USG CORP, 10-K405, 1996-02-29

USG CORP
10-K405, 1996-02-29
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, 1995

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

8.5% Senior Notes, Due 2005 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, 1996, the aggregate market value of USG Corporation
common stock held by nonaffiliates (based upon the New York Stock Exchange
("NYSE") closing prices) was approximately $1,344,772,000.
As of January 31, 1996, 45,478,550 shares of common stock were outstanding.

<PAGE>

DOCUMENTS INCORPORATED BY REFERENCE

Documents Incorporated by Reference:

1. Portions of the Corporation's 1995 Annual Report to Stockholders are
incorporated by reference in Parts I, II and IV of this Form 10-K Report.

2. The Corporation's definitive Proxy Statement for use in connection with
the Annual Meeting of Stockholders to be held on May 8, 1996 are
incorporated by reference in Part III of this Form 10-K Report.

3. A list of exhibits incorporated by reference is presented in this Form
10-K Report beginning on page 13.

TABLE OF CONTENTS

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

PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Item 8 Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure

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

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

Signatures

<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 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 primarily to finance the 1988 Recapitalization. As a result of
high leverage and a severe cyclical downturn in its construction-based
markets, the Corporation initiated a comprehensive restructuring of its debt
(the "Restructuring") that was completed on May 6, 1993, through
implementation of a "prepackaged" plan of reorganization under United States
bankruptcy law. In accordance with the prepackaged plan, $1.4 billion of debt
and accrued interest was converted into equity and interest expense was
significantly reduced. 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." Due to the Restructuring and implementation of fresh start
accounting, financial statements subsequent to May 6, 1993, are not comparable
to financial statements prior to that date.

Since the Restructuring, the Corporation has completed several refinancing
plans. In the first quarter of 1994, the Corporation implemented a
refinancing that included (i) a public offering of common stock yielding net
proceeds of $224 million (ii) the issuance of $150 million of 9.25% senior
notes due 2001 in exchange for cash and 8.0% senior notes due 1996 and 1997
and (iii) an amendment to the Corporation's bank credit agreement. Proceeds
of this refinancing were used primarily to reduce debt.

In the third quarter of 1995, the Corporation completed a refinancing that
included: (i) the establishment of a new seven-year revolving credit facility
to replace the existing bank credit agreement (ii) the sale of $150 million
aggregate principal amount of 8.5% senior notes due 2005 and (iii) the
redemption of the Corporation's remaining $268 million principal amount of
10.25% senior notes due 2002 using a combination of proceeds from the sale of
the 8.5% senior notes, borrowings under the new revolving credit facility and
cash on hand. As a result of this refinancing and other debt repayments in
1995, the Corporation reduced its principal amount of total debt to $926
million as of December 31, 1995, from $1,149 million as of December 31, 1994.

(b) Financial Information About Industry Segments

Financial information and other related disclosure pertaining to the
Corporation's industry segments set forth under "Notes to Financial Statements
- - Note 22. Industry and Geographic Segments" of the Corporation's 1995 Annual
Report to Stockholders is incorporated herein by reference.

Through its subsidiaries, USG is a leading manufacturer of building
materials producing a wide range of products for use in new residential and
nonresidential construction and repair and remodel, as well as products used
in certain industrial processes. USG's operations are organized into two core
businesses: North American Gypsum and Worldwide Ceilings.

North American Gypsum

Business

North American Gypsum, which manufactures and markets gypsum and related
products in the United States, Canada and Mexico, includes U.S. Gypsum and L&W
Supply Corporation ("L&W Supply") in the United States, the gypsum business
of the Corporation's 76%-owned subsidiary, CGC Inc. ("CGC"), in Canada and
Yeso Panamericano S.A. de C.V. in Mexico. 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 1995. L&W Supply is the
country's largest distributor of wallboard and related products and in 1995
distributed approximately 9% of all gypsum wallboard in the United States
(including approximately 24% of U.S. Gypsum's wallboard production).

Products

North American Gypsum 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-
dampening 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 provides 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, sound-dampening 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 for agricultural and industrial customers to use in a number of
applications, including soil conditioning, road repair, fireproofing and
ceramics.

Manufacturing

North American Gypsum's products are manufactured at 43 plants located
throughout the United States, eastern Canada and in central Mexico. In 1995,
the Corporation completed incremental wallboard capacity expansions at nine
strategically located plants in the United States that increased U.S. Gypsum's
wallboard capacity by approximately 600 million square feet. The Corporation
also increased its capital spending program to maintain and to enhance its
control of manufacturing costs.

Gypsum rock is mined or quarried at 14 company-owned locations in the
United States and Canada. In 1995, these facilities provided approximately
93% of the gypsum used by the Corporation's plants in North America. Certain
plants purchase synthetic gypsum or natural gypsum rock from sources other
than company-owned mines and quarries. Such purchases accounted for
approximately 7% of gypsum used in the Corporation's North American plants.
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 225 million tons, of which approximately 70%
are located in the United States and 30% in Canada. Additional reserves of
approximately 153 million tons are found 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 9.8 million tons.

The Corporation owns and operates seven paper mills located across the
United States. 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.

The Corporation maintains a research and development facility in
Libertyville, Ill., which conducts fire, structural and acoustical 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 wallboard,
cement board and ceiling tile, are based. Related technologies are those
pertaining to joint compounds and textures for wallboard finishing, specialty
plaster products for both construction and industrial applications and
specialty coatings for both interior and exterior applications.

Marketing and Distribution

Distribution is carried out through L&W Supply, home improvement centers
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. Based on the Corporation's estimates using publicly
available data, internal surveys, and gypsum wallboard shipment data from the
Gypsum Association, management estimates that during 1995, about 46% of total
industry volume demand for gypsum wallboard was generated by new residential
construction activity, 37% of volume demand was generated by residential and
nonresidential repair and remodel activity, 10% of volume demand was generated
by new nonresidential construction activity and the remaining 7% of volume
demand was generated by other activities such as exports and temporary
construction.

L&W Supply, which was organized in 1971 by U.S. Gypsum, currently has 156
distribution centers in 34 states. It is a service-oriented organization that
stocks a variety of construction materials and delivers less than truckload
quantities of construction materials to a job site and places them in areas
where work is being done, thereby reducing or eliminating the need for
handling by contractors. Although L&W Supply specializes in distribution of
gypsum wallboard (which accounts for approximately 49% of its total net
sales), joint compound and other products manufactured primarily by U.S.
Gypsum, it also distributes products manufactured by USG Interiors such as
acoustical ceiling tile and ceiling grid and products of other manufacturers,
including drywall metal, insulation, roofing products and accessories. L&W
Supply leases approximately 85% of its facilities from third parties.
Usually, initial leases run from three to five years with a five-year renewal
option.

Competition

The Corporation competes in North America as the largest of 18 producers of
gypsum wallboard products and in 1995 accounted for approximately one-third of
total gypsum wallboard sales in the United States. In 1995, U.S. Gypsum
shipped 7.6 billion square feet of wallboard, compared with total domestic
industry shipments of 23.8 billion square feet. Principal competitors in the
United States are: National Gypsum Company, Georgia-Pacific Corporation,
Domtar, Inc., The Celotex Corporation, which has operated under Chapter 11 of
the Bankruptcy Code since 1990, and several smaller, regional competitors.
Major competitors in Canada include Domtar, Inc. and Westroc Industries Ltd.
In Mexico, the Corporation's major competitor is Panel Rey. In late 1995,
Georgia-Pacific Corporation announced that it agreed to purchase the gypsum
business of Domtar, Inc. According to the announcement, completion of the
acquisition is targeted for the first quarter of 1996.

L&W Supply's largest 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,
CSR/GDMA in the southeast (primarily in Florida) and Strober Building Supply
in the northeastern United States. L&W Supply's many local competitors
include lumber dealers, hardware stores, home improvement centers, and
acoustical tile distributors and manufacturers.

Worldwide Ceilings

Business

Worldwide Ceilings, which manufactures and markets interior systems
products worldwide, includes USG Interiors, the international interior systems
businesses managed as USG International ("USG International") and the interior
systems business of CGC. USG Interiors is a leading supplier of interior
ceiling and wall products used primarily in commercial applications. In 1995,
USG Interiors was the largest producer of ceiling grid and the second largest
producer of ceiling tile in the United States, accounting for approximately
one-half and approximately one-third of total domestic sales of such products,
respectively.

Products

Worldwide Ceilings manufactures and markets ceiling grid, ceiling tile,
wall systems, mineral fiber insulation and soundproofing products and, in
Europe and the Asia/Pacific region, access floor systems. 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. USG
Interiors' significant trade names include the "AURATONE" and "ACOUSTONE"
brands of ceiling tile and the "DX," "FINELINE," "CENTRICITEE" and "DONN"
brands of ceiling grid.

USG's wall systems provide the versatility of an open floor plan with the
privacy of floor-to-ceiling partitions that 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 in Europe and the Asia/Pacific region that permits 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.

Manufacturing

Worldwide Ceilings' products are manufactured at 21 plants located in North
America, Europe, New Zealand and Malaysia, including 5 ceiling tile plants and
9 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 Worldwide Ceilings' 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. In 1995, the Corporation initiated a major expansion of its ceiling
tile manufacturing capacity to meet increasing worldwide demand. This
expansion is expected to be completed in 1996.

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, Ill., and at its "Solutions Center"SM in Chicago.

Marketing and Distribution

Worldwide Ceilings' 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. In recent years,
Worldwide Ceilings has increased its emphasis on the retail market.

Competition

The Corporation estimates that it accounts for approximately one-third of
total acoustical ceiling tile sales in the United States. Principal global
competitors include Armstrong World Industries, Inc. (the largest
manufacturer), OWA Faserplattenwerk GmbH (Odenwald) and The Celotex
Corporation. The Corporation estimates that it is the world's largest
manufacturer of ceiling grid. USG's most significant competitor in ceiling
grid is Chicago Metallic Corporation, which participates in the European, Far
East and U.S. markets. Other principal competitors in ceiling grid include
W.A.V.E. (a joint venture of Armstrong World Industries, Inc. and Worthington
Industries/National Rolling Mills).

Other Information

The Corporation's plants are substantial users of thermal energy. Five
major fuel types are used in a mix consisting of 79% natural gas, 10%
electricity, 5% oil, 4% coke and 2% purchased hot air. With few exceptions,
plants that use natural gas are equipped with fuel stand-by systems,
principally oil. Primary fuel supplies have been adequate and no curtailment
of plant operations has resulted from insufficient supplies. Supplies are
likely to remain sufficient for projected requirements. Energy price swap
agreements are used by the Corporation to hedge the cost of certain purchased
fuel.

Neither industry segment has any special working capital requirements or is
materially dependent on a single customer or a few customers on a regular
basis. No single customer of the Corporation accounted for more than 10% of
the Corporation's 1995 or 1994 consolidated net sales. Because orders are
filled upon receipt, neither industry segment has any significant backlog.

Loss of one or more of the patents or licenses held by the Corporation
would not have a major impact on the Corporation's business or its ability to
continue operations. No material part of any of the Corporation's business is
subject to renegotiation of profits or termination of contracts or
subcontracts at the election of the government.

All of the Corporation's products regularly require improvement to remain
competitive. The Corporation also develops and produces comprehensive systems
employing several of its products. In order to maintain its high standards
and remain a leader in the building materials industry, the Corporation
performs on an on-going basis extensive research and development activities
and makes the necessary capital expenditures to maintain production facilities
in sufficient operating condition.

One of the Corporation's subsidiaries, U.S. Gypsum, is a defendant in
asbestos lawsuits alleging both property damage and personal injury.
Virtually all costs of the Personal Injury Cases are being paid by insurance.
However, certain of U.S. Gypsum's insurance carriers continue to contest
coverage for the Property Damage Cases, although U.S. Gypsum believes that
substantial coverage exists, and the trial court and an appellate court in
U.S. Gypsum's Coverage Action have so ruled. 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. Additional information pertaining to
the Corporation's legal proceedings, including definitions of terms in initial
capital letters, set forth under" Notes to Financial Statements - Note 21.
Litigation" of the Corporation's 1995 Annual Report to Stockholders is
incorporated herein by reference.

(d) Financial Information About Foreign and Domestic Operations and
Export Sales

Financial information and other related disclosure pertaining to the
Corporation's foreign and domestic operations and export sales set forth under
"Notes to Financial Statements - Note 22. Industry and Geographic Segments" of
the Corporation's 1995 Annual Report to Stockholders is incorporated herein by
reference.

Item 2. PROPERTIES

The Corporation's plants, mines, quarries, transport ships and other
facilities are located in North America, Europe, 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):

North American Gypsum

Gypsum Wallboard and Other Gypsum Products

United States Canada
Baltimore, Md. Norfolk, Va. Hagersville, Ontario
Boston (Charlestown), Oakfield, N.Y. Montreal, Quebec
Mass. Plaster City, Calif. St. Jerome, Quebec
Detroit (River Rouge), Plasterco (Saltville), (currently idle)
Mich. Va.
East Chicago, Ind. Santa Fe Springs,
Empire, Nev. Calif.
Fort Dodge, Iowa Shoals, Ind.
Fremont, Calif. Sigurd, Utah Mexico
Galena Park, Texas Southard, Okla. Puebla, Puebla
Gypsum, Ohio Sperry, Iowa
Jacksonville, Fla. Stony Point, N.Y.
New Orleans, La. Sweetwater, Texas

Joint Compound

Surface preparation and joint treatment products are produced in plants
located at Chamblee, Ga.; Dallas, Texas; East Chicago, Ind.; Fort Dodge, Iowa;
Gypsum, Ohio; Jacksonville, Fla.; Port Reading, N.J. (leased); Sigurd, Utah;
Tacoma, Wash. (leased); Torrance, Calif.; Hagersville, Ontario, Canada;
Montreal, Quebec, Canada; Puebla, Mexico; and Port Klang, Malaysia (leased).

Gypsum Rock

Gypsum rock is mined or quarried at Alabaster (Tawas City), Mich.; Empire,
Nev.; Fort Dodge, Iowa; Oakfield, N.Y.; Plaster City, Calif.; Plasterco
(Saltville), Va.; Shoals, Ind.; Sigurd, Utah; Southard, Okla.; Sperry, Iowa;
Sweetwater, Texas; Hagersville, Ontario, Canada; Little Narrows, Nova Scotia,
Canada; and Windsor, Nova Scotia, Canada. Synthetic gypsum is processed at
Belledune, New Brunswick, Canada.

Paper

Paper for gypsum wallboard is manufactured at Clark, N.J.; Galena Park,
Texas; Gypsum, Ohio; Jacksonville, Fla.; North Kansas City, Mo.; Oakfield,
N.Y.; and South Gate, Calif.

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 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.

Other Products

A mica-processing plant is located at Spruce Pine, N.C.; perlite ore is
produced at Grants, N.M.; and drywall metal products are manufactured at
Medina, Ohio. Metal lath, plaster and drywall accessories and light gauge
steel framing products are manufactured at Puebla, Mexico. Various other
products are manufactured at La Mirada, Calif. (adhesives and finishes); and
New Orleans, La. (lime products).

Worldwide Ceilings

Ceiling Tile

Acoustical ceiling tile and panels are manufactured at Cloquet, Minn.;
Greenville, Miss.; Walworth, Wis.; San Juan Ixhuatepec, Mexico; and Aubange,
Belgium.

Ceiling Grid

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

USG International is establishing a new ceiling grid plant in Taiwan that
is expected to begin production in the first half of 1996.

Other Products

Access floor systems products are manufactured at Dreux, France; Peterlee,
England (leased); and Port Klang, Malaysia (leased). Mineral fiber products
are manufactured at Birmingham, Ala.; Red Wing, Minn.; Tacoma, Wash.; Wabash,
Ind.; and Walworth, Wis. Wall system products are manufactured at Medina,
Ohio (leased). Drywall metal products are manufactured at Prestice, Czech
Republic (leased). An insulation plant at Weston, Ontario, Canada was closed
on December 31, 1995.

On January 16, 1996, the Corporation announced its intention to divest its
insulation manufacturing business in the United States.

Item 3. LEGAL PROCEEDINGS

Information pertaining to the Corporation's legal proceedings set forth
under "Notes to Financial Statements - Note 21. Litigation" of the
Corporation's 1995 Annual Report to Stockholders is incorporated herein by
reference.

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 1995.

PART II

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

Information with respect to the principal market on which the Corporation's
common stock is traded, the range of high and low market prices and number of
stockholders of record set forth under "Selected Quarterly Financial Data" of
the Corporation's 1995 Annual Report to Stockholders is incorporated herein by
reference.

There have been no dividends declared since the third quarter of 1988.
Bank credit agreements and other debt instruments have previously prohibited
or restricted the payment of cash dividends. Although currently permitted to
some extent under the Corporation's existing debt agreements, the Corporation
has announced an intention not to resume payment of dividends until it has
achieved investment grade status with respect to its senior public debt
issues.

Item 6. SELECTED FINANCIAL DATA

Information with respect to selected financial data set forth under
"Comparative Five-Year Summary" of the Corporation's 1995 Annual Report to
Stockholders is incorporated herein by reference.

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

"Management's Discussion and Analysis of Results of Operations and
Financial Condition" of the Corporation's 1995 Annual Report to Stockholders
is incorporated herein by reference.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Information with respect to financial statements and supplementary data set
forth under "Consolidated Statement of Earnings," "Consolidated Balance
Sheet," "Consolidated Statement of Cash Flows," "Notes to Financial
Statements" and "Report of Independent Public Accountants" of the
Corporation's 1995 Annual Report to Stockholders is incorporated herein by
reference.

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

Information about directors has been omitted from this report as it will be
filed with the Securities and Exchange Commission (the "SEC") in a definitive
proxy statement pursuant to Regulation 14A, which definitive proxy statement
is incorporated herein by reference.

<PAGE>

Executive Officers of the Registrant (as of February 1, 1996)

Has Held
Name, Age Prior Business Experience in Past Present
and Present Position Five Years Position Since
- -----------------------------------------------------------------------------
Eugene B. Connolly, 63 Chairman of the Board and Chief January 1996
Chairman of the Board Executive Officer to March 1993;
Chairman of the Board, President
and Chief Executive Officer to
January 1994; Chairman of the Board
and Chief Executive Officer to
January, 1996.

William C. Foote, 44 Executive Vice President and Chief January 1996
President and Chief Operating Officer, L&W Supply
Executive Officer Corporation to September 1991;
President and Chief Executive
Officer, L&W Supply Corporation
from September 1991 to January 1994;
President and Chief Executive Officer,
USG Interiors, Inc. from January 1993
to January 1994; President and Chief
Operating Officer from January 1994
to January 1996.

J. Bradford James, 49 Vice President, Financial and October 1995
Executive Vice Strategic Planning, USG Corporation
President-International to January 1991; Vice President and
Development and Chief Financial Officer, USG
Distribution Corporation to March 1993; Senior
Vice President and Chief Financial
Officer, USG Corporation to January
1994; Vice President, USG Corporation,
President and Chief Executive Officer,
USG Interiors, Inc. to January 1995;
Group Vice President, Worldwide
Ceilings & International, USG Corpora-
tion, President and Chief Executive
Officer, USG Interiors, Inc. to
October 1995.

P. Jack O'Bryan, 60 President and Chief Executive October 1995
Executive Vice Officer, United States Gypsum Company
President - to January 1993; Senior Vice President
Worldwide Ceilings; and Chief Technology Officer, USG
President and Chief Corporation to August 1994; Senior
Executive Officer, USG Vice President - Worldwide Manufact-
Interiors, Inc. uring and Technology to October 1995.

Donald E. Roller, 58 President and Chief Executive October 1995
Executive Vice Officer, USG Interiors, Inc. to
President - North January 1993; Vice President, USG
American Gypsum; Corporation, President and Chief
President and Chief Executive Officer, United States
Executive Officer, Gypsum Company to January 1995.
United States Gypsum Group Vice President, North American
Company Gypsum; President and Chief Executive
Officer, United States Gypsum Company
to October 1995.

Richard H. Fleming, 48 Director, Corporate Finance, to January 1995
Senior Vice President January 1991; Vice President and
and Chief Financial Treasurer to January 1994; Vice
Officer President and Chief Financial
Officer to January 1995.

Arthur G. Leisten, 54 Senior Vice President and General February 1994
Senior Vice President Counsel to March 1993; Senior Vice
and General Counsel President, General Counsel and
Secretary to February 1994.

Harold E. Pendexter,
Jr., 61 Senior Vice President, Human January 1991
Senior Vice President Resources and Administration
and Chief Administra- to January 1991.
tive Officer

Raymond T. Belz, 55 Vice President Financial Services January 1995
Vice President and and Financial Administration,
Controller, Vice United States Gypsum Company to
President and Chief January 1994; Vice President and
Financial Officer, Controller, USG Corporation, Vice
North American Gypsum President Financial Services, United
States Gypsum Company to January 1995.

Brian W. Burrows, 56 Same position. March 1987
Vice President,
Research and
Development

Matthew P. Gonring, 41 Director, Public Relations to March 1993
Vice President, January 1991; Director, Corporate
Corporate Communica- Communications to March 1993.
tions

Michael P. Kane, 44 Director, Regulatory Affairs and January 1996
Vice President-Inter- Chief Labor Counsel, USG Corporation
national Development; to January 1991; Vice President
Vice President, Pacific Regulatory Affairs and Chief Labor
Rim Operations, World- Counsel, USG Corporation, to August
wide Ceilings 1992; Vice President Pacific Rim and
General Manager, Gypsum Fiberboard,
USG International, to March 1995;
Vice President Pacific Rim and
International Business Development,
USG International, to January 1996.

