --------------------------------- --------------------------------------------------------- ------------------
<S> <C> <C>
Eugene B. Connolly, 61 Chairman and Chief Executive Officer, since January 1994; 1988
Chairman, President and Chief Execuive Officer (April Class 1994
1993-December 1993); Chairman of the Board and Chief
Executive Officer (June 1990-March 1993); President and
Chief Executive Officer (January 1990-May 1990); Executive
Vice President of the Corporation (1987-1989); and
President and Chief Executive Officer of USG Interiors,
Inc. (March 1987-March 1989). He also was President and
Chief Executive Officer of DAP Inc. (July 1988-March
1989). Prior to that, he served as President and Chief
Operating Officer of United States Gypsum Company. He
joined the Corporation in 1958, was appointed General
Manager of the Southern Construction Products Division in
1980, and was elected a Group Vice President, Subsidiaries
in 1983 and Group Vice President, International and
Industrial in 1984. Mr. Connolly is a director of BPB
Industries plc, London, England and a director of U.S. Can
Corporation. He is a member of the Advisory Board of the
Kellogg Graduate School of Management, Northwestern
University; the Dean's Advisory Council, School of
Business, Indiana University; and the Governing Council,
Good Shepherd Hospital (Barrington, Illinois). Mr.
Connolly has been a director of the Corporation since May
1988 and is Chairman of the Board's Executive Committee.

Keith A. Brown, 42 President (since 1987) of Chimera Corporation, a private 1993
management holding company. Mr. Brown is a director Class 1994
(since 1988) of Adelphia Incorporated, a director (since
1988) of Global Film & Packaging Corporation, a director
(since 1989) of Mansfield Foundry Corporation, and a
director (since 1993) of Ashland Castings Corporation.
Mr. Brown has been a director of the Corporation since May
1993 and he is a member of the Board's Audit Committee and
Public Affairs Committee.

James C. Cotting, 60 Chairman and Chief Executive Officer (since April 1987) of 1987
Navistar International Corporation, diesel truck Class 1994
manufacturing and engineering, and financial services.
Mr. Cotting is a director of Asarco Incorporated and The
Interlake Corporation. He is a director of the National
Association of Manufacturers and is a member of the
Conference Board. Mr. Cotting has been a director of the
Corporation since October 1987, is a member of the Board's
Executive Committee and is Chairman of its Finance Committee.

Philip C. Jackson, Jr.,65 Formerly Vice Chairman and a director of Central Bank of
the South, Birmingham, Alabama, and of its parent company, 1979
Central Bancshares of the South (1980-1989), banking and Class 1994
financial services; presently Adjunct Professor,
Birmingham-Southern College, Birmingham, Alabama (since
January 1989). Mr. Jackson was a member (April 1990-
April 1993) of the Thrift Depositors Protection Oversight
Board, Washington, D.C. He is Director, Saul Centers, Inc.,
Washington D.C. His past affiliations include: member of
the Board of Governors of the Federal Reserve System,
Washington, D.C., (July 1975-November 1978) and Vice
President and a director of the Jackson Company (mortgage
banking operations) of Birmingham, Alabama (October 1949-
June 1975). Mr. Jackson is Trustee, Birmingham - Southern
College, Birmingham, Alabama. He has been a director of
the Corporation since May 1979, is a member of the Board's
Executive Committee and is Chairman of its Public Affairs
Committee.

</TABLE>

106

<PAGE>

W.H. Clark, 61 Chairman of the Board (since 1984), Chief Executive 1985
Officer (since 1982) and President (1984-1990) of Nalco Class 1995
Chemical Company of Naperville, Illinois, specialized
chemicals and technology. He joined the company in 1960
and served in various capacities until his appointment
as a General Manager in 1978. Mr. Clark was elected
Group Vice President and President, Industrial
Division (both in 1978); director in 1980; and Executive
Vice President, Domestic Operations, in 1982. He is a
director of Northern Trust Corporation and The Northern
Trust Bank, Nicor Corporation, Bethlehem Steel
Corporation, James River Corporation and Northern Illinois
Gas Company. Mr. Clark has been a director of the
Corporation since August 1985, is a member of the Board's
Executive Committee and Compensation and Organization
Committee, and is Chairman of its Committee on Directors
and Audit Committee.

Lawrence M. Crutcher, 51 Managing Director (since 1990) of Veronis, Suhler & 1993
Associates, investment bankers. From 1967 to 1989, Mr. Class 1995
Crutcher was with Time Inc. He was President of Book-of-
the-Month Club (1985-1989); Vice President for Financial
Planning (1984); Vice President, Magazines (1981-1983);
and Vice President, Circulation (1976-1980). Mr. Crutcher
has been a director of the Corporation since May 1993; he
is a member of the Board's Committee on Directors and
Public Affairs Committee.

Anthony J. Falvo, Jr., 63 Vice Chairman, since April 1993; President (June 1990- 1988
March 1993) and Chief Operating Officer (January 1990- Class 1995
March 1993); Executive Vice President of the Corporation
(1988-1989). He previously served as President and Chief
Executive Officer of United States Gypsum Company (June
1988-March 1989), President and Chief Executive Officer of
Masonite Corporation (April 1986-June 1988), and President
and Chief Operating Officer of Masonite Corporation (March
1985-April 1986). He joined the Corporation in 1955 and
was elected Vice President, Marketing (1982), and Group
Vice President, Consumer Products (1984). He previously
served as President, L&W Supply Corporation (1976) and
Director, Group Staff Services (1980). He serves as a
director of Urban Gateways and is on the Development
Council of Good Shepherd Hospital (Barrington, Illinois).
Mr. Falvo has been a director of the Corporation since May
1988 and is a member of the Board's Executive Committee.

</TABLE>

107

<PAGE>

Judith A. Sprieser, 40 President and Chief Executive Officer (June 1993-present) 1994
of Sara Lee Bakery, North America, a division of Sara Lee Class 1995
Corporation, packaged food and consumer products.
Ms. Sprieser has been with Sara Lee Corporation since 1987
and served as Assistant Treasurer, Corporate Finance
(1987-1990) and Corporate Financial Officer (1990-1993) of
North American Bakery, Sara Lee Bakery. She was also
Vice President, Sara Lee Food Group (January 1993-
June 1993). She has been a director of the Corporation
since February 1994; she is a member of the Board's
Audit Committee and Committee on Directors.

Robert L. Barnett, 53 Formerly Vice Chairman of Ameritech (1991-1992) and 1990
President of the Ameritech Bell Group (1989-1992), Class 1996
communications and information services, which includes
eight wholly-owned subsidiaries of American Information
Technologies Corporation (Ameritech) and the Bell Group
staff. Mr. Barnett also served as President of
Ameritech Enterprise Group (1987-1989), President and
Chief Executive Officer of Wisconsin Bell Company (1985-
1987), Vice President of Operations for Wisconsin Bell
Company (1984-1985), President of Ameritech Mobile
Communications Company (1983-1984), and in various other
capacities with the Bell System, which he joined in 1964.
He is a director of Johnson Controls, Inc. and is a member
of the Advisory Council of the Robert R. McCormick School
of Engineering and Applied Science at Northwestern
University and of the University's Electrical Engineering
and Computer Science Industrial Advisory Board. He is
affiliated with the Institute of Electrical and
Electronics Engineers. Mr. Barnett has been a director of
the Corporation since May 1990. He is a member of the
Board's Compensation and Organization Committee, Audit
Committee and Committee on Directors.

</TABLE>

108

<PAGE>

YEAR FIRST
PRINCIPAL OCCUPATION, BECAME
FIVE YEAR EMPLOYMENT HISTORY DIRECTOR
NAME AND AGE AND OTHER DIRECTORSHIPS AND CLASS
- --------------------------------- --------------------------------------------------------- ------------------
<S> <C> <C>
David W. Fox, 62 Chairman and Chief Executive Officer (since 1990) of 1987
Northern Trust Corporation and The Northern Trust Company, Class 1996
banking and financial services. He has been with The
Northern Trust Company since 1955 and served as Senior
Vice President (1974-1978), Executive Vice President
(1978-1981), Vice Chairman (1981-1987), and President
(1987-1993). Mr. Fox is a director of The Federal
Reserve Bank of Chicago, Northern Trust of Florida
Corp., Banque Rivaud (Paris, France), INROADS/Chicago and
the Chicago Central Area Committee. He is a Governor of
the Chicago Stock Exchange and a trustee of Northwestern
Memorial Hospital, the Adler Planetarium, The Orchestral
Association, and DePaul University. Mr. Fox has been a
director of the Corporation since May 1987, is a member of
the Board's Executive Committee, Finance Committee and
Committee on Directors, and is Chairman of its
Compensation and Organization Committee.

Marvin E. Lesser, 52 Managing Partner (since 1989) of Cilluffo Associates, 1993
L.P., a private investment partnership. Managing Partner Class 1996
(since 1993) of Sigma Partners, L.P., a private investment
partnership. Mr. Lesser has also been a private
consultant since 1992. He was Senior Vice President
(1986-1988) of Bessemer Securities Corporation, a private
investment company and a director (1989-1991) of Amdura
Corporation. Mr. Lesser is Chairman of the Seacoast Area
Chapter (New Hampshire) of the American Red Cross. He has
been a director of the Corporation since May 1993; he is a
member of the Board's Finance Committee, Committee on
Directors and Public Affairs Committee.

Alan G. Turner, 60 Chairman and Chief Executive of BPB Industries plc, 1984
London, England, a manufacturer of gypsum products and Class 1996
other building materials and paper and packaging products.
Prior to September 1993, Mr. Turner was Chairman (November
1992-August 1993), Chairman and Chief Executive
(1985-1992), Chief Executive (1978-1985), Deputy Chief
Executive (1974-1978), and served in various other
capacities since his association with BPB Industries plc
in 1962. He has been a director of that company since
1972. Mr. Turner is also a director and Vice President of
the National Council of Building Material Producers
Limited, United Kingdom; director of The Manufacturers
Life Insurance Company, Toronto; director of Jaguar
Limited, United Kingdom; director of RSA Adelphi
Enterprises Ltd.; and a member of the European Advisory
Board of Boral Limited, Australia. He is an honorary
president of Eurogypsum; a member of the Council and
Treasurer of the Royal Society for the Encouragement of
Arts, Manufactures & Commerce, United Kingdom; and a
member of the Institution of Chemical Engineers. Mr.
Turner has been a director of the Corporation since May
1984 and is a member of the Board's Audit Committee and
Committee on Directors. (BPB Industries plc, London,
England, beneficially owns 1,000 shares of Common Stock of
the Corporation).

Barry L. Zubrow, 41 Partner (since 1988) of Goldman, Sachs & Co., investment 1993
bankers. Mr. Zubrow is a member of the Board of Managers Class 1996
of Haverford College. He has been a director of the
Corporation since May 1993 and is a member of the Board's
Finance Committee and Committee on Directors.

</TABLE>

On February 9, 1994, William C. Foote was elected a director of the
Corporation (in the class with a term expiring in 1995) to become effective
March 1, 1994 following the retirement of Mr. Falvo. See "Executive Officers
of the Registrant" below for Mr. Foote's age, present position and employment
within the past five years. He will be a member of the Executive Committee.

109

<PAGE>

EXECUTIVE OFFICERS OF THE REGISTRANT (WHO ARE NOT DIRECTORS)

HAS HELD
NAME, AGE PRESENT
AND PRESENT POSITION PRIOR BUSINESS EXPERIENCE IN PAST FIVE YEARS POSITION SINCE
- ------------------------------------------- --------------------------------------------------------- --------------
<S> <C> <C>
William C. Foote, 42 Senior Vice President, USG Interiors, Inc. to March 1989; January 1994
President and Chief Operating Officer Senior Vice President and General Manager, Central
Construction Products Region, United States Gypsum
Company to November 1990; Executive Vice President and
Chief Operating Officer, L&W Supply Corporation to
September 1991; President and Chief Executive Officer,
L&W Supply Corporation from September 1991 through
December 1993; President and Chief Executive Officer, USG
Interiors, Inc. from January 1993 through December 1993.

Arthur G. Leisten, 52 Vice President and General Counsel to January 1990; February 1994
Senior Vice President and General Counsel Senior Vice President and General Counsel to March 1993;
Senior Vice President, General Counsel and Secretary to
February 1994.

P. Jack O'Bryan, 58 Senior Vice President and General Manager, Central January 1993
Senior Vice President and Chief Construction Products Region, United States Gypsum
Technology Officer Company to March 1989; President and Chief Executive
Officer, United States Gypsum Company to January 1993.

Harold E. Pendexter, Jr., 59 Vice President, Human Resources and Administration to January 1991
Senior Vice President and Chief Administrative January 1990; Senior Vice President, Human Resources and
Officer Administration to January 1991.

Raymond T. Belz, 53 Vice President Finance, United States Gypsum Company to January 1994
Vice President and Controller, December 1990; Vice President Financial Services, United
USG Corporation; Vice President States Gypsum Company since January 1991.
Financial Services, United States Gypsum
Company

Brian W. Burrows, 54 Same position. March 1987
Vice President, Research and Development

Richard H. Fleming, 46 Vice President Finance and Chief Financial Officer, January 1994
Vice President and Chief Masonite Corporation to February 1989; Director,
Financial Officer Corporate Finance, USG Corporation to January 1991; Vice
President and Treasurer to December 1993.

Matthew P. Gonring, 38 Director, Public Relations to January 1991; Director, March 1993
Vice President, Corporate Corporate Communications to March 1993.
Communications

</TABLE>

110

<PAGE>

HAS HELD
NAME, AGE PRESENT
AND PRESENT POSITION PRIOR BUSINESS EXPERIENCE IN PAST FIVE YEARS POSITION SINCE
- ------------------------------------------- --------------------------------------------------------- --------------
<S> <C> <C>
J. Bradford James, 47 Vice President, Finance & Administration, USG Interiors, January 1994
Vice President; President and Chief Executive Inc. to March 1989; Director, Corporate Strategic
Officer, USG Interiors, Inc. Planning, USG Corporation and Vice President, Finance &
Administration, USG Interiors, Inc. to January 1990; Vice
President, Financial and Strategic Planning, USG
Corporation to January 1991; Vice President and Chief
Financial Officer, USG Corporation to March 1993; Senior
Vice President and Chief Financial Officer to December
1993.

John E. Malone, 50 Vice President and Controller, USG Corporation to January 1994
Vice President and Treasurer, December 1993; Vice President - Finance, USG
USG Corporation; Vice President - Finance, USG International, Ltd. since March 1993.
International, Ltd.

James S. Phillips, 64 Vice President, National Accounts, United States Gypsum December 1990
Vice President, Corporate Company to March 1989; Vice President National Accounts,
Accounts USG Corporation to December 1990.

Donald E. Roller, 56 Executive Vice President and Chief Operating Officer, USG January 1994
Vice President; President and Chief Executive Interiors, Inc. to March 1989; President and Chief
Officer, United States Gypsum Company Executive Officer, USG Interiors Inc. to January 1993;
President and Chief Executive Officer, United States
Gypsum Company since January 1993.

Stanley R. Sak, 53 Group Vice President, Ceiling Group, USG Interiors, Inc. January 1994
Vice President; President and Chief Executive to March 1989; Executive Vice President, USG Interiors,
Officer, USG International, Ltd. Inc. to October 1990; President and Chief Executive
Officer, USG International, Ltd. since October 1990.

S. Gary Snodgrass, 42 Vice President Human Resources, USG Interiors, Inc. to January 1994
Vice President, Human Resources - Operations December 1989; Director, Corporate Human Resources
Planning, USG Corporation and Vice President, Human
Resources, USG Interiors, Inc. to November 1990;
Director, Human Resources, USG Corporation to September
1992; Vice President, Management Resources and Employee
Relations to December 1993.

Dean H. Goossen, 46 General Counsel and Secretary, Arthur J. Gallagher & Co. February 1994
Corporate Secretary to 1989; Vice President, General Counsel and Secretary,
Xerox Financial Services Life Insurance Company to
February 1993; Assistant Secretary, USG Corporation to
February 1994.

</TABLE>

111

<PAGE>

HAS HELD
NAME, AGE PRESENT
AND PRESENT POSITION PRIOR BUSINESS EXPERIENCE IN PAST FIVE YEARS POSITION SINCE
- ------------------------------------------- --------------------------------------------------------- --------------
<S> <C> <C>
Frank R. Wall, 61 Senior Vice President and General Manager, Western January 1994
President and Chief Executive Officer, L&W Construction Products Region, United States Gypsum
Supply Corporation Company to January 1990; Senior Vice President, Operating
Services, United States Gypsum Company to April 1993;
Executive Vice President and Chief Operating Officer, L&W
Supply Corporation to December 1993.

</TABLE>

ITEM 11. EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION AND BENEFITS

The discussion that follows has been prepared based on the actual
compensation paid and benefits provided by the Corporation to the five most
highly compensated executive officers of the Corporation (collectively, the
"NAMED EXECUTIVES"), for services performed during 1993 and the other periods
indicated. This historical data is not necessarily indicative of the
compensation and benefits that may be provided to such persons in the future.

In general, the Prepackaged Plan provided for the continuation by the
Corporation of the existing employment, compensation and benefit arrangements.
The Prepackaged Plan resulted in a substantial reduction on May 6, 1993 in the
amounts otherwise potentially payable to the Named Executives in 1994 under the
Corporation's three-year Incentive Recovery Program (the "IRP") and the
concurrent cash settlement of such reduced awards. Although no further awards
will be made to the Named Executives under the IRP, the Named Executives were
eligible for incentive awards under the Corporation's 1993 Annual Management
Incentive Program.

112

<PAGE>

SUMMARY COMPENSATION TABLE

The following table summarizes for the years indicated the compensation
awarded to, earned by or paid to the Named Executives for services rendered in
all capacities to the Corporation and its subsidiaries.