John E. Malone, 52 Vice President and Controller, USG January 1994
Vice President and Corporation to January 1994; Vice
Treasurer President - Finance, USG International,
from March 1993 to February 1995.

Robert B. Sirgant, 55 Director, Marketing - East Region, January 1995
Vice President, United States Gypsum Company to
Corporate Accounts November 1992; Vice President,
National Accounts and Marketing -
East, United States Gypsum Company
to July 1994; Vice President,
National Accounts, United States
Gypsum Company to January 1995.

S. Gary Snodgrass, 44 Director, Human Resources, USG February 1995
Vice President, Human Corporation to September 1992; Vice
Resources - Operations; President, Management Resources and
Vice President, Human Employee Relations to January 1994;
Resources, Worldwide Vice President, Human Resources -
Ceilings Operations to February 1995.

Frank R. Wall, 63 Senior Vice President, Operating March 1995
Vice President; Services, United States Gypsum
President and Chief Company to April 1993; Executive
Executive Officer, Vice President and Chief Operating
L&W Supply Corporation Officer, L&W Supply Corporation to
January 1994, President and Chief
Executive Officer, L&W Supply to
March 1995.

Dean H. Goossen, 49 Vice President, General Counsel and February 1994
Corporate Secretary Secretary, Xerox Financial Services
Life Insurance Company to February
1993; Assistant Secretary, USG
Corporation to February 1994.

Paul J. Vanderberg, 36 General Manager, Materials Division, January 1995
President and Chief United States Gypsum Company to
Executive Officer, February 1992; General Manager,
CGC Inc. Durock, United States Gypsum Company
to March 1994; Director, Market
Development and Planning, United
States Gypsum Company from November
1992 to March 1994; Executive Vice
President and Chief Operating Officer,
CGC Inc. to January 1995.

Item 11. EXECUTIVE COMPENSATION

Information required by Item 11 has been omitted from this report as it
will be filed with the SEC in a definitive proxy statement pursuant to
Regulation 14A, which definitive proxy statement is incorporated herein by
reference.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

Information required by Item 12 has been omitted from this report as it
will be filed with the SEC in a definitive proxy statement pursuant to
Regulation 14A, which definitive proxy statement is incorporated herein by
reference.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by Item 13 has been omitted from this report as it
will be filed with the SEC in a definitive proxy statement pursuant to
Regulation 14A, which definitive proxy statement is incorporated herein by
reference.

PART IV

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

(a) The following documents are filed as part of this 10-K Report:

1. The consolidated financial statements, notes to financial statements and
report of independent public accountants included in the Corporation's
1995 Annual Report to Stockholders and listed below are incorporated
herein by reference.

Consolidated Statement of Earnings - Years ended December 31, 1995 and
1994, and periods of May 7 through December 31, 1993, and January 1
through May 6, 1993.

Consolidated Balance Sheet - As of December 31, 1995 and 1994.

Consolidated Statement of Cash Flows - Years ended December 31, 1995 and
1994, and periods of May 7 through December 31, 1993, and January 1
through May 6, 1993.

Notes to Financial Statements.

Report of Independent Public Accountants.

2. Supplemental Financial Statement Schedules:

Schedule II - Valuation and Qualifying Accounts

Supplemental Note on Financial Information For United States
Gypsum Company

Report of Independent Public Accountants With Respect to Supplemental
Note and Financial Statement Schedule.

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

3. Exhibits (Reg. S-K, Item 601):

Exhibit
No.

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 relating to USG Corporation's 8% Senior
Notes due 1996 (incorporated by reference to Exhibit
4(b) of USG Corporation's 1993 Annual Report on Form
10-K, dated March 14, 1994).
(c) Resolutions dated March 5, 1987 of a Special Committee
created by the Board of Directors of USG Corporation
relating to USG Corporation's 8.75% Debentures due
2017 (incorporated by reference to Exhibit 4(c) of USG
Corporation's 1993 Annual Report on Form 10-K, dated
March 14, 1994).
(d) Resolutions dated March 6, 1987 of a Special Committee
created by the Board of Directors of USG Corporation
relating to USG Corporation's 8% Senior Notes due 1997
(incorporated by reference to Exhibit 4(d) of USG
Corporation's 1993 Annual Report on Form 10-K, dated
March 14, 1994).
(e) Resolutions dated February 1, 1994 of a Special
Committee created by the Board of Directors of USG
Corporation relating to USG Corporation's 9.25% Senior
Notes due 2001 (incorporated by reference to Exhibit
4(f) of USG Corporation's Registration No. 33-51845 on
Form S-1, dated February 16, 1994).
(f) Resolutions dated August 3, 1995 of a Special
Committee created by the Board of Directors of USG
Corporation relating to USG Corporation's 8.5% Senior
Notes due 2005 (incorporated by reference to Exhibit
4(b) of Amendment No. 3 to USG Corporation's
Registration Statement No. 33-60563 on Form S-3, dated
July 28, 1995).
(g) 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).
(h) 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).
(i) 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).
(j) 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) Form of Nonqualified Stock Option Agreement relating
to stock option grants dated June 1, 1993, February 9,
1994 and August 10, 1994 (incorporated by reference to
Exhibit 10(l) of Amendment No. 1 on USG Corporation's
Registration Statement No. 33-61152 on Form S-1).
(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).
(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) Agreement, dated August 31, 1992 among USG Corporation
and the Ad Hoc Committee of Holders of 13.25% 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).
(i) 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).
(j) 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).
(k) 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).
(l) 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).
(m) First Amendment to Management Performance Plan,
effective November 15, 1993 and dated February 1, 1994
(incorporated by reference to Exhibit 10(aq) of
Amendment No. 1 of USG Corporation's Registration
Statement No. 33-51845 on Form S-1).
(n) 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
Amendment No. 1 of USG Corporation's Registration
Statement No. 33-51845 on Form S-1).
(o) Letter Agreement dated July 28, 1994 between USG
Corporation and Eugene B. Connolly (incorporated by
reference to Exhibit 10(an) of USG Corporation's 1994
Annual Report on Form 10-K, dated March 8, 1995).
(p) Credit Agreement dated as of July 27, 1995 among USG
Corporation and the Banks listed on the signature page
thereto and Chemical Bank as Agent (incorporated by
reference to Exhibit 99(a) of Amendment No. 3 to USG
Corporation's Registration Statement No. 33-60563 on
Form S-3, dated July 28, 1995).
(q) Amendment No. 1, dated as of February 1, 1996 to the
Credit Agreement.
(r) Collateral Trust Agreement dated as of July 27, 1995
between USG Corporation, certain of its subsidiaries
and Wilmington Trust Company and William J. Wade, as
Trustee (incorporated by reference to Exhibit 99(b) of
Amendment No. 3 to USG Corporation's Registration
Statement No. 33-60563 on Form S-3, dated July 28,
1995).
(s) Company Pledge Agreement dated as of July 27, 1995
among USG Corporation, as Pledgor, and Wilmington
Trust Company and William J. Wade, as Trustee
(incorporated by reference to Exhibit 99(c) of
Amendment No. 3 to USG Corporation's Registration
Statement No. 33-60563 on Form S-3, dated July 28,
1995).
(t) Stock Compensation Program for Non-Employee Directors
of USG Corporation, dated May 10, 1995.
(u) 1995 Long-Term Equity Plan of USG Corporation
(incorporated by reference to Annex A to USG
Corporation's Proxy Statement and Proxy dated March
31, 1995).
(v) Form of Nonqualified Stock Option Agreement, pursuant
to the 1995 Long-Term Equity Plan.
(w) Form of Performance-Based Restricted Stock Award
Agreement, pursuant to the 1995 Long-Term Equity
Plan.
(x) Form of Restricted Stock Award Agreement, pursuant to
the 1995 Long-Term Equity Plan.
(y) 1995 Annual Management Incentive Program - USG
Corporation.

11 Computation of Earnings/(Loss) Per Common Share

13 Portions of USG Corporation's 1995 Annual Report to Stockholders.

(Such report is not deemed to be filed with the Commission as part
of this Annual Report on Form 10-K, except for the portions
thereof expressly incorporated by reference.)

21 Subsidiaries

23 Consents of Experts and Counsel
Consent of Arthur Andersen LLP

24 Power of Attorney

27 Financial Data Schedule

(b) Reports on Form 8-K:

No reports on Form 8-K were filed during the fourth quarter of 1995.

<PAGE>

Index to exhibits filed
with the Annual Report on Form 10-K
for the year ended December 31, 1995

Exhibit

10(q) Amendment No. 1 to the Credit Agreement

10(t) Stock Compensation Program for Non-Employee Directors of USG Corporation

10(v) Form of Nonqualified Stock Option Agreement

10(w) Form of Performance-Based Restricted Stock Award Agreement

10(x) Form of Restricted Stock Award Agreement

10(y) 1995 Annual Management Incentive Program - USG Corporation

11 Computation of Earnings/(Loss) Per Common Share

13 Portions of USG Corporation's 1995 Annual Report to Stockholders

21 Subsidiaries

23 Consent of Experts

24 Power of Attorney

27 Financial Data Schedule

If you wish to receive a copy of any exhibit, it may be obtained, upon payment
of reasonable expenses, by writing to:

Dean H. Goossen, Corporate Secretary
USG Corporation
Department #188
P.O. Box 6721
Chicago, IL 60680-6721

<PAGE>

USG CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in millions)

<TABLE>
<CAPTION>
Provision Receivables
Charged to Written Off
Beginning Costs and and Discounts Ending
Balance Expenses Allowed Balance

Year ended December 31, 1995:

<S> <C> <C> <C> <C>
Doubtful accounts $ 11 $ 6 $ (6) $ 11
Cash discounts 3 35 (35) 3

Year ended December 31, 1994:

Doubtful accounts 11 7 (7) 11
Cash discounts 2 33 (32) 3

May 7 through December 31, 1993:

Doubtful accounts 11 4 (4) 11
Cash discounts 2 19 (19) 2

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

January 1 through May 6, 1993:

Doubtful accounts 9 3 (1) 11
Cash discounts 2 10 (10) 2
</TABLE>

<PAGE>

USG CORPORATION
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. Debentures totaling $22 million
and $33 million were recorded on the holding company's books of account as of
December 31, 1995 and 1994, respectively. Financial results for U.S. Gypsum
are presented below in accordance with disclosure requirements of the SEC
(dollars in millions):

<TABLE>

Summary Balance Sheet
<CAPTION>
As of December 31,
1995 1994
<S> <C> <C>
Current assets $ 207 $ 341
Property, plant and equipment, net 529 491
Excess reorganization value, net 143 204
Other assets 120 107
Total assets 999 1,143

Current liabilities 170 154
Other liabilities and obligations 348 299
Stockholder's equity 481 690
Total liabilities and stockholder's equity 999 1,143
</TABLE>

<PAGE>

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

We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of USG Corporation included in this Form
10-K, and have issued our report thereon dated January 25, 1996. Our report on
the consolidated financial statements includes an explanatory paragraph with
respect to the Corporation's May 6, 1993, financial restructuring and the
application of fresh start accounting. As discussed in Notes to Financial
Statements - Note 6. Financial Restructuring, results of operations from
January 1 through May 6, 1993, are not comparable with results of operations
subsequent to that date. Our audits were made for the purpose of forming an
opinion on the consolidated financial statements taken as a whole. The
supplemental note and financial statement schedule on pages 20 and 19 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 consolidated financial statements. The supplemental note and
financial statement schedule have been subjected to the auditing procedures
applied in the audit of the consolidated 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 consolidated financial statements
taken as a whole.

/s/Arthur Andersen LLP

ARTHUR ANDERSEN LLP
Chicago, Illinois
January 25, 1996

<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 29, 1996

By:/s/ Richard H. Fleming
Richard H. Fleming
Senior 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/ William C. Foote February 29, 1996
WILLIAM C. FOOTE
President, Chief Executive Officer
and Director
(Principal Executive Officer)

/s/ Richard H. Fleming February 29, 1996
RICHARD H. FLEMING
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)

/s/ Raymond T. Belz February 29, 1996
RAYMOND T. BELZ
Vice President and Controller
(Principal Accounting Officer)

ROBERT L. BARNETT, KEITH A. BROWN, ) By:/s/ Richard H. Fleming
W. H. CLARK, EUGENE B. CONNOLLY ) Richard H. Fleming
JAMES C. COTTING, LAWRENCE ) Attorney-in-fact
M. CRUTCHER, DAVID W. FOX, ) Pursuant to Power of Attorney
PHILIP C. JACKSON, JR., ) (Exhibit 24 hereto)
MARVIN E. LESSER, JOHN B. SCHWEMM, ) February 29, 1996
JUDITH A. SPRIESER, )
Directors )

Execution Copy

AMENDMENT NO. 1 dated as of February 1, 1996 (this
"Amendment"), among USG Corporation, a Delaware corporation (the
"Borrower"), the financial institutions parties hereto (the
"Lenders" and Chemical Bank, a New York banking corporation, in
its separate capacity as agent for the Lenders (the "Agent").

PRELIMINARY STATEMENTS. (1) The Borrower, the
Lenders, the Issuing Banks and the Agent have entered into the
Credit Agreement dated as of July 27, 1995 (the "Credit
Agreement") and have agreed to amend the Credit Agreement as
hereinafter set forth.

(2) Capitalized terms used herein and not otherwise
defined herein shall have the meanings ascribed to such terms in
the Credit Agreement.

In consideration of the premises and the agreements,
provisions and covenants herein contained, the parties hereto
hereby agree, on the terms and subject to the conditions set
forth herein, as follows:

SECTION 1. Amendment of the Credit Agreement. The
Credit Agreement is hereby amended as follows:

1.1. Section 1.01 of the Credit Agreement is hereby
amended to insert the following new definitions in appropriate
alphabetical order therein:

"Chemical" shall mean Chemical Bank, a New York banking
corporation, and its successors and assigns.

"Mandatory Borrowing" shall have the meaning given to
such term in Section 2.02A(d).

"Maximum Swingline Amount" shall mean $30,000,000.

"Money Market Rate" shall mean, at any time, a
rate agreed upon between the Borrower and Chemical.

"Money Market Rate Borrowing" shall mean a
Borrowing comprised of Money Market Rate Loans.

"Money Market Rate Loan" shall mean any Swingline Loan
the rate of which is based upon the Money Market Rate.

"Swingline Loan Borrowing" shall mean a group of
Swingline Loans of the same Type made by Chemical on a
single date.

"Swingline Loan Note" shall have the meaning given to
such term in Section 2.05.

"Swingline Loans" shall mean the swingline loans made
by Chemical to the Borrower pursuant to Section 2.02A. Each
Swingline Loan shall be a Money Market Rate Loan or an ABR
Loan.

1.2. Section 1.01 of the Credit Agreement is hereby
further amended to amend and restate the following definitions in
their entirety:

"Borrowing" shall mean a Revolving Loan Borrowing,
a Competitive Bid Borrowing or a Swingline Loan
Borrowing.

"Lender" shall mean, at any time, (i) a financial
institution that is either set forth on the signature pages
hereof or that has become a lender pursuant to Section 9.04
and that, as of such time, remains a party hereto and (ii)
in its individual capacity, Chemical, as maker of the
Swingline Loans.

"Loans" shall mean Competitive Bid Loans, Revolving
Loans and/or Swingline Loans.

"Note" shall mean a Competitive Bid Note, a Revolving
Loan Note or the Swingline Loan Note.

"Outstandings" shall mean, at any given time, the
aggregate outstanding principal balance of Revolving Loans,
Competitive Bid Loans, Swingline Loans and the LC Exposure.

1.3. Section 1.01 of the Credit Agreement is hereby
further amended to insert the following as new clause (c)
contained in the definition of "Interest Period" immediately
preceding the words "and (c)" contained therein and to relabel
current clause (c) contained therein as new clause (d):

"(c) as to any Money Market Rate Loan, the period
commencing on the date of such Money Market Rate Loan,
and ending on a date agreed upon by the Borrower and
Chemical which is at least one and not more than 21
days after the making of such Money Market Rate Loan,"

1.4. Section 1.01 of the Credit Agreement is hereby
further amended to insert the phrase "all Swingline Loans
requested but not yet advanced," immediately following the second
comma contained in the second sentence of the definition of
"Revolving Credit Availability" contained therein.

1.5. Section 1.01 of the Credit Agreement is hereby
further amended to insert the term "the Money Market Rate"
immediately following the term "Alternate Base Rate," contained
in the definition of "Type" contained therein.

1.6. Section 2.01 of the Credit Agreement is hereby
amended to insert the following as new clause (b) thereunder and
to relabel current clause (b) contained therein as new clause
(c):

"(b) Subject to the terms and conditions set forth in
this Agreement, Chemical in its individual capacity, hereby
agrees to make Swingline Loans, in dollars, to the Borrower
from time to time during the period from the Closing Date to
the Business Day immediately preceding the Termination Date,
provided that (i) such Swingline Loan Borrowing shall not
exceed the Revolving Credit Availability at such time and
(ii) the aggregate principal amount of all Swingline Loans
shall not exceed the Maximum Swingline Amount."

1.7. Section 2.02(c) of the Credit Agreement is hereby
amended to insert the parenthetical "(unless such Revolving Loan
Borrowing constitutes a Mandatory Borrowing in which case the
amounts so received shall be applied in accordance with Section
2.02A(d))" immediately preceding the word "or" where it appears
in the first sentence thereof.

1.8. Article II of the Credit Agreement is hereby
amended to insert the following new Section 2.02A immediately
following Section 2.02 contained therein:

"SECTION 2.02A. Swingline Loans. (a) Each Swingline
Loan Borrowing shall be in a minimum principal amount of
$1,000,000 and in multiples of $500,000 in excess thereof or
in an aggregate principal amount equal to the Revolving
Credit Availability, provided that in no case shall any
Money Market Rate Borrowing be in a principal amount of less
than $500,000. Each Swingline Loan Borrowing shall be
comprised entirely of ABR Loans or Money Market Rate Loans,
as the Borrower may request pursuant to Section 2.03A,
provided that on the date of any Mandatory Borrowing
described below, all Swingline Loans giving rise to such
Mandatory Borrowing shall automatically become ABR Loans.
Borrowings of more than one Type may be outstanding at the
same time; provided, however, that the Borrower shall not be
entitled to request any Borrowing which, if made, would
result in an aggregate of more than four separate Borrowings
of Swingline Loans which are Money Market Rate Loans being
outstanding hereunder at any one time. All Swingline Loans
may be repaid and reborrowed from time to time in accordance
with the provisions hereof.

(b) No later than 12:00 noon, New York City time, or
in the event that notice of a Borrowing of Swingline Loans
is given on the proposed date of such Borrowing, no later
than 3:00 p.m., New York City time, on the date specified by
the Borrower for each Swingline Loan Borrowing, Chemical
will credit the amounts of such Swingline Loans to the
general deposit account of the Borrower maintained with
Chemical.

(c) Notwithstanding any other provision of this
Agreement, the Borrower shall not be entitled to request any
Swingline Loan Borrowing if the Interest Period requested
with respect thereto would end after the Maturity Date.

(d) On any Business Day, Chemical may, in its sole
discretion, give notice to the Lenders that its outstanding
Swingline Loans shall be funded with a Revolving Loan
Borrowing (provided that such notice shall be deemed to have
been automatically given upon the occurrence of an Event of
Default under Sections 7.01(g) or Section 7.01(h)), in which
case a Revolving Loan Borrowing constituting ABR Loans (such
Borrowing, a "Mandatory Borrowing") shall be made on the
immediately succeeding Business Day by all Lenders
simultaneously and proportionately to their respective Pro
Rata Shares (determined before giving effect to any
termination of the Commitments pursuant to Section 7.02(a))
in accordance with the terms of Section 2.02 and the
proceeds thereof shall be applied directly by the Agent,
upon its receipt thereof from the respective Lenders, to
Chemical to repay Chemical for such outstanding Swingline
Loans. Each Lender hereby irrevocably agrees to make
Revolving Loans upon one Business Day's notice pursuant to
each Mandatory Borrowing in the amount and in the manner
specified in the preceding sentence and on the date
specified in writing by Chemical notwithstanding (i) the
amount of the Mandatory Borrowing may not comply with the
minimum amount for Borrowings otherwise required hereunder,
(ii) whether any conditions specified in Section 4.01 are
then satisfied, (iii) whether a Potential Event of Default
or an Event of Default then exists, (iv) the date of such
Mandatory Borrowing and (v) any reduction in the Revolving
Credit Commitments after any such Swingline Loans were made.
In the event that any Mandatory Borrowing cannot for any
reason be made on the date otherwise required above
(including, without limitation, as a result of the
commencement of a proceeding under the Bankruptcy Code with
respect to the Borrower), each Lender hereby agrees that it
shall forthwith purchase from Chemical such assignments in
the outstanding Swingline Loans as shall be necessary to
cause the Lenders to share in such Swingline Loans ratably
based upon their respective Pro Rata Shares (determined
before giving effect to any termination of the Commitments
pursuant to Section 7.02(a)), provided that all interest
payable on the Swingline Loans shall be for the account of
Chemical until the date the respective assignment is
purchased and, to the extent attributable to the purchased
assignment, shall be payable to the assignee from and after
such date of purchase. Notwithstanding anything to the
contrary in Section 2.01(b), Chemical will not make, and
shall have no obligation to make, a Swingline Loan after it
has received written notice from any Lender or otherwise
becomes aware that a Potential Event of Default or an Event
of Default exists.

(e) Notwithstanding Section 2.08(f), interest on each
Swingline Loan shall be payable on the date the Lenders are
required to make a Mandatory Borrowing under clause (d)
above.

(f) The Borrower shall have the right at any time and
from time to time to prepay Swingline Loans, in whole or in
part, provided, however, that (i) each partial prepayment
shall be in an amount which is an integral multiple of
$500,000 and (ii) all optional prepayments of Swingline
Loans shall be subject to Section 2.18 but otherwise without
premium or penalty. All prepayments of Money Market Rate
Loans under this clause (f) shall be accompanied by accrued
interest on the principal amount being prepaid to the date
of payment."

1.9. Article II of the Credit Agreement is hereby
amended to insert the following new Section 2.03A immediately
following Section 2.03 contained therein:

"SECTION 2.03A. Rate Inquiry; Notice of Borrowings of
Swingline Loans. (a) The Borrower may prior to 1:00 p.m.,
New York City time, on any Business Day, request a quote of
the Money Market Rate which would be applicable for
Swingline Loans, specifying the amount of the proposed Money
Market Rate Loans and the maturity date thereof. Chemical
hereby agrees that it shall promptly provide such quote.

(b) The Borrower shall give Chemical written or
telecopy notice (or telephone notice promptly confirmed in
writing or by telecopy) of a Borrowing consisting of
Swingline Loans, not later than 1:00 p.m., New York City
time, on the Business Day such Swingline Loan is to be made.
Such notice shall be irrevocable (except as expressly set
forth herein) and shall in each case refer to this Agreement
and specify (i) the date of such Borrowing, (ii) the amount
of such Borrowing, (iii) whether the Swingline Loan
Borrowing then being requested is to be a Money Market Rate
Borrowing or an ABR Borrowing, and (iv) any other terms to
be applicable to such Swingline Loan Borrowing.

(c) Mandatory Borrowings shall be made upon the notice
specified in Section 2.02A(d), with the Borrower irrevocably
agreeing, by its incurrence of any Swingline Loan, to the
making of Mandatory Borrowings as set forth in Section
2.02A(d)."

1.10. Section 2.05 of the Credit Agreement is hereby
amended to insert the following as new clause (c) thereunder and
to relabel current clause (c) contained therein as new clause
(d):

"(c) The Borrower shall execute and deliver to
Chemical on or before the date on which the initial
Swingline Loan is made a promissory note substantially in
the form of Exhibit H-3 (the "Swingline Loan Note") to
evidence the aggregate amount of Chemical's Swingline Loans
and with other appropriate insertions. The Swingline Loan
Note shall be stated to mature on the Termination Date and
shall be in a principal amount equal to the Maximum
Swingline Amount."

1.11. Section 2.06(a) of the Credit Agreement is
hereby amended to amend and restate the first sentence contained
therein in its entirety as follows:

"The Borrower agrees to pay the outstanding principal
balance of:

(i) each Revolving Loan on the
Termination Date;

(ii) each Swingline Loan which is an ABR
Loan on the Termination Date and each
Swingline Loan which is a Money Market Rate
Loan on the Interest Payment Date with
respect thereto; and

(iii) each Competitive Bid Loan as
provided in Section 2.04(a).

1.12. Section 2.08(a) of the Credit Agreement is
hereby amended to insert the following phrase "and the Swingline
Loans" immediately following the term "Revolving Loans" where it
appears therein.

1.13. Section 2.08 of the Credit Agreement is hereby
further amended to insert the following as new clause (e)
thereunder and to relabel current clause (e) contained therein as
new clause (f):

"(e) Subject to the provisions of Section 2.09, the
Swingline Loans comprising each Money Market Rate Borrowing
shall bear interest (computed on the basis of the actual
number of days elapsed over a year of 360 days) at a rate
per annum equal to the Money Market Rate."

1.14. Section 2.14 of the Credit Agreement is hereby
amended to insert the following phrase immediately following the
term "Revolving Loans" where it appears therein:

"or the Swingline Loans, and in the case where such
payments or prepayments of Revolving Loans or Swingline
Loans are insufficient, Competitive Bid Loans,"

1.15. Section 2.14 of the Credit Agreement is hereby
further amended to insert the phrase "or Money Market Rate Loans"
immediately following the term "Eurodollar Loans" where it
appears therein.

1.16. Section 2.18 of the Credit Agreement is hereby
amended to insert the phrase "or Money Market Rate Loan"
immediately following the term "Eurodollar Loan" in the first
instance where it appears therein.

1.17. Section 2.18 of the Credit Agreement is hereby
further amended to insert the phrase "or Money Market Rate Loan,
as applicable" immediately following the term "Eurodollar Loan"
in the second instance where it appears therein.

1.18. Section 2.18 of the Credit Agreement is hereby
further amended to insert the phrase "or Money Market Rate, as
the case may be," immediately following the term "LIBO Rate"
where it appears therein.

1.19. Section 4.01(a) of the Credit Agreement is
hereby amended and restated in its entirety as follows:

"(a) Notice of Borrowing. The Agent, Chemical and/or,
where applicable, an Issuing Bank shall have received a
notice of such Credit Event as required by Section 2.03,
Section 2.03A, Section 2.04 or Section 2.15(c)."

1.20. The Credit Agreement is hereby amended to attach
Exhibit H-3 hereto as Exhibit H-3 to the Credit Agreement.

SECTION 2. Representations and Warranties. The
Borrower represents and warrants to each of the Lenders and the
Agent that:

(a) This Amendment has been duly authorized, executed
and delivered by it and constitutes its legal, valid and
binding obligation, enforceable in accordance with its terms
except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, fraudulent transfer, moratorium
or other similar laws affecting creditors' rights generally
and by general principles of equity (regardless of whether
such enforceability is considered in a proceeding at law or
in equity).

(b) Before and after giving effect to this Amendment,
the representations and warranties set forth in Article V of
the Credit Agreement are true and correct in all material
respects with the same effect as if made on the date hereof,
except to the extent such representations and warranties
expressly relate to an earlier date.

(c) Before or after giving effect to this Amendment,
no Event of Default or Potential Event of Default has
occurred and is continuing.

SECTION 3. Condition to Effectiveness. The amendments
to the Credit Agreement set forth in this Amendment shall become
effective as of the date first above written when the Agent shall
have received counterparts of this Amendment that, when taken
together, bear the signatures of the Borrower, Chemical and the
Requisite Lenders.

SECTION 4. Credit Agreement. Except as specifically
amended hereby, the Credit Agreement and each Loan Document shall
continue in full force and effect in accordance with the
respective provisions thereof as in existence on the date hereof.
After the date hereof, any reference to the Credit Agreement
shall mean the Credit Agreement as amended hereby.

SECTION 5. Applicable Law. THIS AMENDMENT SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF NEW YORK.

SECTION 6. Counterparts. This Amendment may be
executed in two or more counterparts, each of which shall
constitute an original but all of which when taken together shall
constitute but one contract.

SECTION 7. Expenses. The Borrower agrees to reimburse
the Agent for its out-of-pocket expenses in connection with this
Amendment, including the reasonable fees, charges and
disbursements of Sidley & Austin, counsel for the Agent.

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed by their respective authorized officers as of the day and year
first written above.

USG Corporation

BY --------------------------

Name ------------------------

Title -----------------------

Chemical Bank, individually and
as Agent

By --------------------------

Name ------------------------

Title -----------------------

Bankers Trust Company

By --------------------------

Name ------------------------

Title -----------------------

(Additional signature pages for exhibit 10(q) have been intentionally omitted).

EXHIBIT H-3
to
CREDIT AGREEMENT
Dated as of July 27, 1995

FORM OF
SWINGLINE LOAN NOTE

$30,000,000 February __, 1996

FOR VALUE RECEIVED, the undersigned, USG Corporation, a
Delaware corporation (the "Borrower"), HEREBY UNCONDITIONALLY
PROMISES TO PAY to the order of Chemical Bank (the "Lender") the
principal sum of THIRTY MILLION AND NO/100 DOLLARS ($30,000,000),
or, if less, the aggregate unpaid amount of all of the Swingline
Loans made by the Lender pursuant to the "Credit Agreement" (as
hereinafter defined). Capitalized terms used herein and not
otherwise defined herein are used as defined in the Credit
Agreement.

The principal amount of the indebtedness evidenced
hereby shall be payable in the amounts and on the dates as
determined in accordance with the terms of the Credit Agreement
and, if not sooner paid in full, on the Termination Date. The
Borrower further promises to pay interest on the unpaid principal
amount of each Swingline Loan from the date of such Swingline
Loan, until the principal amount thereof is paid in full, at the
interest rates and payable at the times as determined in
accordance with the terms of the Credit Agreement.

All payments of principal and interest in respect of
this Swingline Loan Note shall be made payable to the Agent in
lawful money of the United States of America in same day funds
for the Lender's account at Chemical Bank, Account No. 323-207316,
270 Park Avenue, New York, New York 10017, Re: Payment
for USG Corporation, or at such other place as shall be
designated in writing by the Agent for such purpose in accordance
with the terms of the Credit Agreement.

All Swingline Loans made by the Lender to the Borrower,
and all repayments of the principal of all Swingline Loans shall
be recorded by the Lender and, prior to any transfer thereof,
endorsed by the Lender on the schedule attached hereto and made a
part hereof; provided, that the failure of the Lender to make any
such recordation or endorsement shall not affect the obligations
of the Borrower hereunder or under the Credit Agreement.

This Swingline Loan Note is the Swingline Loan Note
referred to in, and is entitled to the benefits of, that certain
Credit Agreement dated as of July 27, 1995, as amended by
Amendment No. 1 thereto dated as of February 1, 1996 (as amended,
restated, supplemented or otherwise modified from time to time,
the "Credit Agreement") among the Borrower, certain financial
institutions party thereto as "Lenders" and "Issuing Banks" and
Chemical Bank, as agent (the "Agent"). The Credit Agreement,
among other things, (i) provides for the making of Swingline
Loans by the Lender to the Borrower from time to time and (ii)
contains provisions for acceleration of the maturity hereof upon
the happening of certain stated events.

Borrower hereby waives demand, presentment, protest and
notice of nonpayment and protest.

Whenever in this Swingline Loan Note reference is made
to the Agent, the Lender or the Borrower, such reference shall be
deemed to include, as applicable, a reference to their respective
successors and assigns. The provisions of this Swingline Loan
Note shall be binding upon and shall inure to the benefit of said
successors and assigns. Borrower's successors and assigns shall
include, without limitation, a receiver, trustee or debtor in
possession of or for Borrower.

THIS SWINGLINE LOAN NOTE SHALL BE INTERPRETED, AND THE
RIGHTS AND LIABILITIES OF THE PARTIES HERETO SHALL BE DETERMINED,
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

USG CORPORATION

By:___________________________
Title:

USG Corporation Swingline Loan Note Schedule

Amount of Unpaid
Amount of Type of Interest Principal Principal Notation
Date Loan Loan Period Repaid Balance Made by

____________________________________________________________________________

STOCK COMPENSATION PROGRAM
FOR
NON-EMPLOYEE DIRECTORS
OF
USG CORPORATION

This document is the definitive statement of the Stock
Compensation Program for Non-Employee Directors of USG
Corporation (the "Program").

1. Purpose. The purpose of the Program is to attract and
retain outstanding non-employee directors by enabling them to
participate in the Corporation's growth through automatic,
nondiscretionary awards of restricted shares of common stock of
the Corporation.

2. Eligibility. Eligibility for participation in the Program
is limited to persons then currently serving as directors of the
Corporation who are not "employees" of the Corporation (or any
of its subsidiaries) within the meaning of the Employee
Retirement Income Security Act of 1974 or for federal income tax
withholding purposes (the "Participants").

3. Stock Available for the Program. Shares of the common stock
of the Corporation, $0.10 par value ("Common Stock"), available
for issuance pursuant to the Program shall be authorized and
unissued shares or treasury shares of the Corporation. An
aggregate of 100,000 shares of Common Stock shall be so
available. No awards shall be made under the Program after
1999.

4. Awards of Restricted Stock. Awards under the Program shall
be made as follows.

4.1. Dates and Amounts. An award shall be made to each of
the Participants on the 25th day of September (or on the
next day that the New York Stock Exchange shall be open for
trading if not open on the 25th day of September), in an
amount of shares of Common Stock equivalent to one-quarter
of the then current annual retainer payable to non-employee
directors (rounded up to the next whole share in the event
of fractional shares) based on the mean of the high and low
sales prices of a share of the Common Stock on such date as
reported on the New York Stock Exchange composite tape.

4.2. Insufficient Shares. If at any time the remaining
shares authorized for issuance under the Program shall be
insufficient to satisfy the awards as calculated pursuant to
the immediately preceding provisions, then the shares
remaining shall be distributed among the Participants on a
pro rata basis.

5. Restrictions. The shares awarded pursuant to Article 4 have
not been registered with the Securities and Exchange Commission
(the "Commission"). None of the Participants shall sell,
assign, exchange, donate, pledge, or encumber any of such shares
unless they shall have been registered with the Commission,
which the Corporation is not obligated to do, or they shall be
eligible for an exemption from registration, such as a sale in
compliance with the Commission's Rule 144 after the shares have
been held not less than two years from the date of grant (the
period from the date of a grant of shares until such
registration or exemption is herein referred to as the
"Restriction Period" with respect to such shares). Such shares
and awards also shall be subject to the following conditions.

5.1. Legend and Custody. The Corporation shall issue
certificates representing the shares granted pursuant to
Article 4 registered in the name of the respective
Participants. Such certificates shall bear legends
referring to the restrictions applicable to the awards as
deemed appropriate or desirable by the Corporation.

5.2. Change in Control. In the event of a "change in
control" of the Corporation during the Restriction Period,
the shares granted pursuant to Article 4 shall be converted
to cash on the basis of the "change in control price", and
such cash shall be paid to each Participant respectively.

5.2.1. For purposes of this Article 5.2, "change in
control" means the happening of any of the following:

(a) When any "person" as defined in Section
3(a)(9) of the Securities Exchange Act of 1934, as
amended (the "Act"), and as used in Sections 13(d)
and 14(d) thereof, including a "group" as defined
in Section 13(d) thereof but excluding the
Corporation and any subsidiary and any employee
benefit plan sponsored or maintained by the
Corporation or any subsidiary (including any
trustee of such plan acting as trustee), directly
or indirectly, becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Act) of securities
of the Corporation representing 20 percent or more
of the combined voting power of the Corporation's
then outstanding securities (excluding the
acquisition by Water Street Corporate Recovery
Fund I, L.P. of voting securities of the
Corporation upon the consummation of the
Corporation's Prepackaged Plan of Reorganization
on May 6, 1993);

(b) When, during any period of 24
consecutive months during the Restriction Period,
the individuals who, at the beginning of such
period, constitute the Board of Directors (the
"Incumbent Directors") cease for any reason other
than death to constitute at least a majority
thereof; provided, however, that a director who
was not a director at the beginning of such
24-month period shall be deemed to have satisfied
such 24-month requirement (and be an Incumbent
Director) if such director was elected by, or on
the recommendation of or with the approval of, at
least two-thirds of the directors who then
qualified as Incumbent Directors either actually
(because they were directors at the beginning of
such 24-month period) or by prior operation of
this Article 5.2; or

(c) The approval by the stockholders of the
Corporation of a transaction involving the
acquisition of the Corporation by an entity other
than the Corporation or a subsidiary through
purchase of assets, by merger, or otherwise.

5.2.2. For purposes of this Article 5.2, "change in
control price" shall mean the highest price per share
paid in any transaction reported on the New York Stock
Exchange composite tape, or paid or offered in any bona
fide transaction related to a change in control of the
Corporation at any time during the sixty-day period
immediately preceeding the occurrence of the change in
control, in each case as determined by the Board of
Directors.

6. Other Benefits and Rights of Participants. Participants
shall be entitled to the following benefits and rights.

6.1. Purchase Price; Income Taxes. The purchase price for
all of the shares granted pursuant to Article 4 above shall
be zero. Under current provisions of the Internal Revenue
Code, the value of Common Stock becomes taxable income to
the recipient on the date of grant, and the Corporation will
be entitled to a deduction of such value as compensation in
the year paid. The value will be determined by multiplying
the number of shares on the date of grant by the mean of the
high and low sales prices of a share of Common Stock on the
date of such event as reported on the New York Stock
Exchange composite tape.

6.2. Rights of Participants. During the Restriction Period,
each Participant shall have all the benefits and rights of a
registered stockholder, including, but not by way of limitation,
the right to vote the shares granted pursuant to Article 4 an
of Article 5 shall remain in force during such time and
shall be a limitation on such benefits and rights.

6.3. Release of Restrictions. If the Restriction Period
expires without the occurrence of any of the conditions
specified or described in Article 5.2, the Corporation at
that time promptly shall deliver to the Participant in
exchange for any certificate or certificates theretofore so
delivered, a certificate or certificates bearing no legends
and otherwise freed of restrictions for shares granted
pursuant to Article 4.

7. Changes in Capitalization or Organization. Nothing
contained in this document shall alter or diminish in any way
the right and authority of the Corporation to effect changes in
its capital or organizational structure; provided, however, that
the following procedures shall be recognized.

7.1. Stock Split, Stock Dividend, or Extraordinary
Distribution. In the event the number of shares of Common
Stock of the Corporation is increased at any time during the
Restriction Period by a stock split, by declaration by the
Board of Directors of the Corporation of a dividend payable
only in shares of such stock, or by any other extraordinary
distribution of shares, the number of shares granted
pursuant to Article 4 shall be proportionately adjusted.

7.2. Organizational Changes. In the event a merger,
consolidation, reorganization, or other change in corporate
structure materially changes the terms or value of the
common stock of the Corporation, the number of shares
granted pursuant to Article 4 shall be adjusted in such
manner as the Board of Directors in its sole discretion
shall determine to be equitable and consistent with the
purposes of the Program. Such determination shall be
conclusive for all purposes with respect to the grant made
in Article 4.

8. Listing, Registration, and Legal Compliance. Each award
made pursuant to Article 4 shall be subject to the requirement
that if at any time counsel to the Corporation shall determine
that the listing, registration or qualification thereof or of
any shares of the Common Stock subject thereto upon any
securities exchange or under any foreign, federal or state
securities or other law or regulation, or the consent or
approval of any governmental body or the taking of any other
action to comply with or otherwise with respect to any such law
or regulation, is necessary or desirable as a condition to or in
connection with such award or delivery of shares of the Common
Stock thereunder, no such award may be made or implemented
unless such listing, registration, qualification, consent,
approval or other action shall have been effected or obtained
free of any conditions not acceptable to the Corporation. The
holder of any such award shall supply the Corporation with such
certificates, representations and information as the Corporation
shall request and shall otherwise cooperate with the Corporation
in effecting or obtaining such listing, registration,
qualification, consent, approval or other action.

9. Reports. The Corporation shall deliver to each Participant,
not less frequently than once each year, a report stating the
number of shares of the Stock held under the Program by such
Participant and the dates on which the Restriction Period or
Periods on same will end.

10. Termination or Amendment of the Program. The Board of
Directors reserves the right to terminate or amend the Program
at any time; provided, however, that (i) such action shall not
adversely affect the rights of any Participant with respect to
awards of Common Stock theretofore made; (ii) such action shall
not increase the amount of Common Stock available for the
Program as specified in Article 3 without the approval of the
stockholders of the Corporation; and (iii) the Program shall not
be amended more than once every six months, other than to
comport with changes in the Internal Revenue Code, the Employee
Retirement Income Security Act, or the rules thereunder.

Chicago, Illinois
February 8, 1995

1995 LONG-TERM EQUITY PLAN OF USG CORPORATION

NONQUALIFIED STOCK OPTION

1. Date of Grant. This option is granted effective January 2,
1996 (the "Date of Grant").

2. Grant of Option. USG CORPORATION (the "Corporation"), for
good and valuable consideration, the receipt of which is hereby
acknowledged, hereby irrevocablygrants to
the "Holder") a nonqualified option to purchase a total of
shares of common stock, $0.10 par value, of the Corporation at
the price of $ 29.40 per share, upon the terms and conditions
hereinafter stated, pursuant to the 1995 Long-Term Equity Plan of
the Corporation (the "Plan"), all determinations by the Committee
appointed under the Plan (the "Committee") necessary or
appropriate to the grant of this option, including the
Committee's Operating Guidelines ("Guidelines") under the Plan
pertaining to this option, having been duly made.

3. Specific Conditions of Grant. The option granted in
paragraph 2 above is subject to the following conditions.

3.1. Exercisability. Subject to the provisions of
paragraphs 3.3 and 3.4, the option shall be exercisable, in
whole or in part, at the rate of 100% of the total grant on a
cumulative basis on or after the second anniversary of the
Date of Grant. In no event shall any part of the option be
exercisable after the tenth anniversary of the Date of Grant.