LONG TERM COMPENSATION
---------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------------- ----------------------- --------

OTHER
ANNUAL RESTRICTED ALL OTHER
NAME AND COMPEN- STOCK OPTIONS/ LTIP COMPEN-
PRINCIPAL POSITION SALARY BONUS SATION AWARDS SARS PAYOUTS SATION
(AS OF JANUARY 1, 1994) YEAR ($) ($)(A) ($)(B) ($)(C) (#)(D) ($)(E) ($)(F)
- ----------------------- ---- ------ ------ ----- ---------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Eugene B. Connolly 1993 $ 612,500 $ 717,624 $ 52,952 $ - 250,000 $1,164,005 $ 42,426
Chairman of the Board 1992 555,000 - - - - - 530
and CEO 1991 475,000 - - 213,750 - - 530

Anthony J. Falvo, Jr. 1993 473,750 543,120 - - 50,000 800,168 32,869
Vice Chairman 1992 432,500 - - - - - 530
1991 376,667 - - 142,500 - - 530

P. Jack O'Bryan 1993 280,000 255,096 - - 100,000 470,448 17,739
Senior Vice President 1992 256,000 - - - - - 530
and Chief Technology 1991 236,750 - - 83,125 - - 530
Officer

Donald E. Roller 1993 280,000 255,096 - - 100,000 446,614 17,574
Vice President; President 1992 250,000 - - - - - 530
and CEO, United States 1991 233,333 - - 83,125 - - 530
Gypsum Company

Harold E. Pendexter, Jr. 1993 269,583 250,614 - - 100,000 408,524 17,739
Senior Vice President 1992 242,500 - - - - - 530
and Chief Administrative 1991 210,000 - - 83,125 - - 530
Officer

<FN>

(a) Reflects payments arising from cash award opportunities under the Corporation's 1993 Annual Management Incentive Program
which were afforded to the Named Executives upon termination of the IRP referred to in footnote (e). The amounts shown
are taken into account for purposes of computing benefits under the Corporation's retirement plans. None of the Named
Executives received an annual cash bonus for 1992 or 1991.

(b) Mr. Connolly's Other Annual Compensation for 1993 included $14,100 in automobile allowance and $16,724 as the estimated
cost of equivalent life insurance provided by the Corporation's executive death benefit plan; no other Named Executive had
perquisites and other personal benefits aggregating the lesser of either $50,000 or 10 percent of salary and bonus for
1993, and none of the Named Executives had such perquisites or other personal benefits for 1992 or 1991.

(c) The amounts shown reflect the value (determined by the closing price of the Corporation's Common Stock on the New York
Stock Exchange on the date of grant) of grants of restricted stock awards made in 1991 under the Management Performance
Plan. The shares subject to some such awards were originally scheduled to vest no later than the tenth anniversary of the
applicable date of grant, subject to acceleration upon the attainment of specified performance objectives, and the awards
included the right to receive dividends paid to stockholders. None of the restricted stock awards were originally
scheduled to vest in less than three years from the date of grant. No dividends were paid by the Corporation in 1991,
1992, or 1993. The shares subject to such awards were reduced proportionally as a result of the one for 50 reverse stock
split effected by the Prepackaged Plan. Although none of such shares had vested as of December 31, 1993, the Compensation
and Organization Committees of the Board of Directors determined in November 1993 to accelerate the vesting of all
outstanding restricted stock awards, including the awards held by the Named Executive in the amounts indicated in the next
sentence, to February 14, 1994. As of December 31, 1993, the aggregate number of restricted shares held by each of the
Named Executives and the aggregate value thereof, determined with reference to closing prices on such date, were as
follows: Mr. Connolly, 3,852 shares, $112,671; Mr. Falvo, 2,628 shares, $76,869; Mr. O'Bryan, 1,528 shares, $44,694; Mr.
Roller, 1,480 shares, $43,290; and Mr. Pendexter, 1,329 shares, $38,873.

</TABLE>

113

<PAGE>

<FN>

(d) Option awards in 1993 were granted effective June 1, 1993. No option awards were granted to the Named Executives in 1992
or 1991 and all option awards outstanding as of May 6, 1993 were cancelled without consideration by the terms of the
Prepackaged Plan.

(e) Reflects cash settlements of reduced awards, otherwise potentially payable in 1994, in connection with termination of the
IRP pursuant to and concurrently with the effectiveness of the Prepackaged Plan. The amounts shown are taken into account
for purposes of computing benefits under the Corporation's retirement plans. None of the Named Executives received long-
term incentive plan payouts in 1992 or 1991.

(f) All Other Compensation for the Named Executives for each year consisted solely of matching contributions from the
Corporation to defined contribution plans.

</TABLE>

OPTION/SAR GRANTS IN LAST FISCAL YEAR (A)

POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
RATES OF STOCK PRICE
INDIVIDUAL GRANTS APPRECIATION FOR OPTION TERM (C)
----------------------------------------------------- --------------------------------

SECURITIES % OF TOTAL
UNDERLYING OPTIONS/SARS
OPTIONS/SARS GRANTED TO EXERCISE
GRANTED EMPLOYEES PRICE EXPIRATION 5% 10%
NAME (#)(B) IN 1993 ($/SH) DATE ($) ($)
- --------------------- ------------- ---------- -------- ---------- ---------- ----------

<S> <C> <C> <C> <C> <C> <C>
Eugene B. Connolly 250,000 14.9 $ 10.3125 6/1/03 $1,618,375 $4,109,375
Anthony J. Falvo, Jr. 50,000 3.0 10.3125 6/1/03 323,675 821,875
P.Jack O'Bryan 100,000 6.0 10.3125 6/1/03 647,350 1,643,750
Donald E. Roller 100,000 6.0 10.3125 6/1/03 647,350 1,643,750
Harold E. Pendexter, Jr. 100,000 6.0 10.3125 6/1/03 647,350 1,643,750

<FN>

(a) No SARs were granted in 1993.

(b) Pursuant to the Prepackaged Plan, all outstanding option awards as of May 6, 1993, were cancelled without consideration. As
permitted by the Prepackaged Plan, 2,788,350 shares of Common Stock were reserved for future issuance in conjunction with
stock options. Options for 1,673,000 shares of Common Stock were granted on June 1, 1993 to 45 individuals, including the
Named Executives, at the exercise price of $10.3125 per share, which was the average of the high and low sales prices for a
share of Common Stock as reported on the NYSE Composite Tape for such date. These options become exercisable at the rate of
one-third of the aggregate grant on each of the first three anniversaries of the date of the grant (except for the option
grant with respect to 50,000 shares to Mr. Falvo, which is expected to become exercisable in 1994 in conjunction with his
anticipated retirement) and expire on the tenth 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.

</TABLE>

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES

NUMBER OF NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
UNDERLYING AT FISCAL YEAR-END (A) AT FISCAL YEAR-END (A)
OPTIONS VALUE ---------------------------- ---------------------------
EXERCISED REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#) ($) (#) (#) ($) ($)
- -------------------- ---------- --------- ---------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Eugene B. Connolly 0 $ 0 0 250,000 $ 0 $4,718,750
Anthony J. Falvo, Jr. 0 0 0 50,000 0 943,750
P. Jack O'Bryan 0 0 0 100,000 0 1,887,500
Donald E. Roller 0 0 0 100,000 0 1,887,500
Harold E. Pendexter, Jr. 0 0 0 100,000 0 1,887,500

<FN>

(a) No SARs were outstanding as of December 31, 1993.

</TABLE>

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<PAGE>
EMPLOYMENT AGREEMENTS

In order to assure continued availability of services of the Named
Executives, the Corporation (or, in the case of Mr. Roller, U.S. Gypsum) entered
into employment agreements (the "EMPLOYMENT AGREEMENTS") with the Named
Executives in 1993 which superseded substantially identical agreements entered
into on various dates prior to 1993. The Employment Agreements, which do not by
their terms provide for renewal or extension, terminate on December 31, 1996.

The Employment Agreements provide for minimum annual salaries at the then
current rate to be paid at normal pay periods and at normal intervals to Messrs.
Connolly ($585,000), Falvo ($455,000), O'Bryan ($280,000), Roller ($280,000),
and Pendexter ($255,000), with the minimum annual salaries deemed increased
concurrently with salary increases authorized by the Compensation and
Organization Committee of the Board of Directors. The Employment Agreements
require that each Named Executive devote his full attention and best efforts
during the term of such agreement to the performance of assigned duties. If a
Named Executive is discharged without cause by the Corporation during the term
of his Employment Agreement, he may elect to be treated as a continuing employee
under such agreement, with salary continuing at the minimum rate specified in
such agreement or at the rate in effect at the time of discharge, if greater,
for the balance of the term of the Employment Agreement or for a period of two
years, whichever is greater. In the event of any such salary continuation,
certain benefits will be continued at corresponding levels and for the same
period of time. If a Named Executive becomes disabled during the term of his
Employment Agreement, his compensation continues for the unexpired term of the
Employment Agreement at the rate in effect at the inception of the disability.
In the event of a Named Executive's death during the term of his Employment
Agreement, one-half of the full rate of compensation in effect at the time of
his death will be paid to his beneficiary for the remainder of the unexpired
term of the Employment Agreement.

Each of the Named Executives has undertaken, during the term of his
Employment Agreement and for a period of three years thereafter, not to
participate, directly or indirectly, in any enterprise which competes with the
Corporation or any of its subsidiaries in any line of products in any region of
the United States. Each Named Executive has also agreed not to, at any time,
use for his benefit or the benefit of others or disclose to others any of the
Corporation's confidential information except as required by the performance of
his duties under his Employment Agreement.

TERMINATION COMPENSATION AGREEMENTS

The Corporation is a party to termination compensation agreements with the
Named Executives, each of such agreement which will terminate at the earlier of
the close of business on December 31, 1995, or upon the Named Executive
attaining age 65.

The agreements provide certain benefits in the event of a "change in
control" and termination of employment within three years thereafter or prior to
the Named Executive attaining age 65, whichever is earlier, but only if such
termination occurs under one of several sets of identified circumstances. Such
circumstances include termination by the Corporation other than for "cause" and
termination by the Named Executive for "good reason". Each "change in control"
will begin a new three-year period for the foregoing purposes. For purposes of
the agreements: (i) a "change in control" is deemed to have occurred, in
general, if any person or group of persons acquires beneficial ownership of 20%
or more of the combined voting power of the Corporation's then outstanding
voting securities, if there is a change in a majority of the members of the
Board within a two year period and in certain other events; (ii) the term
"cause" is defined as, in general, the willful and continued failure by the
Named Executive substantially to perform his duties after a demand for
substantial performance has been delivered or the willful engaging of the Named
Executive in misconduct which is materially injurious to the Corporation; and
(iii) "good reason" for termination by a Named Executive means, in general,
termination subsequent to a change in control based on specified changes in the
Named Executive's duties, responsibilities, titles, offices or office location,

115

<PAGE>

compensation levels and benefit levels or participation.

The benefits include payment of full base salary through the date of
termination at the rate in effect at the time of notice of termination, payment
of any unpaid bonus for a past fiscal year and pro rata payment of bonus for the
then current fiscal year, and continuation through the date of termination of
all stock ownership, purchase and option plans and insurance and other benefit
plans. In the event of a termination giving rise to benefits under the
agreements, the applicable Named Executive will be entitled to payment of a lump
sum amount equal to 2.99 times the sum of (i) his then annual base salary,
computed at 12 times his then current monthly pay and (ii) his full year
position par bonus for the then current fiscal year, subject to all applicable
federal and state income taxes, together with payment of a gross-up amount to
provide for applicable federal excise taxes in the event such lump sum and all
other benefits payable to the Named Executive constitute an "excess parachute
payment" under the Internal Revenue Code. The Corporation is required to
maintain in full force and effect until the earlier of (i) two years after the
date of any termination which gives rise to benefits under any of the agreements
and (ii) commencement by the Named Executive of full-time employment with a new
employer, all insurance plans and arrangements in which the Named Executive was
entitled to participate immediately prior to his termination in a manner which
would give rise to benefits under his agreement, provided that if such
participation is barred, the Corporation will be obligated to provide
substantially similar benefits. In the event of any termination giving rise to
benefits under the agreements, the Corporation is required to credit the
applicable Named Executive with three years of benefit and credited service in
addition to the total number of years of benefit and credited service the Named
Executive accrued under the USG Corporation Retirement Plan. See "Retirement
Plans" below. If the Named Executive has a total of less than five years of
credited service following such crediting, he nonetheless will be treated as if
he were fully vested under that Plan, but with benefits calculated solely on the
basis of such total benefit service.

The Corporation is obligated to pay to each Named Executive all legal fees
and expenses incurred by him as a result of a termination which gives rise to
benefits under his agreement, including all fees and expenses incurred in
contesting or disputing any such termination or in seeking to obtain or enforce
any right or benefit provided under such agreement. No amounts are payable
under such agreements if the Named Executive's employment is terminated by the
Corporation for "cause" or if the Named Executive terminates his employment and
"good reason" does not exist.

Although Water Street's ownership of more than 20% of the Corporation's
voting securities as a result of the Restructuring constituted a "change in
control" under the agreements, each of the Named Executives agreed to waive this
occurrence. Such waivers do not constitute a waiver of any other occurrence of
a change in control.

The Corporation has established a so-called "rabbi trust" to provide a
source of payment for benefits payable under such agreements. Immediately upon
any change in control, the Corporation may deposit with the trustee under such
trust an amount reasonably estimated to be potentially payable under all such
agreements, taking into account any previous deposits. The Corporation did not
make any such deposit to the trust as a result of Water Street's ownership. In
the event that the assets of such trust in fact prove insufficient to provide
for benefits payable under all such agreements, the shortfall would be paid
directly by the Corporation from its general assets.

RETIREMENT PLANS

The following table shows the annual pension benefits on a straight-life
annuity basis for retirement at normal retirement age under the terms of the
Corporation's contributory retirement plan (the "RETIREMENT PLAN"), before the
applicable offset of one-half of the primary social security benefits at time
of retirement. The table has been prepared for various compensation
classifications and representative years of credited service under the Plan.
Each participating employee contributes towards the cost of his or her
retirement benefit. Retirement benefits are based on the average rate of
annual covered compensation during the three consecutive years of highest
annual compensation in the ten years of employment immediately preceding
retirement. Participants become fully vested

116

<PAGE>

after five years of continuous credited service.

RETIREMENT PLAN TABLE

Years of Credited Service
COVERED --------------------------------------------------------------------
COMPENSATION 20 25 30 35 40
------------ ------------ ----------- ----------- ----------- ----------

<S> <C> <C> <C> <C> <C>
$ 200,000 $ 64,000 $ 80,000 $ 96,000 $ 112,000 $ 128,000
400,000 128,000 160,000 192,000 224,000 256,000
600,000 192,000 240,000 288,000 336,000 384,000
800,000 256,000 320,000 384,000 448,000 512,000
1,000,000 320,000 400,000 480,000 560,000 640,000
1,200,000 384,000 480,000 576,000 672,000 768,000

</TABLE>

The Named Executives participate in the Retirement Plan. The Named
Executives' full years of continuous credited service at December 31, 1993 were
as follows: Mr. Connolly, 35; Mr. Falvo, 38; Mr. O'Bryan, 35; Mr. Roller, 33;
and Mr. Pendexter, 36. Compensation under the Retirement Plan includes salary
and incentive compensation (bonus and IRP payments) for the year in which
payments are made.

Pursuant to a supplemental retirement plan, the Corporation has undertaken to
pay any retirement benefits otherwise payable to certain individuals, including
the Named Executives, under the terms of the Corporation's contributory
Retirement Plan but for provisions of the Internal Revenue Code limiting amounts
payable under tax-qualified retirement plans in certain circumstances. The
Corporation has established a so-called "rabbi trust" to provide a source of
payment for benefits under this supplemental plan. Amounts are deposited in
this trust from time to time to provide a source of payments to participants as
they retire as well as for periodic payments to certain other retirees. In
addition, the Corporation has authorized establishment by certain individuals,
including the Named Executives, of special retirement accounts with independent
financial institutions as an additional means of funding the Corporation's
obligations to make such supplemental payments.

DIRECTOR COMPENSATION

Directors who are not employees of the Corporation are currently entitled to
receive a retainer of $6,000 per quarter plus a fee of $900 for each Board or
Board committee meeting attended, together with reimbursement for out-of-pocket
expenses incurred in connection with attendance at meetings. A non-employee
director serving as chairman of a committee is entitled to receive an additional
retainer of $1,000 per quarter for each such chairmanship. Additional fees for
pre-meeting consultations may be paid as applicable to non-employee directors,
the amount of such fees to bear a reasonable relationship to the regular meeting
fee of $900 and the customary length of a meeting of the Board committee
involved. No director of the Corporation has received any compensation of any
kind for serving as a director while also serving as an officer or other
employee of the Corporation or any of its subsidiaries.

In the past, the Corporation has entered into consulting agreements with
retiring non-employee directors who had specified minimum periods of service on
the Board. Those agreements continued the annualized retainer which was in
effect in each instance at the time of retirement from the Board in return for
an undertaking to serve in an advisory capacity and to refrain from any activity
in conflict or in competition with the Corporation. The Board has determined to
continue to offer such agreements on a case-by-case basis but also has
determined to limit any such agreement to a term not to exceed five years.

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<PAGE>

1994 Stock Option Grants

Options for 933,000 shares of Common Stock were granted on February 9, 1994
to 76 officers and key managers, none of whom is a Named Executive, at the
exercise price of $32.5625 per share, which was the average of the
high and low sales prices for a share of Common Stock as reported on the
NYSE Composite Tape for such date. These options become exercisable at the
rate of one-third of the aggregate grant on each of the first three
anniversaries of the date of grant and expire on the tenth 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.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

5% HOLDERS OF COMMON STOCK

The following persons are known by the Corporation to be a beneficial owner
of more than five percent of the outstanding Common Stock:

NAME AND ADDRESS AMOUNT AND NATURE OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP Percent of Class
------------------- -------------------- ----------------
<S> <C> <C>
Water Street Corporate Recovery Fund I, L.P. (a) 16,105,840 43%
85 Broad Street
New York, NY 10004

FMR Corp. (b) 1,922,400 5%
82 Devonshire Street
Boston, MA 02109

<FN>
(a) Water Street owns directly 15,893,231 shares of Common Stock and 116,070
Warrants that are currently exercisable. Goldman, Sachs & Co. owns
directly 96,539 shares of Common Stock and, as the general partner of Water
Street, may be deemed to be the beneficial owner of the 15,893,231 shares
of Common Stock and 116,070 Warrants owned directly by Water Street. Such
shares and Warrants may also be deemed to be beneficially owned by The
Goldman Sachs Group, L.P., one of the general partners of Goldman, Sachs &
Co. Goldman, Sachs & Co. and the Goldman Sachs Group, L.P. disclaim
beneficial ownership of shares and Warrants held by Water Street to the
extent partnership interests in Water Street are held by persons other than
Goldman, Sachs & Co., the Goldman Sachs Group, L.P. and their affiliates.