3.2. Nontransferability. The option granted in paragraph 2
above shall be exercisable during the lifetime of the Holder
only by the Holder and shall not be transferable other than
by will or the laws of descent and distribution upon the
death of the Holder. In the event of such death, the option
shall be exercisable only in accordance with other provisions
contained in this document and only (a) by the executor or
administrator of the estate of the Holder or the person or
persons to whom the option shall pass by will or the laws of
descent and distribution, and (b) to the extent to which the
Holder was entitled at the time of death.

3.3. Termination by Disability, Death or Retirement After
Age 62. In the event employment of the Holder by the
Corporation or any Subsidiary terminates by reason of
disability, death or retirement after attaining age 62, the
entire option shall become and be exercisable thereafter for
a period of five (5) years from the date of such disability,
death or retirement or until expiration of the term of the
option specified in paragraph 3.1 above, whichever period is
shorter; provided, however, that in the event of such a
termination by reason of disability or retirement and the
Holder dies within such five (5)-year period, the option
shall be exercisable for a period of six (6) months from the
date of such death or until the end of such five (5)-year
period, whichever period expires later, but in no event
beyond expiration of the term of the option specified in
paragraph 3.1 above. For purposes of this document,
"disability" shall mean an inability due to physical or
mental impairment to perform the duties of the Holder's
position for the immediately preceding six (6) months and an
inability for the same reasons to be gainfully employed for
the rest of the Holder's life, both of which findings shall
be certified by a physician or physicians satisfactory to the
Corporation or the appropriate Subsidiary.

3.4. Termination by Reason of Early Retirement or Discharge
Without Cause. In the event employment of the Holder by the
Corporation or any Subsidiary terminates by reason of
retirement before age 62 or discharge by the Corporation or a
Subsidiary without cause (a "Termination Event"), the option
shall be exercisable thereafter as follows:

- 0% of the total grant on a cumulative basis if
Termination Event occurs before the first
anniversary of the Date of Grant;

- 50% of the total grant on a cumulative basis if
Termination Event occurs after first but before
second anniversary of the Date of Grant; and

- 100% of the total grant on a cumulative basis if
Termination Event occurs after second anniversary of
the Date of Grant;

in any such case for a period of five (5) years from the date
of such Termination Event or until the expiration of the term
of the option specified in paragraph 3.1 above, whichever
period is shorter; provided, however, that in the event the
Holder dies within such five (5)-year period, the option
shall be exercisable following such death to the extent such
option was exercisable at the time of death and for a period
of six (6) months from the date of such death or until the
end of such five (5)-year period, whichever period expires
later, but in no event beyond expiration of the term of the
option specified in paragraph 3.1 above. For purposes of
this document, the term "cause" shall mean a Holder's
conviction of a felony or a determination by the Committee
that a Holder has engaged in acts which have been materially
harmful to the Corporation or its Subsidiaries, including the
following: (i) an act of fraud, embezzlement or theft in
connection with the Holder's employment; (ii) wrongful damage
to property of the Corporation or its Subsidiaries; (iii)
wrongful disclosure of secret processes or confidential
information of the Corporation or its Subsidiaries; or (iv)
wrongful competition with the Corporation or its
Subsidiaries.

3.5. Termination for Other Reasons. In the event employment
of the Holder by the Corporation or any Subsidiary terminates
for any reason other than disability, death, retirement, or
discharge without cause, the option thereupon shall
terminate, except that such option shall thereafter be
exercisable, to the extent otherwise then exercisable, for
the lesser of three (3) months or the balance of the term of
the option specified in paragraph 3.1 above if such
termination is by voluntary resignation by the Holder;
provided, however, that in the event the Holder dies within
such three (3)-month period, the option shall be exercisable
following such death to the extent such option was
exercisable at the time of death and for a period of six (6)
months from the date of such death, but in no event beyond
expiration of the term of the option specified in paragraph
3.1 above.

4. Procedure for Exercise. The option granted in paragraph 2
above shall be exercisable only in accordance with the following
procedure.

4.1. Notice. The Holder shall deliver or cause to be
delivered to the Corporate Secretary of the Corporation at
125 South Franklin Street, Chicago, Illinois 60606, a written
notice of exercise on a form provided by or acceptable to the
Corporate Secretary. Such written notice shall state the
number of shares as to which the option is being exercised.
The notice shall include the name(s) and address(es) the
Holder wishes to use for the registration of certificates,
together with the social security number of one of the
persons in whose name the stock is to be registered. The
date of receipt of the notice by the Corporate Secretary
(together with payment and any requested representation as
provided in paragraphs 4.2 and 4.3 below) shall conclusively
be deemed the date of exercise.

4.2. Payment. The Holder shall make payment for the shares
as to which the option is being exercised by submitting to
the Corporation, together with the notice specified in
paragraph 4.1 above, either a check payable to the
Corporation or certificates for unrestricted shares of common
stock of the Corporation then owned by the Holder (which
certificates shall be properly endorsed or otherwise properly
transferred to the Corporation), or by any combination of
such a check and such certificates. The value of any such
certificate for purposes of calculating payment of the
aggregate option price for the shares as to which the option
is being exercised shall be based on the closing sales price
of such common stock on the New York Stock Exchange composite
tape on the date of exercise, with the number of shares
required for such payment to be rounded up to the next whole
share. Such payment shall be accompanied by a payment equal
to (a) at least the minimum then current Federal income tax
withholding rate for the income realized by the Holder as of
the date of exercise (which rate is twenty-eight percent
(28%) on the Date of Grant), provided that the Holder may
elect greater withholding up to the then maximum Federal
income tax withholding rate, plus (b) an appropriate percent
for state income tax withholding of such income, plus (c) any
amount required to be withheld under the Federal Insurance
Contributions Act (FICA); provided, however, that, in the
discretion of the Corporation, the Holder may elect, by
written notice to the Corporation delivered at the time of
exercise, to have the total of such withholdings satisfied by
a reduction in the number of shares otherwise deliverable on
such exercise, such reduction to be calculated based on the
closing price on the New York Stock Exchange composite tape
on the date of such notice and additionally to entail
issuance of no fractional shares by the Corporation
(fractional balances to be eliminated by an increase in such
reduction to the next full share). The income realized by
the Holder as of the date of exercise shall equal the
difference between the aggregate option price for the shares
as to which the option is being exercised and the aggregate
market value for such shares (based on (i) the sales price
for such shares, in the case of a "cashless exercise" as
permitted by the terms of the last sentence of this paragraph
4.2, or (ii) the closing price for such shares on the New
York Stock Exchange composite tape on such date, in the case
of all other exercises). The Corporation shall retain the
right to change the above withholding rates to the extent
required by law. Notwithstnding the foregoing, at the
discretion of the Corporation, payment requirements may be
satisfied by a cashless exercise as permitted by the Federal
Reserve Board's Regulation T through a broker subject thereto
and who is a member of the National Association of Securities
Dealers, Inc., subject to applicable securities laws and
state or provincial corporation law requirements.

4.3. Representation. The Holder shall deliver to the
Corporation if requested by the Corporation a representation
to the effect that the Holder is not acquiring the shares as
to which the option is being exercised with a view to
distribution thereof.

4.4. Conditions to Delivery of Shares. The Corporation in
no event shall be obligated to deliver certificates for
shares to the Holder until the notice and payment provisions
of paragraphs 4.1 and 4.2 above have been met and until any
requested representation pursuant to paragraph 4.3 above has
been delivered. Notices, instruments of payment, and other
documents required by any part of this paragraph 4 shall be
satisfactory in form and substance to the Corporate Secretary
of the Corporation. The Corporation under no circumstances
shall be obligated to issue fractional shares.

5. Change in Control. In the event of a Change in Control, as
defined in Section 10(b) of the Plan, after the Date of Grant,
the option granted in paragraph 2 above shall (a) to the extent
not previously exercisable, become fully exercisable, and (b) be
valued, with such value to be converted to cash on the basis of
the Change in Control Price, as defined in Section 10(c) of the
Plan, minus the aggregate option price, and such cash, less
applicable tax withholdings, shall be paid to the Holder.

6. Changes in Capitalization or Organization. Nothing contained
in this document shall alter or diminish in any way the right and
authority of the Corporation to effect changes in its capital or
organizational structure; provided, however, that the following
procedures shall be recognized:

6.1. Stock Split, Stock Dividend, or Extraordinary
Distribution. In the event the number of outstanding shares
of common stock of the Corporation is increased prior to the
termination of the option granted in paragraph 2 above by a
stock split, by declaration by the Board of Directors of the
Corporation of a dividend payable only in shares of such
stock, or by any other extraordinary distribution of shares,
the number and the option price per share shall be
proportionately adjusted without any change in the aggregate
option purchase price.

6.2. Organizational Changes. In the event a merger,
consolidation, reorganization, or other change in corporate
structure materially changes the terms or value of the common
stock of the Corporation, the number of shares subject to the
option granted in paragraph 2 above and the option price
thereof shall be adjusted in such manner as the Committee in
its sole discretion shall determine to be equitable and
consistent with the purposes of the Plan. Such determination
shall be conclusive for all purposes with respect to the
option granted in paragraph 2 above.

7. Registration, Qualification, and Listing. In the event the
Board of Directors of the Corporation at any time determines in
its sole discretion that the shares covered by the option granted
in paragraph 2 above are required to be registered or qualified
pursuant to Federal law or any state law applicable to such
option or should be listed on an exchange, the option shall not
be exercisable in whole or in part unless and until such
registration, qualification, or listing has been effected to the
satisfaction of said Board of Directors.

8. Rights of the Holder. Nothing contained in this document
shall confer on the Holder any right to continue in the
employment of the Corporation or any Subsidiary nor affect in any
way the right of the Corporation or any Subsidiary to terminate
such employment at any time. Nothing contained in this document
shall affect in any way the right of the Holder to participate in
any retirement, insurance, investment or other employee benefit
plan of the Corporation or any Subsidiary. The Holder shall have
no rights of a stockholder with respect to any of the shares
covered by the option granted in paragraph 2 above until the
option has been exercised in whole or in part and the shares in
question have been issued.

9. Plan and Guidelines to Govern. The option granted in
paragraph 2 above and all other provisions contained in this
document shall be subject to and interpreted in a manner
consistent with the terms and conditions of the Plan and the
Guidelines.

USG CORPORATION

By
President and
Chief Executive Officer

I hereby accept the option granted in the foregoing document on
the terms and conditions stated therein.

The Holder

1995 LONG-TERM EQUITY PLAN OF USG CORPORATION

PERFORMANCE-BASED RESTRICTED STOCK AWARD AGREEMENT

1. Date of Award. This award is made as of January 2, 1996
("Date of Award").

2. Award of Performance-Based Restricted Stock. USG CORPORATION
(the "Corporation"), for good and valuable consideration, the
receipt of which is hereby acknowledged, hereby grants to
(the "Grantee") shares of performance-based
restricted common stock, $0.10 par value, of the
Corporation, upon the terms and subject to the restrictions and
conditions hereinafter stated. Such grant is made pursuant to
the 1995 Long-Term Equity Plan of the Corporation (the "Plan"),
all determinations by the Committee appointed under the Plan (the
"Committee") necessary or appropriate to the making of this
award, including the Committee's adoption of Operating Guidelines
(the "Guidelines") under the Plan pertaining to this award,
having been duly made.

3. Restrictions. Grantee shall not sell, assign, exchange,
donate, pledge, or encumber the shares granted pursuant to
paragraph 2 above through the termination of the Performance
Period (as defined in paragraph 4) and the determination by the
Committee of the vesting and release from restrictions of any
portion of the award hereunder (collectively, "Restriction
Period"). This award also shall be subject to the following
conditions:

3.1. Legend and Custody. The Corporation shall issue a
certificate or certificates representing the shares granted
pursuant to paragraph 2 above, which certificate or
certificates shall be registered in the name of the Grantee.
Such certificate or certificates shall bear a legend or
legends referring to the terms, conditions, and restrictions
applicable to the aforesaid award and such other provisions
as may be determined by the Corporation. Such certificate
or certificates shall be retained in the custody of the
Corporation at all times during the Restriction Period, and
Grantee shall execute and deliver to the Corporation,
promptly after the beginning of the Restriction Period, a
stock power, endorsed in blank, relating to such certificate
or certificates.

3.2. Change in Control. In the event of a Change in
Control, as defined in Section 10(b) of the Plan, the value
of the shares granted pursuant to paragraph 2 above shall be
converted to cash on the basis of the Change in Control
Price, as defined in Section 10(c) of the Plan, and such
cash shall be paid to the Grantee.

3.3. Termination by Disability, Death or Retirement After
Age 62. In the event employment of the Grantee by the
Corporation or any Subsidiary terminates, prior to the
termination of the Performance Period, by reason of
disability, death or retirement after attaining age 62, the
entire award hereunder shall be subject to the Performance
Determination (as defined in paragraph 4) and the shares
subjected thereto released or forfeited in accordance with
the provisions of paragraph 4 below (in the event of such
death, any such release of shares shall be only to the
executor or administrator of the estate of the Grantee or
the person or persons to whom this award shall pass by will
or the laws of descent and distribution).

For purposes of this document, "disability" shall mean an
inability due to physical or mental impairment to perform
the duties of the Grantee's position for the immediately
preceding six (6) months and an inability for the same
reasons to be gainfully employed for the rest of the
Grantee's life, both of which findings shall be certified by
a physician or physicians satisfactory to the Corporation or
the appropriate Subsidiary.

3.4. Termination by Reason of Early Retirement or Discharge
Without Cause. In the event employment of the Grantee by
the Corporation or any Subsidiary terminates, prior to the
termination of the Performance Period, by reason of
retirement before age 62 or discharge by the Corporation or
a Subsidiary without cause (a "Termination Event"), the
following portions of the award hereunder shall be subject
to the Performance Determination and the shares subjected
thereto released or forfeited in accordance with the
provisions of paragraph 4 below (the portions of the award
hereunder not so subject to the Performance Determination
shall be forfeited as of the date of the Termination Event):

- 33 1/3% of the total awarad on a cumulative basis
if Termination Event occurs before the first
anniversary of the Date of Award;

- 66 2/3% of the total award on a cumulative basis if
Termination Event occurs after first but before
second anniversary of the Date of Award; and

- 100% of the total award on a cumulative basis if
Termination Event occurs after second anniversary
of the Date of Award.

For purposes of this doument, the term "cause" shall mean a
Grantee's conviction of a felony or a determination by the
Committee that a Grantee has engaged in acts which have been
materially harmful to the Corporation or its Subsidiaries,
including the following: (i) an act of fraud, embezzlement
or theft in connection with the Grentee's employment; (ii)
wrongful damage to property of the Corporation or its
Subsidiaries; (iii) wrongful disclosure of secret processes
or confidential information of the Corporation or its
Subsidiaries; or (iv) wrongful competition with the
Corporation or its Subsidiaries.

3.5. Termination for Other Reasons. In the event employment
of the Grantee by the Corporation or any Subsidiary
terminates for any reason other than disability, death,
retirement, or discharge without cause, the entire award
hereunder shall be forfeited on the date of such termination.

4. Performance Determination. Subject to the provisions of
paragraph 3 above, the award hereunder shall be deemed earned and
freed from all restrictions and delivered to the Grantee in
accordance with the following schedule upon certification by the
Committee of the Corporation's total shareholder return during
the period beginning January 1, 1996 and ending December 31, 1998
(the "Performance Period"), relative to the total shareholder
return of each of the companies (other than the Corporation)
comprising the Value Line Building Materials Index ("Index"),
assuming in each case standard fixed investments and reinvestment
of dividends, and utilizing the average market price of a share
of each company for the last six months of 1995 and 1998 as the
market value of a share of such company on January 1, 1996 and
December 31, 1998, respectively (the "Performance
Determination"):

Total Shareholder Return of
Corporation as Percentile of
Returns of Other Index Percent of Award
Members Deemed Earned

70% or higher 100%
60% 70%
50% (median) 50%
40% 20%
Less than 40% 0

Any portion of the award hereunder not deemed earned in the
Performance Determination shall be forfeited as of the date of
the Performance Determination.

5. Other Benefits and Rights of Grantee. The Grantee shall be
entitled to the following benefits and rights.

5.1. Purchase Price. The purchase price for all of the
shares deemed earned in the Performance Determination shall
be zero.

5.2. Rights of Stockholder. During the Restriction Period,
Grantee shall have all the benefits and rights of a
registered stockholder, including, but not by way of
limitation, the right to vote all of the non-forfeited shares
subject to this award and to receive dividends thereon;
provided, however, that the restrictions imposed by the first
sentence of paragraph 3 above shall remain in force during
such time and shall be a limitation on such benefits and
rights.

5.3. End of Restriction Period. Following the Performance
Determination, the Corporation promptly shall deliver to the
Grantee a certificate or certificates for all the shares
deemed earned in the Performance Determination pursuant to
paragraph 4 above. The Grantee recognizes that, under
current provisions of federal income tax law, he will
recognize ordinary income at the time of the Performance
Determination in an amount equal to the aggregate market
value of the shares deemed earned pursuant to paragraph 4
above (based on the mean between the high and low trading
prices for a share of the Corporation's common stock on the
New York Stock Exchange composite tape on such date). Prior
to or simultaneously with any such delivery, Grantee shall
provide the Corporation with funds (or, in the discretion of
the Corporation, with the equivalent in shares of common
stock of the Corporation of such funds) necessary to
discharge any applicable income tax withholding obligations.

6.1. Stock Split, Stock Dividend, or Extraordinary
Distribution. In the event the number of shares of common
stock of the Corporation is increased at any time during the
Restriction Period by a stock split, by declaration by the
Board of Directors of the Corporation of a dividend payable
only in shares of such stock, or by any other extraordinary
distribution of shares, the number of shares granted pursuant
to paragraph 2 above shall be proportionately adjusted.

6.2. Organizational Changes. In the event a merger,
consolidation, reorganization, or other change in corporate
structure materially changes the terms or value of the common
stock of the Corporation, the number of shares granted
pursuant to paragraph 2 above shall be adjusted in such
manner as the Committee in its sole discretion shall
determine to be equitable and consistent with the purposes of
the Plan. Such determination shall be conclusive for all
purposes with respect to the grant made in paragraph 2 above.

7. Execution, Delivery, and Performance of Agreement. Grantee
shall have no rights with respect to the grant made in paragraph
2 above unless and until such Grantee has executed this Agreement
in the space provided below and has delivered one executed copy
of same to the Corporation, such delivery to be accomplished
within sixty (60) days of the date of award specified in
paragraph 1 above. Grantee likewise shall have no rights with
respect to the grant made in paragraph 2 above unless such
Grantee has otherwise complied with all the terms and conditions
contained in this Agreement.

8. Plan and Guidelines to Govern. The grant made in paragraph 2
above and all other provisions contained in this document shall
be subject to and interpreted in a manner consistent with the
terms and conditions of the Plan and the Guidelines.

USG CORPORATION

By
Corporate Secretary

ACCEPTED:

Grantee:
Date:

1995 LONG-TERM EQUITY PLAN OF USG CORPORATION

RESTRICTED STOCK AWARD AGREEMENT

1. Date of Award. This award is made as of January 2, 1996.

2. Award of Restricted Stock. USG CORPORATION (the
"Corporation"), for good and valuable consideration, the receipt
of which is hereby acknowledged, hereby grants to
(the "Grantee") shares of restricted
common stock, $0.10 par value, of the Corporation, such grant to
be upon the terms and subject to the restrictions and conditions
hereinafter stated. Such grant is made under the 1995 Long-Term
Equity Plan of the Corporation (the "Plan"), pursuant to
authority granted to the Chairman of the Corporation by the
Committee appointed under the Plan (the "Committee").

3. Restrictions. The Grantee shall not sell, assign, exchange,
donate, pledge, or encumber the shares granted pursuant to
paragraph 2 above through the close of business on December 31,
2000 (the "Restriction Period").

4. Change in Control. In the event of a Change in Control, as
defined in Section 10(b) of the Plan, the value of the shares
granted pursuant to paragraph 2 above and not theretofore freed
of restrictions shall be converted to cash on the basis of the
Change in Control Price, as defined in Section 10(c) of the
Plan, and such cash shall be paid to the Grantee.

5. Termination of Employment. In the event employment of
Grantee by the Corporation or a Subsidiary shall terminate at
any time prior to expiration of the Restriction Period by reason
of death or total permanent disability, then all shares granted
pursuant to paragraph 2 above and not theretofore freed of
restrictions shall promptly be freed of restrictions. In the
event such employment shall terminate prior to such time for any
other reason, then all such shares not theretofore freed of
restrictions shall be forfeited.

6. Other Benefits and Rights of Grantee. The Grantee shall be
entitled to the following benefits and rights.

6.1. Purchase Price. The purchase price for all of the
shares granted pursuant to paragraph 2 above shall be zero.

6.2. Rights of Stockholder. During the Restriction Period,
and except as otherwise provided in paragraph 3 above, the
Grantee shall have all the benefits and rights of a
registered stockholder, including, but not by way of
limitation, the right to vote the shares granted pursuant to
paragraph 2 above and to receive dividends thereon.

6.3. Certificates, Legends and Custody. On or after the
date stated above as the date of this award, the Corporation
shall issue a certificate representing the shares granted
pursuant to paragraph 2 above, which certificate shall be
registered in the name of the Grantee. Such certificate
shall bear a legend or legends referring to the terms,
conditions, and restrictions applicable to the aforesaid
award, which legend or legends shall in all other respects
be appropriate and desirable as determined by the
Corporation. Subject to paragraphs 4 and 5 above, such
certificate shall be retained in the custody of the
Corporation at all times during the Restriction Period.
Subject to paragraphs 4 and 5 above, and at the conclusion
of the Restriction Period, such certificate shall be
cancelled and a new certificate free of restrictions for the
amount of shares granted pursuant to paragraph 2 above
promptly shall be delivered to the Grantee. The Grantee
shall execute and deliver to the Corporation, promptly after
the beginning of the Restriction Period, a stock power,
endorsed in blank, relating to the certificate bearing a
legend or legends.

6.4. Income Recognition; Withholdings. The Grantee
recognizes that, under current provisions of federal income
tax law, he will recognize ordinary income at the conclusion
of the Restriction Period in an amount equal to the market
value of the shares freed from restrictions hereunder (based
on the mean between the high and low trading prices for a
share on the New York Stock Exchange composite tape on such
date). Prior to or simultaneously with delivery of the
certificate free of restrictions pursuant to paragraph 6.3
above, the Grantee shall provide the Corporation with funds
(or, in the discretion of the Corporation, with the
equivalent in shares of common stock of the Corporation of
such funds) necessary to discharge any applicable
withholding obligations.

7.1. Stock Split, Stock Dividend, or Extraordinary
Distribution. In the event the number of outstanding shares
of common stock of the Corporation is increased at any time
during the Restriction Period by a stock split, by
declaration by the Board of Directors of the Corporation of
a dividend payable only in shares of such stock, or by any
other extraordinary distribution of shares, the number of
shares granted pursuant to paragraph 2 above shall be
proportionately adjusted.

7.2. Organizational Changes. In the event a merger,
consolidation, reorganization, or other change in corporate
structure materially changes the terms or value of the
outstanding common stock of the Corporation, the number of
shares granted pursuant to paragraph 2 above shall be
adjusted in such manner as the Committee in its sole
discretion shall determine to be equitable and consistent
with the purposes of the Plan. Such determination shall be
conclusive for all purposes with respect to the grant made
in paragraph 2 above.

8. Execution, Delivery, and Performance of Agreement. Grantee
shall have no rights with respect to the grant made in paragraph
2 above unless and until such Grantee has executed this
Agreement in the space provided below and has delivered one
executed copy of same to the Corporation. Grantee likewise
shall have no rights with respect to the grant made in paragraph
2 above unless such Grantee has otherwise complied with all the
terms and conditions contained in this Agreement.

9. Plan to Govern. The grant made in paragraph 2 above and all
other provisions contained in this document shall be subject to
and interpreted in a manner consistent with the terms and
conditions of the Plan.

USG CORPORATION

By
Chairman of the Board of
Directors

ACCEPTED:

Grantee:
Date:

1995

ANNUAL MANAGEMENT INCENTIVE PROGRAM

USG CORPORATION

PURPOSE

To enhance USG Corporation's ability to attract, motivate, reward
and retain key employees of the Corporation and its operating
subsidiaries and to strengthen the existing mutuality of interest
between such key employees and the Corporation's stockholders by
offering such key employees, who discharge their accountabilities
in a manner which makes a measurable contribution to the
Corporation's earnings, incentive award opportunities.

INTRODUCTION

This Annual Management Incentive Program is in effect from
January 1, 1995 through December 31, 1995.

ELIGIBILITY

Individuals eligible for participation in this Program are those
officers and other key employees occupying management positions
having 775 or more points as determined by the Corporation's
position evaluation system. Employees who participate in any
other annual incentive program of the Corporation or any of its
subsidiaries are not eligible to participate in this Program.

GOALS

For the 1995 Annual Management Incentive Program, goal income
targets for USG Corporation, Subsidiaries and Profit Centers will
be determined by the Compensation and Organization Committee
after considering recommendations submitted from USG Corporation,
Operating Subsidiaries and Profit Centers respectively.
Additionally, Working Capital Management Targets will be
established. Profit Center goals will be established which are
consistent with Corporate and Operating Subsidiary goals. Except
in the case of a Named Executive Officer (as defined in the
Administrative Guidelines below), Profit Center goals may be
adjusted by the Chairman & CEO of USG Corporation if business
conditions or other significant unforeseen circumstances beyond
the control of the Profit Center have a major impact on
opportunity.

<PAGE>
AWARD VALUES

For the 1995 Annual Management Incentive Program, position par
values are based on level of accountability and are expressed as
a percent of approved position reference point (midpoint).
Resulting award opportunities represent a fully competitive
incentive opportunity for 100% (target) achievement of Corporate,
Operating Subsidiary and/or Profit Center goals:

POSITION PAR VALUE
USG CORPORATION
Chairman & CEO - USG Corporation 65% of Reference Point
President & COO - USG Corporation 55% of Reference Point

USG CORPORATION 50% Of Reference Point
Senior Vice President Worldwide Manufacturing & Technology
Senior Vice President & General Counsel
Senior Vice President & Chief Administrative Officer
Senior Vice President & Chief Financial Officer

GROUP VICE PRESIDENT NORTH AMERICAN GYPSUM;
PRESIDENT & CEO, U.S. GYPSUM COMPANY
GROUP VICE PRESIDENT WORLDWIDE CEILINGS & INTERNATIONAL;
PRESIDENT & CEO, USG INTERIORS, INC
VICE PRESIDENT, USG CORPORATION;
PRESIDENT & CEO, USG INTERNATIONAL, LTD.

USG CORPORATION & OPERATING SUBSIDIARIES 40% of Reference Point
OFFICERS AND MANAGERS
President & CEO, L&W Supply Corporation
President & CEO, CGC, Inc.
Executive Vice President & COO, U.S. Gypsum Company
Vice President & Treasurer, USG Corporation;
Vice President Finance, USG International, Ltd
Vice President & Controller, Chief Financial Officer
North American Gypsum Group, USG Corporation
Vice President Research

Executive Vice President, USG Interiors, Inc. 35% of Reference Point
Associate General Counsel, USG Corporation
Vice President Human Resources - Operations, USG Corporation

GENERAL MANAGERS (PROFIT CENTER HEADS)
Sales of $50 Million and over 30% of Reference Point
Sales Under $50 Million 25% of Reference Point

USG CORPORATION, OPERATING SUBSIDIARIES & PROFIT CENTERS
OFFICERS AND MANAGERS

Position Reference Point: $149,520 and Over 30% of Reference Point
Position Reference Point: $121,440 - $149,519 25% of Reference Point
Position Reference Point: $108,360 - $121,439 20% of Reference Point
Position Reference Point: $ 86,820 - $108,359 15% of Reference Point
Position Reference Point: Below $86,820 10% of Reference Point

AWARDS

Incentive awards for all participants in the 1995 Annual
Management Incentive Program will be reviewed and approved by the
Compensation and Organization Committee of the USG Corporation
Board of Directors.

For all participants, the annual incentive award opportunity is
the annualized position reference point (midpoint) in effect at
the beginning of the calendar year multiplied by the applicable
position par value percent.

Incentive awards for 1995 will be based on

- Goal income: (net sales less cost of sales and selling
and administrative expenses) based on the Corporation's
year-end financial statements.

- WORKING CAPITAL MANAGEMENT: average monthly Net Working
Capital (net accounts receivable plus FIFO inventory
minus accounts payable) as a percent of annual net
sales.

- Personal Performance (except in the case of the nine
(9) most senior executives whose awards are based
solely on achievement of financial results).

- Except in the case of a Named Executive Officer, other
appropriate performance measures as approved by the
Compensation and Organization Committee of the Board of
Directors.

1. For participants to qualify for the USG Corporation segment
of an award, USG Corporation must achieve 75% or higher of
the Corporation's goal income target. For Subsidiary and
Profit Center participants to qualify for the Subsidiary/
Profit Center segment of an incentive opportunity, the
respective Subsidiary or Profit Center must achieve 75% or
higher of its goal income target. The Compensation and
Organization Committee may eliminate awards to any
participant who fails to receive a personal performance
rating of "Achieved Expectations" (85) or better under the
Corporation's Performance Planning and Review system (PPR).

<PAGE>

2. Once the threshold qualifiers for an incentive award are
satisfied, basic incentive award amounts will be determined
by Corporate performance achievement which meets or exceeds
75% of the Corporate goal income or by Subsidiary or Profit
Center achievements which meet or exceed 75% of their
respective goal income targets, according to the following
schedule:

Goal Goal Income Adjustment Factor
Income For Corporate, Subsidiary or
Achievement Profit Center Performance

Below 75% 0%
75% 50%
80% 60%
90% 80%
100% 100%
110% 120%
120% 140%
140% 180%
150% 200%

3. Basic incentive award amounts are adjusted to the extent
that the percent of net working capital to net sales is
reduced from the 1994 actual level. Each 0.1 reduction of
the percentage will increase basic incentive awards by 2% of
par according to the following schedule:

Average Working Capital Percent of Net Sales
Reduction in Percentage Award

0.0 0%
0.1 2%
0.5 10%
1.0 20%
2.0 40%
3.0 60%
4.0 80%
5.0 100%

4. Except with respect to the nine (9) most senior executives,
including the Named Executive Officers, whose awards are
based solely on achievement of Goal Income and Working
Capital Management Targets, incentive awards based upon
achievement of Goal Income and adjusted for achievement of
Working Capital Management Targets will be further adjusted
based upon the eligible participants' individual Incentive
Performance Rating derived from the accomplishment of
incentive performance targets according to the following
schedule:
Individual Personal Performance
Incentive Rating Adjustment Factor

Distinguished 105.0
102.5
Excellent 100.0
97.5
Good 95.0

The maximum incentive award under this Program is 200% of par.

5. Basic incentive award opportunities and calculations of
awards for participants will be based on the achievement of
specific Corporate, Subsidiary and/or Profit Center goal
income targets as displayed below or, except with respect to
Named Executive Officers, as otherwise may be established
subject to approval of the Chairman and CEO:

Incentive Award
Participants Opportunity/Calculation

USG Corporation 33 1/3% USG Corporation Performance
33 1/3% North American Gypsum Performance
33 1/3% Worldwide Ceilings Performance

North American Gypsum

Group VP, North American Gypsum; 33 1/3% USG Corporation Performance
President & CEO, U.S. Gypsum Co 33 1/3% North American Gypsum
Performance
33 1/3% Worldwide Ceilings Performance

VP & Controller, CFO North American 25% USG Corporation Performance
Gypsum Group, USG Corporation 50% North American Gypsum Performance
25% Subsidiary Performance

General Mgr - IGD 20% North American Gypsum Performance
General Mgr - Materials Division 30% Subsidiary Performance
Profit Center Staff 50% Profit Center/Division Performance
VP & General Mgr, CGC, Inc
(Subject to subsidiary discretion)

President & CEO, CGC, Inc 20% USG Corporation Performance
President & General Mgr, YPSA 30% North American Gypsum Performance
U.S. Gypsum Staff 50% Subsidiary Performance
CGC, Inc Staff

Worldwide Ceilings

Group VP, 33 1/3% USG Corporation Performance
Worldwide Ceilings
& International; 33 1/3% North American Gypsum Performance
President & CEO, USG
Interiors, Inc 33 1/3% Worldwide Ceilings Performance
VP, USG Corporation;
President & CEO, USG
International, Ltd

VP Pacific Rim & 20% Worldwide Ceilings Performance
General Mgr, Gypsum Fiberboard 30% Subsidiary Performance
VP & Managing Director 50% Regional Performance

USG Interiors, Inc Staff 20% USG Corporation Performance
USG International, Ltd Staff 30% Worldwide Ceilings Performance
50% Subsidiary Performance

L&W Supply Corporation

President & CEO 25% USG Corporation Performance
50% North American Gypsum Performance
25% Subsidiary Performance

L&W Supply Corporation Staff 20% USG Corporation Performance
30% North American Gypsum Performance
50% Subsidiary Performance

6. SPECIAL AWARDS

In addition to the incentive opportunity provided by this
Program, a special award may be recommended for any
participant or non-participant, other than a Named Executive
Officer, who has made an extraordinary contribution to the
Corporation's welfare or earnings.

7. STRATEGIC TARGETS

In select cases, not including Named Executive Officers and
other Corporate Officers and Subsidiary CEOs, where the
participant can make an individual, measurable and
quantifiable contribution which will have significant impact
on the Corporation's financial performance and
profitability, up to 25% of the position par or opportunity
may be allocated to personal performance. Such allocations
require approval of the Chief Executive Officer and Chief
Operating Officer of USG Corporation at the beginning of the
Program year.

For Corporate, Subsidiary and Profit Center participants
with a 25% strategic award allocation, the Incentive Award
Opportunity/Calculation will be determined at the beginning
of the Program year.

The strategic award opportunity which is available for
personal performance will be adjusted to the extent that
actual performance exceeds or fails to meet the targeted
goal.

GENERAL PROVISIONS

1. The Compensation and Organization Committee of USG
Corporation's Board of Directors shall review and approve
the awards recommended for officers and other employees who
are eligible participants in the 1995 Annual Management
Incentive Program. The Compensation and Organization
Committee shall submit to the Board of Directors, for their
ratification, a report of the awards for all eligible
participants including corporate officers approved by the
Committee in accordance with the provisions of the Program.
2. The Compensation and Organization Committee shall have full
power to make the rules and regulations with respect to the
determination of achievement of goals and the distribution
of awards. No awards will be made until the Compensation
and Organization Committee has certified goal achievement
and applicable awards in writing.

3. The judgement of the Compensation and Organization Committee
in construing this Program or any provisions thereof, or in
making any decision hereunder, shall be final and conclusive
and binding upon all employees of the Corporation and its
subsidiaries whether or not selected as beneficiaries
hereunder, and their heirs, executors, personal
representatives and assigns.

4. Nothing herein contained shall limit or affect in any manner
or degree the normal and usual powers of management,
exercised by the officers and the Board of Directors or
committees thereof, to change the duties or the character of
employment of any employee of the Corporation or to remove
the individual from the employment of the Corporation at any
time, all of which rights and powers are expressly reserved.

5. No award will be paid to a Program participant who is not a
regular full-time employee in good standing at the end of
the calendar year to which the award applies; except an
award which would otherwise be payable based on goal
achievement may be recommended in the event of retirement,
disability or death or in the event the participant is
discharged without cause from the employment of the company
during the year.

6. The awards made to employees shall become a liability of the
Corporation or the appropriate subsidiary as of December 31,
1995 and all payments to be made hereunder will be made as
soon as practicable after said awards have been approved.

ADMINISTRATIVE GUIDELINES

1. Award values will be based on position reference points
(midpoints) in effect for each qualifying position at the
beginning of the year. Any change in duties, dimensions or
responsibilities of a current position resulting in a new
evaluation and an increase or decrease in reference points
will be applied for Incentive Program purposes on a prorata
basis with the respective reference point and par value to
apply for the actual number of full months of service at
each evaluation except for such a change with respect to a
Named Executive Officer, in which case any change in
reference points and par value, for any reason, shall not
become effective until January 1 of the following year.

2. As provided by the Program, no award is to be paid any
participant who is not a regular full-time employee in good
standing at the end of the calendar year to which the award
applies. However, in the event an eligible participant with
three (3) or more months of active service in the Program
year subsequently retires, becomes disabled or dies, or is
discharged from the employment of the Company without cause,
the participant (or beneficiary) will receive an award which
would otherwise be payable based on goal achievement,
prorated for the actual months of active service during the
year.

3. Employees participating in any other incentive or bonus
program of the parent Corporation or a Subsidiary who are
transferred during the year to a position covered by the
Management Incentive Compensation Program (other than a
Named Executive Officer) will be eligible to receive a
potential award prorated for actual full months of service
in the two positions with the respective incentive program
and par values to apply. For example, a Marketing Manager
promoted to Director, Marketing on August 1, will be
eligible to receive a prorata award for seven months based
on the Marketing Manager Plan provisions and values, and for
five months under the Annual Incentive Program provisions
and par values.

4. In the event of transfer of an employee (other than a Named
Executive Officer) from an assignment which does not qualify
for participation in any incentive or bonus plan to a
position covered by the 1995 Annual Management Incentive
Program, the employee is eligible to participate in the
Annual Incentive Program with any potential award prorated
for the actual months of service in the position covered by
the Program during the year. A minimum of three months of
service in the eligible position is required.

5. Participation during the current Program year for
individuals employed from outside the Corporation is
possible with any award to be prorated for actual full
months of service in the eligible position. A minimum of
three full months of service is required for award
consideration.

6. Exceptions to established administrative guidelines can only
be made by the Compensation and Organization Committee and
only with respect to participants other than Named Executive
Officers.

7. For purposes of this Program, a "NAMED EXECUTIVE OFFICER"
will include any executive officer who is deemed a "named
executive officer" for 1995 under Item 402 (a)(3) of
Regulation S-K under the Securities Exchange Act of 1934 and
was employed by the Corporation or a Subsidiary on the last
day of the year.

<PAGE>

EXHIBIT 11

COMPUTATION OF EARNINGS/(LOSS) PER COMMON SHARE
(Dollar amounts in millions except per share data)

<TABLE>
Primary Earnings/(Loss) Per Share of Common Stock:
<CAPTION>
May 7
Years ended through
December 31, December 31,
1995 1994 1993

<S> <C> <C> <C>
Average common shares outstanding 45,120,120 43,243,497 37,157,672

Loss before extraordinary loss $ (32) $ (92) $ (108)

Primary loss per common share
before extraordinary loss (.71) (2.14) (2.90)

Extraordinary loss, net of taxes - - (21)

Primary extraordinary loss per
common share - - (0.56)

Net loss available to common stockholders (32) (92) (129)

Primary net loss per common share (.71) (2.14) (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 for the period of January 1 through May 6, 1993 is omitted because, as a result of
the Restructuring and implementation of fresh start accounting, per share data is not meaningful.
</TABLE>

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION

Results of Operations
<TABLE>
Consolidated Results (dollars in millions):
<CAPTION>
Years ended December 31,
1995 1994 1993*

<S> <C> <C> <C>
Net Sales $ 2,444 $2,290 $ 1,916

Gross Profit 603 517 372
% of net sales 24.7% 22.6% 19.4%
Selling and administrative expenses 244 244 220
% of net sales 10.0% 10.7% 11.5%
Amortization of excess reorganization value 169 169 113
Operating Profit 190 104 39

Calculation of EBITDA:
Operating profit 190 104 39
Amortization of excess reorganization value 169 169 113
Depreciation and depletion 58 53 54
Other - (1) 12
EBITDA 417 325 218
% of net sales 17.1% 14.2% 11.4%

* Due to the May 6, 1993, 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 "Note 6. Financial Restructuring" for
information on the Restructuring and implementation of fresh start accounting.) Applicable
accounting rules require separate reporting of financial results for the restructured company
and the predecessor company. However, information for 1993 is presented in this discussion
on an annual basis to facilitate a meaningful year-to-year comparison.
</TABLE>

Net sales of $2,444 million in 1995 represented the fourth consecutive
year of improved sales and an increase of $154 million, or 6.7%, over 1994.
Net sales in 1994 were up 19.5% over 1993. These increases reflect improved
sales for each of USG Corporation's core businesses, North American Gypsum and
Worldwide Ceilings. Wallboard selling prices for United States Gypsum Company
increased for the third consecutive year in 1995, while wallboard volume was
down slightly from the record level set in 1994. Improved ceiling tile sales
in 1995 reflect record shipments, surpassing the previous record set in 1994,
and higher selling prices.

Gross profit as a percentage of net sales rose to 24.7% in 1995 from 22.6%
in 1994 and 19.4% in 1993 due to higher selling prices for the major product
lines, partially offset by increased gypsum wallboard unit manufacturing
costs. In addition, the 1994 gross profit margin was adversely affected by a
$30 million pretax ($17 million after-tax) charge to cost of products sold
recorded by U.S. Gypsum primarily to cover the cash portion of two asbestos
litigation settlements. (Approximately $24 million of this amount was paid in
1994 and 1995, with the remainder payable in 1996. See "Note 21. Litigation"
for information on these settlements.)

Excess reorganization value, which was established in connection with USG's
financial restructuring in May 1993 (the "Restructuring"), is currently being
amortized over a five-year period. This noncash amortization, which has no
tax impact, reduced operating profit by $169 million in each of 1995 and 1994
and by $113 million in 1993.

Because of the continuing amortization of excess reorganization value, the
Corporation reports EBITDA (earnings before interest, taxes, depreciation,
depletion, amortization and items classified as other (income)/expense). For
1993, EBITDA also excludes the impact of reorganization and extraordinary
items and changes in accounting principles. The Corporation believes EBITDA
helps to facilitate: (i) comparisons of current and historical results (ii)
the monitoring of covenants related to certain long-term debt and (iii) an
understanding of cash flow generated from operations that is available for
taxes, debt service and capital expenditures. EBITDA amounted to $417 million
in 1995, an increase of $92 million, or 28.3%, versus 1994. For 1994, EBITDA
amounted to $325 million, an increase of $107 million, or 49.1%, over 1993.
(Note: EBITDA should not be considered as an alternative to net earnings as an
indicator of operating performance or to cash flows as a measure of overall
liquidity.)