(b) Based solely on a Schedule 13G filed with the SEC and certain information
received by the Corporation from Fidelity Management and Research Company,
as of February 23, 1994, FMR Corp., a parent holding company, had sole
voting and investment power with respect to 33,600 shares, and sole
investment power with respect to 1,888,800 shares. Fidelity
Management & Research Company, an investment advisor, and Fidelity
Management Trust Company, a bank, both wholly-owned subsidiaries of FMR
Corp., through certain funds or accounts managed or advised by them,
beneficially owned 1,888,800 and 33,600 shares, respectively. Edward
C. Johnson, III, Chairman of FMR Corp. owns 34% of the outstanding
voting common stock of FMR Corp. Various Johnson family members and
trusts for the benefit of Johnson family members own FMR Corp. voting
common stock. These Johnson family members, through their ownership of
voting common stock, form a controlling group with respect to FMR Corp.

</TABLE>

118

<PAGE>

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth information as of January 1, 1994 regarding the
beneficial ownership of Common Stock by each current director and Named
Executive and by all current directors and executive officers of the Corporation
as a group (31 persons). Such information is derived from the filings made with
the SEC by such persons under Section 16(a) of the Exchange Act. The totals
include any shares allocated to the accounts of those individuals through
December 31, 1993 under the USG Corporation Investment Plan.

SHARES BENEFICIALLY PERCENT
NAME OWNED OF CLASS (A)
---- ------------------- ------------
<S> <C> <C>
Robert L. Barnett . . . . . . . . . . . 20
Keith A. Brown . . . . . . . . . . . . 119,256
W. H. Clark . . . . . . . . . . . . . . 2,248
Eugene B. Connolly. . . . . . . . . . . 7,789
James C. Cotting. . . . . . . . . . . . 20
Lawrence M. Crutcher . . . . . . . . . 1,800
Anthony J. Falvo, Jr. . . . . . . . . . 6,852
Wade Fetzer III. . . . . . . . . .. . . (b)
David W. Fox. . . . . . . . . . . . . . 112
Philip C. Jackson, Jr.. . . . . . . . . 1,963
Marvin E. Lesser . . . . . . . . .. . . 500
P. Jack O'Bryan . . . . . . . . . . . . 5,029
Harold E. Pendexter, Jr . . . . . . . . 5,085
Donald E. Roller. . . . . . . . . . . . 4,970
John B. Schwemm . . . . . . . . . . . . 154
Judith A. Sprieser. . . . . . . . . . . 0
Alan G. Turner. . . . . . . . . . . . . 0
Barry L. Zubrow . . . . . . . . . . . (b)
All current directors, and present
executive officers as a group (31 persons),
including those current directors and Named
Executives named above. . . . . . . . . 172,080

<FN>
(a) Total beneficial ownership of 172,080 shares of Common Stock
by members of the group identified above represents
approximately 0.5% of the total outstanding shares of Common
Stock, excluding the shares that Messrs. Fetzer and Zubrow
may be deemed to beneficially own as described in the
following note. No director had a right to acquire
beneficial ownership of any shares of Common Stock within 60
days after January 1, 1994 except as described as follows and
in note (b)below: Warrants that are currently exercisable
are as follows: Mr. Brown, 16,458 Warrants; Mr. Connolly,
1,003 Warrants; Mr. Falvo, 1,003 Warrants; Mr. Fox, 19
Warrants; Mr. Jackson, 879 Warrants; Mr. O'Bryan, 831; Mr.
Pendexter, 619; Mr. Roller, 975; Mr. Schwemm, 25 Warrants.
Warrants held by directors and executive officers as a group
totaled 139,140. The above table also excludes options to
purchase an aggregate of 1,283,000 shares of Common Stock
which are not exercisable within 60 days after January 1,
1994, except for the option grant with respect to 50,000
shares to Mr. Falvo, which is expected to fully vest in 1994
in conjunction with his retirement.

(b) Messrs. Fetzer and Zubrow are general partners of Goldman,
Sachs & Co. As general partners, Messrs. Fetzer and Zubrow
may be deemed to be the beneficial owners of shares
beneficially owned or held by Goldman, Sachs & Co. and its
affiliates, including Water Street and The Goldman Sachs
Group, L.P. As described above, Goldman, Sachs & Co. owns
directly 96,539 shares of Common Stock and, as the general
partner of Water Street, may be deemed to be the beneficial
owner of the 15,893,231 shares of Common Stock and 116,070
Warrants owned directly by Water Street. Messrs. Fetzer and
Zubrow disclaim beneficial ownership of such shares and
Warrants other than to the extent such ownership corresponds
to their respective percentage interests in Goldman, Sachs &
Co., The Goldman Sachs Group, L.P. and Water Street.

</TABLE>

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<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

AGREEMENT WITH WATER STREET ENTITIES

On February 25, 1993, the Corporation entered into an agreement with Water
Street (the "WATER STREET AGREEMENT"). The Water Street Agreement, among other
things, (i) restricts Water Steet and its affiliates Goldman, Sachs & Co. and
The Goldman Sachs Group, L.P. (collectively the "WATER STREET ENTITIES") from
purchasing, or offering or agreeing to purchase, any shares of Common Stock or
other voting securities of the Corporation, except for Permitted Acquisitions
(as defined in the Water Street Agreement) and acquisitions by any Water Street
Entity other than Water Street of up to an aggregate of 10% of the then
outstanding shares of Common Stock in the ordinary course of its business; (ii)
requires (a) Water Street to vote all shares of Common Stock and other voting
securities of the Corporation beneficially owned by it and (b) the other Water
Street Entities to vote all shares of Common Stock beneficially owned by them in
excess of 10% of the then outstanding shares of Common Stock, in each case, in
the same proportion as the votes cast by all other holders of Common Stock and
other voting securities of the Corporation, subject to certain exceptions
described below; (iii) places restrictions on the ability of the Water Street
Entities to transfer shares of Common Stock to any person, except for (a) sales
consistent with Rule 144 of the Securities Act of 1993, (b) underwritten public
offerings, (c) persons not known to be 5% holders, (d) pledgees who agree to be
bound by certain provisions of the Water Street Agreement, (e) in the case of
Water Street, distributions to Water Street's partners in accordance with the
governing partnership agreement, (f) pursuant to certain tender or exchange
offers for shares of Common Stock and (g) pursuant to transactions approved by
the Board; (iv) provides Water Street with certain rights to nominate directors
to the Board and Finance Committee (as described below); (v) requires the
maintenance of directors' and officers' liability insurance and indemnification
rights; (vi) requires that the Corporation's shareholder rights plan provide
temporary exemptions for ownership of Common Stock by the Water Street Entities;
(vii) provides Water Street with four demand registrations and unlimited
piggyback registrations, subject to certain limitations described below; and
(viii) provides for indemnification by the Corporation of Water Street, its
underwriters and related parties for securities law claims related to any demand
or piggyback registration contemplated in clause (vii) above.

In connection with the Restructuring, Water Street nominated two New
Directors to the Board, Wade Fetzer III and Barry L. Zubrow. See Item 10,
"Directors and Executive Officers of the Registrant". In the event that the
Water Street Directors are removed from office without the consent of Water
Street, then the restrictions on the Water Street Entities relating to (i) the
purchases of voting securities of the Corporation other than Permitted
Acquisitions, (ii) the voting of securities of the Corporation and (iii) the
transfer of shares of Common Stock, as described above, shall terminate. These
restrictions shall also terminate upon the earliest to occur of: (i) the
consummation of a merger, consolidation or other business combination to which
the Corporation is a constituent corporation, if the stockholders of the
Corporation immediately before such merger, consolidation or combination do not
own more than 50% of the combined voting power of the then outstanding voting
securities of the surviving corporation, (ii) the Board consisting of a majority
of directors not approved by a vote of the directors serving at the time the
Water Street Agreement was executed, and (iii) the tenth anniversary of the
Water Street Agreement. In addition, the restrictions on purchases of voting
securities and transfers of Common Stock shall also terminate upon the Water
Street Entities owning less than 5% of the then outstanding shares of Common
Stock.

Furthermore, the Water Street Entities will not be subject to the voting
restrictions contained in the Water Street Agreement if, among other things:
(i) the Corporation defaults on the payment of principal or interest required to
be paid pursuant to any indebtedness if the aggregate amount of such
indebtedness is $25 million or more; (ii) the principal of any of the
Corporation's indebtedness is declared due and payable prior to the date on
which it would otherwise become due and payable if the aggregate amount of such
indebtedness is $25 million or more; (iii) any person other than Water Street
becomes the beneficial owner of more than 10% of the then outstanding shares of
Common Stock; or (iv) the Corporation fails to comply with (x) the following
financial covenants: a minimum senior interest coverage ratio, a minimum total
interest coverage ratio, a minimum fixed charge coverage ratio, a minimum
adjusted cumulative net worth, and a maximum leverage ratio or (y) a minimum
total interest coverage

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ratio of 0.63 for a specified coverage period in 1993 and for the first quarter
of 1994, 0.84 for the second quarter of 1994, 0.97 for the third quarter of 1994
and 1.14 for the fourth quarter of 1994, provided that (a) such financial
covenants shall be calculated based only on domestic revenues unless the
Corporation's non-domestic consolidated revenues exceed 35% of its total
consolidated revenues, and (b) the Corporation shall not be deemed out of
compliance in the event of a breach, after 1994 and prior to 1998, of the senior
interest coverage ratio or the total interest coverage ratio unless there shall
also exist at such time a breach of the fixed charge coverage ratio or in the
event of a breach, after 1994 and prior to 1998, of the fixed charge coverage
ratio unless there shall also exist at such time a breach of either the senior
interest coverage ratio or the total interest coverage ratio. See "Description
of Credit Agreement". If the Corporation complies with the financial covenants
within the two fiscal quarters following the first failure to comply, the voting
restrictions shall apply again. However, if the Corporation thereafter fails to
comply with any of the financial covenants, the voting restrictions shall
terminate.

The provision of registration rights to Water Street is subject to certain
limitations, including but not limited to the following: (i) of Water Street's
four demand registrations, the Corporation shall pay the registration expenses
(other than commissions and discounts of underwriters) for two registrations,
and the Corporation and Water Street shall each pay one-half of the registration
expenses (other than commissions and discounts of underwriters) for two
registrations; and (ii) other than in connection with the Offering, Water Street
(and any Water Street Entity that receives a distribution of Common Stock from
Water Street and owns 5% or more of the then outstanding shares of Common Stock)
shall not request a demand registration of Common Stock during any period in
which the Corporation is actively engaged in a registered distribution of Common
Stock until 90 days after the effective date of the registration statement
relating to such distribution. With respect to the Offering, Water Street (and,
if it distributes Common Stock to its partners, those partners) shall not
request a demand registration of Common Stock during the 120-day period after
the effective date of the Offering. In addition, during such 120-day period,
Water Street and Goldman, Sachs & Co. shall not sell or otherwise dispose of any
shares of Common Stock or Warrants, except that, at any time after 90 days after
the effective date of the Offering, Water Street may distribute all or any
portion of its shares of Common Stock or Warrants to its partners in accordance
with its governing partnership agreement. In the event of any such distribution
by Water Street, the partners (other than Goldman, Sachs & Co.) would not be
subject to the restriction on selling shares of Common Stock or Warrants during
the remainder of the 120-day period referred to above. Except in the case of
the Offering, the Corporation and Water Street have mutual piggyback rights on
registrations initiated by either, generally on a 50-50 basis.

The Water Street Agreement originally provided, subject to certain
exceptions, that, in connection with the first underwritten public offering of
Common Stock after the Restructuring, the Corporation would have the right to
sell, without participation of Water Street, up to such number of shares of
Common Stock as would yield an aggregate price to the public of $100,000,000 and
that, if a greater number of shares were to be sold in that offering, Water
Street and the Corporation would each have the right to sell 50% of such greater
number of shares. In addition, in connection with such offering, subject to
certain exceptions, the Water Street Agreement originally provided that Water
Street (and, if it distributes Common Stock to its partners, those partners)
would not request or demand registration of Common Stock during the 180-day
period after the effective date of such offering, rather than the 120-day period
that applies to the Offering. In connection with the Offering, the Corporation
and Water Street have mutually determined that they would sell in the Offering
4,000,000 shares of Common Stock, without regard to such $100,000,000
limitation, and that such 120-day period would apply in lieu of such 180-day
period.

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NOTE PLACEMENT
Fidelity Management & Research Company and Fidelity Management Trust
Company may beneficially own in excess of 5% of the outstanding shares of
Common Stock. See Item 12. "Security Ownership of Certain Beneficial Owners
and Management." In connection with the Note Placement, certain funds and
accounts managed or advised by Fidelity Management & Research Company and
Fidelity Management Trust Company purchased $150 million in aggregate
principal amount of Senior Notes due 2001. Such purchasers exchanged
approximately $30 million aggregate principal amount of the Corporaton's
outstanding Senior Notes due 1996 and approximately $35 million aggregate
principal amount of the Corporation's outstanding Senior Notes due 1997
and paid the $85 million balance of the purchase price in cash.

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PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

EXHIBIT INDEX

(A) 1. & 2. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL FINANCIAL
STATEMENT SCHEDULES

See Part II, Item 8. "Financial Statements and Supplementary Data" for an
index of the Corporation's consolidated financial statements and supplementary
data schedules.

3. EXHIBITS (REG. S-K, ITEM 601):

Exhibits followed by an (*) constitute management contracts or compensatory
plans or arrangements.

EXHIBIT
NO. Page
----

3 Articles of incorporation and by-laws:
(a) Restated Certificate of Incorporation of USG
Corporation (incorporated by reference to
Exhibit 3.1 of USG Corporation's Form 8-K,
dated May 7, 1993.)
(b) Amended and Restated By-Laws of USG
Corporation, dated as of May 12, 1993
(incorporated by reference to Exhibit 3(b) of
Amendment No. 1 to USG Corporation's
Registration Statement No. 33-61162 on Form
S-1, dated June 16, 1993).

4 Instruments defining the rights of security holders,
including indentures:
(a) Indenture dated as of October 1, 1986 between
USG Corporation and Harris Trust and Savings
Bank, Trustee (incorporated by reference to
Exhibit 4(a) of USG Corporation's Registration
Statement No. 33-9294 on Form S-3, dated
October 7, 1986).
(b) Resolutions dated December 16, 1986 of a
Special Committee created by the Board of
Directors of USG Corporation.
(c) Resolutions dated March 5, 1987 of a Special
Committee created by the Board of Directors of
USG Corporation.
(d) Resolutions dated March 6, 1987 of a Special
Committee created by the Board of Directors of
USG Corporation.
(e) Resolutions dated April 26, 1993 of a Special
Committee created by the Board of Directors of
USG Corporation relating to USG Corporation's
8% Senior Notes due 1995 and 9% Senior Notes
due 1998 (incorporated by reference to
Exhibit 4.1 of USG Corporation's Form 8-K,
dated May 7, 1993).
(f) Consent Resolutions adopted by a Special
Committee created by the Board of Directors of
USG Corporation relating to USG Corporation's
9-1/4% Senior Notes due 2001.

123

<PAGE>

(g) Indenture dated as of April 26, 1993 among USG
Corporation, certain guarantors and State
Street Bank and Trust Company, as Trustees,
relating to USG Corporation's 10-1/4% Senior
Notes due 2002 (incorporated by reference to
Exhibit 4.2 of USG Corporation's Form 8-K,
dated May 7, 1993).
(h) Indenture dated as of August 10, 1993 among
USG Corporation, certain guarantors and State
Street Bank and Trust Company, as Trustee,
relating to USG Corporation's 10-1/4% Senior
Notes due 2002, Series B (incorporated by
reference to Exhibit 4(f) of USG Corporation's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1993 dated August 12, 1993.
(i) Warrant Agreement dated May 6, 1993 between
USG Corporation and Harris Trust and Savings
Bank, as Warrant Agent, relating to USG
Corporation's Warrants (incorporated by
reference to Exhibit 4.3 of USG Corporation's
Form 8-K, dated May 7, 1993).
(j) Form of Warrant Certificate (incorporated by
reference to Exhibit 4(g) of Amendment No. 4
to USG Corporation's Registration Statement
No. 33-40136 on Form S-4, dated November 12,
1992).
(k) Rights Agreement dated May 6, 1993 between USG
Corporation and Harris Trust and Savings Bank,
as Rights Agent (incorporated by reference to
Exhibit 10.1 of USG Corporation's Form 8-K,
dated May 7, 1993).
(l) Form of Common Stock certificate (incorporated
by reference to Exhibit 4.4 to USG
Corporation's Form 8-K, dated May 7, 1993).
The Corporation and certain of its
consolidated subsidiaries are parties to
long-term debt instruments under which the
total amount of securities authorized does not
exceed 10% of the total assets of the
Corporation and its subsidiaries on a
consolidated basis. Pursuant to paragraph
(b)(4)(iii)(A) of Item 601 of Regulation S-K,
the Corporation agrees to furnish a copy of
such instruments to the Securities and
Exchange Commission upon request.

10 Material contracts:
(a) Management Performance Plan of USG Corporation
(incorporated by reference to Annex C of
Amendment No. 8 to USG Corporation's
Registration Statement No. 33-40136 on Form
S-4, dated February 3, 1993).*
(b) 1991-1993 Management Incentive Compensation
Program -- USG Corporation, as amended
(incorporated by reference to Exhibit 10(b) of
USG Corporation's 1991 Annual Report on Form
10-K, dated March 5, 1992).*
(c) Amendment and Restatement of USG Corporation
Supplemental Retirement Plan, effective as of
July 1, 1993 and dated November 30, 1993
(incorporated by reference to Exhibit 10(c) of
USG Corporation's Registration No. 33-51845 on
Form S-1).*

124

<PAGE>

(d) First Amendment of USG Corporation
Supplemental Retirement Plan, effective as of
November 15, 1993 and dated December 2, 1993
(incorporated by reference to Exhibit 10(d)
of USG Corporation's Registration No. 33-51845
on Form S-1).*
(e) Termination Compensation Agreements
(incorporated by reference to Exhibit 10(h) of
USG Corporation's 1991 Annual Report on Form
10-K, dated March 5, 1992).*
(f) USG Corporation Severance Plan for Key
Managers, dated May 15, 1991 (incorporated by
reference to Exhibit 10(i) of USG
Corporation's 1991 Annual Report on Form 10-K,
dated March 5, 1992).*
(g) Indemnification Agreements (incorporated by
reference to Exhibit 10(g) of Amendment No. 1
to USG Corporation's Registration No. 33-51845
on Form S-1).*
(h) Form of Change of Control Waiver (incorporated
by reference to Exhibit 10(t) of USG
Corporation's 1992 Annual Report on Form 10-K
dated March 26, 1993).*
(i) Incentive Recovery Program -- Waiver of Full
Payment (incorporated by reference to
Exhibit 10(u) of USG Corporation's 1992 Annual
Report on Form 10-K, dated March 26, 1993).*
(j) Rights Agreement dated May 6, 1993 between USG
Corporation and Harris Trust and Savings Bank,
as Rights Agent (incorporated by reference to
Exhibit 10.1 of Form 8-K filed by USG
Corporation on May 7, 1993).
(k) Warrant Agreement dated May 6, 1993 between
USG Corporation and Harris Trust and Savings
Bank, as Warrant Agent, relating to USG
Corporation's Warrants (incorporated by
reference to Exhibit 4.3 of Form 8-K filed by
USG Corporation on May 7, 1993).
(l) Amended and Restated Credit Agreement dated as
of May 6, 1993 among USG Corporation and USG
Interiors, Inc., as borrowers; the Financial
Institutions listed on the signature
pages thereof, as Senior Lenders; Bankers
Trust Company, Chemical Bank and Citibank,
N.A., as Agents; and Citibank, N.A., as
Administrative Agent (incorporated by
reference to Exhibit 10.2 of Form 8-K filed by
USG Corporation on May 7, 1993).
(m) First Amendment to Amended and Restated Credit
Agreement between USG Corporation and USG
Interiors, Inc. as borrowers; the Financial
Institutions listed on the signature
pages thereof, as Senior Lenders; Bankers
Trust Company, Chemical Bank and Citibank,
N.A., as Agents; and Citibank, N.A., as
Administrative Agent (incorporated by
reference to Exhibit 4M of USG Corporation's
Registration Statement No. 35-65804 on Form S-
1, dated July 9, 1993).