<PAGE>
Construction Markets

Based on preliminary data issued by the U.S. Bureau of the Census, the
Corporation estimates that U.S. housing starts were approximately 1.350
million units in 1995, down 7% from 1994. However, housing starts improved in
the second half of 1995, increasing about 11% as compared with the first half
of the year. Housing starts of 1.457 million units in 1994 represented a 13%
increase over the 1993 level of 1.288 million units. U.S. nonresidential
construction grew 10% over 1994, as measured in contracts awarded. In
management's estimation, this should have a favorable impact on USG's 1996
sales, because finishing of nonresidential interiors follows contract awards
by as much as a year. Repair and remodel activity continued its upward trend
in 1995. Demand for wallboard generated by this market increased 5% for the
industry and is expected to grow at about the same pace in 1996.

<TABLE>
Core Business Results (dollars in millions):
<CAPTION>
Net Sales EBITDA
Years ended December 31, Years ended December 31,
1995 1994 1993 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
North American Gypsum:
U.S. Gypsum Company $ 1,309 $ 1,209 $ 970 $ 327 $ 248 $ 148
L&W Supply Corporation 753 659 528 26 15 7
CGC Inc. (gypsum division) 102 110 91 11 15 9
Other subsidiaries 75 90 77 22 28 23
Eliminations (315) (288) (223) - (2) -
Total 1,924 1,780 1,443 386 304 187

Worldwide Ceilings:
USG Interiors, Inc. 385 400 360 58 53 48
USG International 235 202 185 5 6 4
CGC Inc. (interiors
division) 28 29 30 4 3 4
Eliminations (39) (37) (35) - - -
Total 609 594 540 67 62 56

Corporate - - - (36) (41) (25)
Eliminations (89) (84) (67) - - -
Total USG Corporation 2,444 2,290 1,916 417 325 218
</TABLE>

North American Gypsum

Net sales of $1,924 million in 1995 for North American Gypsum represented
an increase of $144 million, or 8.1%, and EBITDA of $386 million improved $82
million, or 27.0%, compared with 1994. For 1994, net sales of $1,780 million
increased $337 million, or 23.4%, while EBITDA of $304 million, which includes
the impact of the aforementioned $30 million charge associated with asbestos
litigation settlements, increased $117 million, or 62.6%, over 1993.

Results improved in 1995 for U.S. Gypsum compared to 1994 primarily due to
higher wallboard selling prices, partially offset by higher unit manufacturing
costs and slightly lower wallboard volume. In addition, sales of nonwallboard
products such as joint compound and cement board also increased. U.S.
Gypsum's average wallboard selling price in 1995 was $110.44 per thousand
square feet, an increase of 10.4% compared with the 1994 average price of
$100.08, which was up 26.6% over the 1993 average price of $79.07. Higher
manufacturing costs reflect increases in the cost of purchased recycled paper,
the primary raw material of wallboard paper. Compared with 1994, higher
recycled paper costs resulted in an aggregate increase of approximately $28
million in cost of products sold. Shipments of U.S. Gypsum's wallboard
totaled 7.6 billion square feet in 1995, compared with 7.7 billion square feet
in 1994 and 7.3 billion square feet in 1993. U.S. Gypsum's plants operated at
92% of capacity in 1995, compared with the estimated average rate of 91% for
the U.S. industry.

In 1995, L&W Supply Corporation achieved the highest level of sales in its
history, reflecting record sales of gypsum wallboard and nonwallboard
products. As of December 31, 1995, L&W Supply conducted its business out of
156 centers, an increase of 17 compared with December 31, 1994. On a same-
center basis, 1995 sales for L&W Supply also surpassed the previous record set
in 1994. EBITDA for L&W Supply improved significantly in each of the past two
years as a result of gross profit improvements for all of its product lines.

CGC Inc.'s gypsum business experienced lower net sales and EBITDA in 1995,
as wallboard results were adversely affected by the lowest level of housing
starts in eastern Canada in 35 years and the higher cost of wallboard paper.
Results in 1994 benefited from higher wallboard prices and increased shipments
to the United States as compared with 1993.

Worldwide Ceilings

Net sales in 1995 for Worldwide Ceilings rose $15 million, or 2.5%, to $609
million, while EBITDA of $67 million increased $5 million, or 8.1%, compared
with 1994. (Excluding results for the domestic floors division, which was
divested in December 1994, Worldwide Ceilings' 1995 net sales improved $45
million, or 8.0%, and EBITDA increased $5 million, or 8.1%, versus 1994.) For
1994, net sales of $594 million increased $54 million, or 10.0%, and EBITDA
totaled $62 million, an increase of $6 million, or 10.7%, over 1993.

For USG Interiors, Inc., net sales in 1995 and 1994 benefited from record
shipments and higher selling prices for ceiling tile. The record volume was
largely the result of increased demand from the retail and export markets.
EBITDA for USG Interiors continued to improve in 1995, reflecting the increase
in selling prices.

USG International also recorded increased net sales in 1995 and 1994,
primarily due to growing international markets, especially in the Asia/Pacific
region. However, EBITDA declined in 1995 primarily reflecting competitive
market conditions in Europe and write-offs of bad debts and obsolete equipment
and inventory during the fourth quarter of 1995.

Other Consolidated Earnings Information

Interest expense continued to decline as a result of debt repayment and
refinancing activities in 1995 and 1994. Interest expense amounted to $99
million in 1995, down $50 million, or 33.6%, from the 1994 level of $149
million, which was down $29 million, or 16.3%, from $178 million recorded in
1993. For 1994, interest expense included a $16 million pretax ($9 million
after-tax) noncash charge for the write-off of reorganization debt discount
primarily in conjunction with the Corporation's accelerated payment of bank
term loans. For 1993, interest expense included $46 million of interest that
was forgiven or converted to equity as a result of the Restructuring.

In the fourth quarter of 1995, the Corporation recorded a $30 million
pretax ($24 million after-tax) charge in connection with the planned sale of
its insulation manufacturing business in the United States and the closure of
its insulation plant in Canada. Included in this charge is a $15 million
noncash (no tax impact) write-off of excess reorganization value associated
with these businesses. The remainder of the charge primarily reflects a
writedown of the assets of these businesses to their net realizable value.
The total charge is reflected in other (income)/expense, net in the
Consolidated Statement of Earnings.

The Corporation's income tax expense is computed based on pretax earnings
excluding the noncash amortization of excess reorganization value, which is
not deductible for federal income tax purposes. In 1995, income tax expense
amounted to $97 million, compared with $54 million in 1994 and $46 million in
1993. The Corporation's effective tax rates for 1995 and 1994 were 149.0% and
negative 142.1%, respectively. Excluding the amortization of excess
reorganization value and, in 1995, the aforementioned $15 million write-off of
excess reorganization value, the Corporation's 1995 and 1994 effective tax
rates were 39.0% and 41.2%, respectively. See "Note 11. Taxes on Income and
Deferred Income Taxes" for additional information on income taxes.

The Corporation recorded a net loss of $32 million in 1995. However, this
loss included: (i) the noncash amortization of excess reorganization value of
$169 million (ii) the noncash amortization of reorganization debt discount of
$4 million included in interest expense and (iii) the $24 million after-tax
writedown of the insulation business. Together, these items reduced 1995 net
earnings by $197 million, or $4.38 per common share.

A net loss of $92 million in 1994 included: (i) noncash amortizations of
excess reorganization value and reorganization debt discount of $169 million
and $12 million, respectively (ii) the noncash after-tax write-off of
reorganization debt discount amounting to $9 million primarily associated with
bank term loans and (iii) the after-tax charge of $17 million associated with
asbestos litigation settlements. Together, these items reduced 1994 net
earnings by $207 million, or $4.81 per common share.

A net loss of $129 million was recorded in the period of May 7 through
December 31, 1993, after the noncash amortizations of excess reorganization
value and reorganization debt discount of $113 million and $8 million,
respectively, and an after-tax extraordinary loss of $21 million. The
extraordinary loss represented the write-off of reorganization debt discount
associated with debt issues that were prepaid, redeemed or purchased in
connection with a refinancing plan implemented in the first quarter of 1994.
See "Note 3. Debt Refinancings" for information on the refinancing plan.

Net earnings of $1,434 million in the period of January 1 through May 6,
1993, included a reorganization items gain of $709 million, an after-tax
extraordinary gain of $944 million and an after-tax charge of $150 million
related to changes in accounting principles. The reorganization items gain
primarily reflected fresh start accounting adjustments. The extraordinary gain
primarily reflected a gain on the exchange of subordinated debt for common
stock in connection with the Restructuring. See "Note 6. Financial
Restructuring" for additional information on these Restructuring-related
issues. In the first quarter of 1993, the Corporation recorded a one-time
after-tax net charge of $150 million representing the cumulative impact of the
adoption of Statement of Financial Accounting Standards ("SFAS") No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," and
SFAS No. 109, "Accounting for Income Taxes." See "Note 11. Taxes on Income
and Deferred Income Taxes" and "Note 16. Postretirement Benefits" for
information related to these accounting changes.

Liquidity and Capital Resources

The Corporation, which has significantly strengthened its liquidity and
capital resources since the Restructuring in 1993, is currently pursuing a
strategy of reducing debt and growing its core gypsum and ceilings businesses
through a balanced application of free cash flow between debt reduction and
capital expenditures, with an objective of achieving investment grade status.

As a means of enhancing its ability to implement this strategy, the
Corporation completed a refinancing in the third quarter of 1995 that
included: (i) the establishment of a new seven-year revolving credit facility
(the "Revolving Credit Facility") to replace an existing bank credit agreement
that was due to expire in 2000 (ii) the sale of $150 million aggregate
principal amount of 8.5% senior notes due 2005 and (iii) the redemption of the
Corporation's remaining $268 million principal amount of 10.25% senior notes'
due 2002 using a combination of proceeds from the sale of the 8.5% senior
notes, borrowings under the Revolving Credit Facility and cash on hand. As a
result of the refinancing and other debt repayments in 1995, the Corporation
reduced its principal amount of total debt to $926 million as of December 31,
1995, from $1,149 million as of December 31, 1994. See "Note 3. Debt
Refinancings" and "Note 7. Indebtedness" for additional information on the
Revolving Credit Facility.

In the fourth quarter of 1995, the Corporation filed a shelf registration
statement with the Securities and Exchange Commission allowing the Corporation
to offer from time to time: (i) debt securities consisting of notes,
debentures or other evidences of indebtedness in one or more series (ii)
shares of $1.00 par value preferred stock in one or more series (iii) shares
of $0.10 par value common stock or (iv) warrants to purchase shares of common
stock (collectively, the "Offered Securities"), all having an aggregate
initial offering price not to exceed $300 million. The Offered Securities may
be offered separately or as units with other Offered Securities. The debt
securities may be (i) senior or subordinated or (ii) secured or unsecured.
The Corporation intends to use the net proceeds from the sale of the Offered
Securities for general corporate purposes that may include the repayment of
existing indebtedness and the financing of capital expenditures and
acquisitions. The shelf registration was declared effective by the Securities
and Exchange Commission on January 3, 1996. As of the filing date of the
Corporation's 1995 Annual Report on Form 10-K, no securities had been issued
pursuant to this registration.

Substantial capital investments to reduce costs and expand capacity were
made at North American Gypsum plants in 1995. Cost-reduction projects
included the installation of stock-cleaning equipment to utilize lower grades
of recycled paper, continued implementation of technology that lowers
wallboard weight, and additional use of synthetic gypsum at manufacturing
facilities at which it is more economical than natural sources of gypsum rock.
Projects completed in 1995 to enhance manufacturing efficiency increased
wallboard capacity by approximately 600 million square feet. In the Worldwide
Ceilings business, a $45 million expansion under way at USG Interiors' ceiling
tile plant in Greenville, Miss., is scheduled for completion in 1996. In
1995, capital expenditures for the Corporation amounted to $147 million
compared with $64 million in 1994 and $41 million in 1993. As of December 31,
1995, capital expenditure commitments for the replacement, modernization and
expansion of operations amounted to $68 million compared with $61 million as
of December 31, 1994. The Corporation's capital investment plans for the next
several years contemplate spending approximately one-half of its free cash
flow on projects that provide favorable growth and cost-reduction
opportunities. In addition, the Corporation periodically evaluates possible
acquisitions or combinations involving other businesses or companies in
businesses and markets related to its current operations. The Corporation
believes that its available liquidity would be generally adequate to support
most opportunities and that it has access to additional financial resources to
take further advantage of other opportunities.

As of December 31, 1995, working capital (current assets less current
liabilities) amounted to $108 million, and the ratio of current assets to
current liabilities was 1.28 to 1. As of December 31, 1994, working capital
amounted to $228 million, and the ratio of current assets to current
liabilities was 1.55 to 1. In 1995, cash and cash equivalents decreased $127
million, or 64.5%, to $70 million, primarily because of debt repayments.
Receivables (net of reserves) decreased $24 million, or 8.9%, to $246 million;
inventories increased $2 million, or 1.2%, to $175 million; and accounts
payable increased $8 million, or 6.6%, to $130 million.

<PAGE>

<TABLE>
USG CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(Dollars in millions, except per share data)

<CAPTION>
May 7 | January 1
Years ended through | through
December 31, Dec. 31, | May 6,
1995 1994 1993 | 1993

Per share information for the period January 1 through May 6, 1993, is omitted because, as a result of
the Restructuring and implementation of fresh start accounting, it is not meaningful.

The notes to financial statements are an integral part of this statement.
</TABLE>

<PAGE>

<TABLE>
USG CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in millions)

As of December 31,
1995 1994

<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents
(primarily time deposits) $ 70 $ 197
Receivables (net of reserves
of $14 and $14) 246 270
Inventories 175 173
Total current assets 491 640
Property, Plant and Equipment, Net 842 755
Excess Reorganization Value
(net of accumulated amortization
of $466 and $282) 379 561
Other Assets 178 168
Total assets 1,890 2,124

Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable 130 122
Accrued expenses 190 210
Notes payable 7 1
Long-term debt maturing within
one year 35 44
Taxes on income 21 35
Total current liabilities 383 412
Long-Term Debt 865 1,077
Deferred Income Taxes 185 179
Other Liabilities 494 464
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 45,262,539 and 45,083,211 shares
(after deducting 33,988 and 33,988 shares
held in treasury) 5 5
Capital received in excess of par value 223 221
Deferred currency translation (6) (13)
Reinvested earnings/(deficit) (259) (221)
Total stockholders' equity/(deficit) (37) (8)
Total liabilities and stockholders' equity 1,890 2,124

The notes to financial statements are an integral part of this statement.
</TABLE>

<PAGE>

<TABLE>
USG CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)

The notes to financial statements are an integral part of this statement.
</TABLE>

<PAGE>

USG CORPORATION
NOTES TO FINANCIAL STATEMENTS

Note 1. 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. 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. Certain amounts
in the prior years' financial statements have been reclassified to conform
with the 1995 presentation.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and
expenses. Actual results could differ from those estimates.

Excess reorganization value, which was recorded as a result of the
implementation of fresh start accounting, is currently being amortized through
April 1998. The Corporation continues to evaluate whether events and
circumstances have occurred which indicate that 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 "Note 6. Financial
Restructuring" for more information on the implementation of fresh start
accounting.

The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 121 on accounting for the
impairment and/or disposal of long-lived assets, certain identifiable
intangibles and goodwill related to assets to be held and used. As required,
the Corporation will adopt SFAS No. 121 on January 1, 1996. At this time, it
is the opinion of management that the adoption of this statement will not have
any impact on the results of operations or the consolidated financial position
of the Corporation.

Note 2. Writedown of Assets

In the fourth quarter of 1995, the Corporation recorded a $30 million pretax
($24 million after-tax) charge in connection with the planned sale of its
insulation manufacturing business in the United States and the closure of its
insulation plant in Canada. Included in this charge is a $15 million noncash
(no tax impact) write-off of excess reorganization value associated with these
businesses. The remainder of the charge primarily reflects a writedown of the
assets of these businesses to their net realizable value. The total charge is
reflected in other (income)/expense, net in the Consolidated Statement of
Earnings.

Note 3. Debt Refinancings

In the third quarter of 1995, the Corporation completed a refinancing that
included: (i) the establishment of a new seven-year revolving credit facility
(the "Revolving Credit Facility") to replace an existing bank credit agreement
(the "Old Credit Agreement") that was due to expire in 2000 (ii) the sale of
$150 million aggregate principal amount of 8.5% senior notes due 2005 and
(iii) the redemption of the Corporation's remaining $268 million principal
amount of 10.25% senior notes due 2002 using a combination of proceeds from
the sale of the 8.5% senior notes, borrowings under the Revolving Credit
Facility and cash on hand. Under the Revolving Credit Facility, the
Corporation can borrow up to $500 million, including a $125 million letter of
credit subfacility from a syndicate of banks, which are many of the same banks
that had been lenders under the Old Credit Agreement. The Revolving Credit
Facility provides USG greater financial flexibility as a result of: (i) less-
restrictive covenants (ii) the letter of credit subfacility (iii) an
expiration in 2002 with no required amortization prior to maturity and (iv) a
simplification of the Corporation's capital structure through the elimination
of subsidiary guarantees on any of its senior indebtedness.

In the first quarter of 1994, the Corporation implemented a refinancing plan
that included: (i) a public offering of 14,375,000 shares of common stock (the
"Equity Offering"), of which 7,900,000 shares, yielding net proceeds to the
Corporation of $224 million, were issued by the Corporation and 6,475,000 were
sold by Water Street Corporate Recovery Fund I, L.P. ("Water Street"), the
Corporation's largest stockholder at that time (ii) the issuance of $150
million of senior notes due 2001 to certain institutional investors in
exchange for $30 million aggregate principal amount of its outstanding senior
notes due 1996, $35 million aggregate principal amount of its outstanding
senior notes due 1997 and $85 million in cash and (iii) an amendment of the
Old Credit Agreement. In the fourth quarter of 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 prepaid, redeemed or purchased in 1994 in
connection with this refinancing plan.

Note 4. Shelf Registration

Note 5. Accounts Receivable Facility

In the fourth quarter of 1994, the Corporation entered into an accounts
receivable facility (the "Receivables Facility") in which USG Funding
Corporation, a special-purpose subsidiary of the Corporation formed under
Delaware law, entered into agreements with U.S. Gypsum and USG Interiors.
These agreements provide that USG Funding will purchase trade receivables
(excluding intercompany receivables owed by L&W Supply) of U.S. Gypsum and USG
Interiors as generated, in a transaction designed to be a "true sale" under
applicable law. USG Funding is a party to a Master Trust arrangement (the
"Master Trust") under which the purchased receivables are then transferred to
Chemical Bank as Trustee to be held for the benefit of certificate holders in
such trust. A residual interest in the Master Trust is owned by USG Funding
through subordinated certificates. Under a supplement to the Master Trust,
certificates representing an ownership interest in the Master Trust of up to
$130 million have been issued to Citicorp Securities, Inc. Debt issued under
the Receivables Facility will have a final maturity in 2004 but may be prepaid
at any time. The interest rate on such debt is fixed at 8.2% through a long-
term interest rate swap. Pursuant to the applicable reserve and eligibility
requirements, the maximum amount of debt issuable under the Receivables
Facility as of December 31, 1995 and 1994 (including $80 million outstanding
as of each date) was $98 million and $103 million, respectively. Under the
foregoing agreements and related documentation, USG Funding is a separate
corporate entity with its own separate creditors that will be entitled to be
satisfied out of USG Funding's assets prior to distribution of any value to
its shareholder.

As of December 31, 1995 and 1994, the outstanding balance of receivables sold
to USG Funding and held under the Master Trust was $142 million and $151
million, respectively, and debt outstanding under the Receivables Facility was
$80 million as of each date. Receivables and debt outstanding in connection
with the Receivables Facility remain in receivables and long-term debt,
respectively, on the Corporation's Consolidated Balance Sheet.

Note 6. 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 United States bankruptcy law (the "Prepackaged Plan").
In accordance with the terms of the Prepackaged Plan, $1.4 billion of debt and
accrued interest was converted into equity, interest expense was significantly
reduced, and the maturities of a substantial portion of the Corporation's
remaining debt were extended. 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 as of May 6, 1993. Excess
reorganization value, the portion of the reorganization value not attributable
to specific assets, amounted to $851 million and is currently being amortized
over a five-year period, effective May 7, 1993. The Corporation recorded a
one-time reorganization items gain of $709 million in the period of January 1
through May 6, 1993, which primarily reflected the recording of excess
reorganization value. The Corporation also recorded a one-time after-tax
extraordinary gain of $944 million in the period of January 1 through May 6,
1993, primarily reflecting gains of $477 million on the exchange of senior
subordinated debentures for stock and $456 million on the exchange of junior
subordinated debentures for stock and warrants. Due to the Restructuring and
implementation of fresh start accounting, financial statements subsequent to
May 6, 1993, are not comparable to financial statements prior to that date.
Accordingly, such information for 1993 is presented in separate columns in the
financial statements and notes thereto.

On a pro forma basis, if the consummation of the Restructuring, including the
implementation of fresh start accounting, had occurred on January 1, 1993, the
Corporation would have recorded a consolidated loss before extraordinary gain
and changes in accounting principles of $175 million for the year ended
December 31, 1993. This loss includes pro forma adjustments totaling $707
million, primarily reflecting the reversal of the reorganization items gain,
which would have been recorded in 1992 had the Restructuring occurred on
January 1, 1993.