125

<PAGE>

(n) Second Amendment to Amended and Restated
Credit Agreement between USG Corporation and
USG Interiors, Inc. as borrowers; the
Financial Institutions listed on the signature
pages thereof, as Senior Lenders; Bankers
Trust Company, Chemical Bank and Citibank,
N.A., as Agents; and Citibank, N.A., as
Administrative Agent (incorporated by
reference to 10(n) of Amendment No. 1 to USG
Corporation's Registration No. 33-51845 on
Form S-1).
(o) Letter of Credit Issuance and Reimbursement
Agreement dated as of May 6, 1993 between USG
Interiors, Inc. and Chemical Bank
(incorporated by reference to Exhibit 10.12 of
Form 8-K filed by USG Corporation on May 7,
1993).
(p) Amended and Restated Collateral Trust
Agreement dated as of May 6, 1993 among USG
Corporation, USG Interiors, Inc. and USG
Foreign Investments, Ltd., as grantors, and
Wilmington Trust Company and William J. Wade,
as Trustees (incorporated by reference to
Exhibit 10.6 of Form 8-K filed by USG
Corporation on May 7, 1993).
(q) Amended and Restated Company Pledge Agreement
dated as of May 6, 1993 among USG Corporation,
Wilmington Trust Company and William J. Wade
(incorporated by reference to Exhibit 10.7 of
Form 8-K filed by USG Corporation on May 7,
1993).
(r) Amended and Restated Subsidiary Pledge
Agreement dated as of May 6, 1993 among USG
Interiors, Inc., Wilmington Trust Company and
William J. Wade (incorporated by reference to
Exhibit 10.8 of Form 8-K filed by USG
Corporation on May 7, 1993).
(s) Amended and Restated Subsidiary Pledge
Agreement dated as of May 6, 1993 among USG
Foreign Investments, Ltd., Wilmington Trust
Company and William J. Wade (incorporated by
reference to Exhibit 10.9 of Form 8-K filed by
USG Corporation on May 7, 1993).
(t) Amended and Restated Share Pledge Agreement
dated as of May 6, 1993 among USG Foreign
Investments, Ltd., Wilmington Trust Company
and William J. Wade (incorporated by reference
to Exhibit 10.10 of Form 8-K filed by USG
Corporation on May 7, 1993).
(u) Amended and Restated Deed of Charge dated as
of May 6, 1993 among USG Foreign Investments,
Ltd., Wilmington Trust Company and William J.
Wade (incorporated by reference to
Exhibit 10.11 of Form 8-K filed by USG
Corporation on May 7, 1993).
(v) Amended and Restated Company Guaranty dated as
of May 6, 1993 made by USG Corporation
(incorporated by reference to Exhibit 10.3 of
Form 8-K filed by USG Corporation on May 7,
1993).
(w) Amended and Restated Subsidiary Guaranty dated
as of May 6, 1993 made by USG Interiors, Inc.
(incorporated by reference to Exhibit 10.1 of
Form 8-K filed by USG Corporation on May 7,
1993).

126

<PAGE>

(x) Form of Amended and Restated Subsidiary
Guaranty dated as of May 6, 1993 made by each
of United States Gypsum Company, USG Foreign
Investments, Ltd., L&W Supply Corporation, USG
Interiors International, Inc., La Mirada
Products Co., Inc., Westbank Planting Company,
American Metals Corporation and USG
Industries, Inc. (incorporated by reference to
Exhibit 10.5 of Form 8-K filed by USG
Corporation on May 7, 1993).
(y) Consent and Agreement dated as of August 22,
1991 with respect to the Old Credit Agreement
dated as of July 1, 1988 (incorporated by
reference to Exhibit 10(ai) of USG
Corporation's Form 8-K, dated August 23,
1991).
(z) First Amendment dated as of March 12, 1993
with respect to the Consent and Agreement
dated as of August 22, 1991 (incorporated by
reference to Exhibit 10(ap) of USG
Corporation's 1992 Annual Report on Form 10-K,
dated March 26, 1993).
(aa) Deposit Agreement dated as of September 19,
1991 (incorporated by reference to
Exhibit 10(aq) of USG Corporation's 1992
Annual Report on Form 10-K, dated March 26,
1993).
(ab) First Amendment dated as of March 12, 1993 to
the Deposit Agreement (incorporated by
reference to Exhibit 10(ar) of USG
Corporation's 1992 Annual Report on Form 10-K,
dated March 26, 1993).
(ac) Agreement, dated August 31, 1992, among USG
Corporation and the Ad Hoc Committee of Holders
of 13 1/4% Senior Subordinated Debentures of
USG Corporation due 2000 (incorporated by
reference to Exhibit 10(aq) of Amendment No. 4
to USG Corporation's Registration Statement
No. 33-40136 on Form S-4).
(ad) Letter Agreement dated February 25, 1993 among
USG Corporation, Water Street Corporate
Recovery Fund, L.P., the Goldman Sachs Group,
L.P. and Goldman, Sachs & Co. (incorporated by
reference to Exhibit 10(au) of USG
Corporation's 1992 Annual Report on Form 10-K,
dated March 26, 1993).
(ae) Bankruptcy Court Order issued April 23, 1993
confirming USG Corporation's Prepackaged Plan
of Reorganization (incorporated by reference
to Exhibit 28.1 of Form 8-K filed by USG
Corporation on May 7, 1993).
(af) Consulting Agreement dated July 1, 1990, as
amended March 23, 1992, between USG
Corporation and William L. Weiss (incorporated
by reference to Exhibit 10(au) of Amendment
No. 4 to USG Corporation's Registration
Statement No. 33-40136 on Form S-4).
(ag) Consulting Agreement dated May 6, 1993 between
USG Corporation and Jack D. Sparks
(incorporated by reference to Exhibit 10(av)
in USG Corporation's Registration Statement
33-51845 on Form S-1).

127

<PAGE>

Page
----
(ah) Consulting Agreement dated August 11, 1993
between USG Corporation and James W. Cozad
(incorporated by reference to Exhibit 10(aw)
in USG Corporation's Registration Statement
33-51845, on Form S-1).
(ai) 1993 Annual Management Incentive Program --
USG Corporation (incorporated by reference to
Exhibit 10(b) of Amendment No. 1 to USG
Corporation's Registration Statement
No. 33-61152 on Form S-1).
(aj) Form of Employment Agreement dated May 12,
1993 (incorporated by reference to
Exhibit 10(h) of Amendment No. 1 to USG
Corporation's Registration Statement
No. 33-61152 on Form S-1).
(ak) Amendment of Termination Compensation
Agreements (incorporated by reference to
Exhibit 10(j) of Amendment No. 1 to USG
Corporation's Registration Statement
No. 33-61152 on Form S-1).
(al) Form of Nonqualified Stock Option Agreement
effective June 1, 1993 (incorporated by
reference to Exhibit 10(l) of Amendment No. 1
on USG Corporation's Registration Statement
No. 33-61152 on Form S-1).
(am) Form of Nonqualified Stock Option Agreement
with Anthony J. Falvo, Jr. effective June 1,
1993 (incorporated by reference to
Exhibit 10(m) of Amendment No. 1 to USG
Corporation's Registration Statement
No. 33-61152 on Form S-1).
(an) Form of First Amendment to Amended and
Restated Collateral Trust Agreement
(incorporated by reference to Exhibit 10(w) of
Amendment No. 1 to USG Corporation's
Registration Statement No. 33-61152 on Form
S-1).
(ao) Form of First Amendment to Amended and
Restated Subsidiary Guaranty (incorporated by
reference to Exhibit 10(ae) of Amendment No. 2
to USG Corporation's Registration Statement
No. 33-61152 on Form S-1).
(ap) Form of First Amendment to Amended and
Restated Subsidiary Guaranty (incorporated by
reference to Exhibit 10(ae) of Amendment No. 2
to USG Corporation's Registration Statement
No. 33-61152 on Form S-1).
(aq) First Amendment to Management Performance
Plan, effective November 15, 1993 and dated
February 1, 1994 (incorporated by reference to
Exhibit 10(aq) of USG Corporation's Registration
Statement No. 33-51845 on Form S-1).
(ar) Modification letter dated February 1, 1994 to
Nonqualified Stock Option Agreement dated June
1, 1993 between USG Corporation and Eugene B.
Connolly (incorporated by reference to Exhibit
10(ar) of USG Corporation's Registration Statement
No. 33-51845 on Form S-1).
(as) Form of Nonqualified Stock Option Agreement
effective February 9, 1994 (incorporated by
reference to Exhibit 10(as) of USG Corporation's
Registration Statement No. 33-51845 on Form S-1).
(at) Executive Consulting Agreement effective March
1, 1994 between USG Corporation and Anthony J.
Falvo, Jr. (incorporated by reference to Exhibit
10(at) of USG Corporation's Registration
Statement No. 33-51845 on Form S-1).

11 Computation of Earnings/(Loss) Per Common Share

21 Subsidiaries

23 Consents of Experts and Counsel
(a) Consent of Arthur Andersen & Co.

128

<PAGE>

24 Power of Attorney

(B) REPORTS ON FORM 8-K:

No reports on Form 8-K were filed during the fourth quarter of 1993.

129

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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
February 24, 1994

By: /s/ Richard H. Fleming
------------------------------------

Richard H. Fleming
Vice President and
Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.

/s/ Eugene B. Connolly February 24, 1994
- ---------------------------------
EUGENE B. CONNOLLY
Chairman of the Board,
Chief Executive Officer and
Director
(Principal Executive Officer)

/s/ Richard H. Fleming February 24, 1994
- ---------------------------------
RICHARD H. FLEMING
Vice President and Chief
Financial Officer
(Principal Financial Officer)

/s/ Raymond T. Belz February 24, 1994
- ---------------------------------
RAYMOND T. BELZ
Vice President and Controller
(Principal Accounting Officer)

ROBERT L. BARNETT, KEITH A. BROWN, ) By: /s/ Richard H. Fleming
W. H. CLARK, JAMES C. COTTING, ) ---------------------------
LAWRENCE M. CRUTCHER, ANTHONY J. ) Richard H. Fleming
FALVO, JR., WADE FETZER III, DAVID W. FOX, ) Attorney-in-fact
PHILIP C. JACKSON, JR., MARVIN E. LESSER, ) Pursuant to Power of Attorney
ALAN G. TURNER, BARRY L.ZUBROW ) (Exhibit 24 hereto)
Directors ) February 24, 1994

130

<PAGE>

APPENDIX TO FORM 10-K

The following graphic has been omitted from the EDGAR submission of USG
Corporation's form 10-K:

Page 7:

A line graph depicting United States Gypsum wallboard industry
shipments and United States total housing starts for the years
1982 through 1993 was replaced with a table providing such data.

131

<PAGE>
Exhibit 4(b)

MGT426F

Action Taken by a Special Committee
Created by the Board of Directors of
USG Corporation

-----------------------------------------------------

WHEREAS, USG Corporation (the "Corporation") has entered into an Indenture,
dated as of October 1, 1986 (the "Indenture"), with Harris Trust and Savings
Bank (the "Trustee"), providing for the issuance from time to time of debt
securities(the "Securities") in one or more series under the Indenture; and

WHEREAS, the Corporation has filed a Registration Statement on Form S-3
(the "Registration Statement") with the Securities and Exchange Commission (the
"Commission") relating to the registration of $200 million aggregate principal
amount of Securities under the Securities Act of 1933, as amended; and

WHEREAS, the Board of Directors of the Corporation has established a
special committee of said Board of Directors, consisting of Robert J. Day,
Harry M. Stover and Eugene Miller (the "Special Committee"), which committee
has been authorized by said Board of Directors to take all actions relating to
the issuance of the Securities from time to time, including, without limitation,
determining and specifying the terms and the form of any of the Securities to be
issued under the Indenture by the Corporation and authorizing and approving an
underwriting agreement for the sale of the Securities; and

WHEREAS, in light of the inability of Eugene Miller to attend the meeting
of the Special Committee, Robert J. Day has designated William R. Hogan to
attend such meeting in the place of Eugene Miller; and

WHEREAS, the Corporation desires to create two series of Securities under
the Indenture and to make provision for the form and terms thereof, and to make
provision for certain other matters in connection with the issuance and sale of
the Securities; and

WHEREAS, capitalized terms used in these resolutions and not otherwise
defined herein are used with the same meaning ascribed to such terms in the
Indenture;

NOW, THEREFORE, BE IT RESOLVED: That the following resolutions are adopted
by the Special Committee effective December 16, 1986.

BE IT FURTHER RESOLVED: That there are hereby approved and established two
series of Securities under the Indenture, whose terms shall be as follows:

<PAGE>

MGT426F

(1) The series of Securities established hereby to be issued pursuant to
the Indenture shall be known and designated, respectively, as the "7-3/8% Senior
Notes Due 1991" (the "1991 Notes") and the "8% Senior Notes Due 1996" (the "1996
Notes") (the 1991 Notes and the 1996 Notes are hereinafter collectively referred
to as the "Notes").

(2) The aggregate principal amount of each of the 1991 Notes and the 1996
Notes is limited to $100,000,000 (except as provided in Section 2.01(2) of the
Indenture).

(3) The stated maturity of the principal of the 1991 Notes shall be
December 15, 1991, and the stated maturity of the principal of the 1996 Notes
shall be December 15, 1996.

(4) The 1991 Notes and the 1996 Notes shall bear interest at the rate of
7-3/8% per annum and 8% per annum, respectively, from December 15, 1986 or from
the most recent Interest Payment Date to which interest has been paid or duly
provided for, as the case may be, payable on each June 15 and December 15,
commencing June 15, 1987 until the principal amount thereof is paid or made
available for payment. Each June 15 and December 15 shall be an "Interest
Payment Date" for the Notes. The June 1 or December 1 (whether or not a
Business Day) next preceding an Interest Payment Date shall be the "Regular
Record Date" for the interest payable on such Interest Payment Date.

(5) The principal of and interest on the Notes shall be payable, and the
Notes shall be transferable and exchangeable, at the office or agency of the
Corporation maintained for that purpose in the City of Chicago, State of
Illinois; PROVIDED, HOWEVER, that at the option of the Corporation, payment of
interest may be made by check mailed to the address of the Holder entitled
thereto as such address shall appear in the Security Register.

(6) The Notes shall not be redeemable at the Corporation's option prior to
maturity.

(7) The Notes shall be issued only in denominations of $1,000 and integral
multiples thereof.

(8) The Notes shall be issued as Registered Securities only, in fully
registered form.

(9) The following additional covenants of the Corporation shall be added
for the benefit of the Notes:

DEFINITIONS APPLICABLE TO COVENANTS. The following definitions
shall be applicable to the covenants specified below:

-2-

<PAGE>

MGT426F

(i) "Attributable Debt" means as to any particular lease under
which any Person is at the time liable and at any date as of which the
amount thereof is to be determined, the total net amount of rent
required to be paid by such Person under such lease during the
remaining term thereof (including any period for which such lease has
been extended or may, at the option of the lessor, be extended),
discounted from the respective due dates thereof to such date at a
rate per annum equal to one-fourth of one percent above the rate per
annum borne by the 1996 Notes compounded semi-annually. The net
amount of rent required to be paid under any such lease for any
such period shall be the aggregate amount of the rent payable by the
lessee with respect to such period after excluding amounts required
to be paid on account of maintenance and repairs, insurance, taxes,
assessments, water rates and similar charges. In the case of any
lease which is terminable by the lessee upon the payment of a penalty,
such net amount shall also include the amount of such penalty, but no
rent shall be considered as required to be paid under such lease
subsequent to the first date upon which it may be so terminated.

(ii) "Consolidated Net Tangible Assets" means the aggregate
amount of assets (including investments in Unrestricted Subsidiaries,
but less applicable reserves and other properly deductible items)
after deducting therefrom (a) all liabilities and liability items
except Funded Debt, deferred income taxes and stockholders' equity,
and (b) all goodwill, trade names, trademarks, patents, unamortized
debt discount and expense and other like in tangibles, in each case
computed in accordance with generally accepted accounting principles,
which under generally accepted principles would appear on a
consolidated balance sheet of the Corporation and its Restricted
Subsidiaries.

(iii) "Funded Debt" means any indebtedness for money borrowed
maturing on, or extendible at the option of the obligor to, a date
more than one year from the date of the determination thereof.

(iv) "Mortgage" means and includes any mortgage, pledge, lien,
security interest, conditional sale or other title retention agreement
or other similar encumbrance.

(v) "Principal Operating Property" means any principal
manufacturing plant, or distribution or

-3-

<PAGE>

MGT426F

research facility, and related raw material and other facilities
(other than facilities acquired subsequent to the date hereof for the
control or abatement of atmospheric pollutants or contaminants, water
pollution, noise, odor, or other pollution) which on the effective
date hereof or at any time subsequent thereto is located in the United
States and has been owned and operated by the Corporation or any
Subsidiary for more than 90 days, provided, however, that any
principal manufacturing plant, or distribution or research facility,
and related raw material and other facilities (not theretofore owned
by the Corporation or a Subsidiary) owned and operated by a
corporation which becomes a Subsidiary after the effective date hereof
shall not constitute a Principal Operating Property unless owned and
operated by such corporation for more than 90 days after it becomes a
Subsidiary; and provided, further, that the Board of Directors may by
Board Resolution declare that any plant is not of material importance
to the business of the Corporation and its Restricted Subsidiaries as
a whole, in which case such plant shall not be deemed to be a
Principal Operating Property.