<PAGE>

Note 7. Indebtedness

<TABLE>
Total debt, including currently maturing debt, consisted of the following
(dollars in millions):
<CAPTION>
As of December 31,
1995 1994
<S> <C> <C>
Secured Debt:
Revolving Credit Facility due 2002 $ 260 $ -
Receivables Facility due 2003 and 2004 80 80
Bank term loans, installments due 1997 through 2000 - 283
Senior notes and debentures:
8% senior notes due 1996 28 28
8% senior notes due 1997 41 41
9.25% senior notes due 2001 150 150
10.25% senior notes due 2002 - 298
7.875% sinking fund debentures due 2004 22 33
8.5% senior notes due 2005 150 -
8.75% sinking fund debentures due 2017 140 190
Other secured debt, average interest rate 7.6% and 9.4%,
varying payments through 2005 14 7

Unsecured Debt:
Industrial revenue bonds, 5.9% ranging to 8.0%,
due through 2020 41 39
Total principal amount of debt 926 1,149
Less unamortized reorganization discount (19) (27)
Total carrying amount of debt 907 1,122

</TABLE>

On July 27, 1995, the Corporation made effective a seven-year $500 million
secured Revolving Credit Facility, which includes a $125 million letter of
credit subfacility, with a syndicate of banks under a credit agreement (the
"New Credit Agreement"). The Revolving Credit Facility will not require
amortization prior to maturity in 2002 and is secured by a pledge of the
outstanding capital stock of the Corporation's major domestic subsidiaries,
including U.S. Gypsum, USG Interiors, L&W Supply and USG Foreign Investments,
Ltd. However, security will be permanently released at such time as the
Corporation's senior public debt is rated investment grade.

The New Credit Agreement contains material restrictions on the operation of
the Corporation's business, including, without limitation, covenants
pertaining to: (i) liens (ii) sale and leaseback transactions (iii)
investments, provided that this covenant would no longer apply once the
Corporation's senior public debt rating is investment grade (iv) mergers,
consolidations and sales of assets with respect to the Corporation and major
subsidiaries (v) acquisitions of businesses not related to the building
materials industry (vi) dividends, distributions and repurchases of stock and
subordinated debt, provided that this covenant would no longer apply once the
Corporation's senior public debt rating is investment grade (vii) use of
proceeds, provided that the use of proceeds arising from the issuance of
additional debt and equity will be at the Corporation's discretion (viii) debt
or guarantees thereof (ix) restrictions in other agreements on the ability of
subsidiaries to declare and pay dividends and (x) financial covenants or
events of default in other debt agreements that are more restrictive than
those contained in the New Credit Agreement. The negative covenants contain
certain exceptions to the restrictions imposed upon the operation of the
Corporation's business.

As of December 31, 1995, outstanding revolving loans totaled $260 million
and letters of credit issued and outstanding amounted to $52 million, leaving
the Corporation with $188 million of unused and available credit under the
Revolving Credit Facility. The revolving loans bear interest at the London
Interbank Offered Rate ("LIBOR") as determined from time to time plus an
applicable spread based on the Corporation's net debt to EBITDA ratio (as
defined in the New Credit Agreement) for the preceding four quarters. As of
December 31, 1995, the applicable spread was .75%. The average rate of
interest on the revolving loans was 6.8% during the period of July 27 through
December 31, 1995. See "Note 8. Financial Instruments and Risk Management"
for information on instruments used by the Corporation to manage the impact of
interest rate changes on LIBOR-based bank debt.

The average rate of interest on the bank term loans under the Old Credit
Agreement was 8.2% in the period of January 1 through July 26, 1995, and 6.4%
in the year ended December 31, 1994.

The weighted average interest rate on outstanding short-term borrowings was
6.2% and 9.2% as of December 31, 1995 and 1994, respectively.

The fair market value of total debt outstanding was $928 million and $1,109
million as of December 31, 1995 and 1994, respectively, based on indicative
bond prices as of those dates, excluding other secured debt, the fair market
value of which was not practicable to estimate.

As of December 31, 1995, aggregate scheduled maturities of long-term debt,
excluding amounts classified as current liabilities, were $42 million, zero,
$3 million and $4 million for the years 1997 through 2000, respectively.

<PAGE>

Note 8. Financial Instruments and Risk Management

The Corporation has limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to
manage well-defined interest rate and energy cost risks as well as occasional
foreign currency exchange exposure. The following table presents the carrying
amounts and estimated fair value of theCorporation's derivative portfolio
(dollars in millions):

<TABLE>

<CAPTION>
As of December 31,
1995 1994
<S> <C> <C>
Interest Rate Contracts:
Notional amount $ 305 $ 545
Carrying amount 3 5
Fair value (21) 8

Energy Price Swaps:
Notional amount 33 23
Carrying amount - -
Fair value 2 (1)

</TABLE>

The amounts reported as fair value represent the market value as obtained
from broker quotations. The negative fair values are estimates of the amounts
the Corporation would need to pay as of December 31, 1995 and 1994, to cancel
the contracts or transfer them to other parties.

The Corporation is exposed to credit losses in the event of nonperformance
by the counterparties on all its derivative contracts but has no off-balance-
sheet credit risk of accounting loss. All counterparties have investment
grade credit standing; accordingly, the Corporation anticipates that these
counterparties will be able to satisfy fully their obligations under the
contracts. The Corporation does not obtain collateral or other security to
support financial instruments subject to credit risk but monitors the credit
standing of counterparties.

Interest Rate Risk Management

The Corporation enters into swap agreements and purchases interest rate
caps to manage the impact of interest rate changes on LIBOR-based bank debt.
As of December 31, 1995, the Corporation owned interest rate caps that cap the
Corporation's expected LIBOR-based interest payments on $100 million notional
principal at 5.0% for 1995, 7.0% for 1996 and 6.7% for 1997. The Corporation
also entered into various interest rate swap agreements whereby the
Corporation pays a fixed rate in exchange for LIBOR. As of December 31, 1995,
the Corporation has agreements in place to pay 7.1% in exchange for LIBOR on
$125 million notional principal for the years 1995 through 2000 and on $50
million notional principal for 2001 and 2002. In addition, the Corporation
has entered into $80 million of interest rate swap agreements to hedge its
Receivables Facility on which the interest payments are based on commercial
paper rates. Under these agreements, the Corporation pays a fixed rate of
8.2% in exchange for the monthly commercial paper rate due on the Receivables
Facility.

As of December 31, 1994, the Corporation owned interest rate caps which
capped the Corporation's expected LIBOR-based bank debt interest payments at
5.2% for 1995 ($250 million notional principal), 7.0% for 1996 ($120 million
notional principal) and 7.0% for 1997 ($75 million notional principal).
Additionally, as of December 31, 1994, the Corporation had $100 million of
interest rate swap agreements to hedge its Receivables Facility.

Premiums paid for purchased interest rate cap agreements are amortized to
interest expense over the term of the caps. Unamortized premiums are included
in other assets on the Consolidated Balance Sheet. Amounts receivable under
cap agreements and receivables or payables under swap agreements are accrued
as an increase or decrease to interest expense as appropriate.

Energy Cost Risk Management

The Corporation uses energy price swap agreements to hedge anticipated
purchases of fuel to be utilized in the manufacturing process for gypsum
wallboard and ceiling tile. Under these swap agreements, the Corporation
receives or makes payments based on the differential between a specified price
and the actual closing price for the current month's energy price contract.
As of December 31, 1995 and 1994, the Corporation had over-the-counter swap
agreements to exchange monthly payments on notional amounts of energy
amounting to $33 million and $23 million, respectively, all extending one year
or less.

Upon settlement of energy price contracts, the resulting gain or loss is
included in cost of products sold, along with the actual spot energy cost of
the corresponding underlying hedged transaction, the combination of which
amounts to the predetermined specified contract price.

Foreign Exchange Risk Management

The Corporation had no foreign currency exchange contracts as of December
31, 1995 and 1994.

Note 9. Cumulative Effect of Changes in Accounting Principles

A one-time after-tax charge of $150 million was recorded in the first
quarter of 1993. This represented the adoption of 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 "Note 16. Postretirement Benefits" and "Note 11.
Taxes on Income and Deferred Income Taxes" for information on the adoption of
these standards. Neither of these standards impacts cash flow.

Note 10. Research and Development

Research and development expenditures are charged to earnings as incurred
and amounted to $18 million and $17 million in the years ended December 31,
1995 and 1994, respectively; $10 million in the period of May 7 through
December 31, 1993; and $4 million in the period of January 1 through May 6,
1993.

<PAGE>

Note 11. Taxes on Income and Deferred Income Taxes

<TABLE>
Earnings/(loss) before taxes on income, extraordinary items and changes in
accounting principles consisted of the following (dollars in millions):

</TABLE>

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

<PAGE>

<TABLE>
The difference between the actual provision for taxes on income and the
provision for taxes on income at the U.S. federal statutory rate (35% for the
years ended December 31, 1995 and 1994, and the period of May 7 through
December 31, 1993, and 34% for the period of January 1 through May 6, 1993) is
as follows (dollars in millions):

<PAGE>

<TABLE>
Significant components of the Corporation's deferred tax
(assets)/liabilities are as follows (dollars in millions):

<CAPTION>
As of December 31,
1995 1994
<S> <C> <C>
Property, plant and equipment $ 160 $ 164
Debt discount 8 11
Deferred tax liabilities 168 175

Pension and postretirement benefits (92) (94)
Reserves not deductible until paid (86) (71)
Other 3 (6)
Deferred tax assets before valuation allowance (175) (171)
Valuation allowance 90 90
Deferred tax assets (85) (81)
Net deferred tax liabilities 83 94
</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 to the Corporation's net operating loss carryforwards
(the "NOL Carryforwards") as a result of the Restructuring, no deferred tax
asset is recorded. Under fresh start accounting rules, any benefit realized
from utilizing $85 million of the valuation allowance and the NOL
Carryforwards will not impact net earnings.

The Corporation has NOL Carryforwards of $19 million remaining from 1992
after using approximately $30 million in 1995 and $50 million in 1994 to
offset U.S. taxable income in those years. These NOL Carryforwards may be
used to offset U.S. taxable income through 2007. The Internal Revenue Code
limits 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 Internal Revenue Code to the exchange of stock for debt, the Corporation's
NOL Carryforwards to 1994 and later years could be reduced or eliminated. The
Corporation has a $4 million minimum tax credit that may be used to offset
U.S. regular tax liability in future years.

The Corporation does not provide for U.S. income taxes on the portion of
undistributed earnings of foreign subsidiaries that are intended to be
permanently reinvested. The cumulative amount of such undistributed earnings
totaled approximately $106 million as of December 31, 1995. Any future
repatriation of undistributed earnings would not, in the opinion of
management, result in significant additional 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, were not restated to reflect the adoption of this standard.

<PAGE>

Note 12. Inventories

Most of the Corporation's domestic inventories are valued under the
last-in, first-out ("LIFO") method. As of December 31, 1995 and 1994, the LIFO
values of these inventories were $122 million and $121 million, respectively,
and would have been higher by $7 million and $5 million, respectively, 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. Inventories include
material, labor and applicable factory overhead costs. Inventory
classifications were as follows (dollars in millions):

<TABLE>

<CAPTION>
As of December 31,
1995 1994
<S> <C> <C>
Finished goods and work in process $ 107 $ 102
Raw materials 60 62
Supplies 8 9
Total 175 173
</TABLE>

The LIFO value of U.S. domestic inventories under fresh start accounting
exceeded that computed for U.S. federal income tax purposes by $30 million as
of December 31, 1995 and 1994.

<PAGE>

Note 13. Property, Plant and Equipment

Provisions for depreciation of property, plant and equipment 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 additions. Property, plant and equipment classifications
were as follows (dollars in millions):

<TABLE>

<CAPTION>
As of December 31,
1995 1994
<S> <C> <C>
Land and mineral deposits $ 58 $ 56
Buildings and realty improvements 245 230
Machinery and equipment 676 549
979 835
Reserves for depreciation and depletion (137) (80)
Total 842 755

</TABLE>

Note 14. Leases

The Corporation leases certain of its offices, buildings, machinery and
equipment, and autos under noncancelable operating leases. These leases have
various terms and renewal options. Lease expense amounted to $41 million and
$37 million in the years ended December 31, 1995 and 1994, respectively; $22
million in the period of May 7 through December 31, 1993; and $11 million in
the period of January 1 through May 6, 1993. Future minimum lease payments
required under operating leases with initial or remaining noncancelable terms
in excess of one year as of December 31, 1995, were $31 million in 1996, $27
million in 1997, $22 million in 1998, $17 million in 1999 and $14 million in
2000. The aggregate obligation subsequent to 2000 was $21 million.

<PAGE>

Note 15. 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
final years of employment. The Corporation's contributions are made in
accordance with independent actuarial reports. In 1995, the Corporation made
a special funding of $16 million and a normal funding of $5 million to one of
its plans. Minimal funding was required for most plans in 1994 and in the
periods of May 7 through December 31, 1993, and January 1 through May 6, 1993.
Net pension expense included the following components (dollars in millions):

<TABLE>

</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, 1995 and 1994. The
following table presents a reconciliation of the total assets of the pension
plans to the projected benefit obligation (dollars in millions):

<TABLE>

<CAPTION>
As of December 31,
1995 1994
<S> <C> <C>
Amount of assets available for benefits:
Funded assets of the plans at fair
market value $ 427 $ 370
Accrued pension expense 23 29
Total assets of the plans 450 399
Present value of estimated pension obligation:
Vested benefits 344 300
Nonvested benefits 31 25
Accumulated benefit obligation 375 325
Additional benefits based on projected future
salary increases 110 79
Projected benefit obligation 485 404
Projected benefit obligation in excess of assets (35) (5)
</TABLE>

The projected benefit obligation in excess of assets consisted of an
unrecognized net loss in each period 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 years
ended December 31, 1995 and 1994. The assumed weighted average discount rate
used in determining the accumulated benefit obligation was 7.25% and 8.25% as
of December 31, 1995 and 1994, respectively. The rate of increases in
projected future compensation levels was 5% for both years.

Note 16. 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.

<PAGE>

<TABLE>

The following table summarizes the components of net periodic
postretirement benefit cost (dollars in millions):

<TABLE>
The status of the Corporation's accrued postretirement benefit cost was as
follows (dollars in millions):

<CAPTION>
As of December 31,
1995 1994
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 99 $ 81
Fully eligible active participants 15 11
Other active participants 71 59
185 151
Unrecognized net gain/(loss) 16 42
Accrued postretirement benefit cost
liability recognized on the
Consolidated Balance Sheet 201 193
</TABLE>

The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 9% and 10% as of December 31, 1995 and
1994, respectively, with a rate gradually declining to 5% by 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 by $20 million as of December
31, 1995 and 1994, and increase the net periodic postretirement benefit cost
by $2 million and $3 million for the years ended December 31, 1995 and 1994,
respectively. The assumed discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% and 8.25% as of December 31, 1995
and 1994, respectively.

Effective January 1, 1993, the Corporation adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," for
its retiree benefit plans. The Corporation elected to recognize this change
in accounting principle 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.

Note 17. Management Performance Plan

In 1995, an additional 900,000 shares of common stock were reserved in
accordance with the Long-Term Equity Plan that was approved by the
stockholders of the Corporation at the annual meeting on May 10, 1995. As
permitted by the Prepackaged Plan, a certain number of common shares were
reserved for future issuance in conjunction with stock options. Options were
granted in 1993 and 1994 at an exercise price equal to the mean of the high
and low sales prices for a share of the Corporation's common stock as reported
on the New York Stock Exchange composite tape on the grant dates. 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 and expire on
the 10th anniversary of the date of the 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.

On May 6, 1993, all outstanding stock options were canceled without
consideration, and all shares of restricted and deferred stock were cashed out
pursuant to "change in control" provisions contained in the Management
Performance Plan, except for 25,580 shares of restricted stock and awards for
deferred stock yet to be issued, which remained outstanding as a consequence
of certain waivers of the change in control event by senior members of
management. Those shares that remained outstanding on May 6, 1993, were
freed of restrictions in 1994, an acceleration from the original terms, which
freed the restrictions on incremental portions of the shares through 1998.

<PAGE>

<TABLE>
Stock option activity was as follows:

<CAPTION>
Years ended
December 31,
1995 1994
<S> <C> <C>
Outstanding at beginning of period 2,764,500 1,673,000
Granted - 1,161,500
Exercised (at prices ranging from
$10.3125 to $21.875 per share) (172,555) (23,800)
Canceled (31,845) (46,200)
Outstanding at end of period (at
prices ranging from $10.3125
to $32.5625 per share) 2,560,100 2,764,500

Exercisable at end of period 1,369,295 578,020
Available for grant at end of period 929,395 50
</TABLE>

The FASB issued a new standard, SFAS No. 123, on accounting for stock-based
compensation that the Corporation will adopt on January 1, 1996. As
permitted, the Corporation will continue its current method of accounting for
stock-based compensation and will comply with the new disclosure requirements
of this standard.

Note 18. Preferred Share Purchase Rights

On May 6, 1993, a rights plan (the "Rights Agreement") was adopted pursuant
to which the Corporation declared a distribution of one right (the "Rights")
upon each share of common stock. The Rights, which are intended to protect
the Corporation and its stockholders in the event of an unsolicited attempt to
acquire the Corporation, generally become exercisable 10 days following the
announcement of the acquisition of 20% or more of the outstanding common stock
by someone other than the Corporation or one of its employee benefit plans
(10% in the case of an acquisition that the Corporation's Board of Directors
determines to represent a threat of acquisition not in the best interests of
the Corporation's stockholders) or 10 business days after commencement of a
tender offer for 30% or more of the outstanding 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. The Rights also provide for a so-
called "flip-in" feature and an exchange feature.

In the event that the Corporation is the surviving corporation and its
common stock remains outstanding and unchanged in a merger or other business
combination with such acquiring party or the acquiring party engages in one of
a number of self-dealing transactions specified in the Rights Agreement, or in
the event that there is a 10% acquisition that the Board of Directors
determines to represent a threat of acquisition not in the best interests of
the Corporation's stockholders, each holder of a Right, other than the
acquiring party, will thereafter have the right, subject to the exchange
feature, 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.

Note 19. Warrants

As of December 31, 1995 and 1994, outstanding warrants amounted to
2,592,228 and 2,594,181, respectively. 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.

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, in addition to common
stock, were issued to holders of certain debt that was converted to equity in
the Restructuring. 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.

<PAGE>

Note 20. Stockholders' Equity

<TABLE>

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

There were 33,988 shares of $0.10 par value common stock held in treasury
as of December 31, 1995 and 1994. These shares were acquired through the
forfeiture of restricted stock and the surrender of shares in settlement of
tax withholding obligations.

In 1994, the Corporation implemented the Equity Offering under which
14,375,000 shares of common stock were sold to the public, consisting of
7,900,000 shares issued by the Corporation and 6,475,000 sold by Water Street.
Net proceeds to the Corporation from the Equity Offering amounted to $224
million. The Corporation did not receive any proceeds from the sale of shares
by Water Street.

Note 21. 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 1930s; 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 seek to recover
compensatory and in many cases punitive damages for personal injury allegedly
resulting from exposure to asbestos and asbestos-containing products (the
"Personal Injury Cases"). It is anticipated that additional personal injury
and property damage cases containing similar allegations will be filed.

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 $106 million
of these policies are presently insolvent. After deducting insolvencies and
exhaustion of policies, approximately $465 million of insurance remained
potentially available as of December 31, 1995. 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, Ill., 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 seven
insurance carriers that provided comprehensive general liability insurance
coverage to U.S. Gypsum between the 1940s and 1984. As discussed below, 10
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 $8.2 million in
1993 and $33.4 million in 1994. In 1995, insurance payments exceeded
aggregate asbestos-related costs by approximately $10 million due to the
receipt of reimbursement in 1995 of amounts expended in prior years.

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.
As of December 31, 1995, 32 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
below, involve multiple buildings. In addition, approximately 23 property
damage claims have been threatened against U.S. Gypsum. 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.

Class Actions: U.S. Gypsum is one of many defendants in three pending
cases that have been certified as class actions, including one that recently
has been settled, as well as others that request such certification. The
damages claimed against U.S. Gypsum in the class action cases are unspecified.
On October 10, 1995, U.S. Gypsum agreed to settle a class action 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.) Under the settlement agreement, which will require court approval after
notice to the class, U.S. Gypsum will pay $3.6 million, with half paid during
1995 and the remainder payable over the following 18 months. The remaining
two class actions are a conditionally certified class 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.), and a class
action on behalf of various public bodies in the State of Texas, including
cities, counties, hospitals, port authorities and colleges. (Kirbyville
Independent School District v. U.S. Gypsum Co., et al., United States District
Court for the Eastern District of Texas, Beaumont Division)

During 1994, U.S. Gypsum settled two other class actions that are now
closed. One suit was 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. The
other class action settlement involved approximately 333 school districts in
Michigan that had opted out of the nationwide class action. (Board of
Education of the City of Detroit, et al. v. The Celotex Corp., et al., Circuit
Court for Wayne County, Mich.) The Michigan settlement was approved by the
court on December 2, 1994, and no appeal was filed. The settlement of the
nationwide class action was approved on September 13, 1995, and became final
on October 12, 1995.