(vi) "Restricted Subsidiary" means as of the date of
determination any Subsidiary which owns any Principal Operating
Property.

(vii) "Senior Funded Debt" means all Funded Debt, and all
renewals, extensions and refundings of Funded Debt, except
Subordinated Funded Debt.

(viii) "Subordinated Funded Debt" means (i) the Corporation's
4.85% Subordinated Sinking Fund Debentures due 1991 and (ii) any other
unsecured Funded Debt of the Corporation which is expressly made
subordinate and junior in rank and right of payment to the Notes in
the event of any insolvency or bankruptcy proceedings, and any
receivership, liquidation, reorganization or other similar proceedings
in connection therewith, relative to the Corporation or to its
creditors, as such, or to its property, and in the event of any
proceedings for voluntary liquidation, dissolutions or other winding
up of the Corporation, whether or not involving insolvency or
bankruptcy.

(ix) "Subsidiary" of the Corporation means any corporation at
least a majority of the shares of the Voting Stock (or the equivalent
thereof, in the case of corporations organized outside the United
States of America) of which shall at the time be owned, directly or
indirectly, by the Corporation or by one or more

-4-

<PAGE>

MGT426F

Subsidiaries or by the Corporation and one or more Subsidiaries.

(x) "Unrestricted Subsidiary" means any Subsidiary other than a
Restricted Subsidiary.

(xi) "Voting Stock", as applied to the stock of any corporation,
means stock of any class or classes (however designated) having
ordinary voting power for the election of a majority of the directors
of such corporation, other than stock having such power only by reason
of the happening of a contingency.

LIMITATION ON LIENS. So long as any Notes shall be Outstanding,
the Corporation will not itself, and will not permit any Restricted
Subsidiary to, incur, issue, assume, guarantee or suffer to exist any
indebtedness for money borrowed (indebtedness for money borrowed being
hereinafter in this paragraph called "Debt") secured by a Mortgage on
any Principal Operating Property of the Corporation or any Restricted
Subsidiary, or any shares of stock of or Debt of any Restricted
Subsidiary, without effectively providing that the Notes (together
with, if the Corporation shall so determine, any other Debt of the
Corporation or such Restricted Subsidiary then existing or thereafter
created which is not subordinated Debt) shall be secured equally and
ratably with (or, at the option of the Corporation, prior to) such
secured Debt so long as such secured Debt shall be so secured, unless,
after giving effect thereto, the aggregate amount of all such secured
Debt plus all Attributable Debt of the Corporation and its Restricted
Subsidiaries in respect of sale and leaseback transactions (as defined
in the following paragraph, but excluding leases exempt from the
prohibition of the following paragraph clauses (B) through (D),
inclusive, thereof) would not exceed 5% of Consolidated Net Tangible
Assets; provided, however, that this paragraph shall not apply to, and
there shall be excluded from secured Debt in any computation under
this paragraph, Debt secured by:

(A) Mortgages on, and limited to, property of, or on any
shares of stock of or Debt of, any corporation existing at the
time such corporation becomes a Restricted Subsidiary;

(B) Mortgages in favor of the Corporation or any Restricted
Subsidiary;

(C) Mortgages in favor of any governmental body to secure
progress, advance or other payments pursuant to any contract or
provision of any statute;

-5-

<PAGE>

MGT426F

(D) (i) if made and continuing in the ordinary course of
business, any Mortgage as security for the performance of any
contract or undertaking not directly or indirectly in connection
with the borrowing of money or the securing of Debt, or (ii) any
Mortgage with any governmental agency required or permitted to
qualify the Corporation or any Restricted Subsidiary to conduct
business, to maintain self-insurance or to obtain the benefits of
any law pertaining to workmen's compensation, unemployment
insurance, old age pensions, social security or similar matters;

(E) Mortgages for taxes, assessments or governmental
charges or levies if such taxes, assessments, governmental
charges or levies shall not at the time be due and payable, or if
the same thereafter can be paid without penalty, or if the same
are being contested in good faith by appropriate proceedings;

(F) Mortgages created by or resulting from any litigation
or legal proceeding which at the time is currently being
contested in good faith by appropriate proceedings; or Mortgages
arising out of judgements or awards as to which the time for
prosecuting an appeal or proceeding for review has not expired;

(G) Mortgages on, and limited to, property (including
leasehold estates), shares of stock or Debt existing at the time
of acquisition thereof (including acquisition through merger or
consolidation) or to secure the payment of all or any part of the
purchase price thereof or construction thereon or to secure any
Debt incurred prior to, at the time of, or within 120 days after
the later of the acquisition, the completion of construction or
the commencement of full operation of such property or within 120
days after the acquisition of such shares or Debt for the purpose
of financing all or any part of the purchase price thereof or
construction thereon; or

(H) any extension, renewal or replacement (or successive
extensions, renewals or replacements), as a whole or in part, of
any Mortgage referred to in the foregoing clauses (A) through
(G), inclusive, provided, that (i) such extension, renewal or
replacement Mortgage shall be limited to all or a part of the
same property, shares of stock or Debt that secured the Mortgage
extended, renewed or replaced (plus improvements on such
property) and (ii) the Debt secured by such Mortgage at such time
is not increased.

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<PAGE>

MGT426F

LIMITATION ON SALE AND LEASEBACK. So long as any Notes shall be
Outstanding, except as hereinafter provided, the Corporation will not itself,
and it will not permit any Restricted Subsidiary to, enter into any transaction
with any bank, insurance company or other lender or investor, or to which any
such bank, company, lender or investor is a party, providing for the leasing by
the Corporation or a Restricted Subsidiary of any Principal Operating Property
owned at December 15, 1986 which has been or is to be sold or transferred by the
Corporation or a Restricted Subsidiary to such bank, company, lender or
investor, or to any Person to whom funds have been or are to be advanced by such
bank, company, lender or investor on the security of such Principal Operating
Property (herein referred to as a "sale and leaseback transaction"). This
covenant shall not apply to any sale and leaseback transaction if:

(A) the Corporation or such Restricted Subsidiary could create
Debt secured by a Mortgage pursuant to the preceding paragraph,
without regard to clauses (A) through (H) thereof, on the Principal
Operating Property to be leased in an amount equal to the Attributable
Debt with respect to such sale and leaseback transaction without
equally and ratably securing the Notes, or

(B) the Corporation or a Restricted Subsidiary, within 120 days
after the sale or transfer shall have been made by the Corporation or
by a Restricted Subsidiary, applies an amount equal to the greater of
the net proceeds from the sale of the Principal Operating Property
leased pursuant to such arrangement or the fair market value of the
Principal Operating Property so leased at the time of entering into
such arrangement (as determined in any manner approved by the Board of
Directors) to the retirement of Senior Funded Debt of the Corporation
or Funded Debt of a Restricted Subsidiary; provided, that the amount
to be applied to the retirement of Senior Funded Debt of the
Corporation or Funded Debt of a Restricted Subsidiary shall be reduced
by (i) the principal amount of any Notes (or other debentures or notes
constituting Senior Funded Debt of the Corporation or Funded Debt of a
Restricted Subsidiary) delivered within 75 days after such sale or
transfer to the Trustee or other applicable trustee for retirement and
cancellation and (ii) the principal amount of Senior Funded Debt of
the Corporation or Funded Debt of a Restricted Subsidiary, other than
Funded Debt included under clause (i), voluntarily retired by the
Corporation or a Restricted Subsidiary within 75 days after such sale.
Notwithstanding the foregoing, no retirement referred to in this
clause (B) may be effected by payment at maturity or pursuant to any
mandatory sinking fund payment or any mandatory prepayment provision,
or

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<PAGE>

MGT426F

(C) the lease in such sale and leaseback transaction is for a
period, including renewals, of no more than three years, or

(D) such arrangement is between the Corporation and a Restricted
Subsidiary or between Restricted Subsidiaries.

(10) The following additional Event of Default shall be added for the
benefit of the Notes:

any event of default or events of default as defined in any
mortgages, indentures or instruments, under which there may be issued,
or by which there may be secured or evidenced, any indebtedness for
borrowed money of the Corporation or any Subsidiary in excess of
$50,000,000 principal amount in the aggregate, whether such
indebtedness now exists or shall hereafter be created, which shall
happen and shall result in such indebtedness becoming or being
declared due and payable prior to the date on which it would otherwise
become due and payable, and such acceleration or accelerations shall
not be rescinded or annulled for a period of ten days after there has
been given, by registered or certified mail, to the Corporation by the
Trustee or to the Corporation and the Trustee by the Holders of at
least 25% in principal amount of the 1991 Notes or the 1996 Notes, as
the case may be, Outstanding, a written Notice specifying such event
of default or events of default and requiring the Corporation to cause
such acceleration or accelerations to be rescinded or annulled and
stating that such notice is a "Notice of Default" hereunder.

For all purposes of the Indenture, the foregoing Event of Default shall be
deemed to be an Event of Default described in (a), (b) or (c) of Section 6.01 of
the indenture.

(11) The following additional provisions shall be added for the
benefit of the Notes:

LIMITED MANDATORY REDEMPTION OBLIGATION.

(a) DEFINITIONS. For purposes of this provision, the following
definitions shall apply:

(i) "Affiliate" of a Person means any other Person
controlling, controlled by or under common control with such
Person, either solely with respect to the purchase or other
acquisition of Common Shares or otherwise.

(ii) "Common Shares" means the shares of Common Stock, $4.00
par value per share, of the Corporation.

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<PAGE>

MGT426F

(iii) "Designated Event" means any one or more of the
following, which occurs subsequent to December 15, 1986:

(A) (1) the Corporation shall consolidate with or
merge into any other corporation or convey, transfer or
lease all or substantially all of its assets to any Person,
or (2) any Person shall consolidate with or merge into the
Corporation pursuant to a transaction in which the Common
Shares then outstanding are changed or exchanged;

(B) any Person (other than the Corporation or any
Subsidiary) shall purchase or otherwise acquire directly or
indirectly the beneficial ownership of Common Shares and
immediately after such purchase or acquisition such Person
and its Affiliates shall directly or indirectly beneficially
own in the aggregate twenty percent or more of the Common
Shares then outstanding;

(C) the Corporation or any Subsidiary shall purchase
or otherwise acquire directly or indirectly in one or more
transactions an aggregate of thirty percent or more of the
Common Shares outstanding on the date immediately prior to
the last such purchase or other acquisition; or

(D) the Corporation shall make any distribution or
distributions of cash, property or securities (other than
regular periodic cash dividends at a rate which is
substantially consistent with past practice, including with
respect to increases in dividends, and other than Common
Shares or rights to acquire Common Shares) to holders of
Common Shares, whether by means of dividend,
reclassification, recapitalization or otherwise, having an
aggregate, fair market value (as determined in good faith by
the Board of Directors, whose determination shall be
conclusive) in excess of an amount equal to (1) thirty
percent of the fair market value (based on the closing last
sale price of the Common Shares as reported in the Midwest
Edition of the WALL STREET JOURNAL) of all of the
Corporation's Common Shares outstanding on the date
immediately prior to the date of such distribution (or, if
there be more than one, the last such distribution), less
(2) all amounts expended by the Corporation and its
Subsidiaries (the amount expended, if other than in cash, to
be determined in good faith by

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<PAGE>

MGT426F

the Board of Directors, whose determination shall be
conclusive) to purchase or otherwise acquire Common Shares
subsequent to December 15, 1986 and prior to the date of
such distribution (or, if there be more than one, the last
such more distribution).
(iv) "Person" means any Person as defined in the Indenture
but shall also include a group within the meaning of Section
13(d)(3) (or any successor provision) of the Securities Exchange
Act of 1934.

(v) For purposes of this paragraph (a), "beneficial
ownership" shall be determined in accordance with Rule 13d-3 (or
any successor rule) of the Securities and Exchange Commission
under the Securities and Exchange Act of 1934.

(b) MANDATORY REDEMPTION. If,

(i) a Designated Event shall occur at any time prior to
December 15, 1987 or a proposal to consummate a Designated Event
shall be publicly announced prior to December 15, 1987 and shall
thereafter occur, and

(ii) the Prevailing Rating of either series of the Notes by
Standard & Poor's Corporation or its successor ("S&P") or Moody's
Investors Service, Inc. or its successor ("Moody's") is less than
BBB- the case of S&P or Baa3 in the case of Moody's (A) on any
date within 60 days following the occurrence of such Designated
Event or (B) on any date in the event that such Prevailing Rating
is the result of a downgrade which the relevant rating agency has
publicly announced to have been caused solely by the occurrence
(or proposed occurrence) of such Designated Event and related
transactions,

then the Corporation (or its successor) shall redeem such series of Notes in
whole (except as provided in paragraph (d) below), upon not less than 30 days'
notice given as provided in the Indenture, at a redemption price of 100% of the
principal amount of such series of Notes plus accrued interest to the date of
redemption (provided that instalments of interest, the stated maturity of which
is on or prior to the date of redemption, shall be payable to the Holder of such
Notes, registered as such as the close of business on the relevant record dates,
according to the terms and provisions of Section 2.04 and 3.03 of the
Indenture). The date of redemption for any redemption required by this
paragraph (b) shall be not more than 75

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<PAGE>

MGT426F

days following the earliest date on which the conditions specified in clause (i)
and (ii) above shall have been satisfied. Nothing contained in this paragraph
(b) shall require the Corporation to effect more than one redemption of a series
of the Notes, irrespective of any elections made by Holders pursuant to
paragraph (d) below.

(c) PREVAILING RATING. The "Prevailing Rating" of a series of the
Notes on any date shall be the rating of such series of the Notes by
S&P or Moody's as of the close of business on such date. The
Corporation shall take all reasonable action necessary to enable S&P
and Moody's to provide ratings for the Notes.

(d) ELECTION BY HOLDERS. Any Holder of Notes may elect not to
have redeemed all (but not less than all) the Notes held by such
Holder by delivering written notice of such election to the
Corporation (or an agent designated by the Corporation for such
purpose in the notice of redemption) by the close of business on the
fifteenth day preceding the date of redemption, which notice shall
specify the name of such Holder and shall identify the Notes which are
not to be redeemed and their aggregate principal amount. No such
notice shall be deemed to have been delivered until such notice is
actually received by the Corporation (or its agent).

(12) The provisions of Article Twelve of the Indenture relating to
defeasance of Securities shall be applicable to each series of the Notes,
except that Section 12.02 of the Indenture as it relates to each series of
the Notes shall be replaced by the following provision:

SATISFACTION, DISCHARGE AND DEFEASANCE OF NOTES. At the
Corporation's option, either (a) the Corporation shall be deemed to
have paid and discharged the entire indebtedness on all the
Outstanding Notes of a series and the Trustee, at the expense of the
Corporation, shall execute proper instruments acknowledging
satisfaction and discharge of such indebtedness, or (b) the
Corporation shall cease to be under any obligation to comply with any
term, provision, condition or covenant applicable to the Notes of a
series set forth in Section 11.01 of the Indenture, in item 9 of this
Resolution (I.E., the covenants regarding "Limitations on Liens" and
"Limitation on Sale and Leaseback") and in item 11 of this Resolution
(i.e., the provisions regarding "Limited Mandatory Repurchase
Obligation") when

(1) with respect to all Outstanding Notes of such series,

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<PAGE>

MGT426F

(A) the Corporation shall have deposited or caused to be
deposited with the Trustee as trust funds in trust for the
purpose an amount sufficient to pay and discharge the entire
indebtedness of all Outstanding Notes of such series for
principal and interest to the stated maturity or any redemption
date (as contemplated by the penultimate paragraph hereof), as
the case may be; or

(B) the Corporation shall have deposited or caused to be
deposited with the Trustee as obligations in trust for the
purpose such amount of direct noncallable obligations of, or
noncallable obligations the payment of principal of and interest
on which is fully guaranteed by, the United States of America, or
to the payment of which obligations or guarantees the full faith
and credit of the United States of America is pledged, maturing
as to principal and interest in such amounts and at such times as
will, together with the income to accrue thereon (but without
reinvesting any proceeds thereof), be sufficient to pay and
discharge the entire indebtedness on all Outstanding Notes of
such series for principal and interest to the stated maturity or
any redemption date (as contemplated by the penultimate paragraph
hereof), as the case may be;

(2) the Corporation shall have paid or caused to be paid all
other sums payable with respect to the Outstanding Notes of such
series;

(3) if the Notes of such series are then listed on any national
securities exchange, the Corporation shall have delivered to the
Trustee an Opinion of Counsel to the effect that the Corporation's
exercise of its option under this provision would not cause such Notes
to be delisted;

(4) no Event of Default or event (including such deposit) which
with notice or lapse of time would become an Event of Default with
respect to the Notes of such series shall have occurred and be
continuing on the date of such deposit;

(5) the Corporation shall have delivered to the Trustee an
Opinion of Counsel of nationally recognized tax counsel to the effect
that Holders of the Notes of such series will not recognize income,
gain or loss for Federal income tax purposes as a result of the
Corporation's exercise of its option under this provision and will be
subject to Federal income tax in the same amount and in the

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<PAGE>

MGT426F
same manner and at the same times as would have been the case if such
option had not been exercised;

(6) the Corporation shall have delivered to the Trustee an
Opinion of Counsel to the effect that the Corporation's exercise of
its option under this provision will not cause any violation of the
Investment Company Act of 1940, as amended, on the part of the
Corporation, the trust, the trust funds representing the Corporation's
deposit or the Trustee; and

(7) the Corporation shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that all
conditions precedent relating to the Corporation's exercise of its
option under this provision have been complied with.

Any deposits with the Trustee referred to above shall be
irrevocable and shall be made under the terms of an escrow trust
agreement in form and substance satisfactory to the Trustee. If any
Outstanding Notes of such series are to be redeemed prior to their
stated maturity, the applicable escrow trust agreement shall provide
therefor and the Corporation shall make such arrangements as are
satisfactory to the Trustee for the giving of notice of redemption by
the Trustee in the name, and at the expense, of the Corporation.

For purposes of this provision, "discharged" means that the
Corporation shall be deemed to have paid and discharged the entire
indebtedness represented by, and obligations under, the Notes of such
series and to have satisfied all the obligations under this Indenture
relating to the Notes of such series (and the Trustee, at the expense
of the Corporation, shall execute proper instruments acknowledging the
same), except (x) the rights of Holders of Notes of such series to
receive, from the trust fund described above, payment of the principal
of and interest on such Notes when such payments are due, (y) the
Corporation's obligations with respect to the Notes of such series
under Sections 2.05, 2.07, 4.02 and 12.03 of the Indenture and (z) the
rights, powers, trusts, duties and immunities of the Trustee
hereunder.

BE IT FURTHER RESOLVED: That the form of the 1991 Note and 1996 Note
attached hereto is in all respects approve, and that the execution and
delivery of the Notes as provided in the Indenture is hereby authorized,
with such changes therein as the officer executing the same shall approve,
such execution to be conclusive evidence of such approval.

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<PAGE>

BE IT FURTHER RESOLVED: That the form of Underwriting Agreement (the
"Underwriting Agreement") to be entered into by the Corporation and Salomon
Brothers Inc, as representative of the several underwriters named therein (the
"Underwriters"), a copy of which is attached hereto, is approved in all respects
and that the President, any Executive Vice President, any Senior Vice President
or any Vice President of the Corporation be, and each of them hereby is,
authorized, in the name and on behalf of the Corporation, to execute and deliver
the Underwriting Agreement, with such changes therein as the officer executing
the same may approve, such execution to be conclusive evidence of such approval.

BE IT FURTHER RESOLVED: That the 1991 Notes and the 1996 Notes shall be
offered at initial public offering prices equal to 99.6000% of their principal
amount plus in each case accrued interest from December 15, 1986 to the date of
issuance thereof, and that in payment for the Notes the Corporation shall
receive, in the case of the 1991 Notes, 98.9875% of their principal amount
(99.6000% of their principal amount less an underwriting discount of .6125% of
their principal amount to be paid to the Underwriters), and, in the case of the
1996 Notes, 98.9500% of their principal amount (99.6000% of their principal
amount less an underwriting discount of .6500% of their principal amount to be
paid to the Underwriters), plus in each case accrued interest from December 15,
1986 to the date of issuance thereof.

BE IT FURTHER RESOLVED: That the form of Prospectus Supplement dated
December 16, 1986 (the "Prospectus Supplement") with respect to the Notes, a
copy of which is attached hereto, is in all respects approved, and that the
proper officers of the Corporation are authorized to cause the Prospectus
Supplement to be filed or mailed for filing with the Commission.

BE IT FURTHER RESOLVED: That the proper officers of the Corporation be,
and they hereby are, authorized and directed to take such actions and to execute
and deliver such instruments and documents and to do such other things as they
or any of them shall deem necessary or advisable to effectuate the purposes and
intent of the foregoing Resolutions.

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<PAGE>

MGT426F

IN WITNESS WHEREOF, the undersigned have executed this instrument this 16th
day of December, 1986.

Robert J. Day

Harry M. Stover

William R. Hogan

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<PAGE>
Exhibit 4 (c)

FORM OF RESOLUTION CREATING 8-3/4% DEBENTURES DUE 2017

NOW, THEREFORE, BE IT RESOLVED: That the following resolutions are adopted
by the Special Committee effective March 5, 1987.

BE IT FURTHER RESOLVED: That there is hereby approved and established a
series of Securities under the Indenture, whose terms shall be as follows:

(1) The series of Securities established hereby to be issued pursuant to
the Indenture shall be known and designated as the "8-3/4% Debentures Due 2017"
(the "Debentures").

(2) The aggregate principal amount of the Debentures is limited to
$200,000,000 (except as provided in Section 2.01(2) of the Indenture).

(3) The stated maturity of the principal of the Debentures shall be March
1, 2017.

(4) The Debentures shall bear interest at the rate of 8-3/4% per annum
from March 1, 1987 or from the most recent Interest Payment Date to which
interest has been paid or duly provided for, as the case may be, payable on each
September 1 and March 1, commencing September 1, 1987 until the principal amount
thereof is paid or made available for payment. Each September 1 and March 1
shall be an "Interest Payment Date" for the Debentures. The August 15 or
February 15 (whether or not a Business Day) next preceding an Interest Payment
Date shall be the "Regular Record Date" for the interest payable on such
Interest Payment Date.

(5) The principal of (and premium, if any) and interest on the Debentures
shall be payable, and the Debentures shall be transferable and exchangeable, at
the office or agency of the Corporation maintained for that purpose in the City
of Chicago, State of Illinois; PROVIDED, HOWEVER, that at the option of the
Corporation, payment of interest may be made by check mailed to the address of
the Holder entitled thereto as such address shall appear in the Security
Register.

(6) The Debentures shall be redeemable at the Corporation's option, as a
whole or in part, upon not less than 30 nor more than 90 days' notice given as
provided in the Indenture, at any time prior to maturity upon payment of the
applicable optional redemption price set forth in the form of the Debenture
attached hereto, plus accrued interest to the date of redemption (provided

<PAGE>

that instalments of interest, the stated maturity of which is on or prior to
the date of redemption, shall be payable to the Holders of such Debentures,
registered as such at the close of business on the relevant record dates,
according to the terms and provisions of Sections 2.04 and 3.03 of the
Indenture).

Notwithstanding the foregoing, the Corporation may not, prior to March 1,
1997, redeem any of the Debentures pursuant to this item 6, as part of, or in
anticipation of, any refunding operation by the application, directly or
indirectly, of moneys borrowed by or for the account of the Corporation or any
of its Subsidiaries (as defined in item 10 of this Resolution) having an
interest cost (calculated in accordance with generally accepted
financial practice) of less than 8.77% per annum.

(7) As and for a sinking fund (the "Sinking Fund") for the retirement of
the Debentures the Corporation will, until all the Debentures are paid or
payment thereof provided for, deposit with the Trustee prior to March 1 in each
year, commencing with the year 1998 to and including the year 2016, an amount in
cash sufficient to redeem, at 100% of their principal amount, not less than
$10,000,000 aggregate principal amount of the Debentures (the "mandatory
amount") nor more than $25,000,000, less the amount of any credit against such
payment received by the Corporation under the following paragraph. Each such
Sinking Fund payment shall be applied to the redemption of Debentures on such
March 1, as provided below. The right to deposit an amount sufficient to redeem
in excess of $10,000,000 aggregate principal amount of the Debentures for the
Sinking Fund in any of the years 1998 to 2016, inclusive, shall be
noncumulative.

The Corporation (1) may deliver uncancelled Debentures (other than any
previously called for redemption) and (2) may apply as a credit (i) Debentures
redeemed at the election of the Corporation pursuant to item 6 of this
Resolution and (ii) Debentures redeemed in excess of the mandatory amounts
pursuant to the preceding paragraph in satisfaction of all or any part of any
Sinking Fund payment required to be made pursuant to the preceding paragraph
(provided that Debentures so delivered or credited have not been previously
delivered or credited in satisfaction of any mandatory Sinking Fund payment or
any retirement of Senior Funded Debt of the Corporation or Funded Debt of a
Restricted Subsidiary pursuant to item 10 of this Resolution). Each such
Debenture shall be received or credited for such purpose by the Trustee at 100%
of its principal amount for redemption through the operation of the Sinking
Fund, and the amount of such Sinking Fund payment shall be reduced accordingly.

On or before January 15 in each year commencing with the year 1998 to and
including the year 2016, the Corporation will deliver to the Trustee an
Officer's Certificate specifying

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<PAGE>

the amount of the next ensuing Sinking Fund payment (in which event the amount
so specified shall be due prior to the next ensuing March 1) and the portions of
such Sinking Fund payment which are to be satisfied by payment of cash, by
delivery of Debentures or by crediting Debentures, and will also deliver to the
Trustee the Debentures to be so delivered. Such Officers' Certificate shall
also state that the Debentures then delivered or forming the basis of any such
credit qualify therefor under the preceding paragraph and do not include any
Debentures which have been previously credited against any Sinking Fund payment
or any retirement of Funded Debt pursuant to item 10 of this Resolution. In
case of the failure, on or before January 15 in any such year, of the
Corporation to give such notice and to deliver such Debentures, if any, the
Sinking Fund obligation shall be $10,000,000 and shall be paid entirely in cash.
On or before February 1 in each such year the Trustee shall select the
Debentures or portions thereof to be redeemed upon the next ensuing
March 1 in the manner specified, and cause notice of the redemption thereof to
be given in the name of and at the expense of the Corporation in the manner
provided, in Section 3.02 of the Indenture. Such notice having been duly given,
the Sinking Fund payment shall be applied to the redemption of such Debentures
or portions, such redemption to be made upon the terms and in the manner stated
in Section 3.03 of the Indenture.

(8) The Debentures shall be issued only in denominations of $1,000 and
integral multiples thereof.

(9) The Debentures shall be issued as Registered Securities only, in fully
registered form.

(10) The following additional covenants of the Corporation shall be added
for the benefit of the Debentures:

DEFINITIONS APPLICABLE TO COVENANTS. The following definitions shall
be applicable to the covenants specified below:

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<PAGE>

amount of the rent payable by the lessee with respect to such period
after excluding amounts required to be paid on account of maintenance
and repairs, insurance, taxes, assessments, water rates and similar
charges. In the case of any lease which is terminable by the lessee
upon the payment of a penalty, such net amount shall also include the
amount of such penalty, but no rent shall be considered as required to
be paid under such lease subsequent to the first date upon which it
may be so terminated.

(ii) "Consolidated Net Tangible Assets" means the aggregate
amount of assets (including investments in Unrestricted Subsidiaries,
but less applicable reserves an other properly deductible items) after
deducting therefrom (a) all liabilities and liability items except
Funded Debt, deferred income taxes and stockholders' equity, and (b)
all goodwill, trade names, trademarks, patents, unamortized debt
discount and expense and other like intangibles, in each case computed
in accordance with generally accepted accounting principles, which
under generally accepted accounting principles would appear on a
consolidated balance sheet of the Corporation and its Restricted
Subsidiaries.

(iii) "Funded Debt" means any indebtedness for money borrowed
maturing on, or extendible at the option of the obligor to, a date
more than one year from the date of the determination thereof.

(iv) "Mortgage" means and includes any mortgage, pledge, lien,
security interest, conditional sale or other title retention agreement
or other similar encumbrance.

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<PAGE>

a Subsidiary after the effective date hereof shall not constitute a
Principal Operating Property unless owned and operated by such
corporation for more than 90 days after it becomes a Subsidiary; and
provided, further, that the Board of Directors may by Board Resolution
declare that any plant is not of material importance to the business
of the Corporation and its Restricted Subsidiaries as a whole, in
which case such plant shall not be deemed to be a Principal Operating
Property.

(vi) "Restricted Subsidiary" means as of the date of
determination any Subsidiary which owns any Principal Operating
Property.

(vii) "Senior Funded Debt" means all Funded Debt, and all
renewals, extensions and refundings of Funded Debt, except
Subordinated Funded Debt.

(viii) "Subordinated Funded Debt" means (i) the Corporation's
4.85% Subordinated Sinking Fund Debentures due 1991 and (ii) any other
unsecured Funded Debt of the Corporation which is expressly made
subordinate and junior in rank and right of payment to the Debentures
in the event of any insolvency or bankruptcy proceedings, and any
receivership, liquidation, reorganization or other similar proceedings
in connection therewith, relative to the Corporation or to its
creditors, as such, or to its property, and in the event of any
proceedings for voluntary liquidation, dissolutions or other winding
up of the Corporation, whether or not involving insolvency or
bankruptcy.

(x) "Unrestricted Subsidiary" means any Subsidiary other than
a Restricted Subsidiary.

(xi) "Voting Stock", as applied to the stock of any
corporation, means stock of any class or classes (however designated)
having ordinary voting power for the election of a majority of the
directors of such corporation, other than stock having such power only
by reason of the happening of a contingency.

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<PAGE>

LIMITATION ON LIENS. So long as any Debentures shall be Outstanding,
the Corporation will not itself, and will not permit any Restricted
Subsidiary to, incur, issue, assume, guarantee or suffer to exist any
indebtedness for money borrowed (indebtedness for money borrowed being
hereinafter in this paragraph called "Debt") secured by a Mortgage on any
Principal Operating Property of the Corporation or any Restricted
Subsidiary, or any shares of stock of or Debt of any Restricted Subsidiary,
without effectively providing that the Debentures (together with, if the
Corporation shall so determine, any other Debt of the Corporation or such
Restricted Subsidiary then existing or thereafter created which is not
subordinated Debt) shall be secured equally and ratably with (or, at the
option of the Corporation, prior to) such secured Debt so long as such
secured Debt shall be so secured, unless, after giving effect thereto, the
aggregate amount of all such secured Debt plus all Attributable Debt of the
Corporation and its Restricted Subsidiaries in respect of sale and
leaseback transactions (as defined in the following paragraph, but
excluding leases exempt from the prohibition of the following paragraph by
clauses (B) through (D), inclusive, thereof) would not exceed 5% of
Consolidated Net Tangible Assets; provided, however, that this paragraph
shall not apply to, and there shall be excluded from secured Debt in any
computation under this paragraph, Debt secured by:

(A) Mortgages on, and limited to, property of, or on any
shares of stock of or Debt of, any corporation existing at the time
such corporation becomes a Restricted Subsidiary;

(B) Mortgages in favor of the Corporation or any Restricted
Subsidiary;

(C) Mortgages in favor of any governmental body to secure
progress, advance or other payments pursuant to any contract or
provision of any statute;

(D) (i) if made and continuing in the ordinary course of
business, any Mortgage as security for the performance of any contract
or undertaking not directly or indirectly in connection with the
borrowing of money or the securing of Debt, or (ii) any Mortgage with
any governmental agency required or permitted to qualify the
Corporation or any Restricted Subsidiary to conduct business, to
maintain self-insurance or to obtain the benefits of any law
pertaining to workmen's compensation, unemployment insurance, old age
pensions, social security or similar matters;

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<PAGE>
(E) Mortgages for taxes, assessments or governmental charges
or levies if such taxes, assessments, governmental charges or levies
shall not at the time be due and payable, or if the same thereafter
can be paid without penalty, or if the same are being contested in
good faith by appropriate proceedings;

(F) Mortgages created by or resulting from any litigation or
legal proceeding which at the time is currently being contested in
good faith by appropriate proceedings; or Mortgages arising out of
judgments or awards as to which the time for prosecuting an appeal or
proceeding for review has not expired;

(G) Mortgages on, and limited to, property (including
leasehold estates), shares of stock or Debt existing at the time of
acquisition thereof (including acquisition through merger or
consolidation) or to secure the payment of all or any part of the
purchase price thereof or construction thereon or to secure any Debt
incurred prior to, at the time of, or within 120 days after the later
of the acquisition, the completion of construction or the commencement
of full operation of such property or within 120 days after the
acquisition of such shares or Debt for the purpose of financing all or
any part of the purchase price thereof or construction thereon; or

(H) any extension, renewal or replacement (or successive
extensions, renewals or replacements), as a whole or in part, of any
Mortgage referred to in the foregoing clauses (A) through (G),
inclusive, provided, that (i) such extension, renewal or replacement
Mortgage shall be limited to all or a part of the same property,
shares of stock or Debt that secured the Mortgage extended, renewed or
replaced (plus improvements on such property) and (ii) the Debt
secured by such Mortgage at such time is not increased.

LIMITATION ON SALE AND LEASEBACK. So long as any Debentures shall be
Outstanding, except as hereinafter provided, the Corporation will not
itself, and it will not permit any Restricted Subsidiary to, enter into any
transaction with any bank, insurance company or other lender or investor,
or to which any such bank, company, lender or investor is a party,
providing for the leasing by the Corporation or a Restricted Subsidiary of
any Principal Operating Property owned at March 1, 1987 which has been or
is to be sold or transferred by the Corporation or a Restricted Subsidiary
to such bank, company, lender or investor, or to any Person to whom funds
have been or are to

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<PAGE>

be advanced by such bank, company, lender or investor on the security of
such Principal Operating Property (herein referred to as a "sale and
leaseback transaction"). This covenant shall not apply to any sale and
leaseback transaction if:

(A) the Corporation or such Restricted Subsidiary could create Debt
secured by a Mortgage pursuant to the preceding paragraph, without regard
to clauses (A) through (H) thereof, on the Principal Operating Property to
be leased in an amount equal to the Attributable Debt with respect to such
sale and leaseback transaction without equally and ratably securing the
Debentures, or

(B) the Corporation or a Restricted Subsidiary, within 120 days after
the sale or transfer shall have been made by the Corporation or by a
Restricted Subsidiary, applies an amount equal to the greater of the net
proceeds from the sale of the Principal Operating Property leased pursuant
to such arrangement or the fair market value of the Principal Operating
Property so leased at the time of entering into such arrangement (as
determined in any manner approved by the Board of Directors) to the
retirement of Senior Funded Debt of the Corporation or Funded Debt of a
Restricted Subsidiary; provided, that the amount to be applied to the
retirement of Senior Funded Debt of the Corporation or Funded Debt of a
Restricted Subsidiary shall be reduced by (i) the principal amount of any
Debentures (or other debentures or notes constituting Senior Funded Debt
of th Corporation or Funded Debt of a Restricted Subsidiary) delivered with
in 75days after such sale or transfer to the Trustee or other applicable
trustee for retirement and cancellation and (ii) the principal amount of
Senior Funded Debt of the Corporation or Funded Debt of a Restricted
Subsidiary, other than Funded Debt included under clause (i), voluntarily
retired by the Corporation or a Restricted Subsidiary within 75 days after
such sale. Notwithstanding the foregoing, no retirement referred to in this
clause (B) may be effected by payment at maturity or pursuant to any
mandatory sinking fund payment or any mandatory prepayment provision, or

(C) the lease in such sale and leaseback transaction is for a period,
including renewals, of no more than three years; or

(D) such arrangement is between the Corporation and a Restricted
Subsidiary or between Restricted Subsidiaries.

(11) The following additional Event of Default shall be added for the
benefit of the Debentures:

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<PAGE>

any event of default or events of default as defined in any mortgages,
indentures or instruments, under which there may be issued, or by which
there may be secured or evidenced, any indebtedness for borrowed money of
the Corporation or any Subsidiary in excess of $50,000,000 principal amount
in the aggregate, whether such indebtedness now exists or shall hereafter
be created, which shall happen and shall result in such indebtedness
becoming or being declared due and payable prior to the date on which it
would otherwise become due and payable, and such acceleration or
accelerations shall not be rescinded or annulled for a period of ten days
after there has been given, by registered or certified mail, to the
Corporation by the Trustee or to the Corporation and the Trustee by the
Holders of at least 25% in principal amount of the Debentures Outstanding,
a written notice specifying such event of default or events of default and
requiring the Corporation to cause such acceleration or accelerations to be
rescinded or annulled and stating that such notice is a "Notice of Default"
hereunder.