A case pending in state court in South Carolina, which has not been
certified as a class action, purports 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 other described class actions
(Anderson County Hospital v. W.R. Grace & Co., et al., Court of Common Pleas,
Hampton Co., S.C.) (the "Anderson Case"). The Anderson Case also names the
Corporation as a defendant, alleging, 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. In
July 1994, the court in the Anderson Case ruled that claims involving building
owners outside South Carolina cannot be included in the suit.

Results to Date: In total, U.S. Gypsum has settled approximately 95
Property Damage Cases, involving 211 plaintiffs, in addition to the 3 class
action settlements referred to above. Twenty-four cases have been tried to
verdict, 15 of which were won by U.S. Gypsum and 5 lost; 3 other cases, 1 won
at the trial level and 2 lost, were settled during appeals. Another case that
was lost at the trial court level was reversed on appeal and remanded to the
trial court, which has now entered judgment for U.S. Gypsum. In the cases
lost, compensatory damage awards against U.S. Gypsum have totaled $11.5
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; and 2 were settled during the
appellate process.

During 1993, 5 Property Damage Cases were filed against U.S. Gypsum, 7
cases 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
1994, 5 Property Damage Cases were filed against U.S. Gypsum, 5 cases were
dismissed before trial, 19 were settled, 1 was closed following trial or
appeal, and 41 were pending at year-end. U.S. Gypsum expended $40.6 million
for the defense and resolution of Property Damage Cases and received insurance
payments of $9 million in 1994. In 1995, 3 Property Damage Cases were filed
against U.S. Gypsum, 7 cases were dismissed before trial, 3 were settled, 2
were closed following trial or appeal, and 32 were pending at year-end. U.S.
Gypsum expended $36 million for the defense and resolution of Property Damage
Cases and received insurance payments of $48.6 million in 1995.

Estimated Cost: 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 that 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 50,000 claimants pending as
of December 31, 1995, although, as discussed below, approximately 15,000 of
such claims are settled but not yet closed, and another 8,000 of such claims
are enjoined from proceeding because they did not opt out of the Georgine
class action referred to below. 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.

Center for Claims Resolution: 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 awarded,
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.

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 the average settlement cost may 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.

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. During 1994,
approximately 14,000 Personal Injury Cases were filed against U.S. Gypsum;
U.S. Gypsum was added as a defendant in approximately 4,000 cases that had
been previously filed; and approximately 23,000 were settled or dismissed.
U.S. Gypsum incurred expenses of $38 million in 1994 with respect to Personal
Injury Cases, of which $37.3 million was paid by insurance. During 1995,
approximately 13,000 Personal Injury Cases were filed against U.S. Gypsum, and
17,600 were settled or dismissed. U.S. Gypsum incurred expenses of $32.1
million in 1995 with respect to Personal Injury Cases, of which $30.9 million
was paid by insurance. As of December 31, 1995, 1994, and 1993, approximately
50,000, 54,000, and 59,000 Personal Injury Cases were outstanding against U.S.
Gypsum, respectively.

Georgine Class Action Settlement: On January 15, 1993, U.S. Gypsum and the
other members of the Center entered into a class action settlement 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.")
The class of plaintiffs includes all persons who have been occupationally
exposed to asbestos-containing products manufactured by the defendants, who
had not filed an asbestos personal injury suit or "opt out" request as of
January 24, 1994. The settlement has been approved by the district court and,
if upheld on appeal, will provide an administrative compensation system that
will replace judicial claims for all future Personal Injury Cases, except as
noted below. The Georgine settlement 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. Each of the defendants has committed to fund a
defined portion of the settlement, up to a stated maximum amount, over the
initial 10-year period of the agreement (which is automatically extended
unless terminated by the defendants). In each year, a limited number of class
members 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. In addition,
approximately 82,000 purported class members "opted out," or elected to be
excluded from, the settlement, thus retaining the right to file suit in the
court system without regard to the provisions of Georgine. Claimants who
attempt to file suit in the courts but have not opted out of Georgine,
including approximately 8,000 of the personal injury claims pending on
December 31, 1995, have been enjoined from proceeding against the Center
members in the courts and will be required to pursue their claims against them
under the administrative procedures in Georgine. This injunction is currently
on appeal.

The Center members, including U.S. Gypsum, have instituted proceedings
against those of their insurance carriers that had not consented to support
the settlement. The action seeks 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 nonconsenting insurers.

Estimated Cost: Assuming that the Georgine settlement is implemented in
its current form (which depends on the outcome of further proceedings), and
based upon figures provided by the Center, management estimates U.S. Gypsum's
maximum total exposure in Personal Injury Cases (other than Georgine "opt out"
cases) during the next 10 years at approximately $210 million, of which
approximately $195 million is expected to be paid by insurance. This
estimated exposure encompasses four components. First, U.S. Gypsum, through
the Center, has reached settlements in approximately 15,000 of the Personal
Injury Cases pending on December 31, 1995, for amounts totaling approximately
$25 million, to be expended over a three- to five-year period. Second, the
Center estimates that the remaining approximately 26,000 pending Personal
Injury Cases that are not subject to the Georgine injunction can be settled
for an amount between $40 million and $50 million. This estimate is based
primarily upon the Center's and U.S. Gypsum's experience in the Personal
Injury Cases disposed of to date and takes into account a number of
uncertainties. Third, the Center has calculated U.S. Gypsum's contribution to
the Georgine settlement over its 10-year initial term to be a maximum of $120
million. The estimated cost of Georgine is based upon the maximum number of
claims that could be processed in each year and the total amount to be made
available to the claimants over the 10-year period. U.S. Gypsum's actual
contribution to Georgine may be lower, depending upon the number and severity
of claims that are filed. Finally, the Center estimates U.S. Gypsum's share
of legal fees and expenses at approximately $15 million.

The above figures do not include possible future Personal Injury Cases
filed by persons who opted out of the Georgine class action. U.S. Gypsum's
additional exposure for future "opt out" claims would depend on the number and
severity of any 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 from the personal
injury portion of the Coverage Action because they 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.

Property Damage Coverage: In the property damage phase of the Coverage
Action, the applicability of U.S. Gypsum's insurance policies to settlements
and to one adverse judgment in eight "test" Property Damage Cases has been
decided. On November 4, 1994, the Illinois Appellate Court issued a ruling
affirming in part and reversing in part an earlier trial court ruling. The
Appellate Court ruled that the eight "test" cases were covered under all
insurance policies in effect from the date of installation to the date of
removal of asbestos-containing products (known as the "continuous trigger" of
coverage). The Court awarded reimbursement of approximately $6.2 million
spent by U.S. Gypsum to resolve the eight "test" cases. The defendant
carriers' rehearing petition was denied by the Appellate Court in January
1995, and on April 5, 1995, the Illinois Supreme Court denied the insurers'
petition for leave to appeal to that Court. Although the appellate process
has effectively concluded, further proceedings will be necessary in the trial
court to apply the Appellate Court's ruling to all Property Damage Cases other
than the eight "test" cases, as well as to resolve certain other remaining
issues, some of which could, if determined adversely to U.S. Gypsum, affect
the amount or accessibility of available coverage. No schedule has yet been
established for the resolution of these issues.

The "continuous trigger" ruling, if applied to the Property Damage Cases
generally, and subject to the resolution of the remaining issues referred to
above, will allow U.S. Gypsum access to all of its available insurance
coverage for Property Damage Cases (although the same coverage must also be
used for Personal Injury Cases). Under the continuous trigger, all Property
Damage Cases would be covered by insurance unless or until such insurance
becomes exhausted. In addition, if applied to the Property Damage Cases
generally, the ruling gives U.S. Gypsum the right to reimbursement of its past
property damage expenditures, subject to the resolution of the remaining
issues referred to above, and further subject to the allocation of costs to
insolvent carriers, excess carriers with no defense cost obligations, and
carriers that have previously settled. Pursuant to three settlements reached
since the appellate ruling, described below, U.S. Gypsum is receiving
approximately $67 million from three carriers to reimburse it for past
property damage expenses. U.S. Gypsum is also pursuing approximately $60
million from another carrier that it contends is liable for reimbursement of
U.S. Gypsum's past expenditures. The timing and amount of additional
recoveries for past expenses will depend upon the outcome of settlement
negotiations with that carrier or, if a settlement cannot be reached, upon the
ultimate resolution of the remaining issues referred to above.

Settlements: Ten carriers, including three 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 paid all or a substantial portion of their policy limits to
U.S. Gypsum between 1991 and 1995. Another carrier, which provided both
primary and excess policies to U.S. Gypsum during the 1960s and 1970s, has
agreed to pay U.S. Gypsum a total of $38.4 million, $25 million of which was
paid in April 1995 with the rest to be paid in three annual installments. In
August 1995, another carrier that provided both primary and excess insurance
(and is a Supporting Insurer) agreed to pay U.S. Gypsum approximately $25
million to reimburse U.S. Gypsum for past property damage costs and to make
its remaining $18 million of unexhausted coverage available for future costs
as they are incurred. Approximately $19 million of the $25 million was paid
in December 1995, with the rest expected in early 1996. An additional
carrier, which provided $2 million of coverage per year for a 22-month period
in the 1960s, paid U.S. Gypsum $4.2 million in January 1996 as reimbursement
for past costs. Three other excess carriers, including two 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.

Taking into account the above settlements, including participation of
certain of the settling carriers in the Wellington Agreement and insurance
consumption through December 31, 1995, carriers providing a total of
approximately $125 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 $150
million of coverage that was unexhausted as of December 31, 1995, 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 continues to seek negotiated resolutions with
its carriers in order to minimize the expense and delays of litigation.

Insolvent Carriers: 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 likely 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.

Conclusion

It is not possible to predict the number of additional lawsuits alleging
asbestos-related claims that may be filed against U.S. Gypsum. Because
reliable information concerning U.S. Gypsum's exposure is lacking in many of
the Property Damage Cases, the liability therefrom is 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 adopted the requirements of FASB
Interpretation No. 39. At that time, in accordance with Interpretation No.
39, U.S. Gypsum recorded an accrual of $100 million for its liabilities for
asbestos-related matters that are deemed probable and can be reasonably
estimated and separately recorded an asset of $100 million, 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, the liability and asset recorded in
1994 relate only to pending Personal Injury Cases. The implementation of
Interpretation No. 39 did not impact earnings, cash flow 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 estimated 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.

Note 22. Industry and Geographic Segments

Through its subsidiaries, USG Corporation is a leading manufacturer of
building materials, producing a wide range of products for use in new
residential and nonresidential construction and repair and remodel, as well as
products used in certain industrial processes. The Corporation's operations
are organized into two core businesses: North American Gypsum, which
manufactures and markets gypsum wallboard and related products in the United
States, Canada and Mexico; and Worldwide Ceilings, which manufactures and
markets ceiling tile, ceiling grid and other interior systems products
worldwide. Distribution is carried out through L&W Supply Corporation, a
wholly owned subsidiary of the Corporation, home improvement centers and other
retailers, building materials dealers, contractors and distributors.

Transactions between geographic areas are accounted for on an
"arm's-length" basis. Intercompany transfers between geographic areas are not
material. No single customer accounted for 10% or more of consolidated net
sales. Export sales to foreign unaffiliated customers represent less than 10%
of consolidated net sales. Eliminations reflect intercompany sales between
industry segments. Segment operating profit/(loss) includes all costs and
expenses directly related to the segment involved and an allocation of
expenses that benefit more than one segment. Segment operating profit/(loss)
also includes the noncash amortization of excess reorganization value, which
had the impact of reducing operating profit and identifiable assets for North
American Gypsum and Worldwide Ceilings. The decrease in 1995 corporate
identifiable assets primarily reflects a $127 million reduction in cash and
cash equivalents primarily because of debt repayments.

Assets for USG Funding, which was established in 1994, represent the
outstanding balance of receivables purchased from U.S. Gypsum and USG
Interiors, net of reserves, and are included in "corporate identifiable
assets" in the following table. As of December 31, 1995 and 1994, such
receivables, net of reserves, amounted to $110 million and $123 million,
respectively, including $78 million and $84 million purchased from U.S. Gypsum
and $32 million and $39 million purchased from USG Interiors as of the
respective dates.

<PAGE>

<TABLE>

Industry Segments
<CAPTION>
Amortization Depreciation,
Operating of Excess Depletion
Net Profit/ Reorganization and Capital Identifiable
Sales (Loss) Value Amortization Expenditures Assets
(Dollars in millions)
Year ended December 31, 1995

<S> <C> <C> <C> <C> <C> <C>
North American Gypsum $1,924 $ 262 $ 82 $ 42 $ 96 $1,157
Worldwide Ceilings 609 (34) 87 14 49 531
Corporate - (38) - 11 2 206
Eliminations (89) - - - - (4)
Total 2,444 190 169 67 147 1,890

Year ended December 31, 1994

North American Gypsum 1,780 184 82 38 49 1,178
Worldwide Ceilings 594 (38) 87 13 15 600
Corporate - (42) - 33 - 352
Eliminations (84) - - - - (6)
Total 2,290 104 169 84 64 2,124

May 7 through December 31, 1993

North American Gypsum 1,005 57 55 25 24 1,218
Worldwide Ceilings 367 (30) 58 9 5 697
Corporate - (26) - 10 - 251
Eliminations (47) - - - - (3)
Total 1,325 1 113 44 29 2,163

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

January 1 through May 6, 1993

North American Gypsum 438 36 - 14 8 1,285
Worldwide Ceilings 173 13 - 6 4 771
Corporate - (11) - 2 - 139
Eliminations (20) - - - - (1)
Total 591 38 - 22 12 2,194
</TABLE>

<PAGE>
<TABLE>
Geographic Segments

<CAPTION>
Amortization Depreciation,
Operating of Excess Depletion
Net Profit/ Reorganization and Capital Identifiable
Sales (Loss) Value Amortization Expenditures Assets
(Dollars in millions)
Year ended December 31, 1995

<S> <C> <C> <C> <C> <C> <C>
United States $ 2,161 $ 191 $ 135 $ 56 $ 123 $ 1,557
Canada 155 (3) 18 6 19 146
Other Foreign 246 2 16 5 5 187
Transfers between geographic
areas (118) - - - - -
Total 2,444 190 169 67 147 1,890

Year ended December 31, 1994

United States 2,008 94 135 74 52 1,770
Canada 164 2 18 5 9 153
Other Foreign 228 8 16 5 3 200
Transfers between geographic
areas (110) - - - - 1
Total 2,290 104 169 84 64 2,124

May 7 through December 31, 1993

United States 1,147 3 90 36 20 1,789
Canada 95 (6) 12 5 6 178
Other Foreign 143 4 11 3 3 197
Transfers between geographic
areas (60) - - - - (1)
Total 1,325 1 113 44 29 2,163

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

January 1 through May 6, 1993

United States 507 28 - 18 9 1,776
Canada 48 4 - 2 1 198
Other Foreign 65 6 - 2 2 221
Transfers between geographic
areas (29) - - - - (1)
Total 591 38 - 22 12 2,194

</TABLE>

<PAGE>

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' 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 sheets of USG
Corporation and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of earnings and cash flows for the years ended
December 31, 1995 and 1994, and the period of May 7 through December 31, 1993.
We have also audited the consolidated statements of earnings and cash flows
for the period of January 1 through May 6, 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 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 "Note 6. Financial Restructuring," 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 from January 1 through May 6, 1993, 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, 1995 and 1994, and the results of their
operations and their cash flows for the years ended December 31, 1995 and
1994, and the periods of May 7 through December 31, 1993, and January 1
through May 6, 1993, in conformity with generally accepted accounting
principles.

/s/ Arthur Andersen LLP

ARTHUR ANDERSEN LLP
Chicago, Illinois
January 25, 1996

<PAGE>

<TABLE>
USG CORPORATION
SELECTED QUARTERLY FINANCIAL DATA (unaudited)
(Dollars in millions, except per share data)

<CAPTION>
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
<S> <C> <C> <C> <C> <C>
1995
Net sales $ 598 $ 615 $ 629 $ 602 $ 2,444
Gross profit 152 149 152 150 603
Operating profit (a) 50 47 48 45 190
Net loss (a) (2) (3) (2) (25) (b) (32)
Per common share:
Net loss (0.05) (0.07) (0.04) (0.55) (0.71)
Price range (c)
- high 24.125 26.875 29.625 31.375 31.375
- low 19.250 21.625 23.625 26.875 19.250
EBITDA 106 103 106 102 417

1994
Net sales 506 562 621 601 2,290
Gross profit 110 133 153 121 (d) 517
Operating profit (a) 11 32 47 14 (d) 104
Net loss (a) (34) (17) (6) (35) (d) (92)
Per common share:
Net loss (e) (0.87) (0.38) (0.13) (0.79) (2.14)
Price range (c)
- high 36.000 32.250 24.500 21.750 36.000
- low 27.500 17.750 18.375 17.250 17.250
EBITDA 66 87 105 67 325

(a) Excess reorganization value, which was established in connection with the Restructuring in
May 1993, is currently being amortized over a five-year period. This noncash amortization,
which has no tax impact, reduced operating profit and net earnings by approximately $42
million in each quarter during 1995 and 1994.

(b) Fourth-quarter 1995 net loss includes a $30 million pretax ($24 million after-tax) charge in
connection with the planned sale of the Corporation's insulation manufacturing business in
the United States and the closure of its insulation plant in Canada .

(c) 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,
1996: Common - 4,871; Preferred - none.

(d) Fourth-quarter 1994 gross profit, operating profit and net loss reflect a $30 million pretax
($17 million after-tax) charge to cost of sales for asbestos litigation settlements. Fourth-
quarter 1994 net loss also reflects a $16 million pretax ($9 million after-tax) charge for
the write-off of reorganization debt discount.

(e) As a result of common shares issued in the first quarter of 1994 in connection with the
Equity Offering, the sum of the losses per common share for the four quarters of 1994, which
are based on average shares outstanding during each quarter, does not equal the loss per
common share for the year ended December 31, 1994, which is based on the average shares
outstanding during the year.
</TABLE>

<PAGE>

<TABLE>
USG CORPORATION
COMPARATIVE FIVE-YEAR SUMMARY (a) (unaudited)
(Dollars in millions, except per share data)
<CAPTION>

(a) Due to the Restructuring and implementation of fresh start accounting, financial statements for
periods subsequent to May 6, 1993, are not comparable to financial statements for periods prior
to that date. Accordingly, a vertical line has been added to separate such information. See
"Note 6. Financial Restructuring" for information on the Restructuring and implementation of
fresh start accounting.

(b) Results reflect DAP Inc. (sold in 1991) as a discontinued operation.

(c) Per share information for the period of January 1 through May 6, 1993, and for the years ended
December 31, 1992 and 1991, is omitted because, as a result of the Restructuring and
implementation of fresh start accounting, it is not meaningful. Market value per common share
reflects the closing stock price on December 31 of the applicable year.

(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 are $907 million, $1,122 million, $1,476 million and $1,461 million as of
December 31, 1995, 1994, 1993, and May 6, 1993, respectively.
</TABLE>

<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. (a). Delaware
USG Interiors International, Inc. Ohio
USG Funding Corporation Delaware
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
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 Asia Pacific Holdings Pty. Ltd. Singapore
USG Interiors Pacific Ltd. New Zealand
USG Interiors Austrailia 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, 1995, L&W Supply conducted its business out of 156
locations in 34 states using various names registered under applicable
assumed business name statutes.
<PAGE>

<PAGE>
EXHIBIT 23

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation by
reference of our reports dated January 25, 1996, included in this Form 10-K
for the year ended December 31, 1995, into the Corporation's previously filed
Registration Statements Nos. 33-40136 and 33-64217 on Form S-3 and 33-22581,
as amended, 33-22930, 33-36303,33-52573, 33-52715, 33-63554 and 33-65383 on
Form S-8.

/s/Arthur Andersen LLP
ARTHUR ANDERSEN LLP

Chicago, Illinois
February 29, 1996

<PAGE>

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose name
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 ending December 31, 1995 of USG
Corporation and any or 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 substitutes, may lawfully do or cause to be done by
virtue hereof.

This power of attorney has been signed as of the 14th day of
February, 1996, by the following persons:

Eugene B. Connolly, W. H. Clark,
Chairman of the Board Director

William C. Foote, James C. Cotting,
President and Chief Director
Executive Officer

Robert L. Barnett, Lawrence M. Crutcher,
Director Director

Keith A. Brown, David W. Fox,
Director Director

Philip C. Jackson, Jr. John B. Schwemm,
Director Director

Marvin E. Lesser, Judith A. Sprieser,
Director Director

WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 5
<MULTIPLIER> 1,000,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 70
<SECURITIES> 0
<RECEIVABLES> 260
<ALLOWANCES> 14
<INVENTORY> 175
<CURRENT-ASSETS> 491
<PP&E> 979
<DEPRECIATION> 137
<TOTAL-ASSETS> 1890
<CURRENT-LIABILITIES> 383
<BONDS> 865
<COMMON> 5
0
0
<OTHER-SE> (42)
<TOTAL-LIABILITY-AND-EQUITY> 1890
<SALES> 2444
<TOTAL-REVENUES> 2444
<CGS> 1841
<TOTAL-COSTS> 1841
<OTHER-EXPENSES> 244
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 93
<INCOME-PRETAX> 65
<INCOME-TAX> 97
<INCOME-CONTINUING> (32)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (32)
<EPS-PRIMARY> (0.71)
<EPS-DILUTED> (0.71)

</TABLE>