For all purposes of the Indenture, the foregoing Event of Default shall be
deemed to be an Event of Default described in (a), (b) or (c) of Section 6.01 of
the Indenture.

(12) The following additional provisions shall be added for the benefit of
the Debentures:

LIMITED MANDATORY REDEMPTION OBLIGATION.

(a) DEFINITIONS. For purposes of this provision, the following
definitions shall apply:

(i) "Affiliate" of a Person means any other Person
controlling, controlled by or under common control with such Person,
either solely with respect to the purchase or other acquisition of
Common Shares or otherwise.

(ii) "Common Shares" means the shares of Common Stock, $4.00
par value per share, of the Corporation.

(iii) "Designated Event" means any one or more of the following,
which occurs subsequent to December 15, 1986:

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<PAGE>

Corporation pursuant to a transaction in which the Common Shares
then outstanding are changed or exchanged;

(B) any person (other than the Corporation or any
Subsidiary) shall purchase or otherwise acquire directly or
indirectly the beneficial ownership of Common Shares and
immediately after such purchase or acquisition such Person and
its Affiliates shall directly or indirectly beneficially own in
the aggregate twenty percent or more of the Common Shares then
outstanding;

(C) the Corporation or any Subsidiary shall purchase or
otherwise acquire directly or indirectly in one or more
transactions an aggregate of thirty percent or more of the Common
Shares outstanding on the date immediately prior to the last such
purchase or other acquisition; or

(D) the Corporation shall make any distribution or
distributions of cash, property or securities (other than regular
periodic cash dividends at a rate which is substantially
consistent with past practice, including with respect to
increases in dividends, and other than Common Shares or rights to
acquire Common Shares) to holders of Common Shares, whether by
means of dividend, reclassification, recapitalization or
otherwise, having an aggregate, fair market value (as determined
in good faith by the Board of Directors, whose determination
shall be conclusive) in excess of an amount equal to (1) thirty
percent of the fair market value (based on the closing last sale
price of the Common Shares as reported in the Midwest Edition of
the WALL STREET JOURNAL) of all of the Corporation's Common
Shares outstanding on the date immediately prior to the date of
such distribution (or, if there be more than one, the last such
distribution), less (2) all amounts expended by the Corporation
and its Subsidiaries (the amount expended, if other than in cash,
to be determined in good faith by the Board of Directors, whose
determination shall be conclusive) to purchase or otherwise
acquire Common Shares subsequent to December 15, 1986 and prior
to the date of such distribution (or, if there be more than one,
the last such distribution).

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<PAGE>

(iv) "Person" means any Person as defined in the Indenture but
shall also include a group within the meaning of Section 13(d)(3) (or
any successor provision) of the Securities Exchange Act of 1934.

(v) For purposes of this paragraph (a), "beneficial ownership"
shall be determined in accordance with Rule 13d-3 (or any successor
rule) of the Securities and Exchange Commission under the Securities
and Exchange Act of 1934.

(b) MANDATORY REDEMPTION. If,

(i) a Designated Event shall occur at any time prior to
December 15, 1987 or a proposal to consummate a Designated Event shall
be publicly announced prior to December 15, 1987 and shall thereafter
occur, and

(ii) the Prevailing Rating of the Debentures by Standard &
Poor's Corporation or its successor ("S&P") or Moody's Investors
Service, Inc. or its successor ("Moody's") is less than BBB- the case
of S&P or Baa3 in the case of Moody's (A) on any date within 60 days
following the occurrence of such Designated Event or (B) on any date
in the event that such Prevailing Rating is the result of a downgrade
which the relevant rating agency has publicly announced to have been
casued solely by the occurrence (or proposed occurrence) of such
Designated Event and related transactions,

then the Corporation (or its successor) shall redeem the Debentures in
whole (except as provided in paragraph (d) below), upon not less than 30
days' notice given as provided in the Indenture, at a redemption price of
100% of the principal amount of the Debentures plus accrued interest to the
date of redemption (provided that instalments of interest, the stated
maturity of which is on or prior to the date of redemption, shall be
payable to the Holder of such Debentures, registered as such as the close
of business on the relevant record dates, according to the terms and
provisions of Section 2.04 and 3.03 of the Indenture). The date of
redemption for any redemption required by this paragraph (b) shall be not
more than 75 days following the earliest date on which the conditions
specified in clause (i) and (ii) above shall have been satisfied. Nothing
contained in this paragraph (b) shall require the Corporation to effect
more than one redemption of the Debentures, irrespective of any elections
made by Holders pursuant to paragraph (d) below.

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<PAGE>

(c) PREVAILING RATING. The "Prevailing Rating" of the Debentures on
any date shall be the rating of the Debentures by S&P or Moody's as of the
close of business on such date. The Corporation shall take all reasonable
action necessary to enable S&P and Moody's to provide ratings for the
Debentures.

(d) ELECTION BY HOLDERS. Any Holder of Debentures may elect not to
have redeemed all (but not less than all) the Debentures held by such
Holder by delivering written notice of such election to the Corporation (or
an agent designated by the Corporation for such purpose in the notice of
redemption) by the close of business on the fifteenth day preceding the
date of redemption, which notice shall specify the name of such Holder and
shall identify the Debentures which are not to be redeemed and their
aggregate principal amount. No such notice shall be deemed to have been
delivered until such notice is actually received by the Corporation (or its
agent).

(13) The provisions of Article Twelve of the Indenture relating to
defeasance of Securities shall be applicable to the Debentures, except that
Section 12.02 of the Indenture as it relates to the Debentures shall be replaced
by the following provision:

SATISFACTION, DISCHARGE AND DEFEASANCE OF DEBENTURES. At the
Corporation's option, either (a) the Corporation shall be deemed to have
paid and discharged the entire indebtedness on all the Outstanding
Debentures and the Trustee, at the expense of the Corporation, shall
execute proper instruments acknowledging satisfaction and discharge of such
indebtedness, or (b) the Corporation shall cease to be under any obligation
to comply with any term, provision, condition or covenant applicable to the
Debentures of a series set forth in Section 11.01 of the Indenture, in item
10 of this Resolution (I.E., the covenants regarding "Limitation on Liens"
and "Limitation on Sale and Leaseback") and in item 12 of this Resolution
(i.e., the provisions regarding "Limited Mandatory Repurchase Obligation")
when

(1) with respect to all Outstanding Debentures,

(A) the Corporation shall have deposited or caused to be
deposited with the Trustee as trust funds in trust for the purpose an
amount sufficient to pay and discharge the entire indebtedness of all
Outstanding Debentures for principal (and premium, if any) and
interest to the stated maturity or any

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<PAGE>

redemption date (as contemplated by the penultimate paragraph hereof),
as the case may be; or

(B) the Corporation shall have deposited or caused to be
deposited with the Trustee as obligations in trust for the purpose
such amount of direct noncallable obligations of, or noncallable
obligations the payment of principal of and interest on which is fully
guaranteed by, the United States of America, or to the payment of
which obligations or guarantees the full faith and credit of the
United States of America is pledged, maturing as to principal and
interest in such amounts and at such times as will, together with the
income to accrue thereon (but without reinvesting any proceeds
thereof), be sufficient to pay and discharge the entire indebtedness
on all Outstanding Debentures for principal (and premium, if any) and
interest to the stated maturity or any redemption date (as
contemplated by the penultimate paragraph hereof), as the case may be;

(2) the Corporation shall have paid or caused to be paid all other
sums payable with respect to the Outstanding Debentures;

(3) if the Debentures are then listed on any national securities
exchange, the Corporation shall have delivered to the Trustee an Opinion of
Counsel to the effect that the Corporation's exercise of its option under
this provision would not cause such Debentures to be delisted;

(4) no Event of Default or event (including such deposit) which with
notice or lapse of time would become an Event of Default with respect to
the Debentures shall have occurred and be continuing on the date of such
deposit;

(5) the Corporation shall have delivered to the Trustee an Opinion of
Counsel of nationally recognized tax counsel to the effect that Holders of
the Debentures will not recognize income, gain or loss for Federal income
tax purposes as a result of the Corporation's exercise of its option under
this provision and will be subject to Federal income tax in the same amount
and in the same manner and at the same times as would have been the case if
such option had not been exercised;

(6) the Corporation shall have delivered to the Trustee an Opinion of
Counsel to the effect that the Corporation's exercise of its option under
this provision will not cause any violation of the Investment Company Act
of 1940, as amended, on the part of the Corporation, the

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<PAGE>

trust, the trust funds representing the Corporation's deposit or the
Trustee; and

(7) the Corporation shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent relating to the Corporation's exercise of its option under this
provision have been complied with.

Any deposits with the Trustee referred to above shall be
irrevocable and shall be made under the terms of an escrow trust agreement
in form and substance satisfactory to the Trustee. If any Outstanding
Debentures are to be redeemed prior to their stated maturity (including
through operation of the Sinking Fund applicable to the Debentures), the
applicable escrow trust agreement shall provide therefor and the
Corporation shall make such arrangements as are satisfactory to the
Trustee for the giving of notice of redemption by the Trustee in the
name, and at the expense, of the Corporation.

For purposes of this provision, "discharged" means that the
Corporation shall be deemed to have paid and discharged the entire
indebtedness represented by, and obligations under, the Debentures and to
have satisfied all the obligations under this Indenture relating to the
Debentures (and the Trustee, at the expense of the Corporation, shall
execute proper instruments acknowledging the same), except (x) the rights
of Holders of Debentures to receive, from the trust fund described above,
payment of the principal (and premium, if any) of and interest on such
Debentures when such payments are due, (y) the Corporation's obligations
with respect to the Debentures under Sections 2.05, 2.07, 4.02 and 12.03 of
the Indenture and (z) the rights, powers, trusts, duties and immunities of
the Trustee hereunder.

BE IT FURTHER RESOLVED: That the form of the Debenture attached hereto is
in all respects approved, and that the execution and delivery of the Debentures
as provided in the Indenture is hereby authorized, with such changes therein as
the officer executing the same shall approve, such execution to be conclusive
evidence of such approval.

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<PAGE>

Appendix to Exhibit 4(c)

The last two pages of the original of this exhibit is comprised of a photocopy
of a Note Certificate. Such certificate has been omitted from the EDGAR
submission and has been filed under Form SE.

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<PAGE>

FORM OF RESOLUTION CREATING 8% SENIOR NOTES DUE 1997

NOW, THEREFORE, BE IT RESOLVED: That the following resolutions are adopted
by the Special Committee effective March 6, 1987.

BE IT FURTHER RESOLVED: That there is hereby approved and established a
series of Securities under the Indenture, whose terms shall be as follows:

(1) The series of Securities established hereby to be issued pursuant to
the Indenture shall be known and designated as the "8% Senior Notes Due 1997"
(the "Notes").

(2) The aggregate principal amount of the Notes is limited to $100,000,000
(except as provided in Section 2.01(2) of the Indenture).

(3) The stated maturity of the principal of the Notes shall be March 15,
1997.

(4) The Notes shall bear interest at the rate of 8% per annum from March
15, 1987 or from the most recent Interest Payment Date to which interest has
been paid or duly provided for, as the case may be, payable on each September 15
and March 15, commencing September 15, 1987 until the principal amount thereof
is paid or made available for payment. Each September 15 and March 15 shall be
an "Interest Payment Date" for the Notes. The September 1 or March 1 (whether
or not a Business Day) next preceding an Interest Payment Date shall be the
"Regular Record Date" for the interest payable on such Interest Payment Date.

(6) The Notes shall not be redeemable at the Corporation's option prior to
maturity.

(7) The Notes shall be issued only in denominations of $1,000 and integral
multiples thereof.

<PAGE>

(8) The Notes shall be issued as Registered Securities only, in fully
registered form.

(9) The following additional covenants of the Corporation shall be added
for the benefit of the Notes:

DEFINITIONS APPLICABLE TO COVENANTS. The following definitions shall
be applicable to the covenants specified below:

(i) "Attributable Debt" means as to any particular lease under
which any Person is at the time liable and at any date as of which the
amount thereof is to be determined, the total net amount of rent
required to be paid by such Person under such lease during the
remaining term thereof (including any period for which such lease has
been extended or may, at the option of the lessor, be extended),
discounted from the respective due dates thereof to such date at a
rate per annum equal to one-fourth of one percent above the rate per
annum borne by the Notes compounded semi-annually. The net amount of
rent required to be paid under any such lease for any such period
shall be the aggregate amount of the rent payable by the lessee with
respect to such period after excluding amounts required to be paid on
account of maintenance and repairs, insurance, taxes, assessments,
water rates and similar charges. In the case of any lease which is
terminable by the lessee upon the payment of a penalty, such net
amount shall also include the amount of such penalty, but no rent
shall be considered as required to be paid under such lease subsequent
to the first date upon which it may be so terminated.

(ii) "Consolidated Net Tangible Assets" means the aggregate
amount of assets (including investments in Unrestricted Subsidiaries,
but less applicable reserves and other properly deductible items)
after deducting therefrom (a) all liabilities and liability items
except Funded Debt, deferred income taxes and stockholders' equity,
and (b) all goodwill, trade names, trademarks, patents, unamortized
debt discount and expense and other like intangibles, in each case
computed in accordance with generally accepted accounting principles,
which under generally accepted accounting principles would appear on a
consolidated balance sheet of the Corporation and its Restricted
Subsidiaries.

(iii) "Funded Debt" means any indebtedness for money borrowed
maturing on, or extendible at the option

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<PAGE>

of the obligor to, a date more than one year from the date of the
determination thereof.

(iv) "Mortgage" means and includes any mortgage, pledge, lien,
security interest, conditional sale or other title retention agreement
or other similar encumbrance.

(v) "Principal Operating Property" means any principal
manufacturing plant, or distribution or research facility, and related
raw material and other facilities (other than facilities acquired
subsequent to the date hereof for the control or abatement of
atmospheric pollutants or contaminants, water pollution, noise, odor
or other pollution) which on the effective date hereof or at any time
subsequent thereto is located in the United States and has been owned
and operated by the Corporation or any Subsidiary for more than 90
days, provided, however, that any principal manufacturing plant, or
distribution or research facility, and related raw material and other
facilities (not theretofore owned by the Corporation or a Subsidiary)
owned and operated by a corporation which becomes a Subsidiary after
the effective date hereof shall not constitute a Principal Operating
Property unless owned and operated by such corporation for more than
90 days after it becomes a Subsidiary; and provided, further, that the
Board of Directors may by Board Resolution declare that any plant is
not of material importance to the business of the Corporation and its
Restricted Subsidiaries as a whole, in which case such plant shall not
be deemed to be a Principal Operating Property.

(vi) "Restricted Subsidiary" means as of the date of
determination any Subsidiary which owns any Principal Operating
Property.

(vii) "Senior Funded Debt" means all Funded Debt, and all
renewals, extensions and refundings of Funded Debt, except
Subordinated Funded Debt.

(viii) "Subordinated Funded Debt" means (i) the Corporation's 4.85%
Subordinated Sinking Fund Debentures due 1991 and (ii) any other
unsecured Funded Debt of the Corporation which is expressly made
subordinate and junior in rank and right of payment to the Notes in
the event of any insolvency or bankruptcy proceedings, and any
receivership, liquidation, reorganization or other similar proceedings
in connection therewith, relative to the Corporation or to its
creditors, as such, or to its property, and in the event of any

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<PAGE>

proceedings for voluntary liquidation, dissolutions or other winding
up of the Corporation, whether or not involving insolvency or
bankruptcy.

(x) "Unrestricted Subsidiary" means any Subsidiary other than a
Restricted Subsidiary.

LIMITATION ON LIENS. So long as any Notes shall be Outstanding, the
Corporation will not itself, and will not permit any Restricted Subsidiary
to, incur, issue, assume, guarantee or suffer to exist any indebtedness for
money borrowed (indebtedness for money borrowed being hereinafter in this
paragraph called "Debt") secured by a Mortgage on any Principal Operating
Property of the Corporation or any Restricted Subsidiary, or any shares of
stock of or Debt of any Restricted Subsidiary, without effectively
providing that the Notes (together with, if the Corporation shall so
determine, any other Debt of the Corporation or such Restricted Subsidiary
then existing or thereafter created which is not subordinated Debt) shall
be secured equally and ratably with (or, at the option of the Corporation,
prior to) such secured Debt so long as such secured Debt shall be so
secured, unless, after giving effect thereto, the aggregate amount of all
such secured Debt plus all Attributable Debt of the Corporation and its
Restricted Subsidiaries in respect of sale and leaseback transactions (as
defined in the following paragraph, but excluding leases exempt from the
prohibition of the following paragraph by clauses (B) through (D),
inclusive, thereof) would not exceed 5% of Consolidated Net Tangible
Assets; provided, however, that this paragraph shall not apply to, and
there shall be excluded from secured Debt in any computation under this
paragraph. Debt secured by:

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<PAGE>

(A) Mortgages on, and limited to, property of, or on any shares
of stock of or Debt of, any corporation existing at the time such
corporation becomes a Restricted Subsidiary;

(B) Mortgages in favor of the Corporation or any Restricted
Subsidiary;

(C) Mortgages in favor of any governmental body to secure
progress, advance or other payments pursuant to any contract or
provision of any statute;

(D) (i) if made and continuing in the ordinary course of
business, any Mortgage as security for the performance of any contract
or undertaking not directly or indirectly in connection with the
borrowing of money or the securing of Debt, or (ii) any Mortgage with
any governmental agency required or permitted to qualify the
Corporation or any Restricted Subsidiary to conduct business, to
maintain self-insurance or to obtain the benefits of any law
pertaining to workmen's compensation, unemployment insurance, old age
pensions, social security or similar matters;

(E) Mortgages for taxes, assessments or governmental charges or
levies if such taxes, assessments, governmental charges or levies
shall not at the time be due and payable, or if the same thereafter
can be paid without penalty, or if the same are being contested in
good faith by appropriate proceedings;

(F) Mortgages created by or resulting from any litigation or
legal proceeding which at the time is currently being contested in
good faith by appropriate proceedings; or Mortgages arising out of
judgments or awards as to which the time for prosecuting an appeal or
proceeding for review has not expired;

(G) Mortgages on, and limited to, property (including leasehold
estates), shares of stock or Debt existing at the time of acquisition
thereof (including acquisition through merger or consolidation) or to
secure the payment of all or any part of the purchase price thereof or
construction thereon or to secure any Debt incurred prior to, at the
time of, or within 120 days after the later of the acquisition, the
completion of construction or the commencement of full operation of
such property or within 120 days after the acquisition of such shares
or Debt for the purpose of financing all or any part of the purchase
price thereof or construction thereon; or

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<PAGE>

(H) any extension, renewal or replacement (or successive
extensions, renewals or replacements), as a whole or in part, of any
Mortgage referred to in the foregoing clauses (A) through (G),
inclusive, provided, that (i) such extension, renewal or replacement
Mortgage shall be limited to all or a part of the same property,
shares of stock or Debt that secured the Mortgage extended, renewed or
replaced (plus improvements on such property) and (ii) the Debt
secured by such Mortgage at such time is not increased.

LIMITATION ON SALE AND LEASEBACK. So long as any Notes shall be
Outstanding, except as hereinafter provided, the Corporation will not
itself, and it will not permit any Restricted Subsidiary to, enter into any
transaction with any bank, insurance company or other lender or investor,
or to which any such bank, company, lender or investor is a party,
providing for the leasing by the Corporation or a Restricted Subsidiary of
any Principal Operating Property owned at March 15, 1987 which has been or
is to be sold or transferred by the Corporation or a Restricted Subsidiary
to such bank, company, lender or investor, or to any Person to whom funds
have been or are to be advanced by such bank, company, lender or investor
on the security of such Principal Operating Property (herein referred to as
a "sale and leaseback transaction"). This covenant shall not apply to any
sale and leaseback transaction if:

(A) the Corporation or such Restricted Subsidiary could create Debt
secured by a Mortgage pursuant to the preceding paragraph, without regard
to clauses (A) through (H) thereof, on the Principal Operating Property to
be leased in an amount equal to the Attributable Debt with respect to such
sale and leaseback transaction without equally and ratably securing the
Notes, or

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<PAGE>

or Funded Debt of a Restricted Subsidiary) delivered within 75 days after
such sale or transfer to the Trustee or other applicable trustee for
retirement and cancellation and (ii) the principal amount of Senior Funded
Debt of the Corporation or Funded Debt of a Restricted Subsidiary, other
than Funded Debt included under clause (i), voluntarily retired by the
Corporation or a Restricted Subsidiary within 75 days after such sale.
Notwithstanding the foregoing, no retirement referred to in this clause (B)
may be effected by payment at maturity or pursuant to any mandatory sinking
fund payment or any mandatory prepayment provision, or

(C) the lease in such sale and leaseback transaction is for a period,
including renewals, of no more than three years, or

(D) such arrangement is between the Corporation and a Restricted
Subsidiary or between Restricted Subsidiaries.

(10) The following additional Event of Default shall be added for the
benefit of the Notes:

any event of default or events of default as defined in any mortgages,
indentures or instruments, under which there may be issued, or by which
there may be secured or evidenced, any indebtedness for borrowed money of
the Corporation or any Subsidiary in excess of $50,000,000 principal amount
in the aggregate, whether such indebtedness now exists or shall hereafter
be created, which shall happen and shall result in such indebtedness
becoming or being declared due and payable prior to the date on which it
would otherwise become due and payable, and such acceleration or
accelerations shall not be rescinded or annulled for a period of ten days
after there has been given, by registered or certified mail, to the
Corporation by the Trustee or to the Corporation and the Trustee by the
Holders of at least 25% in principal amount of the Notes Outstanding, a
written notice specifying such event of default or events of default and
requiring the Corporation to cause such acceleration or accelerations to be
rescinded or annulled and stating that such notice is a "Notice of Default"
hereunder.

For all purposes of the Indenture, the foregoing Event of Default shall be
deemed to be an Event of Default described in (a), (b) or (c) of Section 6.01 of
the Indenture.

(11) The following additional provisions shall be added for the benefit of
the Notes:

-7-

<PAGE>

LIMITED MANDATORY REDEMPTION OBLIGATION.

(a) DEFINITIONS. For purposes of this provision, the following
definitions shall apply:

(i) "Affiliate" of a Person means any other Person controlling,
controlled by or under common control with such Person, either solely with
respect to the purchase or other acquisition of Common Shares or otherwise.

(ii) "Common Shares" means the shares of Common Stock, $4.00 par
value per share, of the Corporation.

(iii) "Designated Event" means any one or more of the following, which
occurs subsequent to December 15, 1986:

(A) (1) the Corporation shall consolidate with or merge into any
other corporation or convey, transfer or lease all or substantially
all of its assets to any Person, or (2) any Person shall consolidate
with or merge into the Corporation pursuant to a transaction in which
the Common Shares then outstanding are changed or exchanged;

(B) any Person (other than the Corporation or any Subsidiary)
shall purchase or otherwise acquire directly or indirectly the
beneficial ownership of Common Shares and immediately after such
purchase or acquisition such Person and its Affiliates shall directly
or indirectly beneficially own in the aggregate twenty percent or
more of the Common Shares then outstanding;

(C) the Corporation or any Subsidiary shall purchase or
otherwise acquire directly or indirectly in one or more transactions
an aggregate of thirty percent or more of the Common Shares
outstanding on the date immediately prior to the last such purchase
or other acquisition; or

-8-

<PAGE>

having an aggregate, fair market value (as determined in good faith
by the Board of Directors, whose determination shall be conclusive)
in excess of an amount equal to (1) thirty percent of the fair market
value (based on the closing last sale price of the Common Shares as
reported in the Midwest Edition of the WALL STREET JOURNAL) of all of
the Corporation's Common Shares outstanding on the date immediately
prior to the date of such distribution (or, if there be more than
one, the last such distribution), less (2) all amounts expended by
the Corporation and its Subsidiaries (the amount expended, if other
than in cash, to be determined in good faith by the Board of
Directors, whose determination shall be conclusive) to purchase or
otherwise acquire Common Shares subsequent to December 15, 1986 and
prior to the date of such distribution (or, if there be more than
one, the last such distribution).

(iv) "Person" means any Person as defined in the Indenture but shall
also include a group within the meaning of Section 13(d)(3) (or any
successor provision) of the Securities Exchange Act of 1934.

(v) For purposes of this paragraph (a), "beneficial ownership" shall
be determined in accordance with Rule 13d-3 (or any successor rule) of the
Securities and Exchange Commission under the Securities and Exchange Act of
1934.

(b) MANDATORY REDEMPTION. If,

(i) a Designated Event shall occur at any time prior to December 15,
1987 or a proposal to consummate a Designated Event shall be publicly
announced prior to December 15, 1987 and shall thereafter occur, and

(ii) the Prevailing Rating of the Notes by Standard & Poor's
Corporation or its successor ("S&P") or Moody's Investors Service, Inc. or
its successor ("Moody's") is less than BBB- the case of S&P or Baa3 in the
case of Moody's (A) on any date within 60 days following the occurrence of
such Designated Event or (B) on any date in the event that such Prevailing
Rating is the result of a downgrade which the relevant rating agency has
publicly announced to have been casued solely by the occurrence (or
proposed occurrence) of such Designated Event and related transactions,

-9-

<PAGE>

then the Corporation (or its successor) shall redeem the Notes in whole
(except as provided in paragraph (d) below), upon not less than 30 days'
notice given as provided in the Indenture, at a redemption price of 100% of
the principal amount of the Notes plus accrued interest to the date of
redemption (provided that instalments of interest, the stated maturity of
which is on or prior to the date of redemption, shall be payable to the
Holder of such Notes, registered as such as the close of business on the
relevant record dates, according to the terms and provisions of Section
2.04 and 3.03 of the Indenture). The date of redemption for any redemption
required by this paragraph (b) shall be not more than 75 days following the
earliest date on which the conditions specified in clause (i) and (ii)
above shall have been satisfied. Nothing contained in this paragraph (b)
shall require the Corporation to effect more than one redemption of the
Notes, irrespective of any elections made by Holders pursuant to paragraph
(d) below.

(c) PREVAILING RATING. The "Prevailing Rating" of the Notes on any
date shall be the rating of the Notes by S&P or Moody's as of the close of
business on such date. The Corporation shall take all reasonable action
necessary to enable S&P and Moody's to provide ratings for the Notes.

(d) ELECTION BY HOLDERS. Any Holder of Notes may elect not to have
redeemed all (but not less than all) the Notes held by such Holder by
delivering written notice of such election to the Corporation (or an agent
designated by the Corporation for such purpose in the notice of redemption)
by the close of business on the fifteenth day preceding the date of
redemption, which notice shall specify the name of such Holder and shall
identify the Notes which are not to be redeemed and their aggregate
principal amount. No such notice shall be deemed to have been delivered
until such notice is actually received by the Corporation (or its agent).

(12) The provisions of Article Twelve of the Indenture relating to
defeasance of Securities shall be applicable to the Notes, except that Section
12.02 of the Indenture as it relates to the Notes shall be replaced by the
following provision:

-10-

<PAGE>

or covenant applicable to the Notes of a series set forth in Section 11.01
of the Indenture, in item 9 of this Resolution (I.E., the covenants
regarding "Limitation on Liens" and "Limitation on Sale and Leaseback") and
in item 11 of this Resolution (I.E., the provisions regarding "Limited
Mandatory Repurchase Obligation") when

(1) with respect to all Outstanding Notes,

(A) the Corporation shall have deposited or caused to be
deposited with the Trustee as trust funds in trust for the purpose an
amount sufficient to pay and discharge the entire indebtedness of all
Outstanding Notes for principal and interest to the stated maturity or
any redemption date (as contemplated by the penultimate paragraph
hereof), as the case may be; or

(B) the Corporation shall have deposited or caused to be
deposited with the Trustee as obligations in trust for the purpose
such amount of direct noncallable obligations of, or noncallable
obligations the payment of principal of and interest on which is fully
guaranteed by, the United States of America, or to the payment of
which obligations or guarantees the full faith and credit of the
United States of America is pledged, maturing as to principal and
interest in such amounts and at such times as will, together with the
income to accrue thereon (but without reinvesting any proceeds
thereof), be sufficient to pay and discharge the entire indebtedness
on all Outstanding Notes for principal and interest to the stated
maturity or any redemption date (as contemplated by the penultimate
paragraph hereof), as the case may be;

(2) the Corporation shall have paid or caused to be paid all other
sums payable with respect to the Outstanding Notes;

(3) if the Notes are then listed on any national securities
exchange, the Corporation shall have delivered to the Trustee an Opinion of
Counsel to the effect that the Corporation's exercise of its option under
this provision would not cause such Notes to be delisted;

(4) no Event of Default or event (including such deposit) which with
notice or lapse of time would become an Event of Default with respect to
the Notes shall have occurred and be continuing on the date of such
deposit;

-11-

<PAGE>

(5) the Corporation shall have delivered to the Trustee an Opinion
of Counsel of nationally recognized tax counsel to the effect that Holders
of the Notes will not recognize income, gain or loss for Federal income tax
purposes as a result of the Corporation's exercise of its option under this
provision and will be subject to Federal income tax in the same amount and
in the same manner and at the same times as would have been the case if
such option had not been exercised;

(6) the Corporation shall have delivered to the Trustee an Opinion
of Counsel to the effect that the Corporation's exercise of its option
under this provision will not cause any violation of the Investment Company
Act of 1940, as amended, on the part of the Corporation, the trust, the
trust funds representing the Corporation's deposit or the Trustee; and

(7) the Corporation shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent relating to the Corporation's exercise of its option under this
provision have been complied with.

Any deposits with the Trustee referred to above shall be
irrevocable and shall be made under the terms of an escrow trust agreement
in form and substance satisfactory to the Trustee. If any Outstanding
Notes are to be redeemed prior to their stated maturity, the applicable
escrow trust agreement shall provide therefor and the Corporation shall
make such arrangements as are satisfactory to the Trustee for the giving of
notice of redemption by the Trustee in the name, and at the expense, of the
Corporation.

For purposes of this provision, "discharged" means that the
Corporation shall be deemed to have paid and discharged the entire
indebtedness represented by, and obligations under, the Notes and to have
satisfied all the obligations under this Indenture relating to the notes
(and the Trustee, at the expense of the Corporation, shall execute proper
instruments acknowledging the same), except (x) the rights of Holders of
Notes to receive, from the trust fund described above, payment of the
principal of and interest on such Notes when such payments are due, (y) the
Corporation's obligations with respect to the Notes under Sections 2.05,
2.07, 4.02 and 12.03 of the Indenture and (z) the rights, powers, trusts,
duties and immunities of the Trustee hereunder.

BE IT FURTHER RESOLVED: That the form of the Note attached hereto is in
all respects approved, and that the execution and

-12-

<PAGE>

delivery of the Notes as provided in the Indenture is hereby authorized, with
such changes therein as the officer executing the same shall approve, such
execution to be conclusive evidence of such approval.

-13-

<PAGE>

Appendix to Exhibit 4(d)

The last two pages of the original of this exhibit is comprised of a photocopy
of a Note Certificate. Such certificate has been omitted from the EDGAR
submission and has been filed under Form SE.

-14-

<PAGE>

EXHIBIT 11

COMPUTATION OF EARNINGS/(LOSS) PER COMMON SHARE
(Dollar amounts in millions except per share data)

PRIMARY EARNINGS/(LOSS) PER SHARE OF COMMON STOCK
MAY 7
THROUGH
DECEMBER 31,
1993
-------------

Average common shares outstanding. . . . . . . . . . . . . 37,157,672
-----------
-----------

Loss before extraordinary loss . . . . . . . . . . . . . . $ (108)
-----------

Primary loss per common share before extraordinary loss. . (2.90)
-----------

Extraordinary loss, net of taxes . . . . . . . . . . . . (21)
------------

Primary loss per common share from extraordinary loss. . . (0.56)
-------------
Net loss available to common stockholders. . . . . . . . . (129)
-------------
-------------

Primary net loss per common share. . . . . . . . . . . (3.46)
-------------
-------------

COMPUTATION OF EARNINGS/(LOSS) PER COMMON SHARE ON A FULLY-DILUTED BASIS IS
OMITTED BECAUSE THE OPTIONS AND WARRANTS HAVE AN ANTIDILUTIVE EFFECT.
INFORMATION IS OMITTED FOR PERIODS PRIOR TO MAY 7, 1993 BECAUSE, DUE TO THE
RESTRUCTURING AND IMPLEMENTATION OF FRESH START REPORTING, PER SHARE DATA IS
NOT MEANINGFUL.

<PAGE>

EXHIBIT 21

SUBSIDIARIES

The companies listed below are the primary subsidiaries of the Corporation.
The financial data for these subsidiaries, as well as for other subsidiaries
which are not considered to be significant and are therefore excluded from
this exhibit, comprised the Corporation's consolidated financial statements.

Organized Under
Name of Company Laws of
------------- ---------------
DOMESTIC:

United States Gypsum Company(a). . . . . . . Delaware
USG Interiors, Inc.(a) . . . . . . . . . . . Delaware
L&W Supply Corporation (a)(b). . . . . . . . Delaware
USG International, Ltd.. . . . . . . . . . . Delaware
USG Foreign Investments, Ltd.. . . . . . . . Delaware
USG Interiors International, Inc.. . . . . . Ohio
La Mirada Products Co., Inc. . . . . . . . . Ohio
USG Foreign Sales Corporation. . . . . . . . Virgin Islands
Gypsum Engineering Company . . . . . . . . . Delaware

INTERNATIONAL:

CGC Inc.(a). . . . . . . . . . . . . . . . . Canada
USG Canadian Mining Ltd. . . . . . . . . . . Ontario
Gypsum Transportation Limited. . . . . . . . Bermuda
Yeso Panamericano, S.A. de C.V.. . . . . . . Mexico
CIKSA, S.A. de C.V.. . . . . . . . . . . . . Mexico
USG Interiors (Donn) S.A.. . . . . . . . . . Belgium
Donn Products GmbH . . . . . . . . . . . . . Germany
Donn Products (U.K.), Ltd. . . . . . . . . . United Kingdom
Donn Products France S.A.. . . . . . . . . . France
USG Netherlands B.V. . . . . . . . . . . . . Netherlands
USG Interiors (Europe) S.A.. . . . . . . . . Belgium
USG Interiors Coordination Centre S.A. . . . Belgium
USG Interiors Pacific Ltd. . . . . . . . . . New Zealand
USG Interiors Australia Pty. Ltd.. . . . . . Australia
USG Interiors (Far East) SDN BHD . . . . . . Malaysia
Alabaster Engineering (Nederland) B.V. . . . Netherlands
Red Top Technology (Nederland) B.V.. . . . . Netherlands

(A) ACCOUNTS FOR MATERIAL REVENUES

(B) AS OF DECEMBER 31, 1993, L&W SUPPLY CONDUCTED ITS BUSINESS OUT OF
131 LOCATIONS IN 34 STATES USING VARIOUS NAMES REGISTERED UNDER
APPLICABLE ASSUMED BUSINESS NAME STATUTES.

<PAGE>

EXHIBIT 23

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
WITH RESPECT TO FORM S-8

As independent public accountants, we hereby consent to the incorporation by
reference of our report, dated January 31, 1994, included in this Form 10-K
for the year ended December 31, 1993 into the Corporation's previously filed
Registration Statements Nos. 33-22581, as amended, 33-22930, 33-36303 and 33-
67554 on Form S-8.

ARTHUR ANDERSEN & CO.
Chicago, Illinois
February 24, 1994

<PAGE>

EXHIBIT 24

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard H. Fleming, John E. Malone and Raymond
T. Belz and each of them, his or her true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for and in his or
her name, place and stead, in any and all capacities, to sign the Annual
Report on Form 10-K for the year ended December 31, 1993 of USG Corporation,
and any of all amendments thereto, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully
to all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or their or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.

This power of attorney has been signed as of February 9, 1994 by the
following persons.

\s\Eugene B. Connolly \s\David W. Fox
- --------------------- ---------------
Eugene B. Connolly David W. Fox
Chairman of the Board, Director
Chief Executive Officer,
and Director

\s\Anthony J. Falvo, Jr. \s\Philip C. Jackson, Jr.
- ------------------------ -------------------------
Anthony J. Falvo, Jr. Philip C. Jackson, Jr.
Vice Chairman and Director
Director

\s\Robert L. Barnett \s\Marvin E. Lesser
- -------------------- -------------------
Robert L. Barnett Marvin E. Lesser
Director Director

\s\Keith A. Brown
- ----------------- ---------------
Keith A. Brown John B. Schwemm
Director Director

\s\W. H. Clark
- -------------- ------------------
W. H. Clark Judith A. Sprieser
Director Director

\s\James C. Cotting \s\Alan G. Turner
- ------------------- -----------------
James C. Cotting Alan G. Turner
Director Director

\s\Lawrence M. Crutcher \s\Barry L. Zubrow
- ----------------------- ------------------
Lawrence M. Crutcher Barry L. Zubrow
Director Director

\s\Wade Fetzer III
- ------------------
Wade Fetzer III
Director